What is antitrust/competition law? What is its purpose?

1
What is antitrust/competition law? What is its
purpose?

• Concerned with
• Fears of concentrations of economic power in the
  hands of a few
• harmful effects of some forms of business
  cooperation
• misuse of monopoly power
• Simultaneous rise of regulatory agencies and
  antitrust law
• Late 1800s through early 1900s

2
Overview of Antitrust/Competition Laws

• Antitrust/Competition laws place faith in the
  market.
• EC Art. 81 prohibits agreements which have as
  their object or effect the prevention,
  restriction or distortion of competition within
  the common market
• US Sherman Act outlaws "every contract,
  combination . . . , or conspiracy, in restraint
  of trade"

3
Sources of Confusion in Antitrust/Competition Law

• Economic definition of monopoly
• vs.
• Legal definition of monopoly
• KEY market power

4
Whats wrong with concentrations of market
power? How did Standard Oil acquire market
power? John D. Rockefeller believed that monopoly
was beneficial because it protected members of an
industry from the harshness of the market (job
losses and other upheavals). Do you agree or
disagree? Who was hurt by Standard Oils business
practices?
5
Sources of Confusion in Antitrust/Competition Law

• Business competitors that fail to compete with
  one another (by cooperating illegally) violate
  the antitrust laws.
• BUT, businesses that compete too aggressively
  also violate the antitrust laws
• Forms of competition that are not illegal for one
  firm (a non-monopolist) may be illegal for
  another (a monopolist)

6
Sources of Confusion in Antitrust/Competition Law
Illegal restraints of trade
Illegal monopolization
7
Sources of Confusion (contd)

• Changing philosophies over time
• Movement away from presuming harm to consumer and
  toward requiring government/plaintiff to prove
  harm (increasing application of rule of reason)
• Movement towards greater focus on effect on
  consumer in the long run
• European Commission v. US DOJ

8
Competitive vs. Cooperative Strategies

• Two approaches to doing business
• Cooperative strategies, where companies work
  together to their mutual advantage.
• Aggressive or competitive strategies, designed to
  create an advantage over competitors.
• Some competitive strategies which may be illegal
  include
• Tying arrangements
• Exclusive dealing contracts
• Improper monopolistic practices
• Some cooperative strategies which may be illegal,
  include
• Horizontal agreements
• Vertical agreements
• Mergers and joint ventures

9

• Cooperative Strategies, Scenario 1
• The small town of Fort William has only two
  pharmacists. One pharmacist is Catholic, the
  other Protestant. One side of the town is
  predominantly Catholic the other predominantly
  Protestant. The Catholic pharmacist is located
  on the Catholic side of town the Protestant
  pharmacist on the Protestant side of town. But
  some Catholics shop at the Protestant
  pharmacists shop, and some Protestants at the
  Catholic pharmacists shop.
• The two pharmacists agree that each will refrain
  from advertising their products to customers on
  the others side of town.
• Every Sunday, the two pharmacists meet in the
  park and arrange to sell their products at
  identical prices.
• VIOLATION OF ANTITRUST/COMPETITON LAWS?

10

• Horizontal Market Divisions
• Any effort by a group of competitors to divide
  its market is a violation of EC Article 81 and
  the Sherman Act Section 1.
• Customer divisions
• By class (religion)
• Geographically (side of town)
• Supply divisions
• We wont sell X in competition with you, if you
  dont sell Y in competition with us.
• E.g., two hardware stores in a small town agree
  that one will not stock plumbing equipment while
  the other will not stock electrical equipment

11

• Horizontal Agreements (contd)
• Price Fixing and Bid Rigging
• When competitors agree on the prices at which
  they will buy or sell, their price-fixing is a
  per se violation of EC Article 81 and 1 of the
  Sherman Act.
• Pharmacists
• Sports club owners
• Trade shows
• Fixers must be able to exert market power
• Bid-rigging public contracts

12
Illegal Horizontal Agreements (contd)

• Refusals to Deal / Boycotts
• Concerted refusals to deal vs. individual
  refusals
• A refusal to deal violates the law if it harms
  competition.
• U.S. v. Hilton Hotels

13

• Vertical Agreements
• Acme, the worlds largest producer of auto parts,
  has a new Wood Products division that
  manufactures saws and other woodworking tools.
• Acme has no retail outlets of its own, but sells
  its products to several major retail chains, who
  make the retail sales.
• Acme has worked very hard to produce products
  that are price-competitive with Black and Decker
  and other major manufacturers.
• To gain market share, Acme requires buyers of its
  auto parts to (1) also purchase for resale Acmes
  new wood products, and (2) agree to limit the
  markup (retail price wholesale price) to 10 of
  the wholesale price.
• VIOLATION OF ANTITRUST LAWS?

14
Vertical Arrangements Resale Price Maintenance

• Resale price maintenance (RPM) means that the
  manufacturer sets minimum prices that retailers
  may charge, eliminating discounting of certain
  products.
• Manufacturers may want to set minimum prices to
  build loyalty with distributors or to maintain an
  upscale image or to reduce competition among its
  distributors.

15
Resale Price Maintenance

• Resale Price Maintenance is a violation of the
  law. A manufacturer may not enter into an
  agreement with distributors to fix prices.
• Vertical Maximum Price-Fixing
• Vertical maximum price fixing (manufacturer
  setting maximum retail price) is only illegal if
  it has an adverse effect on competition.

16
Illegal Vertical Arrangements Exclusive Dealing

• Contract in which buyer agrees not to buy from
  sellers competitors
• Usually between manufacturer/supplier and
  retailer
• Illegal if the effect is to substantially lessen
  competition
• Standard Oil case (1949)

17

• Scenario 3
• Acme, the worlds largest producer of auto parts,
  controls 65 of the American auto part market,
  and 25 of the world market.
• A British firm, UKAuto, controls 40 of the world
  market, but only 10 of the American market.
  UKAuto wants to increase their market share in
  the U.S.
• When UKAuto begins to erode Acmes American
  market share, the two firms begin merger
  negotiations, and ultimately decide that Acme
  will purchase UKAuto.
• VIOLATION OF ANTITRUST LAWS?

18
Mergers and Joint Ventures

• Horizontal Mergers
• FTC and European Commission halt/approve mergers,
  based on likely impact on competition
• HHI as measure of market concentration too much
  concentration creates rebuttable presumption of
  violation

Herfindahl-Hirschman Index Calculator
19
Mergers and Joint Ventures

• Horizontal Mergers
• A horizontal merger involves companies that
  compete in the same market.
• FTC and European Commission halt/approve mergers,
  based on likely impact on competition
• HHI as measure of market concentration too much
  concentration creates rebuttable presumption of
  violation
• What is market? Product market
• Flexible wrap case case
• Geographic market

20

• Horizontal Mergers
• Hewlett-Packard / Compaq merger

21
Mergers and Joint Ventures (contd)

• Vertical Mergers
• Key is foreclosure of opportunities for
  non-merging firms

22
Illegal Competition Predatory Pricing

• Predatory pricing occurs when a company lowers
  its prices below cost to drive competitors out of
  business.
• To prove predatory pricing, show
• The defendant is selling its products below cost.
• The defendant intends that the plaintiff goes out
  of business,
• If the plaintiff does go out of business, the
  defendant will be able to earn sufficient profits
  to recoup its prior losses.
• Bad intent is not enough bad intent fatal
  damage to competitor may not be enough

23
Illegal Competition Tying Arrangements

• Selling a product on the condition that the buyer
  also purchases a different (or tied) product.
• To determine if it is illegal, ask
• Are the two products clearly separate?
• Is the seller requiring the buyer to purchase the
  two products together?
• Does the seller have significant power in the
  market for the tying product? U.S. Steel case
• Is the seller shutting out a significant part of
  the market for the tied product?

24
Monopolization

• Under 2 of the Sherman Act, it is illegal to
  monopolize or attempt to monopolize.
• EC Art. 82 outlaws abuse of a dominant
  position in the market
• To tell if a monopoly is illegal, ask
• What is the market?
• Does the company control the market?
• No matter what your market shares, you do not
  have a monopoly unless you can exclude
  competitors or control prices.

25
Monopolization (contd)

• How did the monopolist acquire or maintain
  control?
• Possessing a monopoly used to be illegal
  probably not any more
• using bad acts to acquire or maintain one is.
• What kind of bad acts? Anticompetitive behavior
• Other antitrust violations
• Predatory pricing
• Tying arrangements
• Exclusive dealing/refusals to deal
• KEY did/will behavior diminish competition

26
Microsoft

• Does defendant have monopoly power?
• Market share 70 rule of thumb
• What market?
• Did defendant misuse it?
• Microsoft I Caldera v. Microsoft
• Microsoft II The U.S. case - settled
• Microsoft III The European case

27
Microsoft Example

• HISTORY
• Microsoft used its dominance in the operating
  system (OS) market to leverage PC makers into
  using only Microsoft software applications.
• DOJ and Microsoft entered a consent agreement in
  which Microsoft agreed not to tie products
  together in this way.
• DOJ claimed Microsoft violated the consent
  agreement you be the judge.

28
Microsoft Example

• DISTRICT COURT DECISION/ ISSUE 1 RELEVANT
  MARKET
• Microsoft possesses a dominant, persistent, and
  increasing share of the world- wide market for
  Intel-compatible PC operating systems. Every year
  for the last decade, Microsoft's share of the
  market for Intel-compatible PC operating systems
  has stood above ninety percent.
• Even if Apple's Mac OS were included in the
  relevant market, Microsoft's share would still
  stand well above eighty percent.

29

• MICROSOFT ARGUMENT
• Our monopoly cannot hurt consumers for two
  reasons
• Innovation in the computer industry is so fast
  that any monopoly is inherently unstable. If we
  are inefficient, we will lose our monopoly.
• Our industry is characterized by network
  effects i.e., the value of the product
  increases as it is more widely used.
• These two characteristics mean that consumers
  benefit (and costs of production decrease) from a
  monopoly, AND that the monopoly nevertheless
  must be efficient (keep costs down) to survive.

30
Microsoft Example

• DISTRICT COURT DECISION/ISSUE 1 HOW MICROSOFT
  DEFENDED ITS OPERATING SYSTEM (WINDOWS) MONOPOLY
• Vs. Netscapes browsers potential development as
  an operating platform in lieu of Windows
• As soon as Netscape released Navigator on
  December 15, 1994, the product began to enjoy
  dramatic acceptance by the public ... This
  alarmed Microsoft, which feared that Navigator's
  enthusiastic reception could embolden Netscape to
  develop Navigator into an alternative platform
  for applications development.

31
Microsoft Example

• ISSUE 1 (contd)
• A. Defending Windows against Netscape (contd)
• Microsoft offered to leave the browser market for
  non-windows machines to Netscape (i.e., not to
  develop a version of Internet Explorer for those
  machines) and to give Netscape preferred access
  to information about new versions of Windows IF
  Netscape would refrain from developing its
  produce as a platform that could support
  applications.

32
Microsoft Example

• ISSUE 1 (contd)
• A. Defending Windows against Netscape (contd)
• When Netscape refused to cooperate with
  Microsoft, Gates sought to limit other companies
  use of the Netscape Browser.
• Apple was installing Netscape at the default
  browser on its machines. Ninety percent of Mac
  OS users were running a suite of office
  productivity applications called Microsoft's
  Mac Office.
• Microsoft threatened to cancel the product
  unless . . . Apple distributed and promoted
  Internet Explorer, as opposed to Navigator, with
  the Mac OS. Apple agreed.

33
Microsoft Example

• ISSUE 1 (contd)
• Defending Windows against Sun Microsystems
• The inventors of Java at Sun Microsystems
  intended the technology to enable applications
  written in the Java language to run on a variety
  of platforms . . . so that a program written in
  Java . . . will run on any PC system.
• Wanted Java to be windows-compatible, but

34
Microsoft Example

• ISSUE 1 (contd)
• Defending Windows against Sun Microsystems
  (contd)
• Microsoft designed its Java developer tools to
  encourage developers to write their Java
  applications using certain "keywords" and
  "compiler directives" that could only be executed
  properly by Microsoft's version of the . . .
• Microsoft encouraged developers to use these
  extensions by shipping its developer tools with
  the extensions enabled by default and by failing
  to warn developers that their use would result in
  applications that might not run properly with any
  version of Java other than Microsoft's . . .

35
Microsoft Example

• ISSUE 2 OTHER MISUSES OF MONOPOLY POWER
• Vs. Intel
• Although Intel is engaged principally in the
  design and manufacture of microprocessors, it
  also develops some software.. . .
• At a meeting, Gates told Intel CEO Grove that
  he had a fundamental problem with Intel using
  revenues from its microprocessor business to fund
  the development and distribution of free
  platform-level software. In fact, Gates said,
  Intel could not count on Microsoft to support
  Intel's next generation of microprocessors as
  long as Intel was developing platform-level
  software that competed with Windows.

36
Microsoft Example

• ISSUE 2 (contd) MISUSES OF MONOPOLY POWER
• Vs. Intel (contd)
• Intel's senior executives knew full well that
  Intel would have difficultly selling PC
  microprocessors if Microsoft stopped cooperating
  in making them compatible with Windows and if
  Microsoft stated to PC manufacturers that it
  did not support Intel's chips. Faced with Gates
  threat, Intel agreed to stop developing
  platform-level interfaces that might draw support
  away from interfaces exposed by Windows. . .

37
Microsoft Example

• ISSUE 2 (contd) MISUSES OF MONOPOLY POWER
• B. Vs. Apple
• QuickTime is Apple's software architecture for
  creating, editing, publishing, and playing back
  multimedia content. . . . QuickTime competes with
  Microsoft's own multimedia technologies . . .
• Microsoft tried to persuade Apple to stop
  producing a Windows 95 version of its multimedia
  playback software In return, Microsoft
  offered to cooperate with Apple in a joint
  multimedia product.
• Microsoft's representatives made it clear that,
  if Apple continued to market multimedia playback
  software for Windows 95 that Microsoft would
  enter the authoring business to ensure that those
  writing multimedia content for Windows 95 would
  use Microsoft's product instead of Apples.

38
Microsoft Example

• ISSUE 2 (contd) MISUSES OF MONOPOLY POWER
• C. Vs. IBM
• IBM makes PCs, operating systems (OS/2) and
  software.
• Microsoft tried to convince IBM to move its
  business away from products that themselves
  competed directly with Windows (OS) and Office
  (software) . . . . When IBM refused to abate the
  promotion of those of its own products that
  competed with Windows and Office, Microsoft
  punished the IBM PC Company with higher prices, a
  late license for Windows 95, and the withholding
  of technical and marketing support.

39
Microsoft The EU Case