ANSWERS TO PROBLEMS
1. Discuss the validity and effect of each of the following:
(a) A, B, and C, manufacturers of radios, orally agree that due to the disastrous,
cutthroat competition in the market, they will establish a reasonable price to charge their
purchasers.
(b) A, B, C, and D, newspaper publishers, agree not to charge their customers more than
thirty cents per newspaper.
(c) A, a distiller of liquor, and B, A‘s retail distributor, agree that B should charge a price
of five dollars per bottle.
Answer: Price Fixing.
(a) This horizontal price fixing agreement is a per se violation of Section 1 of the
2. Discuss the validity of the following:
(a) A territorial allocation agreement between two manufacturers of the same type of
products, whereby neither will sell its products in the area allocated to the other.
(b) An agreement between manufacturer and distributor not to sell a dealer a particular
product or parts necessary for repair of the product.
Answer: Market Allocations.
(a) An agreement between competitors allocating territories for the sale of their respective
3. Universal Video sells $40 million worth of video recording equipment in the United
States. The total sales of such equipment in the United States is $100 million. One-half of
Universal’s sales is to Giant Retailer, a company that possesses 50 percent of the retail
market. Giant seeks (a) to obtain an exclusive dealing arrangement with Universal, or
(b) to acquire Universal. Please advise Giant as to the validity of its alternatives.
Answer: Exclusive Dealing. Both alternatives would violate the antitrust statutes. The
exclusive dealership arrangement would tend to create a monopoly or might substantially
4. Z sells cameras to A, B, C, and D for $110 per camera. Y, one of Z’s competitor’s, sells a
comparable camera to A for $101.50. Z, in response to this competitive pressure from Y,
lowers its price to A to $101.50. B, C, and D insist that Z lower its price to them to
$101.50, but Z refuses. B, C, and D sue Z for unlawful price discrimination. Decision?
Would your answer differ if Z reduced its price to A to $100?
Answer: Robinson-Patman: Meeting Competition.
(a) Decision for Z. Z would possess a valid defense against a charge of illegally violating
Section 2(a) of the Robinson-Patman Act in that Z was in good faith meeting the price of
5. Discount is a discount appliance chain store that continually sells goods at a price
below manufacturers’ suggested retail prices. A, B, and C, the three largest
manufacturers of appliances, agree that unless Discount ceases its discount pricing, they
will no longer sell to Discount. Discount refuses, and A, B, and C refuse to sell to
Discount. Discount contends that A, B, and C are in violation of antitrust law. Explain
whether Discount is correct.
6. Magnum Company produces 77 percent of the coal used in the United States. Coal
provides 25 percent of the energy used in the United States. In a suit brought by the
United States against Magnum for violation of the antitrust laws, what is the result?
Answer: Monopolization. There are two issues raised by these facts: (1) Magnum
possesses monopoly power in the relevant market–is the relevant market the coal market
7. Justin Manufacturing Company sells high-fashion clothing under the prestigious
“Justin” label. The company has a firm policy that it will not deal with any company that
sells below its suggested retail price. Justin is informed by one of its customers, XYZ, that
its competitor, Duplex, is selling the “Justin” line at a great discount. Justin now
demands that Duplex comply with the agreement not to sell the “Justin” line below the
suggested retail price. Discuss the implications of this situation.
Answer: Price Fixing. In a 2007 case, Leegin Creative Leather Products, Inc v. PSKS, Inc.,
8. Jay Corporation, the largest manufacturer of bicycles in the United States with 40
percent of the market, has recently entered into an agreement with Retail Bike, the largest
retailer of bicycles in the United States with 37 percent of the market, under which Jay
will furnish its bicycles only to Retail, and Retail will sell only Jay’s bicycles. The
government is now questioning this agreement. Discuss.
9. Whirlpool Corporation manufactured vacuum cleaners under both its own name and
under the Kenmore name. Oreck exclusively distributed the vacuum cleaners sold under
the Whirlpool name. Sears, Roebuck & Co. exclusively distributed the Kenmore vacuum
cleaners. Oreck alleged that its exclusive distributorship agreement with Whirlpool was
not renewed because an unlawful conspiracy existed between Whirlpool and Sears.
Oreck further contended that a per se rule was applicable because the agreement was (a)
price fixing or (b) a group boycott, or (c)both. Who should prevail? Why?
10. Indian Coffee of Pittsburgh, Pennsylvania, marketed vacuum-packed coffee under the
Breakfast Cheer brand name in the Pittsburgh and Cleveland, Ohio, areas. Folger
Coffee, a leading coffee seller, began selling coffee in Pittsburgh. In order to make
inroads into the new territory, Folger sold its coffee at greatly reduced prices. At first,
Indian Coffee met Folger’s prices but could not continue operating at such a reduced
price and was forced out of the market. Indian Coffee brings an antitrust action. Explain
whether Folger has violated the Sherman Act.
Answer: Monopolization. Judgment for Folger’s. Here there is no evidence that Folger’s
11. Von’s Grocery, a large retail grocery chain in Los Angeles, sought to acquire Shopping
Bag Food Stores, a direct competitor. At the time of the proposed merger, Von’s sales
ranked third in the Los Angeles area and Shopping Bag’s ranked sixth. Both chains were
increasing their number of stores. The merger would have created the second largest
grocery chain in Los Angeles, with total sales in excess of $170 million. Prior to the
proposed merger, the number of owners operating single stores declined from 5,365 to
3,590 over a thirteen year period. During this same period, the number of chains with
two or more stores rose from 96 to 150. The United States brought suit against Von’s to
prevent the merger, claiming that the proposed merger violated Section 7 of the Clayton
Act in that it could result in the substantial lessening of competition or could tend to
create a monopoly. What should be the result?
Answer: Horizontal Merger. Judgment for the United States. The fundamental purpose
behind Section 7 of the Clayton Act is to prevent economic concentration by keeping a
12. Boise Cascade Corporation is a wholesaler and retailer of office products. The Federal
Trade Commission issued a complaint charging that Boise had violated the
Robinson-Patman Act by receiving a wholesaler’s discount from certain suppliers on
products that Boise resold at retail, in competition with other retailers that could not
obtain wholesale discounts. Has the Robinson-Patman Act been violated? Explain.
Answer: Robinson-Patman Act. Judgment for FTC. This case deals with functional (in
this case as a wholesaler) discounts, which occur when one buyer is allowed to purchase
13. Great Atlantic and Pacific Tea Company desired to achieve cost savings by switching to
the sale of “private label” milk. A&P asked Borden Company, its longtime supplier of
“brand label” milk, to submit a bid to supply certain A&P private label dairy products.
A&P was not satisfied with Borden’s bid, however, so it solicited other offers. Bowman
Dairy, a competitor of Borden’s, submitted a lower bid. At this point, A&P contacted
Borden and asked it to rebid on the private label contract. A&P included a warning that
Borden would have to lower its original bid substantially in order to undercut Bowman’s
bid. Borden offered a bid that doubled A&P’s potential annual cost savings. A&P
accepted Borden’s bid. The Federal Trade Commission then brought this action, charging
that A&P had violated the Robinson-Patman Act by knowingly inducing or receiving
illegal price discrimination from Borden. Discuss whether the FTC is correct in its
allegations.
14. Clorox is the nation’s leading manufacturer of household liquid bleach (accounting for
49 percent—$40 million—of sales annually) and is the only brand sold nationally. Clorox
and its next largest competitor, Purex, hold 65 percent of national sales; and the top four
bleach manufacturers control 80 percent of sales. Because all bleach is chemically
identical, Clorox spends more than $5 million each year in advertising to attract and
keep customers.
Procter & Gamble is the dominant national manufacturer of household cleaning
products, with yearly sales of $1.1 billion. As with bleach, advertising is vital in the
household cleaning products industry. Procter & Gamble annually spends more than
$127 million in advertising and promotions. Procter & Gamble decided to diversify into
the bleach business because its household cleaning products and bleach are both
low-cost, high-turnover consumer goods, are dependent on mass advertising, and are
sold to the same customers at the same stores by the same merchandising methods.
Procter & Gamble decided to merge with Clorox, rather than start its own bleach
division, in order to secure the dominant position in the bleach market immediately.
Should the FTC take action against this merger, and, if so, what decision should it make?
15. The National Collegiate Athletic Association (NCAA) adopted a plan for televising
college football games in order to reduce the adverse effect of television coverage on
spectator attendance. The plan limited the total number of televised intercollegiate
football games and the number of games any one school could televise. No member of the
NCAA was permitted to sell any television rights except in accordance with the plan. As
part of the plan, the NCAA had agreements with the American Broadcasting Company
(ABC) and the Columbia Broadcasting System (CBS) to pay to each school at least a
specified minimum price for televising football games. Several member universities now
join to bring suit against the NCAA, claiming the new plan is a horizontal price fixing
agreement and output limitation and as such is illegal per se. The NCAA counters that
the existence of the product, college football, depends upon member compliance with
restrictions and regulations. According to the NCAA, its restrictions, including the
television plan, have a procompetitive effect. Is the television plan a reasonable
restraint? Explain.
16. The National Society of Professional Engineers (Society) had an ethics rule that
prohibited member engineers from disclosing or discussing price and fee information
with customers until after the customer had hired a particular engineer. This rule against
competitive bidding was designed to maintain high standards in the field of engineering.
The Society felt that competitive pressure to offer engineering services at the lowest
possible price would encourage engineers to design and specify inefficient, unsafe, and
unnecessarily expensive structures and construction methods. According to the Society,
awarding engineering contracts to the lowest bidder, regardless of quality, would be
dangerous to the public health, safety, and welfare. The Society emphasizes that the rule
is not an agreement to fix prices. Rather, it claims the rule was drafted by experienced,
highly trained professional engineers to prevent public harm and is therefore reasonable.
Does the rule unreasonably restrain trade and thus violate §1 of the Sherman Act? Why
or why not?
Answer: Restraint of Trade. Yes, this rule does violate the Sherman Act. The Rule of
Reason analysis focuses directly on the challenged restraint’s impact on competitive
17. During a period of a few years, intense price competition characterized both the retail
and the wholesale oil markets. At times, prices in the wholesale market fell below the
manufacturer’s cost. One cause of the volatile situation was the supply of “distress
gasoline” placed on the market by seventeen independent refiners. These independent
refiners had no retail sales outlets and little storage capacity, so they were forced to sell
their product at “distress prices.” In spite of their unprofitable operations, they could not
afford to shut down, for, if they did so, they would be apt to lose both their oil
connections in the field and their regular customers.
In an attempt to remedy this problem, the major oil companies entered into an informal
agreement whereby each selected as its “dancing partner” one or more independent
refiners having distress gasoline. The major oil company would then assume
responsibility for purchasing the independent’s distress supply at the “fair going market
price.” As a result, the market price of oil rose and the spot market became stable. Have
the companies engaged in horizontal price fixing in violation of the Sherman Act? Why?
Answer: Horizontal Price Fixing. .Yes. Although the major oil companies had not
explicitly agreed on the price at which they would sell their oil, the court found that the
18. As part of a corporate plan to stimulate sagging television sales, GTE Sylvania began to
phase out its wholesale distributors and began to sell its television sets directly to a
smaller and more select group of franchised retailers. To this end, Sylvania limited the
number of franchises granted for any given area and required each franchisee to sell
Sylvania products only from the location or locations at which it was franchised. A
franchise did not constitute an exclusive territory, and Sylvania retained sole discretion
to increase the number of retailers in an area in light of the success or failure of existing
retailers. The strategy apparently was successful, as Sylvania’s national market share
increased from less than 2 percent to 5 percent.
In the course of carrying out its plan, Sylvania franchised Young Brothers as a television
retailer at a San Francisco location one mile from that of Continental T.V., Inc., one of
Sylvania’s most successful franchisees. A course of feuding began between Sylvania and
Continental that reached a head when Continental requested permission to open a store
in Sacramento, and Sylvania refused. Continental opened the Sacramento store anyway
and began shipping merchandise there from its San Jose warehouse. Shortly thereafter,
Sylvania terminated Continental’s franchise. Is the franchise location restriction a per se
violation of the Sherman Act? Explain.
Answer: Market Allocations. No; judgment for Sylvania. In an earlier decision, the Court
erroneously held that territorial and customer restrictions on sales by wholesalers in the
19. In 1923, DuPont was granted the exclusive right to make and sell cellophane in North
America. In 1927, the company introduced a moistureproof brand of cellophane that was
ideal for various wrapping needs. Although more expensive than most competing
wrapping, it offered a desired combination of transparency, strength, and cost. Except for
its permeability to gases, however, cellophane had no qualities that a number of
competing materials did not possess as well. Cellophane sales increased dramatically,
and by 1950, DuPont produced almost 75 percent of the cellophane sold in the United
States. Nevertheless, sales of the material constituted less than 20 percent of the sales of
“flexible packaging materials.”
The United States brought this action, contending that by so dominating cellophane
production, DuPont had monopolized a part of trade or commerce in violation of the
Sherman Act. DuPont argued that it had not monopolized because it did not have the
power to control the price of cellophane or to exclude competitors from the market for
flexible wrapping materials. Who is correct? Explain.
Answer: Monopolization. Judgment for DuPont. The first step in determining whether
DuPont has monopolized is to determine whether the company has monopoly power in
the relevant market. Monopoly power is the power to control prices or to exclude
ANSWERS TO “TAKING SIDES” PROBLEMS
Southwire Company and Essex Group, Inc. are direct competitors in the
cable and wire industry. Southwire’s logistics system is a warehouse
organizational system with components extending from architectural
layout features to customized equipment and modi!ed computer
software. Southwire’s logistics system was primarily designed over a
three-year period, with a development cost exceeding $2 million, by a
project team headed by Richard McMichael. In addition to self-testing and
a trial-and-error learning process, development of Southwire’s logistics
system also included modi!cations based on observation of logistics
systems in other industries and the adaptation of commercially-available
components. The selection and arrangement of components and
equipment in the new logistics system is unique to the Southwire
logistics system. The new logistics system has resulted in substantial
e*ciencies to Southwire, with annual savings of $12 million. Because
Southwire and its competitors produce basically identical goods for sale,
the marketing advantage gained by the important e*ciencies that have
resulted from the new logistics system has proved especially valuable for
Southwire. Essex hired McMichael, and Southwire brought suit against its
former employee, McMichael, and his new employer, Essex, to enjoin
McMichael from disclosing to Essex any Southwire trade secrets,
particularly, trade secrets involving Southwire’s logistics system.
(a)What are the arguments in favor of the court not issuing the
injunction?
(b)What are the arguments in favor of the court issuing the
injunction?
(c) Explain whether the court should issue the injunction.
ANSWER:
(a)Essex could argue that Southwire’s logistics system is not a trade
secret because (i) it is composed primarily of computer hardware
components and warehouse equipment that are commercially
