Landmark Case: United States v. Trenton Potteries Company1
Facts: This case involved dirty behavior in the bathroom fixture business. The federal government al –
leged 23 of the corporations that manufactured these fixtures had agreed on the prices they would
charge their customers. The defendants argued that they had not violated the law because their prices
had been reasonable.
They were found guilty at trial but the appeals court overturned their convictions. The Supreme Court
granted certiorari.
Issue: Is price-fixing legal so long as the prices are reasonable?
Decision: Price-fixing is a per se violation, even if the prices are reasonable.
Reasoning: The goal of the Sherman Act is to promote competition, but price-fixing automatically
eliminates one form of it. Indeed, the power to fix prices is the power to control a market, an outcome
that the Sherman Act prohibits.
Moreover, even if the prices were fair when set, the reasonable price fixed today may through econom-
ic and business changes become the unreasonable price of tomorrow. And it would be wrong to require
the government to prove that prices are unreasonable, especially since economists may not be able to
agree.
For these reasons, the judgment of the appeals court is reversed.
Question: What was the Supreme Court’s holding?
Answer: The Court held that a price-fixing agreement among competitors is an unreasonable re –
Additional Information: In 1940, in another case brought by the United States in the oil industry,
United States v. Socony-Vacuum Oil Co., the Supreme Court repeated that price-fixing agreements are
illegal per se and that “no showing of so-called competitive abuses or evils which those agreements
were designed to eliminate or alleviate may be interposed as a defense.”
Resale Price Maintenance
Resale price maintenance (RPM) (also called vertical price-fixing) means the manufacturer sets the
minimum prices that retailers may charge. In other words, it prevents retailers from discounting.
Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc.2
Facts: Leegin manufactured belts and other women’s fashion accessories under the brand name
“Brighton.” It sold these products only to small boutiques and specialty stores. Sales of the Brighton
brand accounted for about half the profits at Kay’s Kloset, a boutique in Lewisville, Texas.
Leegin decided it would no longer sell to retailers who discounted Brighton prices. It wanted to en –
sure that stores could afford to offer excellent service. It was also concerned that discounting harmed
Brighton’s image. Despite warnings from Leegin, Kay’s Kloset persisted in marking down Brighton
products by 20 percent. So Leegin cut the store off.
Kay’s sued Leegin, alleging that RPM was a per se rule violation of the law. The trial court found
for Kay’s and entered judgment against Leegin for almost $4 million. The Court of Appeals affirmed.
The Supreme Court granted certiorari. On appeal, Leegin did not dispute that it had entered into RPM
1 273 U.S. 392; 1927 U.S. LEXIS 975, SUPREME COURT OF THE UNITED STATES, 1927.
2 127 S. Ct. 2705, 2007 U.S. LEXIS 8668 (Supreme Court of the United States, 2007).
agreements with retailers. Rather, it contended that the rule of reason should apply to those agree –
ments.
Issue: Is RPM a per se or rule of reason violation of the Sherman Act?
Decision: RPM is a rule of reason violation.
Reasoning: To be a per se violation, an activity must not only be anti-competitive, it must also lack any
redeeming virtue. Recent research indicates that RPM may offer some benefits:
Retailers can provide better service. Without RPM, consumers might go look at a product at the
retailer who hires experienced sales help or offers product demonstrations but then go buy the
item from a discounter who provides none of these services. In short order, the upscale retailer
will either go out of business or cut back on service and consumers will have fewer options.
If retailers do not have to compete with others who sell the same brand, they can focus instead
on competing against other brands. For example, retailers selling the same brand may pool their
marketing dollars to have greater impact.
It is worth noting, though, that RPM can have an anti-competitive effect. A manufacturer with market
power could, for example, use RPM to give retailers an incentive not to sell the products of smaller ri –
vals. Courts must be diligent in recognizing and preventing any RPM that has an anti-competitive im –
pact.
Question: Can RPM have anti-competitive effects?
Answer: Yes, according to the court. RPM may make it so expensive for a retailer to sell certain prod –
Question: If the price agreements have an anti-competitive effect, why did the court decide they were
to be judged using rule of reason instead of the per se standard?
Answer: The court decided the rule of reason standard applied to RPM because although there are some
anti-competitive effects of the agreements, there are also many pro-competitive effects, such as increas –
Monopolization
Under §2 of the Sherman Act, it is illegal to monopolize or attempt to monopolize a market. To monop-
olize means to acquire control over a market in the wrong way. Having a monopoly is legal unless it is
gained or maintained by using wrongful tactics.
Predatory Pricing
Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of busi –
ness. To win a predatory pricing case, the plaintiff must prove three elements:
1. The defendant is selling his products below cost.
2. The defendant intends that the plaintiff go out of business.
3. If the plaintiff does go out of business, the defendant will be able to earn sufficient profits to
recover its prior losses.
The Clayton Act
Mergers
The Clayton Act prohibits mergers that are anti-competitive. In determining whether to permit a merg-
er, the government and the courts consider how the merger will affect competition and consumers.
Landmark Case: United States v. Waste Management, Inc. 3
Facts: Waste Management, Inc. (WMI) acquired Texas Industrial Disposal, Inc. (TIDI). Both compa –
nies were in the trash collection business. In Dallas, their combined market share was
48.8 percent. The trial court held that the merger was illegal and ordered WMI to divest itself of TIDI.
Issue: Did WMI violate the Clayton Act by acquiring TIDI?
Decision: No, this merger was not an antitrust violation.
Reasoning: A large market share creates a presumption of monopoly power but the parties can rebut
that presumption by showing that the merger does not have an anticompetitive impact.
Although WMI’s acquisition of TIDI led to a nearly 50 percent market share, WMI nonetheless
made a compelling argument that it was not able to exercise monopoly power. In Dallas, competitors
could easily enter the waste hauling business. Thus, if WMI raised prices, new firms could enter the
market, driving prices down. Indeed, over the previous 10 years, a number of companies had started in
the commercial trash collection business. A person could simply acquire a truck, a few containers,
drive the truck himself, and operate out of his home. This individual’s success would depend on his per-
sonal initiative, and whether he had the desire and energy to provide a high level of service.
Because barriers to entry were low, WMI’s 48.8 percent market share did not accurately reflect fu-
ture market power. Thus, the merger did not substantially lessen competition in the relevant market and
was not a violation of the Clayton Act.
Question: Why was the 48.8 percent market share figure important?
Question: If the goal is to prevent anti-competitive mergers, would it be easier simply to set a mar-
ket share threshold, above which percentage potential mergers will not be allowed?
Answer: A threshold might be more efficient, however such a restriction by the government could
Tying Arrangements
A tying arrangement is an agreement to sell a product on the condition that the buyer also pur –
chases a different (or tied) product. A tying arrangement is illegal under the Clayton Act if:
• The two products are clearly separate;
• The seller requires the buyer to purchase the two products together;
• The seller has significant power in the market for the tying product; and
• The seller is shutting out a significant part of the market for the tied product.
3 12743 F.2d 976, 1984 U.S. App. LEXIS 18843.
The Robinson-Patman Act
Under the Robinson-Patman Act (RPA), it is illegal to charge different prices to different purchasers if:
• The items are the same; and
• The price discrimination lessens competition.
However, it is legal to charge a lower price to a particular buyer if:
• The costs of serving this buyer are lower; or
• The seller is simply meeting competition.
Multiple-Choice Questions
1. Under Regulation D, an issuer:
(a) May not sells to 1,000 accredited investors.
(b) May not sells to 27 unaccredited investors.
2. Which of the following statements is not true about a public offering?
(a) The issuer files a registration statement with the SEC.
(b) The issuer files a prospectus with the SEC.
3. To have an illegal monopoly, a company must:
I. Control the market.
II. Maintain its control improperly.
III. Have a market share greater than 50 percent.
(a) I, II, and III.
4. Lloyd sold car floor mats to Mercedes dealerships. Then Mercedes began to include floor mats as
standard equipment. Mercedes has a 10 percent share of the luxury car market.
(a) Mercedes has created an illegal tying arrangement because floor mats and cars are separate
products.
(c) Mercedes has not created an illegal tying arrangement because it is not tying the two products
together.
(d) Mercedes has created an illegal tying arrangement because it controls the market in floor mats.
5. Mike is director of sales for his company. He negotiates prices with Paige and Lauren, who work
for two of his biggest customers. Paige tells him that she can buy the same product cheaper
elsewhere. He cuts the price for her, but not for his other customers. At the same time, he develops
a crush on Lauren, so offers to sell her the product at a lower price. In subsequent months, these
two customers come to dominate the market. Which statement is correct:
(a) Mike can charge whatever price he wants to any customer.
(b) Mike must charge all his customers the same price.
(d) The price cut to Lauren, but not Paige, is legal.
(e) Mike is not required to charge all his customers the same price, but neither of these price cuts
is legal.
Essay Questions
1. Jonah bought 12 paintings from Theo’s Art Gallery at a total cost of $1 million. Theo told Jonah
that the paintings were a safe investment that could only go up in value. The gallery permitted any
purchaser to trade in a painting in return for any other artwork the gallery owned. In the trade-in,
the purchaser would get credit for the amount of the original painting and then pay the difference if
the new painting was worth more. When Jonah’s paintings did not increase in value, he sued Theo
for a violation of the securities laws. Were these paintings securities?
2. You’re in line at the movie theater when you overhear a stranger say: “The FDA has just approved
Hernstrom’s new painkiller. When the announcement is made on Monday, Hernstrom stock will
take off.” What if you buy stock of the company before the announcement on Monday?
Answer: This is how Investor’s Business Daily, Inc. answered: “In this case, answer “(b)” shouldn’t
3. In New York City, 50 bakeries agreed to raise the retail price of bread. All the association’s mem –
bers printed the new price on their bread sleeves. Are the bakeries in violation of the antitrust
laws?
Answer: Four directors of the association were indicted on antitrust charges. They were charged
4. Suppose that Disney insists that retailers cannot sell DVDs of Ratatouille for less than $16.99.
The company threatens to cut off any retailers who discount that price. But video stores would like
to use these movies as a loss leader, selling them at a very low price to lure customers. Is it legal
for Disney to cut off retailers who discount prices?
Answer: It used to be a per se violation of the Sherman Act for a manufacturer to set minimum
5. Reserve Supply Corp., a cooperative of 379 lumber dealers, charged that Owens-Corning Fiber –
glass Corp. violated the Robinson-Patman Act by selling at lower prices to Reserve’s competitors.
Owens-Corning had granted lower prices to a number of Reserve’s competitors to meet, but not
beat, the prices of other insulation manufacturers. Is Owens-Corning in violation of the Robinson-
Patman Act?
Answer: Owens-Corning had not violated the Robinson-Patman Act because the company had
Discussion Questions
1. Federal security laws are based on the assumption that investors are knowledgeable enough to as –
sess the quality of a stock so long as the issuer provides adequate disclosure. Is this assumption
reasonable or should securities laws provide greater protection to investors?
2. ETHICS David Sokol worked at Berkshire Hathaway for legendary investor Warren Buffett, who
is renowned not only for his investment skills but also his ethics. Bankers suggested to both Sokol
and the CEO of Lubrizol that the company might be a good buy for Berkshire. Sokol then found out
that the CEO of Lubrizol planned to ask his board for permission to approach Berkshire about a
possible acquisition. Sokol purchased $10 million worth of Lubrizol stock before recommending
Lubrizol to Buffett. Sokol mentioned to Buffett “in passing” that he owned shares of Lubrizol. Buf-
fett did not ask any questions about the timing or amount of Sokol’s purchases. Sokol made a $3
million profit when Berkshire acquired Lubrizol. Did Sokol violate insider trading laws? Did he be-
have ethically? What about Buffett?
Answer: Was the information Sokol had material? Buffett defended the purchase by saying that
3. The SEC believes that anyone in possession of non-public material information about a company
should be required to disclose it before trading on the stock of that enterprise. Instead, the courts
have developed a more complex set of rules. Do you agree with the SEC or the courts on this is –
sue?
4. Resale Price maintenance used to be a per se violation of the antitrust laws, but now it is a rule of
reason violation. Will this change in the law lead to higher or lower prices for consumers? Will it
provide other benefits for consumers? Do you agree with the Supreme Court’s decision?
5. ETHICS Clarice, a young woman with a mental disability, brought a malpractice suit against a
doctor at the Medical Center. As a result, the Medical Center refused to treat her on a nonemer –
gency basis. Clarice then went to another local clinic, which was later acquired by the Medical
Center. Because the new clinic also refused to treat her, Clarice had to seek medical treatment in
another town 40 miles away. Has the Medical Center violated the antitrust laws? Was is it ethical
to deny treatment to a patient?
Answer: Clarice brought suit alleging that Medical Center had monopolized medical care in viola-