16 UNIT NINE: GOVERNMENT REGULATION
purposes of an attempted monopolization claim, where the manufacturer had only a 39-percent market share
in the markets for cigars and non-Cuban premium cigars, and there were no barriers to entry in markets).
CHAPTER 46: ANTITRUST LAW 17
• Geneva Pharmaceuticals Technology Corp. v. Barr Laboratories, Inc., 201 F.Supp.2d 236 (S.D.N.Y.
2002) (a supplier of raw material for a drug manufacturer’s product lacked power in the relevant market, for
purpose of the manufacturer’s monopolization claim, where the material was available from multiple sources
and the manufacturer was not “locked–in” to dealing with the supplier).
ENHANCING YOUR LECTURE—
WHAT IS THE RELEVANT PRODUCT MARKET
FOR DOMAIN NAMES?
Most attempts to measure monopoly power involve quantifying the degree of concentration in a relevant
market and/or the extent of a particular firm’s ability to control that market. Accordingly, defining the relevant
market is a necessary step in any monopolization case brought under Section 2 of the Sherman Act. Thus,
when Stan Smith brought a monopolization case against Network Solutions, Inc. (NSI), a domain name
registrar, for not allowing Smith and others to register for expired domain names, a threshold question before
the court was the following: What is the relevant product market for domain names?
THE REGISTRY
At one time, NSI was the only registrar for domain names in this country. In 1998, however, the federal
government opened domain name registration to competition and set up a nonprofit corporation, the Internet
Corporation for Assigned Names and Numbers (ICANN), to oversee the distribution of domain names. At that
time, NSI’s domain name registration service was divided into two separate units: a registrar and a registry
(the Registry).a
they could renew their expired registration. In the meantime, the names remained on the WHOIS database
and were unavailable for others.
The registrar unit continues to register domain names although it is now only one of eighty or so
accredited registrars in operation. The Registry, in contrast, is the only entity of its kind. It maintains a
WHAT IS THE RELEVANT PRODUCT MARKET?
Smith claimed that by failing to make expired domain names available to himself and others, NSI had
intentionally maintained an unlawful monopoly over expired domain names in violation of Section 2 of the
18 UNIT NINE: GOVERNMENT REGULATION
FOR CRITICAL ANALYSIS
Do you agree that the relevant market for domain names should include all domain names and not
just those that have expired? Why or why not?
b. Relevant Geographic Market
The geographic market is that section of the country within which a firm can increase its price a
bit without attracting new sellers or without losing many customers to alternative suppliers
outside that area.
4. The Intent Requirement
a. Why Intent Is Required
The acquisition of monopoly power is not an antitrust violation if it results from—
• Business acumen—good management and efficiency.
• The development of a superior product.
• An historic accident.
If a firm possesses market power as a result of some purposeful act to acquire or to maintain
that power through anticompetitive means, it is a violation of Section 2.
5. Unilateral Refusals to Deal
Refusals to deal involve manufacturers who refuse to deal with retailers or dealers who cut prices to
B. ATTEMPTS TO MONOPOLIZE
This offense may involve predatory pricing (defined above) or predatory bidding—the acquisition and
use of monopsony power (market power on the buy side). This occurs when a buyer bids up the price of
an input too high for competitors to pay, forcing them out of the market. Cases involving attempts to
monopolize require proof of—
• Anticompetitive conduct.
• Intent to exclude competitors and garner monopoly power.
• A dangerous probability of success—a serious threat of monopolization—which exists only when a
party has some degree of market power.
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20 UNIT NINE: GOVERNMENT REGULATION
CASE SYNOPSIS—
Case 46.2: Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co.
Weyerhaeuser Co. owned six mills processing 65 percent of the red alder logs in the Pacific Northwest.
Ross-Simmons Hardwood Lumber Co. operated a single competing mill. When the prices of the logs rose and
those for the lumber fell, Ross-Simmons suffered heavy losses. Several million dollars in debt, the mill closed.
Ross-Simmons filed a suit in a federal district court against Weyerhaeuser, alleging attempted monopolization
under Section 2 of the Sherman Act. Ross-Simmons claimed that Weyerhaeuser used its dominant position in
the market to bid up the prices of logs and prevent its competitors from being profitable. Weyerhaeuser
argued that the test for predatory pricing applies to a claim of predatory bidding and that Ross-Simmons had
not met this standard. From a judgment in the plaintiff’s favor, affirmed by the U.S. Court of Appeals for the
Ninth Circuit, Weyerhaeuser appealed.
The United States Supreme Court vacated and remanded. The test that applies to a claim of predatory
pricing also applies to a claim of predatory bidding. Both predatory pricing and predatory bidding involves a
company’s intentional use of pricing for an anticompetitive purpose. Both actions require a company to incur a
short-term loss on the possibility of later making a “supracompetitive” profit. Because a “rational” firm is
unlikely to “make this sacrifice,” both schemes are “rarely tried and even more rarely successful.” A failed
scheme of either type can benefit consumers. A plaintiff alleging predatory bidding must 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.” The plaintiff must also prove that “the defendant has a dangerous
probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony
power.”
……………………….………………………..……………………………………………………………………………..
Notes and Questions
How might a predatory-bidding scheme benefit consumers? The Court pointed out, “In the first stage
How might a predatory-bidding scheme harm consumers? The Court noted, “Consumer benefit does
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
CHAPTER 46: ANTITRUST LAW 21
IV. The Clayton Act
The Clayton Act targets specific practices that substantially reduce competition or could lead to monopoly
power but are not clearly prohibited by the Sherman Act. The U.S. Department of Justice and the Federal
Trade Commission (FTC) enforce the act. Private parties may also sue for treble damages and attorneys’
fees.
A. SECTION 2—PRICE DISCRIMINATION
Price discrimination occurs when a seller charges different prices to competitive buyers.
1. Required Elements
• The seller must be engaged in interstate commerce.
• The goods must be of like grade or quality.
• The goods must have been sold to two or more buyers.
• The effect of the price discrimination must be to substantially lessen competition or create a
competitive injury.
2. Defenses
• Cost justification—a buyer’s purchases saved a seller costs in producing and selling goods.
• Meeting a competitor’s prices—when a lower price is charged temporarily and in good faith to
meet another seller’s equally low price to the buyer’s competitor.
• Changing market conditions—changing conditions affected the market for or marketability of
the goods.
B. SECTION 3—EXCLUSIONARY PRACTICES
Sellers or lessors cannot sell or lease on condition that the buyer or lessee not use or deal in goods of
the seller or lessor’s competitor.
1. Exclusive-Dealing Contracts
An exclusive-dealing contract, like other anticompetitive agreements, is prohibited if it substantially
lessens competition or tends to create a monopoly.
2. Tying Arrangements
The legality of a tying arrangement depends on many factors, particularly the business purpose or
effect of the arrangement. A tying arrangement that ivolves services must be attacked under
Section 1 of the Sherman Act (because the Clayton Act has been held to cover only commodities).
Once held illegal per se, such arrangements are now more likely to be subject to a rule-of-reason
analysis.
C. SECTION 7—MERGERS
• A person or business organization cannot hold stock or assets in another business if the effect may
be to substantially lessen competition.
• A crucial consideration in merger cases is the market concentration of a product or business—its
percentage market share among competitors in the relevant market. When a small number of
companies control a large share of the market, the market is concentrated.
22 UNIT NINE: GOVERNMENT REGULATION
ADDITIONAL BACKGROUND—
Market Concentration
is greater than 1,800, the market is highly concentrated.
In determining market concentration, the Federal Trade Commission and U.S. Department of Justice
employ what is known as the Herfindahl-Hirschman Index (HHI). The HHI is computed by summing the
1. Horizontal Mergers
Whether a merger between competitors is legal depends first on the market share of the new
entity—anything with a resulting significant share will be presumed illegal. An entity is also analyzed
on the basis of three other factors—
2. Vertical Mergers
In determining a vertical merger’s legality, the FTC looks at such factors as—
• The definition of the relevant product in geographic markets.
• Market concentration.
• Barriers to entry into the market.
• The apparent intent of the merging parties.
ADDITIONAL BACKGROUND—
The Spark-Plug Market
In the 1960s, spark plug manufacturers sold spark plugs to automobile manufacturers for about six cents
per plug, even when their costs were about eighteen cents per plug. The spark plug manufacturers recouped
their losses in the aftermarket. An automobile required, during its useful life, about five replacement sets of
plugs. By custom and practice, mechanics usually replaced plugs with others of the brand that the
manufacturer had installed.
CHAPTER 46: ANTITRUST LAW 23
If Ford had chosen to manufacture its own spark plugs, rather than to acquire Autolite, would
there have been a different effect on competition in the spark plug market? Would Ford’s decision to
manufacture spark plugs itself have been illegal? The effect on competition in the spark plug market
D. SECTION 8—INTERLOCKING DIRECTORATES
Individuals cannot serve as directors on the boards of two or more corporations at the same time if either
has capital, surplus, or undivided profits aggregating more than certain threshold amounts that are
adjusted by the FTC every year.
V. Enforcement and Exemptions
A. AGENCY ACTIONS
The U.S. Department of Justice (DOJ) prosecutes violations of the Sherman Act as either criminal or civil
violations. The DOJ of the Federal Trade Commission (FTC) can enforce the Clayton Act only through
civil proceedings (violations of the Clayton Act are not crimes). Remedies include divestiture and
dissolution. The FTC also enforces the Federal Trade Commission Act.
24 UNIT NINE: GOVERNMENT REGULATION
B. PRIVATE ACTIONS
A private party who has been injured by a violation of the Sherman Act or Clayton Act can sue for treble
damages and attorneys’ fees. Private parties may also seek injunctions. Under the Sherman Act, a
private party must show that—
• The violation caused or was a substantial factor in causing an injury.
• The violation affected business activities protected by the antitrust laws.
CASE SYNOPSIS—
Case 46.3: TransWeb, LLC v. 3M Innovative Properties Co.
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 material. employees of
3M Innovative Properties Co. 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 for patent
……………………….………………………..…………………………………………………………..…..…………….
Notes and Questions
How would a decision in favor of 3M in this case have harmed consumers? 3M’s initial suit was
based on a patent known to be fraudulently obtained and aimed at reducing competition. TransWeb’s
C. EXEMPTIONS FROM ANTITRUST LAWS
Exemptions to antitrust enforcement are given to—
• Labor.
• Agricultural associations.
• Fisheries.
CHAPTER 46: ANTITRUST LAW 25
• Insurance companies
• Exporters.
VI. U.S. Antitrust Laws in the Global Context
Persons in foreign nations are subject to U.S. antitrust laws, as well as protected by those laws from illegal
anticompetitive acts committed by U.S. citizens.
A. THE EXTRATERRITORIAL APPLICATION OF U.S. ANTITRUST LAWS
Any conspiracy that has a substantial effect on U.S. commerce is within the reach of the Sherman Act,
whether the violation occurs outside the United States and whether a foreign government or person
commits it. Any per se violation automatically falls under U.S. jurisdiction.
B. THE APPLICATION OF FOREIGN ANTITRUST LAWS
U.S. firms may be subject to foreign antitrust laws if the firms’ conduct has a substantial effect on those
entities’ commerce.
1. European Union Enforcement
The European Union has more restrictive laws than the United States.
2. Increased Enforcement in Asia and Latin America
Many other nations—including countries in Asia and Latin America—have laws that promote
competition and prohibit trade restraints.
ENHANCING YOUR LECTURE—
HOW CAN YOU AVOID ANTITRUST PROBLEMS?
Business managers need to be aware of how antitrust legislation may affect their activities. In addition to
the federal antitrust laws covered in this chapter, numerous state antitrust laws also exist. States also now
have the power to bring civil suits to enforce federal antitrust laws. Additionally, antitrust law is subject to
26 UNIT NINE: GOVERNMENT REGULATION
CHECKLIST FOR AVOIDING ANTITRUST PROBLEMS
1. Exercise caution when communicating and dealing with competitors.
2. Seek the advice of an attorney specializing in antitrust law to ensure that your business practices and
TEACHING SUGGESTIONS
1. Ask students to discuss whether they think there should be any restrictions on corporate mergers—ab–
sent evidence that the merging companies intend to use their market power to stifle competition unlawfully. If
the ultimate viability of a firm is determined by its products and its productivity, does the size of the
firm or the concentration of its particular industry make any difference?
2. Ask the class to discuss whether mergers, on the whole, have a positive or negative effect on the produc–
3. Do students think it is possible to acquire a monopoly position solely by virtue of hard work? If
so, do they believe it is possible for the monopolist to remain uncorrupted, when, as the maxim says,
“absolute power corrupts absolutely”?
4. A simple understanding of economics can make it easier to understand antitrust law. This might be a
Cyberlaw Link
When a group sets uniform standards for others to use—in, for example, accessing the Internet,
creating software, or designing Web pages—is this a violation of the antitrust laws? When evaluating
mergers, monopolies, and markets, should an Internet-based firm be considered a competitor of a
more traditional firm?
How does the Internet provide pro-competitive benefits without encouraging violations of the
CHAPTER 46: ANTITRUST LAW 27
competitive price environment.
DISCUSSION QUESTIONS
1. What is a monopoly? A monopoly is a market in which there is but a single seller. In legal terms, a
2. What factors contributed to the initial ineffectiveness of the Sherman Act when it was first enacted?
The United States Supreme Court construed the statute too narrowly to give it much effect and subsequently applied
3. What is price discrimination? Price discrimination occurs when sellers charge different buyers different
4. What is a horizontal restraint? A horizontal restraint is any agreement that in some way restrains
5. What is the difference between a per se violation and a violation that is analyzed using a rule of rea–
son? Per se violations are found when firms make agreements to fix prices or restrict output that are blatantly anti-
competitive in that they cannot be justified in terms of providing legitimate benefits to society. A rule of reason
6. When are price-fixing agreements lawful under the Sherman Act? Never. Because the dangers of such
7. What is an exclusive dealing contract? An exclusive dealing contract is one in which a seller forbids the
8. What are the ethical values underpinning antitrust laws, and why are those laws applied to tying
arrangements in particular? The ethical values underlying the antitrust laws include honesty and equity (and liberty
or freedom if those can be characterized as ethical values). A challenge to a tying arrangement is generally justified
9. In what circumstances might a tying arrangement be considered procompetitive? A tying arrangement
(and any restraint of trade subject to a rule of reason analysis) may be considered procompetitive if it results in lower
10. How does the Sherman Act affect international business? Section 1 of the Sherman Act declares that its
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask each student to write a short research paper analyzing whether the antitrust laws have had much effect in
stemming anticompetitive behavior by major corporations in the past decade.
2. Ask students to bring in newspaper and magazine articles that discuss the present state of antitrust law
enforcement in the United States. Is the federal government abdicating its responsibility to enforce the
antitrust laws?
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 12: Leegin Creative Leather Products, Inc. (Leegin), designs, makes, and distributes a line of
leather goods and accessories under the brand name “Brighton.” When Leegin learned that PSKS, Inc. (PSKS), which
operates Kay’s Kloset, was marking down Brighton goods by 20 percent, Leegin stopped selling to the store. PSKS
filed a suit in a federal district court against Leegin, alleging antitrust violations. The court entered a judgment against
Leegin. The U.S. Court of Appeals for the Fifth Circuit affirmed. Leegin appealed.
In Leegin Creative Leather Products., Inc. v. PSKS, Inc., the United States Supreme Court reversed and
remanded, holding that the rule of reason applied to such resale price maintenance agreements. “Resort to per se
rules is confined to restraints * * * that would always or almost always tend to restrict competition and decrease
In what ways do minimum resale price maintenance agreements facilitate interbrand competition? In
the Leegin case, the United States Supreme Court explained that without such agreements “the retail services that
enhance interbrand competition might be underprovided. This is because discounting retailers can free ride on
retailers who furnish services and then capture some of the increased demand those services generate. Consumers
CHAPTER 46: ANTITRUST LAW 29
In general, how are the interests of manufacturers, retailers, and consumers aligned—and in
conflict—with respect to a product’s profit margins? (A product’s profit margin is the difference between the
price a manufacturer charges retailers and the price retailers charge consumers.) In the Leegin case, the United
States Supreme Court explained the common and divergent interests of manufacturers, retailers, and consumers. The
Should the Court have applied the doctrine of stare decisis to hold that minimum resale price
maintenance agreements are still subject to the per se rule? Why or why not? The Court explained that the
doctrine of stare decisis did not block the overruling of the previous common law application of the per se rule to
minimum resale price maintenance agreements primarily because of “the dynamics of present economic conditions.”
Footnote 19: Illinois Tool Works Inc., owns Trident, Inc. The firms make and sell printing systems that
30 UNIT NINE: GOVERNMENT REGULATION
In Illinois Tool Works, Inc. v. Independent Ink, Inc., the United States Supreme Court vacated and
remanded to give Independent “a fair opportunity” to offer evidence of the relevant market and the defendants’ power
What factors does a court consider under the rule of reason? In light of these factors, how might the
court rule on remand with respect to the facts of the Illinois case? Factors that a court considers under a rule-of–
reason analysis include the purpose of an agreement between the parties, the parties’ power to implement the
agreement to satisfy that purpose, and the effect of the agreement on competition. A court might also consider