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Add. Case: South Austin Coalition Community Council v. SBC Communications (7th Cir.,
2001)--SBC and Ameritech, two Baby Bells, merged after receiving approval from the FCC and
state regulators. Justice did not oppose the merger. A consumer group sought to enjoin the
merger on the grounds that the firms were potential competitors. Consumers were injured
because of the loss of potential competition, as each firm might enter the market of the other to
offer phone service. The court held that the plaintiff did not have standing and dismissed the
suit; plaintiffs appealed.
Decision: Affirmed. Approval by the FCC does not immunize the merger against a private
challenge, so the consumer group has standing to challenge the merger. If the complaint alleged
that the merger reduced competition between firms that were currently competing, then relief
could be sought. But under the Clayton Act there is an exception for mergers of common carriers
that are not in competition. The firms are regulated monopolies with assigned territories that did
not overlap before the merger. The argument that they are potential competitors does not stand.
When Mergers Are Allowed—Under the failing firm doctrine, a court may allow a merger to
take place if the firm being acquired is unlikely to survive without the merger; if the firm has no
other prospective buyers or the buyer at issue will affect competition the least; and, if all other
alternatives for saving the firm have been tried. Enhanced efficiency is another defense to a
merger.
Considering Business Realities—Weighing the economic evidence, the courts often decide that
mergers are not harmful to consumers or to competition. In the General Dynamics case, the
Court emphasized the rule of reason approach in such matters.
Add. Case: U.S. v. General Dynamics (S. Ct., 1974)--General Dynamics had a number of
different business interests, including a deep-mining coal operation. The company wished to
acquire a strip-mining company. The government challenged the acquisition, on the basis of §7
of the Clayton Act, claiming such a merger would lessen competition.
Decision: The Court looked at the history of the coal industry and noted that the demand for
coal had fallen, causing a restructuring in the industry. Many companies exited the market. The
future ability of a company to compete, not just its past production, was to be considered when
reviewing a proposed merger. Given the coal industry’s reliance on long-term contracts, past
ability to produce was not a good indicator of competitive power; rather, uncommitted coal
reserves more effectively reflect such power. It was important that the company was selling coal
to large utilities, because that meant purchasers were sophisticated organizations that knew how
to shop the market. Further, utilities require large quantities of coal for long time periods. They
would not sign a contract with a company that would be unlikely to deliver the quantity needed
over time. The Court allowed the merger because the government failed to prove that the
combination would cause economic damage.
Add. Case: Endsley v. City of Chicago (7th Cir., 2000)--Chicago owns a toll bridge, the
Chicago Skyway. Payments for the bridge come from tolls charged to those who use it. Per mile,
it is the most expensive toll in the state. The City has collected $52 million more than needed for
the bridge; the extra funds go for other projects. Endsley, a bridge user, brought a class action
suit against the City, contending that the toll exploits the monopoly power of the bridge in
violation of the Sherman Act. Court dismissed the suit; Endsley appealed.
Decision: Affirmed. “The facts do not suggest that the City has monopoly power in the relevant
market (high-speed limited access routes connecting Chicago to Indiana). At least two alternate
routes ... ‘compete’ with the Skyway. While the Skyway may be the more desirable route, it is not
the only high-speed roadway between Chicago and the Indiana Tollway. ... The availability of
those very viable options for a high-speed access route linking Chicago to Indiana indicates that
the City does not have monopoly power over the relevant market.” The fact that the City charges
a toll greater than is needed to pay for the bridge is not, of itself, anti-competitive.
Add. Info: Power-buyer defense: One business-reality defense recently becoming popular in
some lower federal courts is the power-buyer defense. Under this defense, a merger creating a
high degree of industry concentration will be permitted if the customers of the merged firm are
sophisticated buyers who enjoy substantial bargaining power over their suppliers. The idea is
that powerful buyers will bargain down the price that even monopoly sellers might otherwise
charge.
A case featuring the power-buyer defense is U.S. v. Baker Hughes (D.C. Cir. 1991). The
appellate court denied the government’s attempt to prevent the merger of makers of hardrock
hydraulic underground drilling rigs. Although the court conceded that this merger would further
concentrate an already heavily concentrated industry, the court put great stock in the fact that
oil companies were the main customers of this industry--and oil companies could fend for
themselves in the market against even highly concentrated suppliers. This business reality of
power buyers was sufficient, in the court’s view, to ensure against monopoly pricing in the
hydraulic underground drilling rig industry. The Supreme Court has not yet ruled on the
power-buyer defense. A more conventional defense based on business realities is the claim that,
although the industry is concentrated, firms in the industry have no monopoly power.
Add. Case: Hospital Corp. of America v. FTC (7th Cir., 1986)--HCA was the largest chain of
private hospitals in the country. It owned a hospital in Chattanooga. HCA bought two
corporations, both of which had hospitals in Chattanooga. After the merger, HCA ran 5 of 11
hospitals in the Chattanooga area. The FTC challenged the merger as a violation of the Clayton
Act.
Decision: The Supreme Court has adopted an “economic concept” of competition. It focuses on
the harm to consumers from a merger. Under an economic approach, a merger will be denied if
it is “likely to facilitate collusion.” Reduced competition, a cooperative relationship among
hospitals, inelastic demand, and barriers to entry all contributed to the court finding the merger
illegal.
Add. Case: U.S. v. Western Electric (DC Cir., 1995)--AT&T, the largest long distance
telephone company, and McCaw, the largest cellular telephone company, wished to merge.
AT&T applied for a waiver of the 1982 court order that broke AT&T up by splitting off the
regional bell companies. The district court (Judge Greene) granted the waiver, allowing the
merger with certain restrictions. BellSouth, a cellular competitor, protested.
Decision: Affirmed. It was within the power of the district court to review the competitiveness of
the market and the reasonableness of the merger. Given the evolution of the highly competitive
cellular phone market, AT&T needed a cellular partner to be a competitor. To prohibit the
merger would, in fact, “artificially and unfairly restrict competition,” which is the opposite of
what the antitrust law is to provide. The decision is consistent with the evolution of the phone
market.
Cyberlaw: B2B Antitrust Concerns
Business to Business sales on the Internet are of much greater value than consumer sales and
have greatly increased competition. A concern of antitrust authorities is that if auctions by
companies buying supplies and inputs are not handled properly they could result in competitors
being able to share pricing information and collude.
HORIZONTAL RESTRAINTS OF TRADE—Businesses at the same level of operation (i.e., a
group of retailers or a group of producers of the same product), generally in the same market,
integrate in some manner, either through contract, merger or conspiracy, so that competition is
restricted. Some cartels, such as OPEC, are government backed, and so cannot be prosecuted.
Price Fixing—Firms that sell the same product engage in horizontal price fixing if these firms
agree to work together on setting prices for their products. Horizontal price-fixing is per se
illegal the Supreme Court has held; that is, evidence of such price-fixing automatically means the
antitrust laws have been violated. Trenton Potteries is a leading original case. Another was the
1982 case, Arizona v. Maricopa Co. Med. Soc. There, doctors joining medical service plans
agreed not to charge more than maximum fees set by plan operators. That was held a Sherman
Act violation to fix maximum fees, and so per se illegal. The Supreme Court has noted that some
pricing arrangements may allow certain joint ventures to work that otherwise might not be able
to exist. In such cases, such as Broadcast Music and NCAA, a rule of reason analysis will apply.
CASE: Freeman v. San Diego Assn. of Realtors (9th Cir., 2003)—Real estate agents share info
about listed properties via Multiple Listing Services they subscribe to. In San Diego, 11 of 12
MLS services joined together standardized prices, which were generally higher than before,
although lower for some subscribers. Freeman, a realtor, sued, contending the price was too high
and that the central agency, Sandicor, was earning high profits. Court dismissed; Freeman
appealed.
Decision: Reversed. Price fixing is the worst kind of antitrust violation. This is a per se violation
of the Sherman Act. There was a horizontal agreement among the MLS firms to work through
Sandicor, which gave each MLS half the take from each realtor. By working together, they could
monopolize the market.
Questions: 1. Sandicor claimed that the quality of their data was better because all associations
contributed data, so the subscribers got superior service. Why did that argument not matter?
Sandicor was making big profits. No doubt it was a lower cost operation than the previous
2. Sandicor claimed that it helped competition because the smallest, highest cost associations
were kept in business because they were subsidized by the larger ones. Why was that argument
rejected?
The court said that if all competitor associations charge the same price, there is hardly
competition. It would be as if every Ford dealer charged exactly the same price for the cars they
Add. Case: Texaco v. Dagher (Sup. Ct., 2006)--Texaco and Shell formed a joint venture,
Equilon, to refine and sell gasoline in the western U.S. under the two companies’ brand names.
Equilon set a single price for both brands. A group of Shell and Texaco service station owners
sued, contending that by unifying gas prices under two brands, the companies violated the per se
rule against price fixing under Section 1 of the Sherman Act. The district court held that a rule of
reason applied and found no violation of the Sherman Act. The appeals court reversed. Texaco
and Shell appealed.
Decision: Reversed. It is not per se illegal under the Sherman Act for an economically integrated
joint venture to set prices at which it sells its products. Per se liability is reserved for only those
agreements that are so plainly anticompetitive that no elaborate study of industry is needed to
establish their illegality. The Act only prohibits unreasonable restraints of trade. Under a rule of
reason analysis, a plaintiff must show that a particular contract or combination is in fact
unreasonable and anticompetitive before it will be found unlawful. Shell and Texaco did not
directly compete in the retail gas market served by Equilon, so there was no anticompetitive act.
Add. Case: U.S. v. Trenton Potteries (S. Ct., 1927)--The Sanitary Potters’ Assn. was a group of
manufacturers and distributors of bathroom fixtures who controlled 82% of the market. The Assn
fixed prices and restrained sales and trade. The case was concerned with whether or not
price-fixing agreements were unreasonable restraints of trade.
Decision: The Court noted that the result of price-fixing is a reduction in competition, and
increased control of and power over the market. The Court held agreements which led to the
creation of such power may be viewed as “unreasonable or unlawful.” The case established the
rule of per se illegality in price-fixing situations.
Add. Case: Catalono v. Target Sales (S. Ct., 1980)--To reduce competition, Target Sales and
other alcohol wholesalers secretly agreed to sell only to retailers who paid in advance or on
delivery. Before this, wholesalers followed state law, which permitted the extension of credit
without interest for 30- and 42-day periods. The wholesalers had competed with each other on
credit terms given to retailers. In the post-agreement period, no credit was extended. Catalono
was a beer retailer who brought suit alleging that fixing credit terms was a violation of §1 of the
Sherman Act.
Decision: The Court agreed with the lower court that “an agreement to eliminate credit was a
form of price fixing.” The secretive agreement at issue was found to be per se illegal. The Court
noted that the elimination of credit could lead to anti-competitive behavior with no redeeming
purpose. However, the Court also noted that even if, in fact, no harm resulted from the
elimination of credit, the very act of price-fixing in this manner rendered the actions per se
illegal.
Add. Info: Settlements: Many antitrust cases are settled before judgment is entered, so many
cases are never resolved to a decision that would provide further guidance. One settlement
involved a charge of price fixing by Abbott Laboratories, the largest baby formula seller, in State
of Florida v. Abbott Laboratories. Florida and several large retailers sued Abbott, claiming that
it conspired with other baby formula makers to fix prices of their products. Abbott denied
wrongdoing, but signed a consent decree and agreed to pay $140 million; two other companies
settled for about $90 million more in total.
Add. Case: Broadcast Music v. CBS (S. Ct., 1979)--Owners of copyrighted music joined
decades ago to create a system to control the use of their music. The American Society of
Composers, Authors and Publishers (ASCAP), and Broadcast Music, Inc. (BMI) were formed.
They provide the licensing of music through “blanket licenses” that sets fixed fees for music
users. For example, a restaurant that seats up to 200 customers may be billed $400 per year to
cover the royalty fees for the music it plays. Price negotiation is rarely allowed. CBS held
blanket licenses from both organizations. It argued that the licenses were a form of price-fixing
which is per se illegal.
Decision: The Court determined that the blanket license arrangements used by ASCAP and BMI
did not restrain trade for purely anti-competitive purpose, but instead represented a rational
approach to the problem of monitoring the use of copyrighted music. Because thousands of users
(radio stations, etc.) are involved, it would be impossible for copyright holders to contract with
users individually. ASCAP and BMI provided a necessary “middleman” function and helped the
market operate more efficiently. Unique circumstances were seen to apply to this type of
transaction. Thus, the blanket license fees were not per se illegal.
Add. Case: NCAA v. Univ. of Oklahoma (S, Ct., 1984)--The TV Comm. of the NCAA regulated
the broadcast of college football games by the networks. In 1981, the NCAA signed contracts
with ABC and CBS specifying a certain number of games these networks would broadcast and
the fees that universities would receive. Fees were determined based on the type of telecast and
not factors such as the audience size or the markets in which the game was broadcast. Two
universities challenged this, alleging that the NCAA was a cartel that fixed prices and limited
output.
Decision: The Court noted that the NCAA rules concerning televised college football games
limited the number of games that could be seen, thereby limiting output. Normally such a finding
would lead to an application of the rule of per se illegality, but here the Court determined that
the nature of the NCAA enterprise might require some horizontal restraints on competition in
order to promote efficiency. The Court applied a rule of reason approach to the NCAA’s behavior
and, under this standard, determined that the actions of the NCAA resulted in anti-competitive
consequences that violated the antitrust laws. The NCAA could regulate some aspects of college
football (such as number of athletic scholarships), but could not control prices and quantities of
all games.
