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Chapter 11 – Antitrust Law—Monopolies and Mergers

Answers to Chapter Questions (p. 495)

1. The district court dismissed the suit and the circuit court affirmed, based on the existence of the

a. The antitrust claims were monopoly and attempted monopoly.

b. The First Circuit upheld the jury’s finding that MLS did not, in fact, have a monopoly because

3. The court choose the wider geographic description after pointing out that over 22% of people in

4. This is a discussion-based question. Students’ answers may vary according to different

perspectives. Initially, there was an inquiry to find out whether BCS was involved in an

anti-competitive trust mentioned under the Sherman Anti-Trust Act. This resulted in the BCS

5. The list would include such factors as a small number of firms, each with a large market share;

a. Democracy is predicated on reasonable access to the marketplace of ideas by a multitude of

b. The impact of the Internet on this issue should be pointed out to the students—nearly

a. Shepherd was concerned about increasingly concentrated corporate power and the resulting

b. This is a discussion-based question. Students’ answers vary. After reading this chapter, the

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Chapter 11 – Antitrust Law—Monopolies and Mergers

c. The rapid increase in consolidation in Europe after years of resisting that trend suggests that

a. Antitrust law is important to the success of the economies in these countries for the same

b. Yes. There are five reasons why even countries with a great deal of state involvement in their

economies would benefit from adopting both antitrust law and “competition commissions”: (1)

9. This is a discussion-based question. Students’ answers may vary. Through the changing

economy and shifts in the U.S. political attitudes and public sentiment, the effectiveness of

10. Of 47 economists whose positions were published in the Antitrust Law & Economics Review, 21

would answer the question with a yes, 11 with a no, 5 were equivocal, and 10 had no opinion.

11. The Court affirmed the general right of businesses to exercise their own judgment about those

with whom they deal (Colgate). The Court also re-affirmed the general view that the antitrust laws

In a critique of the Trinko decision, Matthew Cantor explained the Court’s broader policy

reasoning:

The Court held that “enforced sharing” of a telephone monopolists’ facilities “is in some tension

with the underlying purpose of antitrust law, since it may lessen the incentive for the

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Chapter 11 – Antitrust Law—Monopolies and Mergers

The Court held that enforced sharing is bad because it requires courts to “act as central planners,

identifying price, quantity and other terms of dealing.” But what are the other options? To permit

12.

a. The government was concerned that DuPont earned its commanding share of GM’s

business via acquisition rather than on merit alone. Further, the government argued that the

b. The Court said, “To accomplish the congressional aim, the government may proceed at any

time that an acquisition may be said with reasonable probability to contain a threat that it

c. DuPont sought to broaden the product market. In the total United States industrial finishes

and fabrics market, GM purchases amounted to 3.5% and 1.6%, respectively, in 1947.

d. The Court found for the government. The acquisition gave DuPont, as a supplier, an unfair

13. The possibilities are numerous; but, in general, mergers are a method of improving efficiencies,

particularly as to management.

14. Professor Phillip Areeda, in Antitrust Analysis, 2nd ed. (Boston: Little Brown and Co., 1974),

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Chapter 11 – Antitrust Law—Monopolies and Mergers

15. The Supreme Court decided for Cargill by a 6-2 vote. It held:

A possible loss of profits due to increased competition does not constitute a threat of

antitrust injury.

Supplementary Materials

I. Conglomerate Merger (p. 482)

Although the federal government, at present, is unlikely to challenge a conglomerate merger, students

may find intellectual value in understanding the government’s historical concerns regarding those

mergers. In essence, they fall into one of four categories:

Potential Entrant—when a firm might have entered a market on its own but chose instead to

acquire an existing firm, the government may raise a challenge under Section 7 of the Clayton

Act.

Market Power Entrenchment—the government may challenge a conglomerate merger

involving a large firm acquiring a leading firm in a concentrated market in cases when the

acquisition may solidify or entrench the acquired firm’s already strong market posture. The

government is concerned that some conglomerate mergers will enhance the ability of the

merged firm to increase product differentiation, with the result that competition is reduced and

barriers to entry are increased. The Proctor & Gamble case (below) is an example of this line of

analysis.

Reciprocity—essentially, reciprocity involves a “you scratch my back, and I’ll scratch yours”

sales arrangement in which two parties agree to both buy from and sell to each other.

Conglomerate mergers sometimes exacerbate reciprocity.

Aggregate Concentration—these cases are concerned with circumstances where a merger

would have resulted in unacceptable increases in overall commercial concentration. No

recorded judicial opinion has explicitly supported this line of analysis.

Supplementary Cases

I. United States V. Grinnell Corp., 384 U.S. 563 (1966) (See Merger Law:

Overview p. 485)

Syllabus

The government brought a civil action against Grinnell Corporation and three affiliated

companies, which it controlled through preponderant stock ownership, alleging violations of

sections 1 and 2 of the Sherman Act. Grinnell manufactures plumbing supplies and fire

sprinkler systems and its affiliates supply subscribers with fire and burglar alarm services from

central stations through automatic alarm systems installed on subscribers’ premises. The

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Chapter 11 – Antitrust Law—Monopolies and Mergers

affiliates, which had participated in market allocation agreements, discriminatory price

manipulation to forestall competition, and the acquisition of competitors, had acquired 87% of

the country’s insurance-company-accredited central station protective service market. One

affiliated company, American District Telegraph Co. (ADT), itself controls 73% of the national

market. The district court treated the accredited central station service business as a single

“market” and held that the geographic market is national. It found that the four companies had

violated sections 1 and 2 of the Sherman Act.

Held:

1. The existence of monopoly power may be inferred from the predominant share of the

market; and where Grinnell and its affiliates have 87% of the accredited central station

service business, there is no doubt they have monopoly power, which they achieved in

part by unlawful and exclusionary practices.

2. The district court was justified in treating the accredited central station service business

as a single market.

a. There is no barrier to combining in a single market a number of different products

or services where the combination reflects commercial realities. Here there is a

single basic service, the protection of property through use of a central station,

which must be compared with all other forms of property protection.

b. Just as under section 7 of the Clayton Act’s “line of commerce,” a “cluster of

services” marks the appropriate market for “part” of commerce within the

meaning of section 2 of the Sherman Act.

c. Accredited, as distinguished from non-accredited central station service, is a

relevant part of commerce, with specific requirements, recognition and approval

by insurance companies, and distinct customer needs and demands.

3. The geographic market for the accredited central station service, as the district court

found, is a national one. While the main activities of an individual station may be local,

the business of providing such service is operated on a national level, with national

planning and agreements covering activities in many states.

II. Aspen Skiing Company v. Aspen Highlands Skiing Corporation, 105 S.Ct.

2847 (1985) (See Sherman Act p. 494)

Syllabus

Respondent, owner of one of the four major mountain facilities for downhill skiing in Aspen,

Colorado, filed a treble-damages action in federal court in 1979 against petitioner, owner of

the other three major facilities. The complaint alleged that petitioner had monopolized the

market for downhill skiing services at Aspen in violation of the Sherman Antitrust Act. The

evidence showed that in earlier years, when there were only three major facilities operated by

three independent companies (including both petitioner and respondent), each competitor

offered both its own tickets for daily use of its mountain and an interchangeable 6-day

all-Aspen ticket, which provided convenience to skiers who visited the resort for weekly

periods but preferred to remain flexible about what mountain they might ski each day.

Petitioner, upon acquiring its second of the three original facilities and upon opening the

fourth, also offered, during most of the ski seasons, a weekly multi-area ticket covering only its

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Chapter 11 – Antitrust Law—Monopolies and Mergers

mountains, but eventually the all-Aspen ticket outsold petitioner’s own multi-area ticket. Over

the years, the method for allocation of revenues from the all-Aspen ticket to the competitors

developed into a system based on random-sample surveys to determine the number of skiers

who used each mountain. However, for the 1977-78 ski season, respondent, in order to

secure petitioner’s agreement to continue to sell all-Aspen tickets, was required to accept a

fixed percentage of the ticket’s revenues. When respondent refused to accept a lower

percentage—considerably below its historical average based on usage—for the next season,

petitioner discontinued its sale of the all-Aspen ticket; it instead sold 6-day tickets featuring

only its own mountains; and it took additional actions that made it extremely difficult for

respondent to market its own multi-area package to replace the joint offering. Respondent’s

share of the market declined steadily thereafter. The jury returned a verdict against petitioner,

fixing respondent’s actual damages, and the court entered a judgment for treble damages.

The Court of Appeals affirmed, rejecting petitioner’s contention that there cannot be a

requirement of cooperation between competitors, even when one possesses monopoly

powers.

The Supreme Court held:

Although even a firm with monopoly power has no general duty to engage in a joint marketing

program with a competitor (and the jury was so instructed here), the absence of an unqualified

duty to cooperate does not mean that every time a firm declines to participate in a particular

cooperative venture, that decision may not have evidentiary significance, or that it may not

give rise to liability in certain circumstances. The question of intent is relevant in determining

whether the challenged conduct is fairly characterized as “exclusionary,” “anticompetitive,” or

“predatory.” In this case, the monopolist did not merely reject a novel offer to participate in a

cooperative venture that had been proposed by a competitor, but instead elected to make an

important change in a pattern of distribution of all-Aspen tickets that had originated in a

competitive market and had persisted for several years. It must be assumed that the jury, as

instructed by the trial court, drew a distinction “between practices which tend to exclude or

restrict competition on the one hand, and the success of a business which reflects only a

superior product, a well-run business, or luck, on the other,” and that the jury concluded that

there were no “valid business reasons” for petitioner’s refusal to deal with respondent.

In determining whether petitioner’s conduct may properly be characterized as exclusionary, it

is appropriate to examine the effect of the challenged pattern of conduct on consumers, on

respondent and on petitioner itself. The evidence here showed that, over the years, skiers

developed a strong demand for the all-Aspen ticket and that they were adversely affected by

its elimination. The adverse impact of petitioner’s pattern of conduct on respondent was

established by evidence showing the extent of respondent’s pecuniary injury, its unsuccessful

attempt to protect itself from the loss of its share of the patrons of the all-Aspen ticket and the

steady decline of its share of the relevant market after the ticket was terminated. The evidence

relating to petitioner itself did not persuade the jury that its conduct was justified by any normal

business purpose, but instead showed that petitioner sought to reduce competition in the

market over the long run by harming its smaller competitor. That conclusion is strongly

supported by petitioner’s failure to offer any efficiency justification whatever for its pattern of

conduct.

III. FTC v. Procter & Gamble, 386 U.S. 568 (1967) (See Clayton Act p. 494)

Syllabus

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Chapter 11 – Antitrust Law—Monopolies and Mergers

Procter & Gamble (Procter), a large diversified manufacturer of household products, acquired

in 1957 the assets of Clorox Chemical Co., the leading manufacturer of household liquid

bleach, and the only one selling on a national basis. Clorox had 48.8% of the national market,

with higher percentages in some regional areas. Clorox and one other firm accounted for 65%

of liquid bleach sales, and with four other firms for almost 80%, with the rest divided among

more than 200 small producers. Procter is a dominant factor in the area of soaps, detergents

and cleaners, with total sales in 1957 in excess of $1 billion, and an advertising budget of

more than $80 million, due to which volume Procter receives substantial discounts from the

media. The FTC challenged the acquisition, and after hearings found that the substitution of

Procter for Clorox would dissuade new entrants in the liquid bleach field, discourage active

competition from firms already in the industry due to fear of retaliation from Procter, and

diminish potential competition by eliminating Procter, the most likely prospect, as a potential

entrant. The FTC, which placed no reliance on post-acquisition evidence, held the acquisition

violative of section 7 of the Clayton Act and ordered the divestiture of Clorox. The relevant line

of commerce was found to be household liquid bleach and the relevant geographical market

was held to be the nation and a series of regional markets. The Court of Appeals reversed,

stating that the FTC’s finding of illegality was based on “treacherous conjecture,” mere

possibility, and suspicion. The Court found nothing unhealthy about the market conditions in

the industry, found “it difficult to base a finding of illegality on discounts in advertising,” found

no evidence to show that Procter ever intended to enter the bleach field, and relied heavily on

post-acquisition evidence to the effect that other producers “were selling more bleach for more

money than ever before.”

Held:

1. Any merger, whether it is horizontal, vertical, conglomerate, or, as in this case, a

“product-extension merger,” must be tested by the standard of section 7 of the Clayton

Act; that is, whether it may substantially lessen competition, which requires a prediction

of the merger’s impact on present and future competition.

2. This merger may have anticompetitive effects.

a. In this oligopolistic industry the substitution of the powerful acquiring firm for the

smaller but dominant firm may substantially reduce the competitive structure of

the industry by dissuading the smaller firms from competing aggressively,

resulting in a more rigid oligopoly with Procter the price leader.

b. The acquisition may also tend to raise the barriers to new entrants who would be

reluctant to face the huge Procter, with its large advertising budget.

c. Potential economies cannot be used as a defense to illegality, as Congress

struck the balance in favor of protecting competition

d. The FTC’s finding that the acquisition eliminated Procter, the most likely entrant

into the liquid bleach field, as a potential competitor, was amply supported by the

evidence.

IV. State v. Kraft General Foods, Inc., 926 F. Supp. 321 (SDNY 1995) (See

Horizontal Analysis p. 486)

Syllabus

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Chapter 11 – Antitrust Law—Monopolies and Mergers

In a classic analysis of a horizontal merger, the court reviewed Kraft’s purchase of Nabisco’s

ready-to-eat cereal assets. The court held that:

The relevant geographic market was the entire United States. The definition of the relevant

product market was somewhat more complex. The State argued that the product market

was “adult cereals,” while Kraft argued the market was all ready-to-eat cereals. The court

accepted Kraft’s view, finding that the defining characteristic of the entire market was a

demand for variety, as well as the existence of such evidence as that “substantial numbers

of adults eat ‘kid’” cereals.

Using an HHI analysis, the court found that market concentration was sufficiently high to raise

potentially significant competitive concerns, but ultimately held that none of the potential

concerns seemed to be borne out by the facts in this instance. For example, the evidence

indicated that after the purchase there was actually a reduced market concentration in the

industry.

V. United States v. General Dynamics Corporation, 415 U.S. 486 (1974) (See

Clayton Act p. 494)

Syllabus

Material Service Corp., a deep-mining coal producer, and its successor, appellee General

Dynamics Corp., acquired, through stock purchases, control of appellee United Electric Coal

Companies, a strip-mining coal producer. The government brought suit alleging that this

acquisition violated section 7 of the Clayton Act. The district court found no violation on the

ground, inter alia, that the government’s evidence—consisting principally of past production

statistics showing that within certain geographic markets, the coal industry was concentrated

among a small number of large producers, that this concentration was increasing, and that the

acquisition here would materially enlarge the acquiring company’s market share and thereby

contribute to the concentration trend—did not support the government’s contention that the

acquisition substantially lessened competition in the production and sale of coal in either or

both of two specified geographic markets. This conclusion was primarily based on a

determination that United Electric’s coal reserves were so low that its potential to compete with

other producers in the future was far weaker than the aggregate production statistics relied on

by the government might otherwise have indicated, virtually all of United Electric’s proved

reserves being either depleted or already committed by long-term contracts with large

customers so that its power to affect the price of coal was severely limited and steadily

diminishing.

Held for General Dynamics:

While the government’s statistical showing might have been sufficient to support a finding

of “undue concentration” in the absence of other considerations, the district court was

justified in finding that other pertinent factors affecting the coal industry and appellees’

business mandated a conclusion that no substantial lessening of competition occurred or

was threatened by the acquisition. Ample evidence showed that United Electric does not

have sufficient reserves, which are a key factor in measuring a coal producer’s market

strength, to make it a significant competitive force. Thus in terms of probable future ability

to compete, rather than in terms of past production on which the government relied, the

Court was warranted in concluding that the merger did not violate section 7 of the Act.

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Chapter 11 – Antitrust Law—Monopolies and Mergers

VI. Brown Shoe Co. v. United States, 370 U.S. 294 (1961) (See p.)

Syllabus

The government brought suit to enjoin consummation of a merger of two corporations on the

ground that its effect might be to substantially lessen competition, or to tend to create a

monopoly in the production, distribution and sale of shoes, in violation of section 7 of the

Clayton Act. The district court found that the merger would increase concentration in the shoe

industry, both in manufacturing and retailing, eliminate one of the corporations as a substantial

competitor in the retail field, and establish a manufacturer-retailer relationship which would

deprive all but the top firms in the industry of a fair opportunity to compete; and that, therefore,

it probably would result in a further substantial lessening of competition and an increased

tendency toward monopoly. It enjoined appellant from having or acquiring any further interest

in the business, stock or assets of the other corporation, required full divestiture by appellant

of the other corporation’s stock and assets, and ordered appellant to propose in the immediate

future a plan for carrying into effect the Court’s order of divestiture.

Held: The judgment is affirmed.

1. The record supports the district court’s findings and its conclusion that the shoe industry

is being subjected to a cumulative series of vertical mergers which, if left unchecked,

may substantially lessen competition, within the meaning of section 7.

a. The record in this case supports the district court’s finding that the relevant lines

of commerce are men’s, women’s, and children’s shoes.

b. The district court properly found that the predominantly medium-priced shoes

which appellant manufactures do not occupy a product market different from the

predominantly low-priced shoes which the other corporation sells.

c. In defining the product market, the district court was not required to employ finer

“price/quality” or “age/sex” distinctions than those recognized by its classifications

of “men’s,” “women’s,” and “children’s” shoes.

d. Insofar as the vertical aspect of this merger is concerned, the relevant geographic

market is the entire nation.

e. The trend toward vertical integration in the shoe industry, when combined with

appellant’s avowed policy of forcing its own shoes upon its retail subsidiaries,

seems likely to foreclose competition from a substantial share of the markets for

men’s, women’s, and children’s shoes, without producing any countervailing

competitive, economic or social advantages.

2. The district court was correct in concluding that this merger may tend to lessen

competition substantially in the retail sale of men’s, women’s, and children’s shoes in

the overwhelming majority of the cities and their environs in which both corporations sell

through owned or controlled outlets.

a. The district court correctly defined men’s, women’s, and children’s shoes as the

relevant lines of commerce in which to analyze the horizontal aspects of the

merger.

b. The district court properly defined the relevant geographic markets in which to

analyze the horizontal aspects of this merger as those cities with populations

exceeding 10,000 and their environs in which both corporations retailed shoes

through their own or controlled outlets.

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Chapter 11 – Antitrust Law—Monopolies and Mergers

c. The evidence is adequate to support the finding of the district court that, as a

result of the merger, competition in the retailing of men’s, women’s, and children’s

shoes may be lessened substantially in those cities.

Selected Bibliography

Walter Adams and James W. Brock, “The Sherman Act and the Economic Power Problem,” The

Antitrust Bulletin 35, No. 1 (Spring 1990), p. 25.

Associated Press, “Big Banks Have Bigger Fees,” Waterloo-Cedar Falls Courier, August 3, 2000, p.

A2.

Alan J. Auerbach, ed., Corporate Takeovers: Cases and Consequences (Chicago and London: The

University of Chicago Press, 1988).

William M. Bulkeley, “Bush’s Plan to Prosecute Antitrust Cases Could Fail Because of Reaganite

Judges,” The Wall Street Journal, August 6, 1990, p. B4.

Bryan Burrough and John Helyar, Barbarians at the Gate: The Fall of RJR Nabisco (New York: Harper

& Row, 1990).

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Chapter 11 – Antitrust Law—Monopolies and Mergers

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