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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
2.
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;
6.
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
7.
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
8.
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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