978-1285860381 Chapter 38 Solution Manual Part 2

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Additional Case: Camarda v. Snapple Distributors, Inc.5

Facts: Snapple Beverage Corporation distributed its products through Snapple Distributors, Inc. (SDI)

which in turn sold to local area distributors (LADs). These LADs were only allowed to resell Snapple

to small retail outlets such as pizzerias, newsstands, and “Mom and Pop” stores within a specific

territory. SDI also sold Snapple to other distributors called transshippers, who could sell to any

customers is any location. SDI charged transshippers $2.00 to $3.00 less per case, and as a result the

transshippers sold to the LADs customers at a cheaper price. During this period the LAD’s business

declined. The LAD’s sued SDI alleging it had violated the Robinson-Patman Act.

You be the Judge: Did Snapple engage in illegal price discrimination?

Holding: The court found for SDI. The LADs fell into the standard RPA trap – they thought that

simply showing that they had been charged a higher price was enough. But it isn’t – they have to show

that the higher price caused some harm to competition. This is a difficult feat, and one they could not

accomplish.

Question: What is price discrimination?

Answer: Price discrimination is charging different prices to different purchasers. Price discrimination

is illegal if the items are the same and the discrimination lessens competition. However, it is legal to

Question: Isn’t that what was going on in the Snapple case? Snapple was charging a higher price per

case to the LADs than to the transshippers?

Question: Then why was that conduct not considered illegal by the court?

Answer: Because price discrimination is a rule of reason violation. The LADs must prove not only

Horizontal v. Vertical Mergers

Horizontal Mergers—a horizontal merger involves companies that compete in the same market.

The government views these types of mergers as more likely to reduce competition and raise prices.

Vertical Mergers—a vertical merger can also be anticompetitive, especially if they reduce entry

into a market by locking up an important supplier or a top distributor. But often the participants are

better able to show some advantage to consumers.

Landmark Case: United States v. Waste Management, Inc.6

Facts: Waste Management, Inc. (WMI) acquired Texas Industrial Disposal, Inc. (TIDI). Their

combined market share of the trash collection business in Dallas was 48.8 percent. The trial court held

that the merger was illegal and ordered WMI to divest itself of TIDI.

Issue: Does a horizontal merger that creates a company with a 48.8 percent market share violate the

Clayton Act?

Holding: Not necessarily. A merger resulting in a large market share creates a presumption of

illegality. However, evidence that the merger will not have an anticompetitive impact can overcome

the presumption. In this case, competitors can easily enter the waste hauling business; therefore, WMI

will not have market power to raise prices. No violation.

Question: How large can your market share be before your merger is illegal?

6 743 F.2d 976, 1984 U.S. App. LEXIS 18843 United States Court of Appeals for the Second Circuit, 1984

Question: WMI had 48.8 percent of the market. Did it have enough market power to set prices?

Question: In merger cases, what issue is more important than market share?

Example: Staples and O ce Depot Merger

The FTC blocked the horizontal merger of office supply giants Staples, Inc., and Office Depot although

the two companies controlled only 4 percent of the national market for office supplies. But, rather than

national market share, the FTC focused instead on the companies’ ability to control prices locally. The

agency found that, when both stores operated in the same market, prices were significantly lower than

when only one store was present. In the FTC’s view, if the two stores combined, they would have had

enough power in local markets to raise prices and harm consumers.

Joint Ventures

A joint venture is a partnership for a limited purpose—the companies do not combine permanently,

they simply work together on a specific project. The government will usually permit a joint venture,

even between competitors with significant market power.

Aggressive Strategies

Monopolization

Under §2 of the Sherman Act, it is illegal to monopolize or attempt to monopolize a market. To

monopolize means to acquire a monopoly 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

business.

Example: Generic Cigarettes

Liggett began selling generic cigarettes at a price 30 percent below that of branded cigarettes. Brown

& Williamson retaliated by introducing its own generics at an even lower price. Liggett sued, claiming

that Brown’s prices were below cost. The Supreme Court agreed that Brown was selling below cost

and that it intended to harm Liggett. Brown still won the case, however, because there was no

evidence that it would be able to recover its losses from the below-cost pricing. If Brown raised its

prices, other competitors would come back into the market.

Question: What is predatory pricing?

Answer: Predatory pricing occurs when a company:

Question: Did Brown & Williamson lower its prices below cost?

Question: Did Brown & Williamson intend to drive Liggett out of business?

Question: So why did Liggett lose?

Question: Does predatory pricing harm consumers?

Question: How could Liggett have proved that Brown & Williamson had enough market power to

raise its prices on generics?

Answer: The Supreme Court admits that this would be difficult. There are so many large

Question: What theory of antitrust law is the Supreme Court applying?

Answer: It certainly sounds like the Chicago School again. Notice the focus on the harm to

Tying Arrangements

A tying arrangement is an agreement to sell a product on the condition that the buyer also purchases a

different (or tied) product. A tying arrangement is illegal 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.

Controlling Distributors and Retailers

Resale Price Maintenance—also called vertical price fixing, means the manufacturer sets

minimum prices that retailers may charge. In other words, it prevents retailers form discounting.

Research: If students completed the research on retail price maintenance, now would be an

appropriate place to discuss their findings.

Case: Leegin Creative Leather Products, Inc. v. PSKS, Inc7

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. The Brighton brand

was imported to Kay’s Kloset, a boutique in Lewisville, Texas, because it accounted for 40 to 50

percent of the store’s profits.

Leegin decided it would no longer sell to retailers how discounted Brighton process. Despite

warnings from Leegin, Kay’s Kloset persisted in marking down Brighton products by 20 percent.

Leegin cut the store off.

Kay’s sued Leegin, alleging that is had violated the per se rule against resale price maintenance.

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 is

had entered into resale price maintenance agreements with retailers. Rather, it contended that the rule

of reason should apply to those agreements.

Issue: Is resale price maintenance a per se or rule of reason violation of the Sherman Act?

Holding: Resale price maintenance is to be judged according to rule of reason. According to the

court, to justify a per se prohibition a restraint must have a manifestly anticompetitive effect and lack

any redeeming value. The few studies documenting the effects of resale price maintenance show that

there are some benefits to such a pricing scheme, and thus cast doubt on whether it meets the criteria of

a per se violation.

According to the court, resale price maintenance can stimulate interbrand competition, which is the

competition among different manufacturers of a similar product, by reducing intrabrand competition,

which is the competition among retailers selling the same brand. Resale price maintenance encourages

retailers to invest in tangible or intangible services or promotional efforts that aid the manufacturer’s

position against rivals. Resale price maintenance also has the potential to give consumers more options

so that they can choose among low-price, low-service brands; high-priced high-service brands; and

anything in between.

Without resale price maintenance, 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.

Vertical agreements setting minimum resale prices can also have anti-competitive effects. For

example, a manufacturer with market power might use resale price maintenance to give retailers an

incentive not to sell the products of smaller rivals or new entrants. If the rule of reason were to apply,

courts would have to be diligent in eliminating their anticompetitive uses from the market.

Question: Can resale price maintenance have anti-competitive effects?

Answer: Yes, according to the court. Resale price maintenance may make it so expensive for a

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 resale price maintenance because

although there are some anti-competitive effects of the agreements, there are also many

Example

If you live in Stilwell, Oklahoma (pop. 2,700), you do not have to buy your electricity from the utility

owned by the city. However, you can get awfully thirsty if you buy it from somebody else. When a

real estate developer built a new apartment complex here, he ordered electricity from an out -of-town

utility, which offered him a good deal on water heaters. Local officials told him that if he did not buy

the town’s electricity, they would deny him water and sewer service, which he could not buy

elsewhere. The developer figured it would be tough to find renters willing to live without running

water, so he decided to buy power from the city.8

Question: Has Stilwell violated the antitrust laws?

Question: What is the tying product?

Question: What is the tied service?

Question: Does Stilwell have significant power in the market for the tying product?

Question: What defense might it make?

Question: What outcome would you predict?

Multiple Choice Questions

8 Bryan Gruley, “Little Town Becomes First Municipality Sued By U.S. for Antitrust,” Wall Street Journal, June 3, 1996, p.

1. Are horizontal price fixing and vertical price fixing per se violations of the Sherman Act?

(a) Yes, Yes

(b) Yes, No

(d) No, No

2. If Sterling Steel (SS) refused to buy concrete from Carat Concrete (CC) unless CC bought steel

from SS would that arrangement be a violation of antitrust laws?

(a) Yes, a per se violation.

(b) It used to be a violation but is no longer.

(d) Yes, if SS has a monopoly.

3. Reserve Supply Corp., a cooperative of 379 lumber dealers, charged that Owens-Corning

Fiberglass Corp. violated the Robinson-Patman Act by selling at lower prices to Reserve’s

competitors. It presented proof that these prices had harmed competition. Owens-Corning

admitted that it 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 RPA?

(a) Yes, because the RPA requires that manufacturers charge all customers the same price.

(b) Yes, because any difference in price is a per se violation of the RPA.

(d) No, because a manufacturer is not liable under the RPA if it charges lower prices to meet

competition.

4. All the first-run movie theaters in Silicon Valley charge the same prices for tickets. If one

cinema raises its prices, so do the others. What is this type of activity called, and is it a

violation of the antitrust laws?

(a) Refusal to deal; it is a rule of reason violation.

(b) Conscious parallelism; it is not a violation in itself.

(d) Resale price maintenance; it is a rule of reason violation.

5. A horizontal merger is illegal if:

(a) the resulting company controls at least 90 percent of the market.

(b) the resulting company controls at least 50 percent of the market.

(d) All of the above.

Case Questions

1. Samantha manufactures 60 percent of the titanium screws sold in the United States. Does she

have a monopoly on this product? What would you need to know to answer this question?

2. After acquiring the Schick brand name and electric shaver assets, North American Phillips

controlled 55 percent of the electric shaver industry in the United States. Remington, a

competitor, claimed that the acquisition of such a large market share was a violation of the law

because the increased competition from Phillips would decrease Remington’s profits. Does

Remington have a valid claim?

Answer: The court held that a 55 percent market share creates a presumption of antitrust

illegality. It reasoned, however, that a decrease in Remington’s profits did not constitute an

antitrust injury. The law seeks to prevent injury from reduced competition, not from increased

3. In New York City, 50 bakers formed an association. They developed a system of distribution

under which stores were only allowed to buy from a single baker. A store that wanted to shift

to another baker had to consult the association and pay cash to the former baker. The

association also decided to raise the retail price of bread. All the association’s members 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

4. You Be the Judge: WRITING PROBLEM American Academic Suppliers

(AAS) and Beckley-Cardy (B-C) both sold educational supplies to schools. When B-C’s sales

began to plummet, it responded by reducing its catalog prices. It also offered an additional

discount in states in which AAS was making substantial gains. What claim might AAS make

against B-C? Is it likely to prevail in court? Argument for AAS: B-C has committed predatory

pricing. The company is selling below cost for the purpose of driving us out of business.

Argument for B-C: Even if we were to drive AAS out of business, we do not have enough

market power to recoup our losses.

Answer: AAS charged B-C with predatory pricing. The court, however, found for B-C

because the company lacked monopoly power and because there was no showing of harm to

5. Suppose that Masi Bikes insists that retailers cannot sell its Soulville 10 model for less than

$1,099. The company threatens to cut off any retailers who discount that price. But bicycle

stores would like to use these bikes as a loss leader—selling them at a lower price to lure

customers. Is it legal for Masi to cut off retailers who discount prices??

Discussion Questions

1. Texaco sold gasoline in Spokane, Washington, to independent retailers and also to Gulf Oil,

which operated its own filling stations and also sold to retailers. Texaco charged a substantially

lower price to Gulf than to the independent retailers. These retailers sued Texaco, alleging that

this price structure violated the RPA. At trial, the retailers presented evidence that they could

not compete against Gulf. Texaco did not present evidence that the different prices it charged

reflected the costs of serving these two sets of customers. Did Texaco violate the RPA?

2. Pricegrabber.com is a website that helps online shoppers find the lowest-priced goods on the

Internet. But it cannot always find the cheapest items because some online sellers are afraid to

list their prices. If you go to Amazon.com, for example, you will see some items for which

there is no price, just the note, “To see our price, add this item to your cart.” Amazon does that

for fear that, after the Leegin case, manufacturers will refuse to supply items that it sells below

the established retail price. Manufacturers worry that if they do not set some floor to their

prices, other retailers will drop the products altogether. eBay and Amazon argue that the

consumer is best served by a free market that permits them to set whatever prices they want.

What is your view on RPM?

3. In Boston, 50 restaurants threatened to stop accepting the American Express card if the

company refused to reduce the commission it charged on each purchase. Visa International, one

of American Express’s rivals, offered to pay the group’s legal expenses. American Express then

lowered its commission for all restaurants except for those with a volume lower than $1 million

a year. Have either the restaurants, Visa, or American Express potentially violated the antitrust

laws?

4. 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

nonemergency 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 it ethical to deny treatment to a patient? What Life Principles are at issue here?

Answer: Clarice brought suit alleging that Medical Center had monopolized medical care in