CHAPTER 11
Antitrust Law—Monopolies and Mergers
Chapter Goals
If instructors’ experiences correspond with the authors, generating student interest in antitrust law is a
daunting task indeed. The numbers are so big, and the scenes of action are so remote from the students’
daily lives. Dangerously simplified, people continue to face the tired, but timeless, question: Is bigness
bad? Or contrariwise, is bigness necessary for commercial success in the global market? Few questions
are more important to the study of business and to the development of good citizenship. Students must
understand that federal antitrust policy may have an enormous impact upon the total character of life in
the U.S. Students should come to appreciate the role of antitrust law as a governor of sorts of American
commercial life. Since commercial life dictates and/or reflects so much of the nature of individuals lives
generally, antitrust law should be understood for what it is—not merely turgid, arcane, applied economics,
but a primary lever of national social policy.
Chapters 10 and 11 should primarily serve as vehicles for exploring the large policy questions raised by
the continued emergence of a global market and other governments’ antitrust positions. Of course, those
positions are only a present-moment manifestation of the many decades of debate about how much
regulation is necessary and desirable in America.
Chapter Learning Objectives
After completing this chapter, students will be able to:
1. Explain how Microsoft violated U.S. antitrust laws.
2. Analyze when a monopoly has been created.
3. Identify the potential benefits and hazards of mergers.
4. Distinguish between horizontal and vertical mergers.
5. Explain premerger notification requirements.
6. Describe remedies for mergers determined to be anticompetitive.
7. Analyze when a horizontal merger is anticompetitive.
8. Analyze when a vertical merger creates anticompetitive “market foreclosure.”
9. Contrast antitrust enforcement in the United States and the European Union (EU).
Chapter Outline
I. Introduction—Google, Microsoft, and Monopoly
Google Too Big?
Google handles about two-thirds of all web searches, and it reportedly controls about 75 percent of the
search advertising market. Nonetheless, the Federal Trade Commission (FTC) ended a 19-month
investigation of Google by announcing in early 2013 that it would not pursue litigation against the giant.
Rather, Google issued a pair of promises: (1) Google agreed to desist from scraping. Reportedly, Google,
without permission or compensation, was taking reviews and other data from rival websites for use on its
own websites; and (2) Google agreed to ease practices that had discouraged advertisers using Google’s
AdWords platform from simultaneously using rival platforms. The FTC also unanimously concluded that
Google’s search practices were not anticompetitive in that they were designed primarily to improve the
quality of the product delivered to consumers.
Investigations of Google continue in a number of states. Further, the European Union is expected to reach
a settlement with Google that may include more sweeping concessions than those required by the United
States.
Microsoft a Monopolist?
Is Microsoft an outsized, predatory lawbreaker, an amazing force for technological progress, or
both? The U.S. Justice Department, 18 states, and the District of Columbia went to trial against
Microsoft in 1998, claiming not that the software giant was too big, but that it had violated
various antitrust laws in gaining and maintaining its market dominance. An epic legal struggle
followed with major elements of the American justice system challenging one of the world’s
richest men, Bill Gates.
A federal district court in 2000 and later a federal court of appeals ruled that Microsoft had
violated federal antitrust laws by maintaining its 95 percent share of the Intel-compatible PC
operating systems market through anticompetitive means. The case was settled out of court
with Microsoft agreeing, among other things, to not retaliate unfairly against other software and
computer makers, to disclose some software code, and to be temporarily monitored by a federal
judge.
Settlements
The Federal antitrust charges were only the beginning of Microsoft’s battles. Settlements with
Novell, Sun Microsystems, AOL, RealNetworks, and others cost Microsoft billions. European
Union antitrust enforcers pursued Microsoft for a decade before settling their claims out of court
in 2009.
Just as the 2009 settlement appeared to have resolved Microsoft’s European problems, the
European Commission announced in 2013 that it had fined Microsoft over $730 million for
breaking the terms of that settlement. Microsoft apologized for what it said was a technical
problem that had temporarily denied about 15 million users the promised choice of browsers.
Part One—Monopoly
Both the federal district court and the court of appeals in the Microsoft case concluded that the computer
giant held monopoly power in the Intel-compatible PC operating systems market. An extensive,
sophisticated, evolving system of analysis has emerged. Section 5 of the Federal Trade Commission Act
applies to antitrust cases although the wisdom of that use is disputed.
Monopoly Defined
From an economic viewpoint, a monopoly is a situation in which one firm holds the power to
control prices and/or exclude competition in a particular market. The general legal test for
monopolization is:
The possession of monopoly power in the relevant market
The willful acquisition or maintenance of that power, as distinguished from growth or
development as a consequence of a superior product, business acumen, or historic
accident
Antitrust law does not punish efficient companies who legitimately earn and maintain large
market shares. The federal government continues to rely strongly on market concentration data
(structure) in combination with evidence of actual behavior (conduct) to identify anticompetitive
situations.
Oligopoly
A few firms sharing monopoly power constitute an oligopoly. In industries such as telecom, food
processing, credit ratings, and book publishing, it is found that enormous American and
international markets are dominated by a handful of companies. Of course, oligopolies often
produce significant efficiencies, and they may leave market space for smaller competitors,
including start-ups. But in many cases, oligopolies may threaten consumer welfare.
Apple a Monopolist?
In late April 2012, Business Insider, citing Apple’s dominance in the mobile phone and tablet
markets, argued that the “decline of Android signals the rise of Apple’s monopoly.” In
mid-November 2012, Michael Wolff wrote in USA Today that “the age of Apple may be over.”
As Wolff explained, Apple became America’s most valuable company in 2012 with its shares
selling as high as $700, but then Apple’s share price fell back dramatically in part because
Samsung became a powerful competitor in the smartphone market. At the same time, Samsung
tripled its tablet share to 18.4 percent while Apple’s tablet share fell from 60 to 50 percent in one
year. In 2013, the Ninth Circuit Federal Court of Appeals dismissed a class action by iPod and
iTunes buyers claiming that Apple is a monopolist.
I. Monopolization Analysis
Although the case law is not a model of clarity, a rather straightforward framework for monopoly analysis
has emerged:
Define the relevant product market.
Define the relevant geographic market.
Compute the defendant’s market power.
Assess the defendant’s intent (predatory or coercive conduct).
Raise any available defenses.
A. 1. Product Market
Here the court seeks, effectively, to draw a circle that encompasses categories of goods in which the
defendant’s products or services compete and that excludes those not in the same competitive arena.
The fundamental test is interchangeability as determined primarily by the price, use, and quality of the
product in question.
An analysis of cross-elasticity of demand is a key ingredient in defining the product market. Assume
that two products, X and Y, appear to be competitors. Assume that the price of X doubled and Y’s
sales volume was unchanged. What does that tell individuals about whether X and Y are, in fact, in the
same product market? Products closely matched in price, use, and quality are interchangeable, and
thus are competitors in the same product market.
B. 2. Geographic Market
The judicial decisions to date offer no definitive explanation of the geographic market concept. A
working definition might be “any section of the country were the product is sold in commercially
significant quantities.” From an economic perspective, the geographic market is defined by elasticity.
The geographic market must be broadened to embrace new sources of supply. If not, the geographic
market is not larger than the area in question. A better approach is to read the cases and recognize
that each geographic market must simply be identified in terms of its unique economic properties.
C. 3. Market Power (Market Share)
How large a share must be to raise monopoly concerns depends on a variety of considerations
including how fragmented or concentrated the market is. Market share alone, however, does not
establish monopoly power. Barriers to entry, economies of scale, the strength of the competition,
trends in the market, and pricing patterns all help to determine whether the market remains
competitive despite a single firm’s large share.
D. 4. Intent (Predatory or Coercive Conduct)
A monopoly finding requires a showing of both market power (structure) and willful acquisition or
maintenance of that power (conduct). Antitrust law is not designed to attack legitimately earned market
power. Rather, the concern lies with those holding monopoly power that was acquired or maintained
wrongfully. Thus, a showing of deliberate, predatory, coercive, or unfair conduct (such as collusion
leading to price fixing) will normally suffice to establish the requisite intent. In 2009, Intel agreed to pay
$1.25 billion to settle claims AMD brought in a patent and antitrust lawsuit, and the European Union
fined Intel a record $1.45 billion for antitrust offenses.
E. 5. Defenses
The defendant may yet prevail if the evidence demonstrates that the monopoly was innocently
acquired via “superior skill, foresight, or industry;” that is, the monopoly was earned. Sometimes a
monopoly may be “thrust upon” the monopolist because the competition failed or because of “natural
monopoly” conditions where the market will support only one firm or where large economies of scale
exist (such as for electricity suppliers).
II. Attempted Monopolization
The Sherman Act forbids attempts to monopolize as well as monopoly itself. In the 1993 Spectrum Sports
decision, the Supreme Court set out a three-part test for attempted monopolization: (1) that the defendant
has engaged in predatory or anticompetitive conduct with (2) a specific intent to monopolize and (3) a
dangerous probability of achieving monopoly power.
Is Bob Marley a Product Market?
Music producer Rock River released remixed Bob Marley and the Wailers recordings in 2006. Universal
Music Group claimed exclusive rights to those recordings and sent “cease and desist” orders to music
distributors (Amazon, iTunes, etc.) who immediately discontinued sale of the Rock River remix. Rock
River then sued Universal alleging attempted monopoly of the reggae genre of sound recordings in the
United States, among other claims. Rock River alleged that Universal “accounted for 81 percent of the
reggae sound recordings sold, and Bob Marley recordings accounted for 76 percent of the total reggae
recordings sold.”
A. Monopoly Case I
The case that follows is a private antitrust action involving a claim by Christy Sports, a Utah ski rental
company, that Deer Valley Resort Company (DVRC), a ski resort developer/operator, had monopoly
power over Deer Valley Resort’s ski rental business and that DVRC abused that power to harm Christy
Sports.
Legal Briefcase: Christy Sports v. Deer Valley Resort Company 555 F.3d 1188 (10th Cir. 2009)
B. Monopoly Case II
The Syufy case that follows reflects what may be the dominant “ideological” view of monopoly among
federal court judges. The decision embodies the free-market philosophy of the Reagan and Bush
administrations and their judicial appointees, and it suggests an increasing judicial acceptance of the
position that dominant market shares may be earned and maintained legitimately—particularly where
competition can easily enter the market.
Legal Briefcase: U.S. v. Syufy Enterprises 903 F.2d 659 (9th Cir. 1990)
Practicing Ethics: Break Up the Biggest Banks?
Sanford Weill, spoke to America’s ongoing financial crisis in 2012:
“What we should probably do is go split up investment baking from banking, have banks be
deposit-takers, have banks make commercial loans and real estate loans, have banks do
something that’s not going to risk the taxpayer dollars, that’s not too big to fail.”
By 2006 Weill had relinquished his Citicorp duties, and his colossal bank was reduced to taking huge
government bailout funds during the recent financial crisis. His strategy had failed his bank and
arguably threatened the welfare of the nation. Weill was reduced, basically, to calling for a return to the
1933 Glass–Steagall Act (separating commercial and investment banking), which Congress repealed
in 1999, much to the delight of Wall Street bosses.
Part Two—Mergers
In 2013, merger activity remained generally flat following the recession, but corporations are holding vast
pools of cash so a new merger boom is not out of the question. The two most notable recent mergers are
the $23 billion takeover of Pittsburgh ketchup maker, H.J. Heinz, by 3G Capital and Berkshire Hathaway,
and the $11 billion merger of American Airlines and US Airways, creating the world’s largest airline.
American and US Airways say the merger will lower costs and allow American Airlines Group to better
compete with entrenched giants Delta Air Lines and United Airlines. The government believes the
settlement, giving low-cost airlines a bigger foothold at key airports, will produce more competitive pricing.
Some mergers may be considered a business necessity, but not infrequently they are much better for
shareholders than for consumers.
Why?
Technological change, efficiency enhancement, and piles of available cash are often important
motivators for merger activity; but the big drivers often are growth opportunities and cost cutting.
Many companies have extracted maximum value from their own products, making growth
possible only by purchasing new lines, and cost savings have become essential in fierce global
competition.
A. Merger Virtues
Mergers often have clearly beneficial effects. Some of the potential virtues of mergers include:
Mergers permit the replacement of inefficient management, and the threat of replacement
disciplines managers to be more productive.
Mergers may permit stronger competition with previously larger rivals.
Mergers may improve credit access.
Mergers may produce efficiencies including economies of scale.
Mergers frequently offer a pool of liquid assets for use in expansion and in innovation.
Very often, mergers offer tax advantages.
Growth by merger is often less expensive than internal growth.
Mergers help satisfy the personal ambitions and needs of management.
Practicing Ethics: Mergers That Abuse Customers?
In 2011, the federal government approved, with restrictions, a merger giving Comcast, a controlling
interest in the NBC television network. In 2013, Comcast announced it was buying the remaining 49
percent of NBCUniversal. From the inception, one of the parties most concerned was the
California-based Tennis Channel, which feared Comcast would favor its own sports channels over the
Tennis Channel and other independents.
The Tennis Channel filed a complaint with the Federal Communications Commission alleging that
Comcast is violating the law and the terms of the merger agreement by favorable placement for the
Golf Channel and NBC Sports Network while leaving the Tennis Channel on a little-watched sports tier.
At the texts writing, the case is on appeal at the U.S. Court of Appeals for the D.C. Circuit (Case No.
12-1337) where the primary questions appear to be the statute of limitations for such complaints and
whether restrictions on Comcast’s treatment of the Tennis Channel would violate Comcast’s freedom
of speech.
B. Merger Problems
Experts generally estimate the merger failure rate, measured in various ways, at between 50 and 80
percent. In addition to those frequent financial failures, other merger hazards should be noted:
Too much power is being concentrated in too few hands
A particular merger, although not threatening in and of itself, may trigger a merger movement
among industry competitors
Higher market concentration may lead to higher prices
Innovation may be harmed
Some companies are so large that they can significantly shape political affairs
Some companies may have become so large that is it not allowed for them to fai.
When Should the Government Intervene?
The U.S. Justice Department faced that question in reviewing Anheuser-Busch InBev’s (ABI)
proposed $20.1 billion acquisition of the 50 percent of Mexican brewer Grupo Modelo not
already owned by ABI. Justice’s core concern was that the acquisition would eliminate Modelo
as a restraint on ABI’s capacity to raise prices, increase its market share, and coordinate pricing
policies with the remaining brewers. Justice noted that ABI had been raising prices with
regularity and that even small price increases could lead to billions in total increased costs for
consumers.
ABI, the world’s largest brewer, is the product of a 2008 merger between Anheuser-Busch and
InBev, a Belgian-Brazilian goliath. ABI itself reportedly has announced a total of 15 takeovers
since the middle of 2008. The acquisition likely will help ABI reduce costs, a matter of particular
concern for Budweiser whose sales have slumped for 25 consecutive years.
International competition is already fierce with ABI challenged by Denmark’s Carlsberg, Britain’s
SABMiller, and Japan’s Asahi. Thus, ABI and many experts argue that the merger is simply part
of a much larger global pattern of consolidation necessary to operate efficiently. Indeed, since
InBev acquired Anheuser-Busch, the new organization cut costs by several billion dollars and
instituted tighter organizational controls.
I. Merger Law: Overview
Technically, a merger involves the union of two or more enterprises wherein the property of all is
transferred to the one remaining firm. However, antitrust law embraces all those situations in which
previously independent business entitles are united—whether by acquisition of stock, purchase of
physical assets, creation of holding companies, consolidation, or merger.
Mergers fall into three categories:
A Horizontal merger involves firms that are in direct competition and occupy the same product and
geographic markets.
A vertical merger involves two or more firms at different levels of the same channel of distribution,
such as a furniture manufacturer and a fabric supplier.
A conglomerate merger involves firms dealing in unrelated products.
Premerger Notification
Under the Hart-Scott-Rodino Antitrust Improvements Act (HSR), mergers and acquisitions must
be reported to the Federal Trade Commission and the Justice Department if those deals exceed
certain dollar thresholds that change annually in accord with the gross national product. [For
more HSR threshold details, see http://www.ftc.gov/bc/hsr/index.shtm]
The merging firms are required to provide documentation about the merger’s impact on
competition. The waiting period gives the government time and information by which to
determine whether the merger should be challenged.
Remedies
After the HSR review, the government may decide that the merger is not threatening, and it will
be allowed to proceed. The government may, on the other hand, conclude that the merger is
anticompetitive. If the parties persist with a disfavored merger, the government can file suit. A
settlement might involve one of the parties selling some of its assets or agreeing to forego
business in some geographic segment of the market for a time.
In cases where negotiation fails and the government decides to sue, it can ask the court for a
remedy, such as an order stopping the merger or an order requiring divestiture of certain
aspects. Government litigation is infrequent, but the resulting message to the business
community is powerful. Furthermore, private parties commonly use the antitrust laws to sue for
treble damages when they believe a merger has harmed them unlawfully. [To read summaries of
recent developments in antitrust law, see Antitrust Today at http://www.antitrusttoday.com/]
[For a humorous treatment of mergers, see Stephen Colbert’s 2007 video segment,
“Mega-Mergers,” at www.businessinsider.com/stephen-colbert-att-2011-3]
II. Horizontal Analysis
Horizontal merger analysis ordinarily follows the FTC/Justice Department merger guidelines, which focus
on a pair of concerns:
Coordinated effects/collusion—broadly, the government takes the position that fewer firms and thus
greater market concentration increases the likelihood of collusion—a position the courts often, but
not always, embrace.
Unilateral effects—arise with products that significantly restrain each other prior to the merger. A
merger’s removal of a rival could allow the newly merged entity to exercise market power.
A. Market Power
Broadly, the guidelines are designed to identify mergers that may result in market power, defined as
the ability of a seller “profitably to maintain prices above competitive levels for a significant period of
time.” The guidelines set out a five-step methodology for analyzing horizontal mergers:
Market definition
Measurement of market concentration
Identification of likely anticompetitive effects
Likelihood of future entrants to the market
Appraisal of efficiencies and other possible defenses
Market
The market will be defined as the smallest product and geographic market in which a hypothetical
monopolist could raise prices a small but significant and non-transitory amount (usually set at 5
percent above current prices).
Market Concentration
The Herfindahl-Hirschman Index (HHI) is employed to measure market concentration. The market
share of each firm is squared and the results are summed. Thus, if five companies each had 20
percent of a market, the index for that market would be 2,000. The larger the HHI, the more
concentrated the market. The greater the HHI and the greater the increase in the HHI, the more
likely the government will be concerned about the merger.
The guidelines provide that the potential for competitive concern also depends on the analysis of
additional factors, such as a change in the number of competitors along with adverse effects and
ease of entry, as explained below. Broadly, the government’s guidelines reject the older notion of
market size alone as a threat to the welfare of the economy.
Adverse Effects
The basic point here is the government’s worry that the merger may permit monopoly behavior in
the merged firm’s market.
Ease of Entry
If new competitors can readily enter the post-merger market, the existing firms will be forced to
charge competitive prices and otherwise conform to the discipline of the market.
Defenses
An otherwise unacceptable merger may be saved by certain defenses. The failing company
doctrine permits a merger to preserve the assets of a firm that would otherwise be lost to the
market. Efficiencies include such desirable economic results as economies of scale or reduced
transportation costs as a result of the merger..
III. Guideline Changes
In 2010, the Justice Department and the Federal Trade Commission announced revisions to the
Horizontal Merger Guidelines that bring the Guidelines more in line with actual government practice. The
new reasoning is that the analysis will begin in identifying practical, real-world competitive harm at which
point market definition and the balance of the analysis outlined above would be influential. This approach
may, therefore, allow the government greater flexibility in proving competition problems even if high
market shares cannot be established.
Horizontal Merger Blocked
The Justice Department’s successful 2011 challenge to a proposed horizontal merger between tax
preparers H&R Block and Tax ACT illustrates many of the aforementioned considerations described to
evaluate the legality of a horizontal merger. Judge Beryl Howell at the District Court for the District of
Columbia agreed with the Justice Department that the relevant product market was digital do-it-yourself
(DDIY) tax preparation products with the three largest firms controlling 90 percent of the market and the
remaining 10 percent split among a number of smaller firms. The court concluded that H&R Block had
failed to show that collusion would not result in what would have become a highly concentrated
post-merger market.
IV. Vertical Analysis
A vertical merger typically involves an alliance between a supplier and a purchaser. The primary resulting
threat to competition is labeled market foreclosure. A vertical merger may deny a source of supply to a
purchaser or an outlet for sale to a seller, thus potentially threatening competition in violation of the
Clayton Act.
In addition to foreclosing sources of supply or outlets for sale, the government may be concerned about
other anticompetitive effects such as raising rivals’ costs, facilitating collusion, and raising barriers to
entry.
Vertical Merger Challenge
The government has practiced a generally lenient approach to vertical mergers, but under some
conditions they will be challenged. That was the case with the Ticketmaster-Live Nation merger
that was largely vertical in character although it included some horizontal features.
Obama administration antitrust officials made it clear that the government would resist the
merger. 30 Litigation was not necessary, however, because the merger partners and the Justice
Department in 2010 agreed to a settlement allowing the creation of the new company—to be
called Live Nation Entertainment. Ticketmaster agreed to divest itself of one of its ticketing
divisions while licensing its ticketing software to a competitor, thus effectively allowing the
creation of two new competitors for Ticketmaster.
V. Horizontal Merger Case
The Staples–Office Depot litigation that follows illustrates the standard horizontal merger analysis.
Legal Briefcase: Federal Trade Commission v. Staples, Inc. and Office Depot, Inc. 970 F. Supp.
1066 (D.D.C. 1997)
Part Three—American Antitrust Laws and the International Market
America’s commercial market embraces the entire globe. Antitrust questions can become extremely
complex in transactions involving multiple companies in multiple nations, where those transactions are
potentially governed by both U.S. and foreign antitrust laws. United States antitrust laws are, of course,
applicable to foreign firms doing business here. The Sherman, Clayton, and FTC acts, among others, are
all potentially applicable to American business abroad.
A. Sherman Act
The Sherman Act applies to the conduct of American business abroad when that business has a direct
effect on American commerce. That the business was conducted entirely abroad or that the agreement
was entered into another nation does not excuse an American firm from the reach of the Sherman Act.
B. Clayton Act
Section 7 of the Clayton Act is clearly applicable to acquisitions combining domestic and foreign firms
and is potentially applicable to acquisitions not involving American firms if the effect would harm
competition in the American market.
C. Federal Trade Commission Act
As noted earlier, the FTC shares antitrust enforcement authority with the Justice Department, and
Section 5 of the act strengthens Clayton 7.
D. Extraterritoriality
Since 1992, the U.S. Justice Department has claimed national authority to apply American antitrust
law abroad. In practice, the Justice Department files suit in U.S. courts against foreign companies
operating in the United States if those foreign companies are taking action abroad that (1) harms
competition in the United States or (2) limits American access to markets in other nations. Those
lawsuits are permissible under U.S. law only where the conduct abroad has a “direct, substantial, and
reasonably foreseeable” effect on the United States’ domestic market.
I. International Antitrust Enforcement
Most antitrust enforcement occurs in the United States and the European Union, but other nations are
taking a more aggressive stance, usually by employing laws that largely mimic those of the United States
or the European Union.
European Union Antitrust Enforcement
In general, American and European Union antitrust policies are compatible and are the product
of constant consultation. Nonetheless, EU regulators have demonstrated that they are willing to
part ways with America if market conditions require. Given the European Union’s powerful
economic role, the antitrust decisions of EU regulators necessarily influence business practices
worldwide. [For access to EU antitrust law, see
http://ec.europa.eu/competition/index_en.html
Other Nations
The number of nations with competition laws soared from 40 in 1995 to more than 125 in 2009,
33 and the beginning of a worldwide convergence of those laws led by the United States, the
European Union, and China is evident. Indeed, in 2012, the European Union and China signed
a memorandum of understanding affirming antitrust cooperation, much as the United States and
China had done in 2011.
Reflecting the broadened importance of antitrust in our complex global markets, regulators in
2012 began to assert themselves more aggressively in India where Apple and Google
reportedly are both under investigation and where a wide range of industries, including cement
and tire manufacturing, are being scrutinized for alleged price fixing.