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Business Law Chapter 46 Homework Although The United States Supreme Court Has

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Business Law: Text and Cases 14th Edition
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
Chapter 46
Antitrust Law
The basis of antitrust legislation is a desire to foster competition. Antitrust legislation was initially created, and
continues to be enforced, because of our belief that competition leads to lower prices, more product information, and
a better distribution of wealth between consumers and producers.
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.
I. The Sherman Antitrust Act
The Sherman Act is proscriptive rather than prescriptive. It is the basis for policing, rather than regulating,
business conduct.
Sections 1 and 2 contain the main provisions.
Section 1Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint
of trade or commerce among the several States, or with foreign nations, is hereby declared to be
illegal [and is a felony punishable by fine or imprisonment].
Section 2Every 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
several States, or with foreign nations, shall be deemed guilty of a felony [and is similarly pun-
Federal Antitrust Legislation
Despite condemning anticompetitive agreements on the basis of public policy, the common law proved to
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.
After the Civil War ended, the nation renewed its drive westward. With the movement westward came the
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 famousor 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
determining the control of exclusive geographical markets for all trust members. As used by Standard Oil and
others around the turn of the century, a trust was a device used to amass market power. Members could
compete free from competition with other members. Also, a trust might wield such economic power that
companies outside the trust could not compete effectively.
In some cases, an entire industry was dominated by a single organization. The public perception was
that 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.
Congress next attempted to deal with trusts in a direct, unified way by passing the Sherman Act in 1890.
The Sherman Act, however, failed to end public concerns over monopolies. The United States Supreme
Court initially construed the statute too narrowly to give it much effect and subsequently applied it so
rigorously as to make the act unworkable. Lackluster enforcement also contributed to the public’s
dissatisfaction. Concern over the trust problem continued to the point that it dominated the 1912 presidential
election, and eventually, 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 the Federal Trade Commission and invested it with broad enforcement powers to prevent, as well as
correct, business behavior broadly defined as unfair trade practices.
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.
Any activity that substantially affects commerce falls under the act, which also extends to U.S. nationals
abroad who engage in activities that have an effect on U.S. foreign commerce.
 
The author of the Sherman Antitrust Act of 1890, Senator John Sherman, was the brother of the famed
Civil War general William Tecumseh Sherman and a recognized financial authority. Sherman had been
concerned for years with the diminishing competition within U.S. industry and the emergence of monopolies,
such as the Standard Oil trust.
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.
The increasing consolidation occurring in U.S. industry, and particularly the Standard Oil trust, came to
the attention of the public in March 1881. Henry Demarest Lloyd, a young journalist from Chicago, published
an article in the Atlantic Monthly entitled “The Story of a Great Monopoly.” The article discussed the success
of the Standard Oil Company and clearly demonstrated that the petroleum industry in the United States was
dominated by one firm—Standard Oil. Lloyd’s article, which was so popular that the issue was reprinted six
times, marked the beginning of the U.S. public’s growing awareness of, and concern over, the growth of
The common law regarding trade regulation was not always consistent. Certainly, it was not very familiar
to the members of Congress. The public concern over large business integrations and trusts was familiar,
however. In 1888, 1889, and again in 1890, Senator Sherman introduced in Congress bills designed to
destroy the large combinations of capital that, he felt, were creating a lack of balance within the nation’s
economy. Sherman told Congress that the Sherman Act “does not announce a new principle of law, but
applies old and well-recognized principles of the common law.”a In 1890, the Fifty-first Congress enacted the
bill into law.
Generally, the act prohibits business combinations and conspiracies that restrain trade and commerce, as
well as certain monopolistic practices.
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
a. 21 Congressional Record 2456 (1890).
II. Section 1 of the Sherman Act
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.
1. Rationale for the Rule of Reason
If the rule-of-reason had not developed, almost any business agreement could be held to violate the
Sherman Act.
2. Factors That Courts Consider
Factors that a court might consider in a rule-of-reason analysis include
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.
Horizontal restraints result from concerted action by direct competitors.
1. Price Fixing
An agreement among competitors to fix prices is unlawful per se.
a. The Reason Behind the Agreement Is Not a Defense
b. Price Fixing Cartels Today
Price-fixing cartels are common among U.S. companies and international corporations in
many industries.
2. Group Boycotts
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.
3. Horizontal Market Division
It is a per se violation for competitors to divide up territories or customers.
4. Trade Associations
Generally, the rule of reason is applied to trade association actions. Like other anticompetitive
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.
 
Like almost every other product, homes are now being sold via the Internet on hundreds of thousands of
Web sites. The most extensive listings of homes for sale, though, are found on the multiple listing services
(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)
and the U.S. Department of Justice have brought antitrust actions against both local real estate associations
and the National Association of Realtors®, a national trade association for real estate brokers and agents, for
attempting to restrict the use of MLS databases.
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 FTC’s Bureau of Competition filed a complaint for violation of antitrust laws against the Board of
Realtors® in Austin, Texas, which had a rule prohibiting discount brokers from listing on its MLS site. After
several months of negotiations, the FTC prevented the Austin board from adopting and enforcing “any rule
that treats different types of real estate listing agreements differently.” The FTC is now pursuing similar
negotiations in other cities including Cleveland, Columbus, Detroit, and Indianapolis.
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
through which prospective homebuyers could search the MLS database. The password would be given only
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.
In response, the NAR developed a new policy for Web listings. The policy included an opt-out provision
“that forbade any broker participating in a multiple listing service from conveying a listing to his or her
customers via the Internet without the permission of the listing broker.” In other words, a traditional broker
could prevent her or his listings in the MLS database from being displayed on the Web site of a VOW-
operating broker.
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
antitrust action against the NAR, the association modified its policy and eliminated the selective opt-out
provision aimed specifically at VOW-operating brokers. Nevertheless, the revised policy still allowed brokers
to prevent their listings from being displayed on any competitor’s Web site. Thus, under the new policy,
traditional brokers could still prevent VOW-operating brokers from providing the same MLS information via the
Internet that traditional brokers could provide in person. The policy also permitted MLS sites to lower the
quality of the data feed they provide brokers, thereby restraining brokers from using Internet-based features to
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
policies constitute a “contract, combination, and conspiracy between NAR and its members which
unreasonably restrains competition in brokerage service markets throughout the United States to the
detriment of American consumers.” In 2006, finding that the Justice Department had shown sufficient
evidence of anticompetitive effects to allow the suit to go forward, the court denied the NAR’s motion to
dismiss the case.a.
Why couldn’t discount brokers simply create their own Web sites to list the houses they have for
5. Joint Ventures
Generally, the rule of reason applies (unless price fixing or market divisions are involved).
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.
1. Territorial or Customer Restrictions
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
A manufacturer may want dealers to share marketing and service costs proportionately, for
example, instead of competing against each other to cut those costs.
b. Judged under Rule of Reason
These restrictions are judged under the rule of reason.
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.
Resale Price Maintenance Agreements
Cases considering resale price maintenance agreements include the following.
Ozark Heartland Electronics, Inc. v. Radio Shack, A Division of Tandy Corp., 278 F.3d 759 (8th Cir. 2002)
(there is no violation of the antitrust laws, which proscribe unreasonable price maintenance agreements, if the
plaintiff is merely the agent of the defendant, not a buyer and reseller of the defendant’s product).
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).
III. Section 2 of the Sherman Act
Section 2 proscribes monopolization and attempts to monopolize. A tactic that may be involved in either
offense is predatory pricingpricing below the cost of production to drive competitors out of business. The
surviving firm can then price its products at high enough levels to earn monopoly profits.
Predatory Pricing
Predatory pricing refers to the systematic underpricing by a firm of its productssometimes at levels
below the costs of producing those productsto wrest sales from competitors operating in the same market
and, over time, drive those competitors out of business. Once the competitors have been eliminated, the
surviving firm can then price its products at high enough levels so that it can earn monopoly profits. In any
event, predatory pricing is widely regarded as a practice that accompanies the intent by a company to
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
as prevalent as is commonly supposed. Due to the sheer cost of engaging in predatory pricing for a
sustained period of time coupled with the lack of certainty about whether other firms will enter the market later
once the firm raises its prices in an attempt to extract monopoly prices, a firm engaging in predatory pricing
practices may not necessarily be able to recover its costs.
Although the United States Supreme Court has not heard many predatory pricing cases in recent years, it
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
marginal cost is the proper benchmark for predation and that short-run marginal cost is not an appropriate
benchmark for identifying predation) will not cause the test itself to be rendered irrelevant to predatory pricing
issues altogether in the future.a
a. See Herbert Hovenkamp, Economics and Federal Antitrust Law. (St. Paul: West Publishing Company, 1985), pp. 175-79
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
in about half of the states.
4-75-201 Title.
This subchapter shall be known and designated as the “Unfair Practices Act”.
4-75-202 Purpose.
The General Assembly declares that the purpose of this subchapter is to safeguard the public against the
creation or perpetuation of monopolies and to foster and encourage competition by prohibiting unfair and
discriminatory practices by which fair and honest competition is destroyed or prevented.
4-75-203 Construction.
This subchapter shall be literally construed so that its beneficial purposes may be subserved.
4-75-204 Penalties.
Any person, firm, or corporation, whether as principal, agent, officer, or director, for himself, or itself, or for
another person, or for any firm or corporation, or any corporation who or which shall violate any of the
provisions of this subchapter is guilty of a misdemeanor for each single violation and upon conviction shall be
punished by a fine of not less than one hundred dollars ($100) nor more than one thousand dollars ($1,000)
or by imprisonment not exceeding six (6) months, or by both a fine and imprisonment in the discretion of the
4-75-205 Forfeiture of charter, rights, etc. -- Proceedings.
(a) Upon the third violation of any of the provisions of this subchapter by any corporation, it shall be the duty
of the Attorney General to institute proper suits or quo warranto proceedings in any court of competent
jurisdiction for the forfeiture of its charter, rights, franchises, or privileges and powers exercised by the
corporation, and to permanently enjoin it from transacting business in this state.
(b) If in such action the court finds that the corporation is violating or has violated any of the provisions of this
subchapter, it must enjoin the corporation from doing business in this state permanently or for such time as
the court shall order, or must annul the charter or revoke the franchise of the corporation.
4-75-206 Contracts violating subchapter illegal.
Any contract, express or implied, made by any person, firm, or corporation in violation of any of the
provisions of this subchapter is declared to be an illegal contract and no recovery thereon shall be had.
4-75-207 Destruction of competition by price discrimination prohibited.
(a) It shall be unlawful for any person, firm, or corporation doing business in the State of Arkansas and
engaged in the production, manufacture, distribution, or sale of any commodity or product or of service or
output of a service trade of general use or consumption or of the product or service of any public utility with
the intent to destroy the competition of any regular established dealer in the commodity, product, or service,
or to prevent the competition of any person, firm, private corporation, or municipal or other public corporation
who or which in good faith intends and attempts to become a dealer to discriminate between different
sections, communities, or cities or portions thereof, or between different locations in the sections,
communities, cities, or portions thereof in this state, by selling or furnishing the commodity, product, or
service at a lower rate in one section, community, or city or any portion thereof, or in one location in the
section, community, or city or any portion thereof, than in another, after making allowance for difference, if
any, in the grade, quality, or quantity and in the actual cost of transportation from the point of production, if a
raw product or commodity, or from the point of manufacture, if a manufactured product or commodity.
(b) The inhibition of this section against locality discrimination shall include any scheme of special rebates,
collateral contracts, or any device of any nature whereby such discrimination is, in substance or fact, effected
in violation of the spirit and intent of this subchapter.
(c) This subchapter shall not be construed to prohibit the meeting in good faith of a competitive rate, or to
prevent a reasonable classification of service by public utilities for the purpose of establishing rates.
4-75-208 Secret payments or allowance of rebates, refunds, etc. -- Penalty.
(a) The secret payment or allowance of rebates, refunds, commissions, or unearned discounts, whether in
the form of money or otherwise, or secretly extending to certain purchasers special services or privileges not
extended to all purchasers purchasing upon like terms and conditions, to the injury of a competitor and
where the payment or allowance tends to destroy competition, is an unfair trade practice.
(b) Any person, firm, partnership, corporation, or association resorting to such trade practice shall be
deemed guilty of a misdemeanor and on conviction shall be subject to the penalties set out in § 4-75-204.
4-75-209 Sale at less than cost or with intent to injure competitors.
(a)(1) It shall be unlawful for any person, partnership, firm, corporation, joint-stock company, or other
association engaged in business within this state, to sell, offer for sale, or advertise for sale any article or
product, or service or output of a service trade, at less than the cost thereof to the vendor, or to give, offer to
give, or advertise the intent to give away any article or product, or service or output of a service trade, for the
purpose of injuring competitors and destroying competition.
(2) Any person or entity so doing shall be guilty of a misdemeanor, and on conviction shall be subject to the
penalties set out in § 4-75-204 for any such act.
(b)(1) The term “cost” as applied to production is defined as including the cost of raw materials, labor, and all
overhead expenses of the producer; and, as applied to the distribution, “cost” shall mean the invoice or
replacement cost, whichever is lower, of the article or product to the distributor and vendor plus the cost of
doing business by the distributor and vendor.
(2) The “cost of doing business” or “overhead expense” is defined as all costs of doing business incurred in
the conduct of the business and must include without limitation the following items of expense: labor, which
includes salaries of executives and officers, rent, interest on borrowed capital, depreciation, selling cost,
maintenance of equipment, delivery cost, credit losses, all types of licenses, taxes, insurance, and
(c) In establishing the cost of a given article or product to the distributor and vendor, the invoice cost of the
article or product purchased at a forced, bankrupt, closeout sale, or other sale outside of the ordinary
channels of trade may not be used as a basis for justifying a price lower than one based upon the
replacement cost as of date of the sale of the article or product replaced through the ordinary channels of
trade, unless:
(1) The article or product is kept separate from goods purchased in the ordinary channels of trade; and
(2) The article or product is advertised and sold as merchandise purchased at a forced, bankrupt, or closeout
sale, or by means other than through the ordinary channels of trade, and the advertising states the
conditions under which the goods were so purchased, and the quantity of the merchandise to be sold or
offered for sale.
(d) In any injunction proceeding or in the prosecution of any person as officer, director, or agent, it shall be
sufficient to allege and prove the unlawful intent of the person, firm, or corporation for whom or which he
(e) Where a particular trade or industry of which the person, firm, or corporation complained against is a
member has an established cost survey for the locality and vicinity in which the offense is committed, the
cost survey shall be deemed competent evidence to be used in proving the costs of the person, firm, or
corporation complained against within the provisions of this subchapter.
(f) The provisions of this section shall not apply to any sale made:
(1) In closing out in good faith the owner’s stock or any part thereof for the purpose of discontinuing his trade
in the stock or commodity, and, in the case of the sale of seasonal goods or to the bona fide sale of
(2) When the goods are damaged or deteriorated in quality, and notice is given to the public thereof;
(3) By an officer acting under the orders of any court;
(4) In an endeavor made in good faith to meet the legal prices of a competitor as herein defined selling the
same article or product, or service or output of a service trade, in the same locality or trade area.
(g) Any person, firm, or corporation who performs work upon, renovates, alters, or improves any personal
property belonging to another person, firm, or corporation shall be construed to be a vendor within the
meaning of this subchapter.
4-75-210 Liability of directors, officers, agents, etc. -- Proof of unlawful intent.
(a) Any person who, either as director, officer, or agent of any firm or corporation or as agent of any person
violating the provisions of this subchapter, assists or aids, directly or indirectly, in the violation shall be
responsible therefore equally with the person, firm, or corporation for whom or which he acts.
(b) In the prosecution of any person as officer, director, or agent, it shall be sufficient to allege and prove the
unlawful intent of the person, firm, or corporation for whom or which he acts.
4-75-211 Remedies -- Witnesses and documents -- Immunity.
(a) Any person, firm, private corporation, or municipal or other public corporation, or trade association, may
maintain an action to enjoin a continuance of any act or acts in violation of this subchapter and, if injured
thereby, for the recovery of damages.
(b)(1) If, in such action, the court shall find that the defendant is violating or has violated any of the provisions
of this subchapter, it shall enjoin the defendant from a continuance thereof.
(2) It shall not be necessary that actual damages to the plaintiff be alleged or proved.
(3) In addition to injunctive relief, the plaintiff in the action shall be entitled to recover from the defendant
three (3) times the amount of the actual damages, if any, sustained.
(c)(1) Any defendant in an action brought under the provisions of this section or any witness desired by the
state may be required to testify under the provisions of §§ 16-43-211 and 16-43-701.
(2) In addition, the books and records of any such defendant may be brought into court and introduced, by
reference, into evidence.
(3) However, no information so obtained may be used against the defendant as a basis for a misdemeanor
prosecution under the provisions of §§ 4-75-204 and 4-75-2074-75-210.
(d) The remedies prescribed in this subchapter are cumulative and in addition to the remedies prescribed in
the Public Utilities Act, § 23-1-101 et seq., for discrimination by public utilities. If any conflict shall arise
between this subchapter and the Public Utilities Act, § 23-1-101 et seq., the latter shall prevail.
There are two elements to a Section 2 violation
Possession of monopoly power in the relevant market.
Willful acquisition or maintenance of that power.
1. Defining Monopoly Power
Monopoly refers to control by a single entity. If a firm has sufficient market power to affect prices
and output, it may be a monopoly even though it is not the sole seller in the market. To define a
firm’s market power, courts look to its share of the relevant market.
2. Proving Monopoly Power
Monopoly power may be proved by direct evidence that a firm used its market power to control
prices or exclude competition.
To prove monopoly power indirectly, a firm may be shown to have a dominant share of the
relevant market. Courts also consider the barriers for competitors to enter that market.
A Monopolist Charging Lower Prices?
The courts do not view the Sherman Act as protection for competitors from competitive practices.
Instead, the courts see the act as protection for consumers from monopolistic practices. The monopolistic
practices that result once a company attains monopoly power consist chiefly of charging higher prices. Thus,
when the conduct that a plaintiff complains of consists primarily of charging lower prices, the plaintiff may
find it difficult to prove a violation of the Sherman Act. The plaintiff will lose the case if it appears unlikely that
a company’s lower prices today indicate that the company will charge higher, monopolistic prices tomorrow. A
company without monopoly power will not be able to recoup the losses sustained in charging lower prices by
later raising prices. In that situation, the lower prices will only benefit, not harm, consumers.
3. Relevant Market
To define a firm’s market power, courts look to its share of the relevant market, consisting of
A relevant product market.
A relevant geographic market.
a. Relevant Product Market
In determining the relevant product market, the key issue is the degree of products’ in-
terchangeability. Decisions on this issue can often be interpreted as arbitrary.
Case 46.1: McWane, Inc. v. Federal Trade Commission
McWane, Inc., is the dominant producer of domestic ductile iron pipefittings. When Star Pipe Products
entered the market, McWane told its distributors that unless they bought all of their domestic fittings from
McWane, they would lose their rebates and be cut off from purchases for twelve weeks. The Federal Trade
Commission (FTC) brought an action against McWane under Section 5 of the Federal Trade Commission Act.
McWane's actions were found to constitute an illegal exclusive-dealing policy used to maintain McWane's
monopoly power. The FTC ordered McWane to stop requiring exclusivity from distributors. McWane
The U.S. Court of Appeals for the Eleventh Circuit affirmed. The FTC’s “factual and economic
conclusionsidentifying the relevant product market for domestic fittings produced for domestic-only projects,
finding that McWane had monopoly power in that market, and determining that McWane's exclusivity program
harmed competitionare supported by substantial evidence in the record, * * * and their legal conclusions
are supported by the governing law.”
Notes and Questions
How might the imposition of McWane’s exclusive-dealing policy benefit consumers? McWane’s
policy may have affected competition in its market, but its market consisted chiefly, if not entirely, of
contractors working on municipal, state, and federal waterworks projects. These contractors are often legally
bound to use domestic pipefittings. Consumers may indirectly be affected by the prices for McWane’s fittings
by the prices that the government pays for the contractor’s work. There could arguably be an indirect benefit if
the government maintained closer oversight of the contractor’s bids and costs, and consequently attempted to
deliver more cost-effective efficiencies in those deals.
Cases including claims of monopolization include the following.
PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101 (2d Cir. 2002) (in a cola syrup manufacturer’s suit against a
competitor, alleging in part monopolization based on the defendant’s distributorship agreements with
independent food service distributors (IFD) that prohibited the IFDs from delivering the plaintiff’s products to
any of their customers, the competitor lacked market power to support the claim when it had only a 64-
percent share of the total fountain syrup sales by the three largest suppliers).
Tate v. Pacific Gas & Electric Co., 230 F.Supp.2d 1072 (N.D.Cal. 2002) (a natural gas utility had
monopoly power in the market of supplying specialized natural gas technologies in its service area, for the
purpose of antitrust claims asserted by the seller of portable gas liquefaction devices, even though the utility
was not yet in the business of selling such devices, because the essence of the seller’s claim was that the
utility had acted to protect its existing business and to clear the way for its future entry into the liquefied gas
supply business).
General Cigar Holdings, Inc. v. Altadis, S.A., 205 F.Supp.2d 1335 (S.D.Fla. 2002) (there was no
dangerous probability that a Spanish cigar manufacturer would be successful in achieving a monopoly, for

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