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• The effect of the price discrimination must be to substantially lessen competition or create a
competitive injury.
2. Defenses
• A buyer’s purchases saved the seller costs in producing and selling goods.
• 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 conditions affected the market for or marketability of the goods.
ADDITIONAL BACKGROUND—
Some Comments about Predatory Pricing
Predatory pricing refers to the systematic underpricing by a firm of its products—sometimes at levels below the
costs of producing those products—to 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.
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 possi–
ble 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 average variable cost per
a. See Herbert Hovenkamp, Economics and Federal Antitrust Law. (St. Paul: West Publishing Company, 1985), pp. 175-79
ADDITIONAL BACKGROUND—
State Antitrust Laws
1150 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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.
ARKANSAS CODE OF 1987 ANNOTATED
TITLE 4. BUSINESS AND COMMERCIAL LAW
SUBTITLE 6. BUSINESS PRACTICES
CHAPTER 75. UNFAIR PRACTICES
SUBCHAPTER 2. UNFAIR PRACTICES ACT
4-75-201 Title.
This subchapter shall be known and designated as the “Unfair Practices Act”.
4-75-202 Purpose.
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
six (6) months, or by both a fine and imprisonment in the discretion of the court.
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
enjoin it from transacting business in this state.
4-75-206 Contracts violating subchapter illegal.
4-75-207 Destruction of competition by price discrimination prohibited.
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(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
(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
(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
(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.
(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
1152 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
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 acts.
(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 perishable goods, to
prevent loss to the vendor by spoilage or depreciation, if notice is given to the public thereof;
(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
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
equally with 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
(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 4-75-207–4-75-210.
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
C. SECTION 7—MERGERS
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.
1154 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
a. Factors to Determine Legality
• An entity is also analyzed on the basis of three other factors: (1) the concentration in the relevant
product market, (2) the market’s history of tending toward concentration, and (3) whether the
purpose of the merger is to establish market power or restrict competition.
b. The Herfindahl-Hirschman Index
To determine market concentration, the FTC and the DOJ use the Herfindahl-Hirschman Index (HHI).
Generally, in a highly concentrated market, a merger that produces an increase in the HHI between 50
and 100 points raises significant competitive concerns. Mergers that produce an increase in the HHI of
more than 100 points in a highly concentrated market are deemed likely to enhance market power.
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 and characteristics identified as impeding competition (for example, whether
the merger prevents competitors from competing in a part of the market that otherwise would be open to
them). The text lists “market concentration, barriers to entry into the market, and the apparent 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.
In Ford Motor Co. v. United States, 405 U.S. 562, 92 S.Ct. 1142, 31 L.Ed.2d 492 (1972), the United States
Supreme Court affirmed the lower court’s ruling. If the acquisition were allowed, the spark-plug industry would
become as concentrated as the auto industry, and entry into the spark plug market by new firms would be impossible.
“As a result of the acquisition of Autolite, the structure of the spark plug industry changed drastically. . . . Ford, which
CHAPTER 47: ANTITRUST LAW 1155
before the acquisition was the largest purchaser of spark plugs from the independent manufacturers, became a major
manufacturer. The result was to foreclose to the remaining independent spark plug manufacturers the substantial
segment of the market previously open to competitive selling.”
“Ford may well have been more useful as a potential than it would have been as a real producer” of spark plugs.
How could Ford, as an outsider, have affected competition among spark plug manufacturers? Before Ford
acquired Autolite, it had “a moderating influence” on spark plug manufacturers. “An interested firm on the outside has
a twofold significance. It may someday go in and set the stage for noticeable deconcentration. While it merely stays
near the edge, it is a deterrent to current competitors. This was Ford uniquely, as both a prime candidate to
manufacture and the major customer of the dominant member of the oligopoly.”
D. 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 vio-
lations. The DOJ can enforce the Clayton Act only through civil proceedings. Remedies include divestiture and
dissolution. The Federal Trade Commission (FTC) enforces the Clayton Act and the Federal Trade Commission Act.
B. PRIVATE ACTIONS
C. TREBLE DAMAGES
A successful private party can recover treble damages, for which each competitor to a price-fixing agreement may
be held jointly and severally liable.
D. EXEMPTIONS FROM ANTITRUST LAWS
1156 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
Some of the exemptions to antitrust enforcement are listed in the text. Some of the most notable are the
exemptions given to professional baseball, insurance companies, research among small business firms, research
by consortiums of competitors to cooperate in the development of new computer technology, and efforts
exempted under the Noerr-Pennington doctrine.
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.
B. THE APPLICATION OF FOREIGN ANTITRUST LAWS
U.S. firms may be subject to foreign antitrust laws, such as the European Union’s more restrictive laws, and those
of many other nations—including countries in Asia and Latin America—if the firms’ conduct has a substantial
effect on those entities’ commerce.
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 various interpretations by
the courts. Unless a businessperson exercises caution, a court may decide that his or her actions are in violation of a
federal or state statute.
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 agreements
do not violate antitrust laws.
3. If you conduct business ventures in other countries, obtain the advice of an attorney who is familiar with the
antitrust laws of those nations.
TEACHING SUGGESTIONS
1. Ask students to discuss whether they think there should be any restrictions on corporate mergers—absent
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 productivity and
3. Do students think it is possible to acquire a monopoly position solely by virtue of hard work? If so, do they
4. A simple understanding of economics can make it easier to understand antitrust law. This might be a useful topic
to explain before covering the chapter’s material in depth.
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 antitrust
laws? The Internet provides opportunities for economically efficient methods of doing business, such as rapid
1158 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
DISCUSSION QUESTIONS
1. What is a monopoly? A monopoly is a market in which there is but a single seller. In legal terms, a monopoly may
2. What factors contributed to the initial ineffectiveness of the Sherman Act when it was first enacted? The United
3. What is price discrimination? Price discrimination occurs when sellers charge different buyers different prices for
4. What is a horizontal restraint? A horizontal restraint is any agreement that in some way restrains competition
5. What is the difference between a per se violation and a violation that is analyzed using a rule of reason? Per
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 buyer from
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
9. In what circumstances might a tying arrangement be considered procompetitive? A tying arrangement (and any
10. How does the Sherman Act affect international business? Section 1 of the Sherman Act declares that its
provisions are applicable both in the U.S and abroad; it purports to reach any conspiracy (foreign or domestic) that has a
substantial effect on U.S. commerce. Foreign governments as well as natural persons can be sued for violating the Sherman Act
regardless of whether the alleged violations occurred inside or outside the U.S. Before a U.S. court will exercise its jurisdiction
over an alleged antitrust violation, however, the party bringing the claim must demonstrate that the alleged violations have the
requisite effect on U.S. commerce. The jurisdiction of the court will be automatically invoked, however, if a per se violation
has been committed as would be the case if a U.S. firm had joined a foreign cartel and conspired successfully to control the
production, price, or distribution of a good that substantially affected U.S. commerce.
ACTIVITY AND RESEARCH ASSIGNMENTS
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?
1160 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 16: Netscape Communications Corp. marketed Navigator, which worked with Sun Microsystems, Inc.’s
Java technology. Microsoft perceived a threat to its dominance of the OS market and developed Internet Explorer (IE). Microsoft
required computer makers who wanted to install Windows to install IE and exclude Navigator. Meanwhile, in Windows,
Microsoft commingled code so that deleting files containing IE would cripple the OS. Microsoft offered to promote and pay
Internet service providers (ISPs) to distribute IE and exclude Navigator. Microsoft developed its own Java code and deceived
many independent software vendors (ISVs) into believing that this code would help in designing cross-platform applications
when in fact it would run only on Windows. The U.S. Department of Justice, and others, filed a suit in a federal district court
against Microsoft, alleging in part monopolization in violation of Section 2 of the Sherman Act. The court ruled against
In markets characterized by network effects, one product dominates because the utility of the product to the consumer
increases with the number of consumers using it. Do “old economy” monopolization doctrines apply to companies
competing in “dynamic” technological product markets “characterized by network effects”? The court left this question
open, although noting that dominance in such markets can be short “because innovation may alter the field altogether.” There
is no consensus as to whether antitrust laws should be changed to cover these markets. In this case, Microsoft did not argue
that it conduct should be treated differently, so the court did not decide the issue.
Footnote 22: Illinois Tool Works Inc., owns Trident, Inc. The firms make and sell printing systems that include
patented components that use unpatented ink. As part of each sale, a buyer agrees to buy ink exclusively from Illinois and
Trident. Independent Ink, Inc., sells identical ink at a lower price. Independent filed a suit in a federal district court against
Illinois and Trident, alleging that they were engaged in illegal tying. Independent filed a motion for summary judgment, arguing
that because the defendants owned patents in their products, market power could be presumed. The court issued a summary
judgment in the defendants’ favor. The U.S. Court of Appeals for the Federal Circuit reversed. Illinois and Trident appealed. 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 within it. “[T]he essential
characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the
buyer into the purchase of a tied product.” At one time, it was presumed that a company automatically possessed market
power in a product for antitrust purposes if the firm held a patent in the product. Over time, however, the patent misuse
doctrine on which this presumption rested has been eroded—most recently by Congress’s amendment of the patent laws. Now,
a plaintiff who alleges an illegal tying arrangement involving a patented product must prove that the defendant has market
power in the tying product. In other words, tying arrangements involving patented products should be evaluated under such
factors as those that apply in a rule-of-reason analysis.
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
CHAPTER 47: ANTITRUST LAW 1161
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 whether there were less restrictive
means to accomplish that purpose. In the Illinois case, the purpose of the tying agreement might have been to require a party
to buy the tied product from the maker of the tying product simply to increase the maker’s profit and eliminate the
competition. There is the evidence of the competition’s lower price. What would the maker have done if a party had bought the
competition’s product? The purpose might have related more practically to the maker’s tying product, however—to lengthen its
life, for example—but other means to achieve this purpose might then be weighed to assess the legitimacy of the tying
agreement.
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. How does Section 1 of the Sherman Act deal with horizontal restraints? A horizontal restraint results from
2. How does the Clayton Act deal with exclusionary practices? Section 3 of the Clayton Act prohibits exclusive
1162 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
REVIEWING—
ANTITRUST LAW
The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit entity that organizes Internet
domain names. It is governed by a board of directors elected by various groups with commercial interests in the
Internet. One of ICANN’s functions is to authorize an entity to serve as a registrar for certain “Top Level Domains”
(TLDs). ICANN and VeriSIgn entered into an agreement that authorized VeriSign to provide registry services in
accordance with ICANN’s specifications. VeriSign complained that ICANN was restricting the services that it could make
available as a registrar and was blocking new services, imposing unnecessary conditions on those services, and setting
the prices at which the services were offered. VeriSign claimed that ICANN’s control of the registry services for domain
names violated Section 1 of the Sherman Act. Ask your students to answer the following questions, using the
information presented in the chapter.
1. Should ICANN’s actions be judged under the rule of reason or deemed per se violations of Section 1 of
the Sherman Act? Because ICANN is at a higher level of the distribution process than Verisign, it is imposing a vertical
2. Should ICANN’s actions be viewed as a horizontal or a vertical restraint of trade? Because ICANN and
3. Does it matter that ICANN’s leadership is chosen by those with a commercial interest in the Internet? If
4. If the dispute is judged under the rule of reason, what might be ICANN’s defense for having a
standardized set of registry services that must be used? 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.
DEBATE THIS:
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
CHAPTER 47: ANTITRUST LAW 1163
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
country. The Internet has brought to the average consumer full information on prices, availability, and facts about
most products—and at the speed of light. Also, anticompetitive behavior is readily denounced in blogs, Web sites,
tweets, and social networking sites.
ANSWERS TO QUESTIONS—
SPECIAL CASE ANALYSIS
Case No. 47.2
Leegin Creative Leather Products, Inc. v. PSKS, Inc.
Supreme Court of the United States, 2007.
551 U.S. 877,
127 S.Ct. 2705,
168 L.Ed.2d 623.
(a) Issue: The dispute in this case was between which parties and turned on what legal issue? The dispute in
this case arose between a distributor (seller) and a retailer (buyer and reseller) of branded fashion accessories. The
legal question on which the Court focused was whether a minimum resale price maintenance agreement, which the
distributor imposed on its buyers, should be treated as a per se violation of the antitrust laws.
(b) Rule of Law: In resolving this dispute, what common law rule did the Court overturn and what rule did the
Court create to replace this rejected precedent? Prior to this case, the common law rule was that a minimum resale
price maintenance agreement was a per se violation of the antitrust laws. The Court overturned the precedent and
held that such agreements should be analyzed according to the rule of reason.
1164 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
to a per se rule, recent cases considered “the appreciated differences in economic effect between vertical and
horizontal agreements.” Minimum price resale maintenance agreements can stimulate competition in some cases, the
Court explained, and they may have anticompetitive effects in other cases. Because the application of a per se rule
would “proscribe a significant amount of procompetitive conduct, these agreements appear ill suited for per se
condemnation.”
(d) Conclusion: In whose favor did the Court rule and why? The retailer had filed a suit in a federal district court