Environmental Engineering Chapter 22 Lads Customers Cheaper Price During This Period

Chapter 22

ANTITRUST

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Suggested Additional Assignments

Field Work: Setting Prices

If students have jobs, ask them to interview someone in their company who has responsibility for setting

prices. Several years ago, one of Beatty and Samuelson’s students told the class that she was in charge of

setting prices for her division. How did she do it? She met with her competitors to see what they were

charging. In the next class, she said, “I didn’t really mean that.” Students do not know what they will

discover if they ask questions.

Research: Mergers

Ask students to research a recent merger, such as the XM Satellite Radio and Sirius Satellite Radio

Research: Horizontal Mergers

As the text report, the FTC blocked the merger of office supply chains Staples and Office Depot, even

though these two retailers controlled only 4 percent of the market. The FTC based its decision in part on

Research: Resale Price Maintenance

Ask students to identify one consumer item, such as a particular tennis racket, CD player, or Nine West

shoe style, and compare the prices at three different stores. Is resale price maintenance alive and well?

Chapter Overview

Chapter Theme

Congress passed the major antitrust statutes between 1890 and 1936. Although their language has not

Quote of the Day

“Is there not a causal connection between the development of these huge, indomitable trusts and the

In the Beginning

Chicago School

The Chicago School refers to a school of thought originating among economists and lawyers at the

University of Chicago in the 1960s and 1970s. Adherents argue that the goal of antitrust enforcement

should be efficiency, permitting companies to grow as large as they like provided growth is based on

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Overview of Antitrust Laws

These are the major provisions of the antitrust laws:

• Section 1 of the Sherman Act prohibits all agreements “in restraint of trade.”

• The Robinson-Patman Act bans price discrimination that reduces competition.

Antitrust law divides violations into two categories: per se and rule of reason.

• Per se violations are automatic “bright–line” violations. As a rule, the Justice Department has

Cooperative Strategies

There are three types of potentially illegal cooperative strategies:

• Horizontal agreements among competitors;

• Vertical agreements among participants at different stages of the production process; and

• Mergers and joint ventures among competitors

Horizontal Cooperative Strategies

Cooperative Strategy

Per Se Violation

Rule of Reason violation

Market Division

Yes

Price-Fixing and Bid-Rigging

Refusals to Deal

Yes

Field Work/Research: Setting Prices

If students interviewed someone in their company who has responsibility for setting prices or researched a

price-fixing case, this would be a good time to discuss what they found.

Landmark Case: United States v. Trenton Potteries, Company

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Facts: This case involved dirty behavior in the bathroom fixture business. The federal government

alleged 23 of the corporations that manufactured these fixtures had agreed on the prices they would

charge their customers. The defendants argued that they had not violated the law because their prices had

been reasonable.

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273 U.S. 392; 1927 U.S. LEXIS 975, SUPREME COURT OF THE UNITED STATES, 1927

Chapter 22 Antitrust 3

Our view of what is a reasonable restraint of commerce is controlled by the recognized purpose of the

Sherman Law itself. Whether this type of restraint is reasonable or not must be judged in part at least in

the light of its effect on competition, for whatever difference of opinion there may be among economists

The power to fix prices, whether reasonably exercised or not, involves power to control the market and to

fix arbitrary and unreasonable prices. The reasonable price fixed today may through economic and

business changes become the unreasonable price of tomorrow. Once established, it may be maintained

Moreover, in the absence of express legislation requiring it, we should hesitate to adopt a construction

making the difference between legal and illegal conduct in the field of business relations depend upon so

uncertain a test as whether prices are reasonable — a determination which can be satisfactorily made only

after a complete survey of our economic organization and a choice between rival philosophies. Thus

viewed, the Sherman law is not only a prohibition against the infliction of a particular type of public

injury. It is a limitation of rights which may be pushed to evil consequences and therefore restrained.

It follows that the judgment of the circuit court of appeals must be reversed and the judgment of the

district court reinstated. Reversed.

Question: What was the Supreme Court’s holding?

Answer: the Court held that a price fixing agreement among competitors is an unreasonable restraint

Additional Information: In 1940, in another case brought by the United States in the oil industry, United

Conscious Parallelism

If competitors act in concert but without an explicit agreement, their behavior is called conscious

Case: Fears v. Wilhelmina Model Agency, Inc.

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Facts: A group of models sued some of the top agencies in New York, alleging that these firms had

violated §1 of the Sherman act by conspiring to fix the commissions that they charged the models for

placing them. The agencies were all members of the International Model Managers Association, Inc.

(IMMA).

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The models point to various facts to support their claim:

• All IMMA member agencies changed their state registration from “employment agency” to

“management agency” to take advantage of the higher commission that management agencies

could charge under New York law.

The agencies admitted that they had engaged in parallel behavior but they argued that these activities

were not sufficient to support a charge of illegal price-fixing. The agencies moved for summary

judgment.

Issues: Did the modeling agencies engage in illegal price fixing? Is parallel behavior illegal?

Holding: Defendants’ motion for summary judgment denied. The court has never held that “proof of

parallel business behavior conclusively establishes agreement or, phrased differently, that such behavior

businesses . . . may reasonably be inferred to demonstrate an industry inundated with collusion.”

Question: Why did the agencies change their state registration from “employment agency” to

“management agency?”

than 10%. Management agencies could charge commissions of up to 20%.

Question: What is parallel conduct?

Question: Is parallel conduct illegal per se?

Question: What does it take for parallel conduct to be illegal?

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Question: Did the court find plus factors to be present in this case?

Vertical Cooperative Strategies

Reciprocal Dealing Agreements

Under a reciprocal dealing agreement, a buyer refuses to purchase goods from a supplier unless the

supplier also purchases items from the buyer.

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One wonders whether the court was tempted, in this modeling case, to refer to them as “Max Factors.”

Chapter 22 Antitrust 5

Price Discrimination

Under the Robinson-Patman Act, it is illegal to charge different prices to different purchasers if:

• The items are the same, and

• The price discrimination lessens competition.

However, it is legal to charge a lower price to a particular buyer if:

In the J. Truett Payne case, Chrysler Motors charged Payne more than other dealers in the Birmingham,

Alabama area. Unable to compete, Payne went out of business. The accepted formula for determining

damages in a Robinson-Patman Act case had been the difference between the two prices times the number

Question: Did Chrysler treat Payne differently from other dealers?

Answer: Yes, Chrysler charged Payne higher prices.

Question: Is it illegal for Chrysler to charge customers different prices?

Question: What does that mean?

Question: How do you show lower costs and lost profits?

Answer: It is difficult and requires sophisticated economic analysis.

Question: What did Payne propose as an alternative calculation?

Answer: The company simply calculated the difference in price for each car he bought multiplied by

Question: What is the difference between the Supreme Court’s definition and Payne’s?

Example

A group of 40,000 retail pharmacies sued the nation’s drug manufacturers alleging that the drug

manufacturers (1) fixed prices and (2) discriminated against pharmacies by charging them higher

prices than health maintenance organizations. There was evidence that at meetings of the

Pharmaceutical Manufacturers Association (an industry trade group) the manufacturers shared pricing

information. The drug companies admitted they gave discounts to HMOs and not to pharmacies.

Question: What provisions of the antitrust statutes did the pharmacies accuse the drug manufacturers

of violating?

Answer:

• Section 1 of the Sherman Act–price-fixing

Question: Have the manufacturers violated price-fixing prohibitions?

Answer: It would appear so. Price-fixing is a per se violation. There certainly seems to be evidence

Association.

Question: What is the moral of the story?

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Answer: Trade associations are very dangerous. You become friends with your competitors and the

Pharmaceutical Manufacturers Association.

Question: Have the drug companies violated the Robinson-Patman Act?

Answer: That is a tougher call because price discrimination is illegal only if it lessens competition.

Question: Make an argument that it does not lessen competition.

Answer:

• Retail pharmacies and health maintenance organizations do not compete against each other

Question: What was the outcome in this case?

Answer: The drug manufacturers settled with the pharmacies. They agreed to pay $351 million and

to stop charging the pharmacies higher prices.

Question: Does this mean prices will be lower to consumers who buy at pharmacies?

Answer: No, the experts predict prices may go down a bit at pharmacies and up a bit at HMOs.

Question: Was there a fatal weakness in the manufacturers’ case?

Answer: Price-fixing tainted the manufacturers’ case. That was a per se violation for which they

You be the Judge: Feesers, Inc. v. Michael Foods, Inc.

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Facts: This case is about food that is served in institutions such as schools, hospitals and nursing homes,

likely including institutions in which you have eaten. Michael Foods was the nation’s largest producer of a

product unappetizingly referred to as “liquid eggs.” It sold its egg products and potatoes to (1) distributors

who simply resold the food to “self–ops” (who prepared it themselves in-house) and (2) food service

management companies that bought, prepared and also served food in institutions. Feesers, Inc.

distributed food to self-ops within a 200 mile radius of Harrisburg, Pennsylvania while Sodexo, Inc. was a

food management company that served institutions worldwide. (Sodexo was the largest private purchaser

of food in the world.) Both Feesers and Sodexo bought products from Michael’s.

Institutions sometimes switched back and forth between preparing food themselves and hiring a food

service management company to do it. Feesers and Sodexo competed against each other when a customer

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591 F.3d 191, 2010 U.S. App. LEXIS 337 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT, 2010.

Chapter 22 Antitrust 7

In marketing its product, Sodexo brags that its food prices are lower. Although our customers may not

know the exact cost of eggs and potatoes, they do know that Sodexo’s prices are lower. That gives

Sodexo an unfair competitive advantage.

Argument for Michael’s: Although Feesers and Sodexo both buy food from Michael’s, they are not

competitors. Sodexo handles all dining services for its customers; supplying food is only a small part.

Feesers just distributes food. No one would choose the full service option because of lower prices on eggs

and potatoes.

NOTE: In finding for Michael’s, the Court noted that the Supreme Court takes a narrow view of the RPA.

Michael’s argument here mirrors the Court’s opinion.

Question: Why is Sodexo able to purchase foods from Michael’s at much lower prices than Feesers?

Answer: Sodexo is a multinational business that purchases huge volumes of food, thus it is able to

of buying power.

Question: Does the Robinson-Patman Act allow for this kind of price variation?

Answer: Yes, the RPA allows Michael’s to charge different prices to different customers, as long as

Question: Do Feesers and Sodexo compete?

Answer: Technically, no, which is why Michael’s maintains it has the right to charge different prices

Additional Case: Camarda v. Snapple Distributors, Inc.

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

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

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

SDI also sold Snapple to other distributors called transshippers, who could sell to any customers is any

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

the LADs customers at a cheaper price. During this period the LAD’s business declined. The LAD’s

sued SDI alleging it had violated the Robinson-Patman Act.

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

8 Unit 5 Government Regulation and Property

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

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

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

Question: What is price discrimination?

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

lower, or the seller is simply meeting competition.

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

per case to the LADs than to the transshippers?

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

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

Mergers and Joint Ventures

Horizontal Mergers

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

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

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

Clayton Act?

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

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

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

not have market power to raise prices. No violation.

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

Answer: That’s the wrong question. The issue is not how large your market share, but whether you

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

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

Example: Staples and Office Depot Merger

The text discusses the decision by the FTC to block a merger between Staples and Office Depot. The

FTC found that in markets where Office Depot and Staples compete, prices are much lower than markets

where only one of these stores is present. If students completed the Horizontal Mergers Research at the

start of this chapter, ask them to report what they discovered. Did they find that prices are lower when

these two chains compete against each other?

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

Chapter 22 Antitrust 9

Vertical Mergers

Ask students who completed the Vertical Mergers Research to discuss the FTC’s current enforcement

stance on such mergers.

Aggressive Strategies

Monopolization

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

monopolize means to acquire a monopoly in the wrong way. Having a monopoly is legal unless it is

gained or maintained by using wrongful tactics.

Predatory Pricing

Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of

business.

Example: Generic Cigarettes

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

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

competitors would come back into the market.

Question: What is predatory pricing?

Answer: Predatory pricing occurs when a company:

• Lowers its prices below cost,

• Drives competitors out of business, and then

• Raises its prices to make up the losses.

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

an anticompetitive course of events.”

Question: So why did Liggett lose?

reasonable prospect of recovering its losses from the below-cost pricing.”

Question: Does predatory pricing harm consumers?

market power to raise its prices and recoup its losses.

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

raise its prices on generics?

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

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

10 Unit 5 Government Regulation and Property

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

Tying Arrangements

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

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

• The two products are clearly separate,

Controlling Distributors and Retailers

Efforts by a manufacturer to allocate customers or territory among its distributors are subject to a rule of

reason. These allocations are illegal only if they have an anticompetitive effect.

Resale Price Maintenance

If a manufacturer enters into an agreement with distributors or retailers to fix minimum prices, this

arrangement is subject to the rule of reason standard—illegal only if it has an anticompetitive effect.

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

place to discuss their findings.

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

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Facts: Leegin Manufactured belts and other women’s fashion accessories under the brand name

“Brighton”. It sold these products only to small boutiques and specialty stores. The Brighton brand was

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

the store’s profits.

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

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

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

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

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

violation.

Chapter 22 Antitrust 11

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

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

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

anything in between.

Without resale price maintenance, the retail services that enhance interbrand competition might be

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

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

Question: If the price agreements have an anti-competitive effect, why did the court decide they

were to be judged using rule of reason instead of the per se standard?

Answer: The court decided the rule of reason standard applied to resale price maintenance because

Example

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

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

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

which offered him a good deal on water heaters. Local officials told him that if he did not buy the town’s

electricity, they would deny him water and sewer service, which he could not buy elsewhere. The

developer figured it would be tough to find renters willing to live without running water, so he decided to

buy power from the city.

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Question: Has Stilwell violated the antitrust laws?

Question: What is the tying product?

Question: What is the tied service?

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

Question: What defense might it make?

Answer: It could argue that the utilities are not separate products. It could also claim that the

antitrust laws should not/do not apply to municipalities.

Question: What outcome would you predict?

other municipal services such as water and sewer.

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

12 Unit 5 Government Regulation and Property

Multiple Choice Questions

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

(a) Yes/Yes

(b) Yes/No

(c) No/Yes

(d) No/No

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

would that refusal to deal be a violation of antitrust laws?

(a) Yes, a per se violation

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

(c) Yes, if the competitive impact is highly significant.

(d) Yes, if SS has a monopoly.

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

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

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

admitted that it had granted lower prices to a number of Reserve’s competitors to meet, but not

beat, the prices of other insulation manufacturers. Is Owens-Corning in violation of the Robinson-

Patman Act?

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

(b) Yes, because any violation of the RPA is per se.

(c) Yes, because these price variations harmed competition.

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

competition.

4. Oftentimes, if one airline lowers its prices on a particular route, so will all of the others. What is

this type of activity called and is it a violation of the antitrust laws?

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

(b) Conscious parallelism/it is not a violation by itself

(c) Price discrimination/it is a per se violation

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

5. A horizontal merger is illegal if:

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

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

(c) the resulting company has the ability to exclude competitors

Chapter 22 Antitrust 13

(d) the resulting company has assets of $131.9 million or higher.

Essay Questions

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

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

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

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

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

structure violated the Robinson Patman Act. At trial, the retailers presented evidence that they

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

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

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

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

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

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

on their bread sleeves. Are the bakeries in violation of the antitrust laws?

Answer: Four directors of the association were indicted on antitrust charges. They were charged

Posing as Bakers Charge 4 With Price Fixing,” New York Times, July 14, 1994, p. A13.

4. You Be the Judge: WRITING PROBLEM American Academic Suppliers (AAS) and

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

plummet, it responded by reducing its catalog prices. It also offered an additional discount in

states in which AAS was making substantial gains. What claim might AAS make against B-C? Is

it likely to prevail in court? Argument for AAS: B-C has committed predatory pricing. The

company is selling below cost for the purpose of driving us out of business. Argument for B-C:

Even if we were to drive AAS out of business, we do not have enough market power to recoup

our losses.

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

5. Suppose that Disney insists that retailers cannot sell DVDs of Ratatouille for less than $16.99.

The company threatens to cut off any retailers who discount that price. But video stores would

14 Unit 5 Government Regulation and Property

like to use these movies as a loss leader—selling them at a very low price to lure customers. Is it

legal for Disney to cut off retailers who discount prices?

Discussion Questions

1. Proponents of the Post Chicago School argue that federal antitrust regulators should undertake

enforcement actions that will lead to lower consumer prices. Look at the five cases in this chapter.

Are the courts’ decisions likely to cause consumer prices to go up or down? Do you agree with

the courts’ decisions?

2. Is it appropriate for U. S. antitrust laws to apply overseas? Should businesspeople who never set

foot in the United States be liable for activities they conducted in their own countries?

3. Pricegrabber.com is a website that helps online shoppers find the lowest price goods on the

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

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

no price, just the legend, “To see our price, add this item to your cart.” Amazon does that for fear

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

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

other retailers will drop the products altogether. eBay and Amazon argue that the consumer is

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

view on resale price maintenance?

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

refused to reduce the commission it charged on each purchase. Visa, one of American Express’s

rivals, offered to pay the group’s legal expenses. American Express then lowered its commission

for all restaurants except for those with a volume lower than $1 million a year. Have either the

restaurants, Visa, or American Express potentially violated the antitrust laws?

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

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

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

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

Remington have a valid claim?

6. ETHICS Clarice, a young woman with a mental disability, brought a malpractice suit against a

doctor at the Medical Center. As a result, the Medical Center refused to treat her on a

nonemergency basis. Clarice then went to another local clinic, which was later acquired by the

Medical Center. Because the new clinic also refused to treat her, Clarice had to seek medical

Chapter 22 Antitrust 15

treatment in another town 40 miles away. Has the Medical Center violated the antitrust laws?

Was is it ethical to deny treatment to a patient?

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