Suggested Additional Assignments
Field Work: Setting Prices
If students have jobs, ask them to interview someone in their company who has responsibility for setting
prices. Several years ago, one of Beatty and Samuelson’s students told the class that she was in charge of
setting prices for her division. How did she do it? She met with her competitors to see what they were
charging. In the next class, she said, “I didn’t really mean that.” Students do not know what they will
discover if they ask questions.
Research: Mergers
Ask students to research a recent merger, such as the XM Satellite Radio and Sirius Satellite Radio
merger, or others such as InBev and Anheuser-Busch, Cos., and have them identify the particular issues
on which the FTC focused. In the XM-Sirius merger, the FTC focused on defining the relevant market.
Are there other issues that are of concern to the FTC?
Research: Price-Fixing
If students do not have jobs, ask them to research and prepare a report to class on an interesting
price-fixing case.
Research: Horizontal Mergers
As the text reports, the FTC blocked the merger of office supply chains Staples and Office Depot, even
though these two retailers controlled only 4 percent of the market. The FTC based its decision in part on
the fact that when both stores operated in the same market, prices were significantly lower than when only
one store was present. Ask students to do their own research. Find a town anywhere in the country that
has both an Office Depot and a Staples and price the same item at both of these stores. Then price this
item at an Office Depot and at a Staples that operate solo in an area. What do the students find about
prices?
Research: Resale Price Maintenance
Ask students to identify one consumer item, such as a particular tennis racket, CD player, or Nine West
shoe style, and compare the prices at three different stores. Is resale price maintenance alive and well?
Chapter Overview
Chapter Theme
Congress passed the major antitrust statutes between 1890 and 1936. Although their language has not
changed, their interpretation has–dramatically. Politics is an important ingredient of antitrust
enforcement. As we see throughout this chapter, enforcement is on a pendulum. To understand antitrust
law, it is necessary to know the statutes, the case law, and the political environment.
Quote of the Day
“Is there not a causal connection between the development of these huge, indomitable trusts and the
horrible crimes now under investigation? . . . Is it not irony to speak of the equality of opportunity in a
country cursed with bigness?” –Louis D. Brandeis (1856-1941), Supreme Court Justice.
In the Beginning
Chicago School
The Chicago School refers to a school of thought originating among economists and lawyers at the
University of Chicago in the 1960s and 1970s. Adherents argue that the goal of antitrust enforcement
should be efficiency, permitting companies to grow as large as they like provided growth is based on
superior products or lower costs, not anti-competitive tactics. The market, these proponents argue, should
determine the most efficient size for each industry. The Chicago School seeks enforcement of antitrust
laws to protect competition, not competitors.
Overview of Antitrust Laws
These are the major provisions of the antitrust laws:
Section 1 of the Sherman Act prohibits all agreements “in restraint of trade.”
Section 2 of the Sherman Act bans “monopolization”—the wrongful acquisition of a
monopoly.
The Clayton Act prohibits anticompetitive mergers, tying arrangements, and exclusive
dealing agreements.
The Robinson-Patman Act bans price discrimination that reduces competition.
Antitrust law divides violations into two categories: per se and rule of reason.
Per se violations are automatic “bright-line” violations. As a rule, the Justice Department
has sought criminal sanctions only against per se violators.
Rule of reason violations are illegal only if they have an anticompetitive impact.
Any conduct overseas that has an anticompetitive impact in the United States
is a violation of U.S. law provided that (1) the foreign actor intended to affect the U.S.
market, and (2) the foreign conduct has a direct and substantial effect on the U.S. market.
Cooperative Strategies
There are three types of potentially illegal cooperative strategies:
Horizontal agreements among competitors;
Vertical agreements among participants at different stages of the production process; and
Mergers and joint ventures among competitors.
Horizontal Strategies Vertical Strategies Mergers
Market division Reciprocal dealing Horizontal mergers
Price fixing Price discrimination Vertical mergers
Bid rigging Joint ventures
Refusal to deal
Horizontal Cooperative Strategies
Although the term “cooperative strategies” sounds benign, these tactics can be harmful to competition.
Indeed, many horizontal cooperative strategies are per se violations of the law and can lead to prison
terms, heavy fines, and expensive lawsuits with customers and competitors.
Field Work/Research: Setting Prices
If students interviewed someone in their company who has responsibility for setting prices or researched a
price-fixing case, this would be a good time to discuss what they found.
Landmark Case: United States v. Trenton Potteries, Company1
1 273 U.S. 392; 1927 U.S. LEXIS 975, SUPREME COURT OF THE UNITED STATES, 1927
Facts: This case involved dirty behavior in the bathroom fixture business. The federal government alleged
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 a violation of the law if the prices are reasonable?
Excerpts from Justice Stone’s Decision: The trial court refused various requests to charge [the jury] that
the agreement[s] to fix prices, if found, did not in themselves constitute violations of law unless it was
also found that they unreasonably restrained interstate commerce.
Our view of what is a reasonable restraint of commerce is controlled by the recognized purpose of the
Sherman Law itself. Whether this type of restraint is reasonable or not must be judged in part at least in
the light of its effect on competition, for whatever difference of opinion there may be among economists
as to the social and economic desirability of an unrestrained competitive system, it cannot be doubted that
the Sherman Law and the judicial decisions interpreting it are based upon the assumption that the public
interest is best protected from the evils of monopoly and price control by the maintenance of competition.
The aim and result of every price-fixing agreement, if effective, is the elimination of one form of
competition.
The power to fix prices, whether reasonably exercised or not, involves power to control the market and to
fix arbitrary and unreasonable prices. The reasonable price fixed today may through economic and
business changes become the unreasonable price of tomorrow. Once established, it may be maintained
unchanged because of the absence of competition secured by the agreement for a price reasonable when
fixed. Agreements which create such potential power may well be held to be in themselves unreasonable
or unlawful restraints, without the necessity of minute inquiry whether a particular price is reasonable or
unreasonable as fixed and without placing on the government in enforcing the Sherman Law the burden
of ascertaining from day to day whether it has become unreasonable through the mere variation of
economic conditions.
Moreover, in the absence of express legislation requiring it, we should hesitate to adopt a construction
making the difference between legal and illegal conduct in the field of business relations depend upon so
uncertain a test as whether prices are reasonable — a determination which can be satisfactorily made only
after a complete survey of our economic organization and a choice between rival philosophies. Thus
viewed, the Sherman law is not only a prohibition against the infliction of a particular type of public
injury. It is a limitation of rights which may be pushed to evil consequences and therefore restrained.
It follows that the judgment of the circuit court of appeals must be reversed and the judgment of the
district court reinstated. Reversed.
Question: What was the Supreme Court’s holding?
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.”
Conscious Parallelism
If competitors act in concert but without an explicit agreement, their behavior is called conscious
parallelism. As the following case illustrates, conscious parallelism is illegal only if plus factors are
present. Plus factors include:
A motive to conspire
A high level of communication among firms.
Case: United States v. Apple, Inc.
Facts: Amazon’s e-book reader, the Kindle, not only changed how people bought and read books, it
lowered prices dramatically.2 Amazon charged $9.99 for every e-book, no matter how much its print
version cost. On many of the books it sold, Amazon lost money because it paid the publisher more than it
charged customers. It did so to create a market where there had been none.
But publishers were unhappy because the $9.99 e-book price made it harder to sell print books. Why
would anyone pay $30 for a hardcover? Also, publishers worried (with reason) that cheap e-books
threatened the viability of the brick-and-mortar stores in which books were displayed and sold. But
Amazon had such market power, it was able to ignore the individual publisher’s pleas to raise prices.
On to this unhappy scene came Apple, about to launch its first iPad. To ensure the iPad’s success, Apple
needed to be able to offer books in its iBookstore. Apple was not, however, willing to sell books below
cost as Amazon did. But why would anyone buy from iBookstore if its books cost more than Amazon’s?
To solve this fundamental problem, Apple approached the six major U.S. publishers with a proposal: They
would all agree on a higher e-book price for the iBookstore, but also insist that Amazon charge the same
higher price.3 Apple would benefit by obtaining titles for its iBookstore, while also ensuring that
competition with Amazon was based on technology (iPad versus Kindle), which Apple thought it could
win, rather than on price, where Amazon had the advantage.
All of the publishers except Random House agreed to Apple’s plan.4 They met, emailed and spoke on the
phone with Apple and each other hundreds of times to negotiate the precise terms of the deal – in
particular, the prices that would be charged for each category of books. All these discussions were hardly
secret—the Wall Street Journal reported on them. Finally, a deal was reached.
22 This case involves trade books, which are novels and general interest non-fiction, not texts or reference
books.
33 The publishers were Hachette, HarperCollins, Macmillan, Penguin Group, Random House, and Simon
& Schuster.
44 Ultimately, Random House also joined the agreement when Apple refused to allow it to sell its own
app.
The publishers then each individually informed Amazon of the new pricing structure. Amazon at first
resisted but ultimately agreed to the prices that the publishers and Apple had negotiated . . . . but then sent
a letter of complaint to the FTC. As a result of the Apple agreement, prices of e-e-book increased, in some
cases by 50 percent or more.
The FTC and some states filed suit against Apple and the five publishers (Publisher Defendants), alleging
illegal price-fixing in violation of §1 of the Sherman Act. The five publishers admitted guilt and settled
their cases, but Apple went to trial.
Issue: Did Apple engage in illegal price fixing?
Excerpts from Judge Cote’s Decision:
Consumers suffered in a variety of ways from this scheme to eliminate retail price competition and to
raise e-book prices. Some consumers had to pay more for e-books; others bought a cheaper e-book rather
than the one they preferred to purchase; and it can be assumed that still others deferred a purchase
altogether rather than pay the higher price.
Per se price-fixing agreements may also include those where a vertical player participates in and
facilitates a horizontal conspiracy. There is overwhelming evidence that the Publisher Defendants joined
with each other in a horizontal price-fixing conspiracy. The Plaintiffs have also shown that Apple was a
knowing and active member of that conspiracy. Apple not only willingly joined the conspiracy, but also
forcefully facilitated it.
[T]he Publisher Defendants had collectively tried through a variety of means to pressure Amazon to raise
the prices of their e-books. Their efforts proved futile. Apple then presented a strategy that would allow
the Publishers to take control of and raise e-book retail prices in a matter of weeks. It assured each
Publisher Defendant that it would only move forward if a critical mass of the major publishing houses
agreed to its terms. It kept each Publisher Defendant apprised of how many others had agreed to execute
Apple’s Agreements. Without the collective action that Apple nurtured, it is unlikely any individual
Publisher would have succeeded in unilaterally imposing an [agreement] on Amazon.
The evidence of this conspiracy can be found in contemporaneous e-mails pulled from the files of Apple,
the Publishers, Amazon, and others; in the web of telephone calls among Publisher Defendants’ CEOs
surrounding each turning point in the execution of the Agreements; and as compellingly, in the
circumstantial evidence. This circumstantial evidence includes the following; the [agreement] protected
Apple from price competition; and each of the Publisher Defendants acted in identical ways even though
each was also afraid of retaliation by Amazon. In sum, the Plaintiffs have shown through compelling
direct and circumstantial evidence that Apple participated in and facilitated a horizontal price-fixing
conspiracy. As a result, they have proven a per se violation of the Sherman Act.
If it were necessary to analyze this evidence under the rule of reason, however, the Plaintiffs would also
prevail. The procompetitive effects to which Apple has pointed, including its launch of the iBookstore, the
technical novelties of the iPad, and the evolution of digital publishing more generally, are phenomena that
are independent of the Agreements and therefore do not demonstrate any procompetitive effects flowing
from the Agreements. In any event, the Plaintiffs have shown that the Agreements did not promote
competition, but destroyed it. The Agreements removed the ability of retailers to set the prices of their
e-books and compete with each other on price, relieved Apple of the need to compete on price, and
allowed the Publisher Defendants to raise the prices for their e-books, which they promptly did.
[T]his Court finds that Apple conspired to restrain trade in violation of Section 1 of the Sherman Act.
Question: What does Section 1 of the Sherman Act prohibit?
Question: Was the agreement between Apple and the publishers a vertical or horizontal agreement? Why?
Question: Was Apple’s agreement with the publishers an example of a per se violation or a rule of reason
violation? Why?
Vertical Cooperative Strategies
Price Discrimination
Under the Robinson-Patman Act, 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.
In the J. Truett Payne case, Chrysler Motors charged Payne more than other dealers in the Birmingham,
Alabama area. Unable to compete, Payne went out of business. The accepted formula for determining
damages in a Robinson-Patman Act case had been the difference between the two prices times the number
of units purchased. These numbers were easy to calculate. However, in Payne, the Supreme Court held
that it is not enough to prove that competitors are able to buy at a lower cost. The plaintiff must also
show that these competitors passed their savings on to customers and, as a result, plaintiff lost profits.
These are difficult facts to prove and have raised the bar for price discrimination cases.
Question: Did Chrysler treat Payne differently from other dealers?
Question: Is it illegal for Chrysler to charge customers different prices?
Question: What does that mean?
Answer: The Supreme Court wanted hard economic data proving that Payne’s competitors had
Question: How do you show lower costs and lost profits?
Question: What did Payne propose as an alternative calculation?
Answer: The company simply calculated the difference in price for each car he bought multiplied by
Question: What is the difference between the Supreme Court’s definition and Payne’s?
Answer: Essentially, Payne is proposing a per se rule–you sell cars at a higher price to me than to
Example
A group of 40,000 retail pharmacies sued the nation’s drug manufacturers alleging that the drug
manufacturers (1) fixed prices and (2) discriminated against pharmacies by charging them higher
prices than health maintenance organizations. There was evidence that at meetings of the
Pharmaceutical Manufacturers Association (an industry trade group) the manufacturers shared pricing
information. The drug companies admitted they gave discounts to HMOs and not to pharmacies.
Question: What provisions of the antitrust statutes did the pharmacies accuse the drug manufacturers
of violating?
Answer:
Question: Have the manufacturers violated price-fixing prohibitions?
Answer: It would appear so. Price-fixing is a per se violation. There certainly seems to be evidence
Question: What is the moral of the story?
Answer: Trade associations are very dangerous. You become friends with your competitors and the
Question: Have the drug companies violated the Robinson-Patman Act?
Question: Make an argument that it does not lessen competition.
Answer:
Retail pharmacies and health maintenance organizations do not compete against each
Question: What was the outcome in this case?
Question: Does this mean prices will be lower to consumers who buy at pharmacies?
Question: Was there a fatal weakness in the manufacturers’ case?
Answer: Price-fixing tainted the manufacturers’ case. That was a per se violation for which they had
Case: Coalition for a Level Playing Field, L.L.C. v. AutoZone, Inc.
Facts: Auto parts manufacturers used two distribution channels: (1) a two-step process in which they
sold to big box stores, such as Wal-Mart, Sam’s Club, and AutoZone, who then sold the parts to the
end users, and (2) a three-step process in which they sold to warehouse distributors (WDs), who then
sold to mom and pop auto parts stores (also called jobbers), who sold to the end users.
The WDs and jobbers alleged that the manufacturers and big box stores were violating the
Robinson-Patman Act. The manufacturers charged the WDs the official list price, while granting all
sorts of discounts to the big box stores, such as allowances for defective and obsolete merchandise,
volume discounts, and deferred payment agreements. For example, AutoZone only paid for a part
once the item sold, while plaintiffs were required to pay within 30 days of receipt. According to the
plaintiffs, manufacturers sold to the defendants below their cost of production—at a price 40 to 50
percent less than they charged plaintiffs.
The defendants filed a motion to dismiss
Issue: Did the manufacturers and big box stores violate the Robinson-Patman Act?
Excerpts from Judge Holwell’s Decision:
Congress enacted the Robinson-Patman Act because of its concern that large chain stores were
exercising economic power to obtain anticompetitive discounts on large purchases of goods.
However, with the RPA, Congress did not intend to outlaw price differences that result from or further
the forces of competition. Despite its seemingly broad coverage, it would be a mistake to assume that
[the RPA] regulates all transactions that somehow involve a price differential.
Just the contrary, courts have held that in at least [two] circumstances relevant to this action, a seller
may charge different prices to different buyers without violating [the RPA]. First, courts have held
that a seller may charge a buyer reduced prices if the reduced prices reflect a bona fide functional
discount—in essence, a set-off for the value of services the purchaser performs for the seller.
Second, courts have held that a seller is not obligated to charge the same prices for a commodity if its
sales contracts with different buyers contain materially different terms. Thus, courts have long held
that a seller may charge different prices for goods sold under long-term contracts than for those sold
on the spot market, for the same reason a seat on the 6:00 a.m. flight from Chicago to New York is not
the same as a seat on the 5:00 p.m. flight.
The nub of the complaint in this action is that the retailer defendants take a number of discounts
pursuant to their vendor agreements with the parts manufacturers, and that these discounts in fact are
a subterfuge for illegal price discrimination. In support of this theory, the complaint cites a large
amount of pricing data, including examples of parts where the retailer defendants’ retail prices are
lower than plaintiffs’ wholesale prices. But while the complaint plausibly alleges differentials, it
contains virtually no allegations as to whether those differentials are justified.
It is common ground that compared to WDs and jobbers, the retailer defendants pay lower
wholesale prices, operate in a different distribution chain, and provide a different mix of distribution,
warehousing, marketing, and promotional services to the parts manufacturers. A plausible inference to
draw from these differences is that manufacturers and buyers engage in hard negotiation over all
aspects of their commercial relationship, and the retailer defendants offer the manufacturers a mix of
services that is more valuable than that offered by traditional WDs and jobbers.
[T]he complaint here alleges conduct (price differentials) which becomes illegal only if (i)
discounts are given for services that are not being performed at all, or (ii) the amount of discounts
greatly exceeds the value of the services provided by the retailer defendants. There are no factual
allegations, however, tending to show that either of these conditions is satisfied.
Defendants’ motion to dismiss for failure to state a claim is granted.
Question: When is illegal to charge different prices to different purchasers under the
Robinson-Patman Act?
Question: When is it legal to charge a lower price to a particular buyer under the Robinson-Patman
Act?