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whole or in part.
Antitrust Law
To curb anticompetitive or unfair business practices, the federal government passed the Sherman Antitrust
Act of 1890, the Clayton Act of 1914, the Federal Trade Commission Act of 1914, and other laws. This chapter
discusses these statutes, focusing primarily on the Sherman Act and the Clayton Act.
be an ineffective means of protecting free competition. These shortcomings became acutely obvious during
the latter half of the 1800s as a concentrated group of powerful individuals began to acquire unrivaled market
power by combining competing firms under singular control.
whole or in part.
expansion of the railroads and the further integration of the economy. The growth of national markets also
witnessed the efforts of a number of small companies to combine into large business organizations, many of
which gained considerable market power. These later type of organizations became known as trusts, the
most famous—or infamous—being John D. Rockefeller’s Standard Oil Trust. Participants transferred their
stock to a trustee for trust certificates. The trustee made decisions fixing prices, controlling production, and
the trusts used their market power to drive small competitors out of business, leaving the trusts then free to
raise prices virtually at will. Many states attempted to control these consequences by enacting statutes
outlawing trusts (which is why all laws regulating economic competition today are referred to as antitrust
laws). Congress initially dealt with the railroad monopolies by attempting regulation rather than an outright
assault on monopoly power. The result was the Interstate Commerce Act of 1887.
in 1914, led to enactment of the Clayton Act and the Federal Trade Commission Act, which proscribed
specific acts and provided for more aggressive means of enforcement.
The Clayton Act (as amended by the Robinson-Patman Act in 1936 and the Celler-Kefauver Act of 1950)
addressed specific acts that are considered to be anticompetitive. The Federal Trade Commission Act created
I. The Sherman Antitrust Act
The Sherman Act is proscriptive rather than prescriptive. It is the basis for policing, rather than regulating,
business conduct.
• Section 2—Every person who shall monopolize, or attempt to monopolize, or combine or conspire
with any other person or persons, to monopolize any part of the trade or commerce among the
CHAPTER 26: ANTITRUST LAW 3
B. DIFFERENCES BETWEEN SECTION 1 AND SECTION 2
Section 1 requires two or more persons; one person alone can violate Section 2. Section 1 cases are
often concerned with agreements that restrain trade; Section 2 cases deal with the structure of a
monopoly. Both sections seek to curtail practices that result in undesired monopoly behavior, but Section
2 requires that a “threshold” or “necessary” amount of monopoly power already exist.
ENHANCING YOUR LECTURE—
THE SHERMAN ANTITRUST ACT OF 1890
By 1890, the Standard Oil trust had become the foremost petroleum refining and marketing combination
in the United States. Streamlined, integrated, and centrally and efficiently controlled, its monopoly over the
industry could not be disputed. Standard Oil controlled 90 percent of the U.S. market for refined petroleum
products, and small manufacturers were incapable of competing with such an industrial leviathan.
times, marked the beginning of the U.S. public’s growing awareness of, and concern over, the growth of
monopolies.
THE PASSAGE OF THE SHERMAN ANTITRUST ACT
whole or in part.
applies old and well-recognized principles of the common law.”a In 1890, the Fifty-first Congress enacted the
The Sherman Antitrust Act remains very relevant to today’s world. The widely publicized monopolization
case brought by the U.S. Department of Justice and a number of state attorneys general against Microsoft
Corporation is just one example of the relevance of the Sherman Act to modern business developments and
practices.
Trade restraints fall into two categories: horizontal and vertical. Those that are blatantly anticompetitive are
per se violations; those that are not so blatant are analyzed under the rule of reason.
A. PER SE VIOLATIONS VERSUS THE RULE OF REASON
• The purpose of an arrangement.
• The powers of the parties.
• The effect of the parties’ actions.
• Whether a less restrictive means might have accomplished the same result.
a. Price Fixing and E-Books
Five major book publishers and Apple, Inc., were charged with conspiring to fix the prices of e-
books. The publishers entered into a settlement with the government.
whole or in part.
An agreement by two or more sellers to refuse to deal with, or boycott, a particular person or firm is
a group boycott, or joint refusal to deal, a per se violation.
actions subject to the rule of reason, if a trade association practice that restrains trade benefits the
association and the public, it may be deemed reasonable.
ENHANCING YOUR LECTURE—
(MLS) sites that are available for every locality in the United States. An MLS site is developed through a
cooperative agreement by real estate brokers in a particular market area to pool information about the
properties they have for sale. Today, the majority of residential real estate sales involve the use of MLS.
Although MLS sites offer convenience by combining listings from many brokers, the sites have also raised
antitrust concerns by restricting how certain brokers may use the sites. The Federal Trade Commission (FTC)
In a given market area, the MLS listings are put together by the members of a local real estate
association, typically called a Board of Realtors®, for the members’ exclusive use. In many areas, Boards of
Realtors® have attempted to restrict the homes that can be listed on the official MLS Web site. In particular,
the boards have tried to prevent discount brokers from listings the homes they have for sale.
THE NAR TRIES TO RESTRICT VIRTUAL BROKERS.
The National Association of Realtors (NAR) represents more than 1 million individual member brokers
and their affiliated agents and sales associates. Its policies govern the conduct of its members throughout the
United States. In the 1990s, many members of the NAR began to create password-protected Web sites
whole or in part.
to potential buyers who had registered as customers of the broker. The brokers who worked through these
virtual office Web sites, or VOWs, came to be known as VOW-operating brokers. Because they had no need
of a physical office, their operating expenses were lower than those of traditional brokers. Soon both Cendant
and RE/MAX, the largest and second- largest U.S. real estate franchisors, respectively, expressed concern
that VOW-operating brokers would put downward pressure on brokers’ commissions.
THE U.S. DEPARTMENT OF JUSTICE ENTERS THE FRAY.
The Antitrust Division of the U.S. Department of Justice, however, contended that the opt-out policy was
anticompetitive and harmful to consumers. When the Justice Department indicated that it would bring an
enhance the services they offer customers.
In response, the Justice Department filed a suit in federal district court against the NAR, asserting that the
association’s policies had violated Section 1 of the Sherman Act by preventing real estate brokers from
offering better services as well as lower costs to online consumers. The department contends that the NAR’s
FOR CRITICAL ANALYSIS
Why couldn’t discount brokers simply create their own Web sites to list the houses they have for
sale?
C. VERTICAL RESTRAINTS
The text explains that vertical restraints arise from agreements between firms at different levels in the
distribution process. Some are per se violations; some are judged under the rule of reason.
whole or in part.
To insulate dealers from direct competition with other dealers selling a manufacturer’s product, the
manufacturer may institute territorial restrictions or attempt to ban wholesalers or retailers from
reselling the product to certain classes of buyers.
a. May Have Legitimate Purpose
2. Resale Price Maintenance Agreements
A resale price maintenance agreement, in which a manufacturer tells a retailer at what price the
retailer can sell the manufacturer’s products, is considered subject to the rule of reason.
operates Kay’s Kloset, was marking down Brighton goods by 20 percent, Leegin stopped selling to the store.
PSKS filed a suit in a federal district court against Leegin, alleging antitrust violations. PSKS claimed Leegin
had violated antitrust laws by entering into agreements with retailers to charge only prices fixed by Leegin.
The court entered a judgment against Leegin. The U.S. Court of Appeals for the Fifth Circuit affirmed. Leegin
appealed.
price maintenance may have anticompetitive effects or represent an attempt to obtain monopoly profits. But
they can instead stimulate competition and offer advantages to consumers.
..................................................................................................................................................
costs by promoting frivolous suits against legitimate practices. . . . Administrative advantages are not
sufficient in themselves to justify the creation of per se rules, and . . . their use [has been and should be
relegated] to restraints that are manifestly anticompetitive. Were the Court . . . to conclude that vertical price
restraints should be per se illegal based on administrative costs, we would undermine, if not overrule, the
8 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
traditional demanding standards for adopting per se rules. Any possible reduction in administrative costs
How are “the interests of manufacturers and consumers . . . aligned with respect to retailer profit
margins”? The Court explained, “The difference between the price a manufacturer charges retailers and the
price retailers charge consumers represents part of the manufacturer's cost of distribution, which, like any
other cost, the manufacturer usually desires to minimize. A manufacturer has no incentive to overcompensate
ANSWERS TO THE LEGAL REASONING
QUESTIONS AT THE END OF CASE 26.1
competitors, the trend in antitrust law has been away from the application of such per se rules.
2. What factors might the courts consider in applying the rule of reason to minimum resale price
maintenance agreements? The Court acknowledged that “[r]esale price maintenance, it is true, does have
economic dangers.” As factors to consider in applying the rule of reason to such agreements, the Court listed,
In the Leegin case, the United States Supreme Court explained that without such agreements “the retail
services that enhance interbrand competition might be underprovided. This is because discounting retailers
can free ride on retailers who furnish services and then capture some of the increased demand those services
generate. Consumers might learn, for example, about the benefits of a manufacturer's product from a retailer
that invests in fine showrooms, offers product demonstrations, or hires and trains knowledgeable employees.
manufacturer's retailers compete among themselves over services.
CHAPTER 26: ANTITRUST LAW 9
new brands are essential to a dynamic economy, and if markets can be penetrated by using resale price
maintenance there is a procompetitive effect.
Resale price maintenance can also increase interbrand competition by encouraging retailer services that
would not be provided [otherwise] * * * . It may be difficult and inefficient for a manufacturer to make and
conflict—with respect to a product’s profit margins? (A product’s profit margin is the difference
between the price a manufacturer charges retailers and the price retailers charge consumers.) In the
Leegin case, the United States Supreme Court explained the common and divergent interests of
manufacturers, retailers, and consumers. The Court stated, “The difference between the price a manufacturer
charges retailers and the price retailers charge consumers represents part of the manufacturer's cost of
price.”
ADDITIONAL CASES ADDRESSING THIS ISSUE —
• Chavez v. Whirlpool Corp., 93 Cal.App.4th 363, 113 Cal.Rptr.2d 175 (2 Dist. 2001) (there is no violation
of state antitrust laws, which like their federal counterparts proscribe unreasonable price maintenance
agreements, if a dishwasher manufacturer announces its resale prices in advance and refuses to deal with
those who fail to comply).
10 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS
whole or in part.
ADDITIONAL BACKGROUND—
Predatory Pricing
monopolize unlawfully a product market.
Many people believe that predatory pricing is a tool used by powerful companies that have the financial
resources to continue selling their products at prices below those of their competitors. Yet it is often difficult to
determine whether a company is selling products below cost. Moreover, it is not clear that predatory pricing is
is possible that future cases before it may turn in large part on whether the firm is producing above or below
its average variable costs (the Areeda and Turner Test). Leaving aside the question as to whether the av-
erage variable cost per unit produced can be accurately calculated, a product price below the company’s
average variable cost will be presumed to be illegal. This conclusion assumes, of course, that the criticisms
made of the Areeda and Turner Test (that average variable cost is often a poor surrogate even assuming
ADDITIONAL BACKGROUND—
State Predatory-Pricing Laws
All fifty states have adopted their own antitrust laws, many of which are nearly identical federal antitrust
statutes. For this reason, state courts often rely on the decisions of federal courts in interpreting and applying
state antitrust laws. State courts vary in their interpretations, however, when there is a difference between
federal and state statutes or policy. The following is a state predatory-pricing statute that is similar to those
