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Business Law Chapter 46 Homework Antitrust Law Answers Business Scenarios

Page Count
9 pages
Word Count
5576 words
Book Title
Business Law: Text and Cases 14th Edition
Authors
Frank B. Cross, Kenneth W. Clarkson, Roger LeRoy Miller
1
CHAPTER 46
ANTITRUST LAW
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
DIGITAL UPDATECRITICAL THINKING
Which companies in Europe do you think may have pressured the European Union to
lodge its antitrust complaint against Google? Undoubtedly, the numerous comparison
shopping sites throughout Europe that have declined insignificance brought pressure on the
European Union Antitrust Commission. These sites including BizRate, LeGuide, and Nextag. A
few years ago these sites were popular and profitable. They no longer are. And ten years ago,
there were many other similar comparison shopping sites, all of which have gone out of
business
ANSWERS TO QUESTIONS
AT THE ENDS OF THE CASES
CASE 46.1LEGAL REASONING QUESTIONS
1. How did McWane’s Full Support Program harm competition? Explain. McWane,
Inc., is the dominant producer of domestic ductile iron fittings. 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. This
was McWane’s “Full Support Program.”
The Federal Trade Commission (FTC) brought an action against McWane, alleging that
the producer’s exclusivity policy was an antitrust violation of Section 5 of the FTC Act. The FTC
ordered McWane to stop requiring exclusivity from distributors. On appeal, the U.S. Court of
Appeals for the Eleventh Circuit affirmed the order. McWane’s exclusivity policy constituted an
illegal attempt to maintain monopoly power. This conclusion was supported by McWane's
market share, the amount of capital needed to enter the market, and McWane's power to control
prices in that market.
2. What did the Federal Trade Commission conclude in this case? What “factual and
economic” evidence supported this conclusion? In the McWane case, the Federal Trade
Commission (FTC) identified the relevant product market for domestic pipefittings produced for
domestic-only projects, found that McWane, Inc., the dominant producer of domestic ductile iron
fittings, had monopoly power in that market, and determined that McWane's “Full Support
Program” harmed competition.
McWane adopted its “Full Support Program” 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
FTC concluded that this exclusivity policy was an antitrust violation of Section 5 of the FTC Act.
This conclusion was supported by McWane's market share, the amount of capital needed
to enter the market, and McWane's power to control prices in that market. McWane’s share of
the market—defined as “the supply of domestically manufactured fittings for use in domestic-
3. Instead of imposing an exclusivity policy, what action might McWane have taken to
benefit its customers and compete with Star? Instead of imposing an exclusivity policy,
McWane, Inc., the dominant producer of domestic ductile iron fittings, could have benefitted its
customers and competed with Star Pipe Products, or almost any other new entrant into the
domestic pipefittings market by simply dropping prices.
As indicated by the findings of the Federal Trade Commission (FTC) noted by the U.S.
Court of Appeals for the Eleventh Circuit in the McWane case, new entrants to the relevant
market must overcome ongoing relationships between existing manufacturers, distributors, and
ultimate users. To offer customers at least the 100 most commonly ordered patterns and
moldingsout of thousands of possible shapes, and sizes, and so onan entrant into the
CASE 46.2CRITICAL THINKING
SOCIAL
Do predatory-bidding schemes ever benefit consumers? Explain your answer. Yes. A
predatory-bidding scheme can benefit consumers by leading to lower prices. A predator’s high
ECONOMIC
Why does a plaintiff alleging predatory bidding have to prove that the defendant’s
“bidding on the buy side caused the cost of the relevant output to rise above the
revenues generated in the sale of those outputs”? Because without proof of a likely
recoupment of the losses suffered to allegedly drive competitors out of the market, a strategy of
predatory bidding would not make economic senseit would involve a short-term loss that was
not likely to be offset by a long-term gain.
CASE 46.3CRITICAL THINKING
LEGAL ENVIRONMENT
How would TransWeb’s injury have been “shared by all consumers in the relevant
markets” if TransWeb had not sued until after it had been driven out of those markets by
3M’s actions? If TransWeb, LLC had not proceeded with its suit until after 3M Innovative
Products Co.’s actions had excluded TransWeb from the relevant markets, TransWeb’s injury
would have been “shared by all consumers” in those markets by the increased prices charged
by 3M for its products. As the U.S. Court of Appeals for the Federal Circuit noted, TransWeb
proved at trial that increased prices for fluorinated filter * * * respirators would have resulted
had 3M succeeded in its suit.”
TransWeb makes respirator filters made of nonwoven fibrous material to be worn at
contaminated worksites. At an industry exposition, TransWeb’s founder handed out samples of
its filter material. 3M employees obtained the samples. At the time, 3M was experimenting with
filter materials.
Later, 3M obtained patents for its filter products and filed a suit against TransWeb,
claiming infringement. 3M claimed that it had not obtained the TransWeb samples until after
filing for its patents. The suit was dismissed.
ETHICAL
What does 3M’s conduct suggest about its corporate ethics? The conduct by 3M Innovative
Products Co. in the TransWeb case suggests greed and deception in the firm’s fraudulent use of
the patent system and its abuse of the legal system to obtain an unfair market advantage.
TransWeb, LLC makes respirator filters made of nonwoven fibrous material to be worn at
dirty and polluted worksites. At an industry exposition, the company distributed samples of this
CHAPTER 46: ANTITRUST LAW 5
material. 3M employees obtained some of the samples. At the time, 3M was experimenting with
filter materials.
Later, 3M obtained patents for filter products and filed a suit against TransWeb, claiming
infringement. 3M claimed that it did not obtain the TransWeb samples until after it applied for its
patents. The suit was dismissed.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Per se v. rule of reason
Because ICANN is at a higher level of the distribution process than Verisign, it is imposing a
vertical restraint. Since the vertical restraint that Verisign complains of involves restrictions on
services that Verisign can offer (customer restrictions) and the setting of prices at which Verisign
can sell its services (resale price maintenance agreement), ICANN’s action should be judged
under the rule of reason.
2A. Horizontal v. vertical restraint
Because ICANN and Verisign are firms at different levels in the distribution of top-level domain
3A. Directors
If ICANN’s directors were chosen by those with a commercial interest in the Internet, the
directors might represent commercial interests with significant market power and restrain trade
in violation of the Sherman Act.
4A. Best defense
ICANN’s best defense is to assert that a standardized set of registry services is efficient and has
the effect of promoting competition rather than suppressing it. Under the rule of reason, as long
as an agreement is merely regulatory and does not unreasonably restrain trade, it should not be
considered illegal.
6 UNIT NINE: GOVERNMENT REGULATION
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
The Internet and the rise of e-commerce have rendered our current antitrust
concepts and laws obsolete. When our antitrust laws were written, the possibility of intense
nationwide and even global competition was not possible. Today, in contrast, the Internet has
increased competition to such a degree that few, if any, sellers of most products can maintain
prices that are significantly higher than prices offered by other sellers anywhere in the
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Under what circumstances would Pop’s Market, a small store in a small, isolated
town, be considered a monopolist? If Pop’s is a monopolist, is it in violation of Section 2
of the Sherman Act? Why or why not? Size alone does not determine whether a firm is a
monopolysize in relation to the market is what matters. A small store in a small, isolated town
2A. Maple Corporation conditions the sale of its syrup on the buyer’s agreement to buy
Maple’s pancake mix. What factors would a court consider to decide whether this
arrangement violates the Clayton Act? Why or why not? This agreement is a tying ar-
rangement. The legality of a tying arrangement depends on the purpose of the agreement, the
CHAPTER 46: ANTITRUST LAW 7
ANSWERS TO BUSINESS SCENARIOS
AT THE END OF THE CHAPTER
46-1A. Group boycott
This is a classic case of an anticompetitive group boycott in violation of the Sherman Act,
Section 1. No-Glow Department Store and the manufacturers have reached an agreement
462A. Antitrust laws
Yes. The major antitrust law being violated is the Sherman Act, Section 1. Allitron and
Donovan are engaged in interstate commerce, and the agreement to divide marketing territories
ANSWERS TO BUSINESS CASE PROBLEMS
AT THE END OF THE CHAPTER
463A. Section 2 of the Sherman Act
No. DVRC’s action does not represent an attempt to monopolize in violation of the Sherman Act.
DVRC merely returned to a position that it had a right to from the beginning. In their contract
DVRC had expressly informed Christy that their relationship could change at any time. Thus
46-4A. Price fixing
The participants in Music Net appear to have engaged in a conspiracy to fix the prices (and
terms) under which their music would be sold online. This may have violated the Sherman Act.
The antitrust laws, including the Sherman Act, are intended to limit restraints of trade
agreements between firms that have the effect of reducing competition in the marketplace. The
underlying assumption of Section 1 of the Sherman Act is that society’s welfare is harmed if rival
firms are permitted to join in an agreement that restrains competition. Not all agreements
between rivals, however, unreasonably restrain trade. Under the rule of reason, anticompetitive
agreements that may violate the Sherman Act are analyzed with the view that they may, in fact,
constitute reasonable restraints of trade. When applying this rule, a court considers the purpose
465A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWERPrice discrimination
Spa Steel satisfies most of the requirements for a price discrimination claim under Section 2 of
the Clayton Act. Dayton Superior is engaged in interstate commerce, and it sells goods of like
grade and quality to at least three purchasers. Moreover, Spa Steel can show that, because it
46-6A. Section 1 of the Sherman Act
No, the standard set by the National Collegiate Athletic Association (NCAA) and the National
Federation of State High School Associations (NFHS) for non-wood baseball bats did not violate
Section 1 of the Sherman Act. Underlying this section is the assumption that society is harmed if
rival firms join in an agreement that restrains competition. Under the rule of reason, the courts
46-7A. Mergers
Yes, the affiliation between St. Luke’s and Saltzer violated antitrust law. Under Section 7 of the
Clayton Act, a merger violates antitrust law “where the effect * * * may be to substantially
lessen competition.” This can occur when a merger results in a combination’s obtaining
monopoly power in the relevant market. An important consideration is market concentration.
When a small number of companies control a large share of the market, the market is
concentrated.
A merger between firms that compete with each other in the same market is a horizontal
merger. If a horizontal merger creates an entity with a significant market share, it increases
market concentration and may be presumed illegal. But courts also consider other factors,
including whether the apparent design of the merger is to establish market power.
Here, in Nampa, Idaho, the market for adult primary care providers was highly
concentratedthere are only three providers mentioned in the facts. St Luke’s emergency clinic
468A. Section 1 of the Sherman Act
The agreement between Manitou North America Inc. and Gehi Co., both makers of telehandlers
(a type of forklift), to allocate territories within Michigan among certain dealers for each
manufacturer and to limit the dealers’ selection of competitive products to certain models is a
horizontal trade restraint. A territorial or market division such as this agreement is a violation of
10 UNIT NINE: GOVERNMENT REGULATION
Competitors who agree to divide territoriesa horizontal market divisioncommit a per
se violation of Section 1 of the Sherman Act. To recover for the violation, a party must suffer an
injury attributable to it that flows from the anticompetitive aspect of the agreement and reduces
competition.
In this problem, the agreement between Manitou and Gehi provided for the division of
territories among telehandler dealers at the same level of the market, thereby reducing
469A. A QUESTION OF ETHICSSection 1 of the Sherman Act
(a) In his appeal, Rose contended in part that the price-fixing and market-allocating
conspiracy among the competitors had expired before he had become the president of DuCoa,
citing the increase in competitive activity among the companies at the time that he assumed the
presidency. The U.S. Court of Appeals fro the Fifth Circuit affirmed the lower court’s sentence.
The appellate court pointed out that “Rose determined whether DuCoa would be part of the
conspiracy once he knew of the agreement to fix prices and allocate customers.” Based on the
testimony of other participants in the crimes, the court reasoned that if Rose had refused to
cooperate, the anticompetitive activities among the three companies would have ceased.
CHAPTER 46: ANTITRUST LAW 11
the law is a component of moral conduct, then a violation of the law is immoral and unethical.
This same standard could be applied to the other participants in the anticompetitive conspiracy.
Rose’s activities—and the conduct of the other participating individuals and companies
might also be viewed as unethical based on that behavior’s effect on chorine chloride’s
customers. The conspiracy to fix the price of, and allocate the customers for, the vitamin may
have stabilized the market for its makers, but the conspiracy made the product more costly for
those customers to buy. The conspiratorial deception foisted on the customers by the
competitors may also be interpreted as unethical.
ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
4610A. Antitrust violations
(a) The plaintiffs could base a claim for damages and an injunction on an allegation
that the taverns, in agreeing to eliminate drink specials on Friday and Saturday nights after 8:00
P.M., violated antitrust prohibitions against “conspiracies in restraint of trade.”
(b) The defendants might contend that they could not be held liable for anticompetitive
conduct because their agreement was in direct response to the city's exercise of its legitimate

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