GENERAL ANTITRUST PRINCIPLES

Pre-Modern Era (1890–1977)

 Primarily concerned with protecting “competition”
o Control political power; protect small businesses; ensure fair distribution; pluralism.
 Driven by ruthless business tycoons.
 It was much cheaper to produce products when done at a very large scale. (economies of scale)
 Antitrust advocates concerned with breaking up large corporations, more sellers, and efficient markets.

Modern Era: (1977–present)

 More focused on the practice of the parties (how they act) rather than the structure.
 Now focused on several parties: consumers, workers, firms, etc.
 Seeks higher output and lower prices.

Micro Economics
 Basic principles (or “assumptions”)
o There is a scarcity of resources.
o People will act for their own self-interest.
o People and firms act with perfect information.
o People, generally behave on the margins.
 As costs go up, the benefit of every increase goes down.
 The marginal cost-benefit scenario decreases until the benefit no longer outweighs cost.
 Types of costs:
o Fixed- will remain the same no matter what the level of production is. (e.g. rent)
o Variable- the cost depends on the level of the production. (e.g. inventory level)
o Marginal- the cost per additional unit sold/produced.
o Total/ATC/LRAC- (scale economies, natural monopoly) fixed combined with variable costs.
o Opportunity- what is lost by making one decision over another.
o External- imposed on a party that is not part of the transaction or activity.
 Perfectly elastic demand- no single firm can change the price or demand of a product based on their
decision because the product is so similar in other places.
o The more elastic a product or service is, the more efficient the market is.
 Inelastic demand- a product is unique and the firm that produces it has an extremely high amount of
influence on how the market reacts to its decisions.

Market “Equilibrium” – Perfect Competition

 Supply tracks marginal costs (MC).
 Demand tracks marginal return (MR).
 The perfect market occurs at the intersection of MC and MR.

Perfect Competition Model: Assumptions

 Homogenous product  No externalities
 Several sellers and buyers  Increasing cost curves
 Perfect information being shared  No entry or exit barriers
 Perfect rationality (or close to)  No collusion or coordination amongst competitors

Equilibrium: Monopoly
 A single firm is the entire market and controls the market price.
o Unlike homogenous products increase in price will not decrease sales.
o Still, at some point, the marginal cost will outweigh the marginal revenue.
 In this market, the price will match the MR (rather than matching the MC in a competitive market).

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 THE SHERMAN ACT
Sherman Act of 1890
 § 1: “Every [unreasonable] contract, combination . . ., or conspiracy, in restraint of trade . . . is illegal.”
o Must include multiple parties in either horizontal or vertical agreements.
o All contracts are, at some level, a restraint of trade, so only unreasonable ones are condemned.
 §2: “Every person who shall monopolize or attempt to monopolize . . . .”
o Single-person conduct. Purely unilateral.
 Small groups of people (or business) can coordinate much easier than large groups. (cartels usually weak).
 An agreement can be banned as per se unreasonable (illegal) or possibility unreasonable (Rule of Reason).

Horizontal Restraints on Trade

 Two or more actors at the same level make an agreement on how the restraints are structured. (e.g. prices)
o E.g. Bar Dog and Local agree to sell beer at $3.00. “Locks up entire level of distribution chain.”
 Includes: price fixing, market divisions, bid rigging, group boycotts, etc.
 Cartel- firms agree on price and output, behaving more like a monopolist; lower output and higher prices.
o If the cartel sets the price of the product too high, it may encourage new firms to enter the market,
which will increase market output and reduce prices.
o The cartel may be subject to cheating by cartel members.

Vertical Restraints on Trade

 The restraint flows across multiple levels of the supply chain. One party is selling/buying from the other.

Rule of Reason Restraints – (Rule Restraints  NOT Price Fixing)

 Plaintiff must prove the agreement was unreasonable.
o Look at the nature of the agreement, its effects, AND how it does or may play out.
 Applied when there are at least plausible procompetitive reasons for restraint. (Chicago Board of Trade)
o E.g. some cooperation for the product/trading platform must exist for it to work.
 Steps in argument (of a case) with the Rule of Reason:
(1) At least “plausible” facially apparent procompetitive justifications for the restraint.
 Initial inquiry as to whether to even apply the Rule of Reason.
 The justifications can be non-economic, but to do so, it will require taking an additional
step away from its own actions to explain a broader justification.
(2) Plaintiff’s initial burden of showing there is a negative effect on competition.
(3) Defendant must produce justifiable reasons for the restraint.
 Can argue economic or non-economic goals.
(4) Plaintiff then may show there less restrictive means of achieving the stated goal?

Anticompetitive Proof and Market Power (Plaintiff’s steps in the Rule of Reason)
 Option 1 – The plaintiff can show there is actual and quantifiable anticompetitive effects, and, if that is
clearly shown, there is no need to show whether the defendant had market power.
 Option 2 – In the alternative, the plaintiff can show the “likely” anticompetitive effects.
o If this route is taken, market power MUST be shown by the plaintiff.

Factors Tending to Show Reasonableness (none are dispositive) (Chicago Board of Trade)
 The intent behind the restraint/agreement was a positive one for the market/consumers.
o E.g. the rule has good ethical goals. (Professional Engineers)
 If the effect of the agreement is trivial, harmless, or small.
o E.g. the “call rule” only effected a few hours on one type of sale.
 If the scope of the rule is small, it will be more likely to be reasonable.
o E.g. the “call rule” only effected a few hours on one type of sale.
 The nature of the rule is a common rule across most markets, it is more likely to be reasonable.

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  Practices of a learned profession/licensing board may be given more deference. (Professional Engineers)

Procompetitive Justifications (PJs) For the RoR

 Unjustifiable:
o Protecting the public from harm (ensuring safety). (Professional Engineers)
o “Fixing” market failures – Irrational judgements made by consumers (an unreasonable market).
 Justifiable:
o The restraint promotes a bigger and healthier public market for trade. (Chicago Board of Trade)
o The restraint is the ONLY reasonable or efficient way for the market to operate. (BMI)
 Pointing to the market failure as a reason for the restraint.
 Ask: (1) Was there a market failure that needed to be fixed; and
(2) Was the market failure actually fixed?
 Similarly, it would help small businesses that would not be able to operate otherwise.
o It is a learned profession that needs governing rules (Professional Engineers)
 This is NOT conclusive, but deference will be given.
o A market that is unfamiliar to the court or public is a factor but not conclusive. (Microsoft)
o Generally, NCAA rules (even price fixing) subject to the RoR as necessary to produce the product.
 Maintains competitive balance amongst schools. (O’Bannon v. NCAA)
o Preserving amateurism (NCAA or Olympics). (O’Bannon v. NCAA)

Per Se Illegal Agreements (Trenton Potteries – plumbing price fixing)

 Applied when the conduct is likely to have NO beneficial effect AND significantly impairs competition.
 “Any type of price fixing arrangement [that is in restraint of trade] is per se illegal as harmful to market.”
o The Court does not need to go into a deeper analysis when harm is clearly present.
 Horizontal agreements among competitors tend to, though not always, lean towards being per se illegal.
 Excuses that are NOT valid defenses under the per se approach:
o Setting a “reasonable” price – a price that is reasonable one day may be unreasonable the next.
o Having good intent or effect with the agreement – only mitigates under the RoR.
o The amount of interstate commerce is large. (e.g. Sony-Vacuum – gasoline sales)
o Narrowly tailoring the price fixing. (e.g. Sony-Vacuum – limiting “spot sales”)

CONSCIOUS PARALLELISM
Proving an Agreement
 Agreements (under antitrust law) can be expressed or implied.
o Expressed, or explicit, horizontal agreements are strongly condomed.
o Implied agreements, if proven, are still a violation.
 Proving an expressed agreement:
o Direct evidence
o Circumstantial evidence, which includes inferences.
 “Building the case to make an easy connection.”

Conscious Parallelism (Interstate Circuit = liability) (Theatre Enterprises = no liability)

 When two horizontal competitors act in the same or similar fashion.
 Bare conscious parallelism, by itself, is NOT enough to prove an illegal agreement. (Theatre Enterprises)
o There must be more present and proven for there to be a violation.
 In theory, the fewer the firms there are in an industry, the more likely there will be conscious parallelism.
o Making it more important in merger situations. (Clayton Act § 7).
 May be inferred (liability) when the following are present: (Interstate Circuit)
o The actors had knowledge of everyone’s invitation to collude;
 (e.g. all of the actors received a letter addressed to everyone)

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 o Individual action by each party would have been irrational; AND
 (The action would only be rational if everyone was acting together to collude.)
 (Rational to parallelly prevent freeriding) (Theatre Enterprises)
o The demands/new practices were “radical departures” from past practices.
 (Alternatively, the proposed action is a departure from current practices.)
 The complaint must plead specific facts that show the alleged conduct is plausible. (Twombly)
o The complaint cannot be bear assertions and must include actual allegations.

INTRA-ENTERPRISE CONSPIRACY
Intra-Enterprise Conspiracy (generally)
 “If the original combination of the single entity was illegal, then their later actions will not be excused.”
 Employees of the same firm do NOT create a plurality of actors required for § 1 conspiracy. (Copperweld)
 If there is a debate between being a single firm or multiple firms, check:
o Whether there is a parent company that is wholly owned (viewed as a single enterprise) that acts
for the same purpose, or if there is separate ownership; and
 (The enterprises are owned by different people or entities, operate in different markets,
compete against, independently managed, etc.)
 (But there may be times when actors of the business are NOT part of the same entity.)
o Whether there are separate economic actors with separate interests that can form the requisite
conspiracy for a § 1 violation.
 (e.g. NFL teams may be considered a single entity (with a common interest) when
running wholesome adds for “NFL Sunday Ticket,” but each team’s IP and trademarks
are distinct to each team and are incentivized to maximize their own profits, even if it is
at the expense of another team.)
 “A true subsidiary would NOT be happy if it stole sales from the parent.”

HORIZONTAL MARKET DIVISIONS

Horizontal Market Divisions (generally)
 Today, most judges follow the Topco approach (per se) rather than Polk Bros (RoR). (split)
o Kicker factor: Are there obvious procompetitive justifications? (If yes, go Polk Bros)
o Apply both on an essay with conclusions to both sides.
 Topco per se approach: (non-compete in grocery store coop)
o Even if there are valid justifications, competitors cannot agree to territorial divisions of markets.
 “[Competitors] must be left to their unfettered choice.”
 Coops are allowed but blanket market divisions are not.
 Polk Bros RoR approach: (shared-lease agreement non-compete within the building)
o Non-competes may be necessary to prevent free riding.
o If the non-compete was necessary for the transaction to occur, it tends to be procompetitive.
 (e.g. Polk would not have opened the store/entered the lease without the agreement.)
o Courts should be very careful and sure before applying the per se approach.

HORIZONTAL REFUSALS TO DEAL

Refusals to Deal (generally)
 Refusals that target “rivals” in the industry, including:
o Kicking a rival out of a joint venture or association;
o Refusing to buy or sell from a vertically-integrated rival; OR
o Refusing to deal with the rival’s counter-part (indirect pressure).
 Trying push the rival out of the market or pressure them into acting in a certain way.

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  If only one actor refuses to deal, there is no § 1 violation.
o (But check § 2 for monopoly violation.)
 Were there justifications for the actions, pointing to rational conduct?
 Interstate Circuit factors for conscious parallelism may be used to show refusal. (Eastern States Lumber)
o Applying those factors to a “blacklist” scenario:
 Knowledge of other’s conduct is shown directly through the blacklists;
 It is, usually, irrational to buy only from a single retailer.
 Refusing to deal with these typical retailers is likely to be a change in business practice.
 Klor (refusal to deal with wholesalers)  pre-modern per se example.
 Northwest Stationers (coop refused to deal with what became a competitor  modern RoR example.
o By rule, exclusions from coops are NOT categorically anticompetitive.
 Specific facts of a case will determine the approach (leans toward RoR).
o Are there plausible procompetitive justifications to allow the refusal?
o Permissible PJs for coop instances: (Northwest Stationers)
 Helps the coop ensure the members are creditworthy, allowing it to survive.
 No strong showing of anticompetitive effects or market power.
 Proof of actual detrimental effects obviates the need to inquire into market power. (Federation of Dentists)

NONCOMMERCIAL BOYCOTTS
Boycotts
 Using market power in one area to affect change in another. (Very specific, and limited, meaning.)
 Whether it is permissible often depends on whether the purpose behind the boycott.
o Civil rights – NAACP v. Claiborne Hardware Co. (boycott white-owned business)
o First Amendment issues – Missouri v. NOW (boycott until free speech was allowed)
o Political strength, etc.
 Collective boycotting for economic gain is NOT a permissible purpose.
o FTC v. Superior Ct. Trial Lawyers (refusing to take indigent clients until rates were raised)

HUB-AND-SPOKE CONSPIRACIES
Toys “R” Us v. FTC (2000) – “Modern Hub-and-Spoke”
 Warehouse stores (Sam’s Club/Costco) were gaining traction and starting to compete with Toys “R” Us.
o Toys, threatened, with major market power, went to the manufacturers to pressure them into
giving them exclusive distribution to certain toys.
 A group boycott by the manufacturers through the pressure of Toys.
 Interstate Circuit factors applied to show an implied agreement:
o Toys manufactures had knowledge of the others’ acceptance, stating, “I’ll do it if they do.”
o The lack of the horizontal cartel would make these actions irrational.
o Stopping the sales to the warehouses was a change in business practice.
 Rule applied: Rule of Reason, or a loose variation thereof. (Northwest Stationers)
o Elements “quasi-RoR”: (in horizontal refusals to deal)
 There was dominate market power acting as the “hub”;
 Less than for a monopoly power, but a significant amount (at least 20%).
 There were “plausible” procompetitive justifications; AND
 E.g. free rider issues
 There was a “cut off” of supply.
 The overall output to consumers went down.
 HELD: There was a violation, failing the quasi-RoR analysis.

United States v. Apple Inc. (modern) – “Controlling eBook Prices”

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  Amazon was selling its eBooks at below cost (best sellers for $9.99).
o While this seemed predatory, there were obvious promotional justifications for this.
o Publishers became very frustrated that a higher price wasn’t charged.
o This hurt hard copy sales that were set at a higher price.
 Apple, as a spoke to four of the “Big Five” publishers, coordinated iBook prices at $14.99 to compete.
o Extensive evidence showed knowledge in forming the agreement.
o Clear horizontal price fixing, leading to per se treatment.
 HELD: There was per se violation.
o In the alternative, there was also a RoR violation.
 There were less restrictive means of competing with Amazon.
o When applying per se there is NO requirement to be a “dominate actor” in the market to be a hub.
 While this is often the case, the party could be a conduit.

VERTICAL RESTRAINTS ON TRADE

General Terminology and Patterns
 Interbrand competition- competition among manufactures of the same generic product.
o Primary concern of antitrust law.
o Akin, though, not always the same as, horizontal restraints.
 Intrabrand competition- competition—either wholesale or retail—of the product of a single manufacturer
[higher up the supply chain].
o More likely to be given Rule of Reason rather than per se.
o More procompetitive justifications.
 Broadly, vertical restraints are treated friendlier than horizontal ones.

Vertical Restraint Rules

 Given RoR treatment. (Leegin v. Kay’s Closet)
 Vertical price fixing is not per se illegal. Intrabrand price fixing down the supply chain. (same product)
 Procompetitive justifications for the vertical restraint: (pointing to RoR)
o Interbrand competition is stimulated.
o Preventing the free rider effect. (Continental T.V. v. GTE Sylvania, Inc.)
 Undercutting investments into sales staff and advertisement.
 Freeriding off the better reputation.
 Includes restraining geographic markets.
o Stimulates market entry for new manufacturers. (lack of information)
 Which gives consumers more options for products.
o Transaction costs (between wholesaler and retailer) become standardized.
 Complaints by retailers (or at least one) followed by termination of another retailer, without other showing
of wrongdoing, is NOT enough for per se to be applied. (Monsanto Co. v. Spray-Rite Service Corp.)
o Direct and circumstantial evidence must still be shown.

Black-Letter Laws from American Express

 Burden-shifting framework for Rule of Reason analysis.
o Leans toward being defendant friendly.
 Two-sided markets (transaction platform): confined to credit and debit cards.
o The market is defined to include both sides.
o Different than a non-transaction platform like newspapers.
 Plaintiff must show indirect evidence of harm in vertical cases.
o In horizontal cases, plaintiff can either show: (1) direct evidence, or (2) likely effects through
indirect evidence using market power.
 Showing output reductions may be a necessary element for plaintiffs.
o E.g. For credit cards, there would have to be a shown decrease in transactions

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 VERTICAL RESTRAINTS – EXCLUSIVE DEALING
Vertical Exclusive Dealings – Clayton Act § 3 (folded into Sherman Act § 1)
 It shall be unlawful . . . to . . . contract for [the] sale of goods . . . or fix a price charged . . . on
condition, agreement, or understanding that the purchaser shall NOT use or deal in the goods . . .
of a competitor . . . of the seller, where the effect . . . may be to substantially lessen competition
or tend to create a monopoly.

Procompetitive Justifications for Vertical Exclusive Dealing

 Ensures adequate cost; lowers transactions costs; etc.

Standard Oil Co. v. United States

 If the restraint meets a threshold of having a market effect, it will be “presumptively illegal.”
o E.g. In this case, Standard Oil’s actions effected 6.7% of the market, which met the threshold.
 DISSENT: Allowing these major barons to continue to control the market will have drastic effects on the
small business owners of America.
o These owners will be “replaced by clerks of the major corporations.”

Tampa Electric Co. v. Nashville Coal Co.

 Procompetitive justifications of the exclusive dealing:
o There is a need to ensure the utility industry is reliable and predicable (protecting the public.)
o Reducing the transaction costs of having shorter or multiple supply deals.
 HELD: The Rule of Reason applies in this case to § 3 of the Clayton Act.
o Elements for a Vertical Exclusive Dealing Violation: (Substantiality)
 The line of commerce (goods) at hand need to be defined;
 The relevant geographic AND product market must be defined.
 The threatened foreclosure of competition (exclusive dealing agreement) MUST be in
relation to the market affected; AND
 The competition limited by the agreement MUST be substantial share of the market.
 10% or less is NOT considered a substantial share.
 If the dealer had “market power,” it will inherently have “substantial effects on
the market.”

TYING ARRANGEMENT
Anticompetitive Effects for ALL Vertical Restraints
 Fixing prices (output, quality, etc.); Foreclosure; Leverage.

Tying Definitions
 Tying product- the desired product (from the view of the customer).
 Tied product- the “undesired product” that is attached to the tying product.

Possible Procompetitive Justifications for Tying

 May be an efficient mechanism for product bundles.

Tying Arrangements Overtime

 Pre-modern tying was treated as per se illegal. (N. Pac. R. Co. v. United States – RR Selling Excess Land)
 Modern treatment for tying = quasi per se. (Jefferson Parish Hosp. v. Hyde – Anesthesiologist and Hosp.)
 Rule for Tying Violations: (quasi-per se)
o There must be separate products (a tied and a tying product);
o There must be significant market power in the tying power market;

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  (Market power- the ability to control price or output (broad)).
o Using the market power, there was actual coercion in buying the tied product that would not have
been bought in a competitive market; AND
 (Without sufficient market power, coercion is “not possible.”)
o There must “not insubstantial volume of commerce” (anticompetitive effects).
(Note, no explicit procompetitive burden rebuttal by the defendants.)
o EXCEPTION to quasi-per se for tying, when RoR is applied: (Microsoft III)
 Highly technological products/markets; incentivize innovation (better for consumers).

Market Power Analysis

 Define the relevant market: (indirect route)
o Relevant market = all “reasonable interchangeable” products.
 Define product market (e.g. Tampa Electric)
 Define geographic market (e.g. Tampa Electric)
o Calculate defendant’s shares (%) with the relevant market.
 In Kodak, it was 80–90%.
 Direct routs: Defendant actually controlled price, output, quality, etc. of the market.

Section 2 (Monopoly) Tying (Kodak Co. v. Image Technical Services, Inc.)

 Lock-in theory – once the original product is bought, the seller drastically raises prices on sub-parts and
maintenance services.
o Often present when (condemned more) the seller is going out of business AND when the relevant
product is being discontinued.

Network Externalities/Effects
 When they are positive:
o The more people that use the product, the more valuable the product becomes to the user.
 E.g. Facebook, telephones, email, etc.
o Direct effects: when each user is “directly” interacting with another user, increasing the value.
 When they are negative:
o The more people that use the product, the less valuable the product becomes.
 E.g. public swimming pools.

MONOPOLIES – SECTION 2
Monopolies (generally)
 There is no per se rule for monopolies. (“You will not get in trouble for being too big.”)
 When monopolies get in trouble under section 2:
o Monopoly power is present, AND there is exclusionary or oppressive conduct.
 Market power- the ability of a firm to obtain higher profits by reducing output and selling at a higher price.
o Must be defined by the product market and geographic market. Typically, at least 20%.
 Monopolization- illegal conduct by which a single firm seeks either to obtain or to retain market power.
 Monopoly power- analyzed by looking at market shares controlled (% of market place). (Alcoa)
o Less than 50% is not enough to have monopoly power.
o With 50–69% it is split as two whether there is monopoly market power.
o 70% or more is affirmed as monopoly power.
(Basing monopoly power on profit margin is NOT a valid approach or a defense.)
 The conduct of focus will be gaining and retaining a monopoly NOT reducing overall output.
o The exclusionary conduct, not the fruits that stem from it.
 High prices, or raising prices, on its own will NOT give rise to monopoly conduct. (American Can)
 Its ever-increasing size by increasing capacity will not be condemned on its own (must have bad conduct).
 A plaintiff does NOT have to prove a defendant’s intent to monopolize.

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 o All that is focused on is market power and the effects stemming from the power.
 Whether someone had monopoly power in the past is irrelevant. Only the current effects are focused on.

Monopolies Flow Chart

(1) Agreement or single firm conduct?  Single firm (§ 2)
(2) Under single firm (§ 2) conduct, is there:
o Both monopoly power, AND
o Exclusionary or oppressive conduct?
(3) If (2) is met, does the defendant have procompetitive justifications for their actions?

Test for Sharman Act § 2 violation: (Rule of Reason)

(1) Defendant possessed monopoly power in the relevant market; AND (power)
o “More than just market power.” (80% is enough, minimum of 50%)
(2) Willful acquisition or maintenance of that power in an anticompetitive manner, rather than growth or
development as a consequence of a superior product. (conduct)
(3) If elements (1) and (2) are met, the burden then shifts to the defendant to show whether there are plausible
procompetitive justifications.

Steps/Burden-Shifting in a § 2 Claim (Microsoft) (Stated in American Express)

(1) Plaintiff shows there were anticompetitive acts/effects AND monopoly power.
o Harm to the “competitive process” (i.e. consumers) by creating a lower output, higher prices,
fewer consumer choices, etc.
(2) Defendant then has the opportunity to offer procompetitive justifications.
(3) Plaintiff has the opportunity to rebut the justifications OR show there are less-intrusive alternatives to the
actions taken by the monopolist.

Questions to Ask for Monopolies

 Is there an analogue to per se illegality under § 2?  No.
 What % market share is enough/not enough to prove monopoly power?  At least 50%, 80% is definitive.
 What role should entry play in market power analysis?
 What role do internally used output and “secondary” durable goods play?
 What types of conduct can be “exclusionary”?
 What remedies are appropriate for Section Two violation?

Entry Barrier Considerations

 To have a monopoly, there must be extreme market power AND harsh entry barriers.
o Allows the company to raise its prices.
 Without harsh entry barriers, there will not be a straightforward illegal monopoly.
 Not necessarily based on the conduct of the wrongful party.
 Examples of entry barriers:
o Time to enter the market (structural). (good law)
o Holding excess inventory, then flood the market when a competitor enters the market. (bad law)
o Tariffs on foreign competition.

Suspicious Conduct in Monopoly Cases (American Can)

 Mergers and acquisitions: bought out and integrated its rivals. (serial acquisition of harm)
o Harmful if actual heavy entry barriers (and potentially worse than exclusive dealing).
 Vertical integration: American Can began manufacturing its own tin plates.
 Exclusive deals with manufacturers or sellers. (strong showing of anticompetitive harm)
 Refusal to deal:
 Predatory pricing:
 Price squeezes: increasing the price of the base product to competitors while lowering the price of the
finished product to suppliers down the chain. (Alcoa)

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 o Requires the plaintiff to prove both sides of the squeeze.
 Predatory pricing and refusal to deal.

Helpful Procompetitive Justifications

 Lowering the price of the product via economies of scale. (American Can)
o Most helpful for a defendant  benefits consumers.
 The monopoly allowed for innovative practices. (helpful but not conclusive)
 Standardization of the industry. (more likely to be helpful if there is a preexisting market failure).

Unhelpful Procompetitive Justifications

 Higher quality of product or services were created.
o A competitive market “fixes” this on its own.
 The excess profits allowed the company to pay its workers more.
o Ill-gotten gains for humanitarian purposes is not a valid justification.

Remedies Once a Monopoly is Shown

 Courts are reluctant to break up a company, even when there is wrongful conduct.
o Appropriate when there is the potential for future harm.
 Usually damages and/or injunctions to bar the wrongful conduct.

MONOPOLY POWER SPECIFICS

Monopoly Power (According to the Supreme Court) (§ 2 Violations)
 The power to either control the price or output (usually) or exclude competition.
(1) High market share (monopoly power), the plaintiff must:
o Define the relevant market; (not required under § 1)
 Includes defining the product AND geographic market.
 Both can be “aggregated” to avoid being too specific.
 The conduct at issue often drives the product analysis.
o Then must assign the shares to bases on the market shares (%). (based on output)
(2) If step (1) (high market share) is proven, the plaintiff must also show entry/expansion of rivals would
NOT negate the monopoly power of the defendant.
(3) Further, after satisfying the first two steps, the plaintiff must prove improper monopoly conduct.

Simplified Steps in a § 2 Claim

(1) Showing of monopoly power – (control market price/output OR exclude competition)
o High market share; AND entry or expansion of rivals does NOT negate market power.
(2) Improper monopoly conduct.

Defining the Market

 Product market- the specific product or service at issue that is reasonably interchangeable with others.
o Does NOT need to be the exact same.
o E.g. “packaging materials” contains lots of specific products such as peanuts, bubble wrap, etc.
 Geographic market- a “reasonably related” geographic area in relation to the product.
o Major companies will almost always be the entire U.S., or even larger.
 Factors that may (but not conclusively) used to show the product market: (Du Pont – cellophane)
o The functional interchangeability of the product.
 E.g. other materials can wrap food, not just cellophane.
 E.g. security service and fire service “lumped together” into central stations. (Grinnell)
 But watchmen would not be a reasonable substitute, too many differences.
o The cross-elasticity of demand of the product.
 As the price of the product goes up, even slightly, customers go to a substitute product.
 What would consumers do in the face of a price increase?

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  However, can create a “cellophane fallacy.” (relevant but not conclusive)
 What would co
o Price differences between products.
 Cellophane fallacy- when determining cross-elasticity of demand, the monopolist’s prices are likely already
at the profit-maximizing level, so even for a monopolist, there is a high elasticity of demand.
 Courts are reluctant to condemn innovation, so they may try to broaden the market to dilute the defendant’s
share. (Telex Corp. v. IBM Corp.)

Possible Routes to Help Show an Absence of Market Power

 Immediate/rapid entry by a competitor.
o A company that currently exists that does not currently participate in the relevant market but
easily, cheaply, and quickly could.
o Rapid entry- could practically be overnight.
o The threat of them entering the market requires them being included in the market.
 Low entry barriers, so competitors NOT currently in the market, in existence or not, could easily enter.
 Broaden the market to dilute the shares of the company at issue. (bad law/wrong – Telex)

Barriers to Entry Approaches

 Bainian definition (majority approach)- some factor in a market that permits incumbent firms to earn
monopoly prices without attracting new entry.
o As the market currently stands, are there barriers to entry?
o Broader than the Stigler definition.
 Stigler definition (Chicago School)- a cost of producing (at some rate of output) which must be borne by
firms which seek to enter an industry but is not borne by firms already in the industry.
o Examines barriers at the time the new competitors enter the market.
o Do not want to punish innovators.
o Narrower than the Bainian definition.

Breaking Down Monopoly Power

(1) Define the relevant market.
o Product market AND geographic market
 What are the reasonably options available to the buyer?
 Are the buyers “stuck” with the local option, or are there broader ones available?
 If a consumer is “stuck,” broader markets should NOT be included.
(2) Assign shares to each competitor in the industry.
o Identify market participants
o Assign percentage of relevant market to each participant
 May include potential entrants/unused competitor capacity.
(3) Assess whether the defendant’s share is high enough. (Threshold of 50%, 75% is conclusive.)
(4) Assess whether entry/expansion negates high market share evidence.
(Direct evidence will be extremely useful for steps 1, 3, and 4.)

Conduct Violation Analysis

 Focused on anticompetitive or exclusionary conduct.
o E.g. serial acquisition (Grinnell)
 High price increase alone is NOT enough to be impermissible conduct.
o A firm will not be punished for “enjoying their market share,” unless they acted wrongfully.
o Superior business acumen and innovation should not be stifled.
 Refusing to disclose innovative information/marketing plans to competitors is NOT impermissible.
 Anticompetitive product design is NOT impermissibly anticompetitive. (Kodak)
 The time and way a new product is introduced is permissible. (Kodak)
 Rule for product design:
o So long as there is ANY evidence the new product is better for consumers (good or innovative),
that specific conduct will NOT be considered anticompetitive.

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  If NO benefit to consumers and design is anticompetitive, burden met—defendant loses.

PREDATORY PRICING
Predatory pricing- driving rivals out of business by selling products at less than their cost, with the expectation of
charging a monopoly price in the future when the rivals have either left the market or have been coaxed into raising
their own prices.

Primary-line injury- injury that harms direct competitors of the discriminating seller.

Predatory Pricing Elements (Liggett v. B&W – Black and White Cigarettes)

(1) The defendant’s prices were below its own costs; AND
(2) There was a “dangerous probability” the defendant would recoup the losses during the predatory period.
o To prove (2), the plaintiff may show the predatory is in the predation period and about to be in the
recoupment period, which is likely to occur, OR the predator is already in the recoupment period.
 Dangerous probability of recouping losses-
o Above competitive pricing in this period.
o The recoupment period must outweigh the predation period.
o The scheme was economically logical (rational) during the predatory period.
 Courts are worried about deterring false positives.
o Courts should guard against impermissibly stifling legal innovation, efficiency, and low prices.
o Also, predatory pricing schemes are rare and, when they are present, not often successful.
o It’s not likely someone who is engaged in predatory pricing will go unpunished.
 Possible ways a plaintiff’s case (in arguing an illegal oligopoly) will be undercut:
o Inability to coordinate with cartel members;
o Inability to monitor other cartel members; OR
o Inability to discipline other cartel members.

Predatory Bidding (monopsony) (Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber)

 Predatory bidding- bidding up the market price to high level so other buyers cannot survive.
 Monopsony power- market power on the buy side of the market, aka “a buyer’s monopoly.”
o Treated under § 2. It’s just the inverse of a traditional monopoly.
 RULE: Similar to predatory pricing, in a predatory bidding claim a plaintiff must show:
o Plaintiff must prove the alleged predatory bidding led to below cost downstream pricing.

REFUSALS TO DEAL UNDER § 2

Refusal to Deal Characteristics (Aspen Ski Co. v. Highlands) (Verizon v. Trinko) (Novell)
 Firms have the right to refuse to deal, but it has limits.
 Similar characteristics as exclusionary conduct under § 1.
 Plaintiff must show: (Steward applied this as factors, not requirements. Quasi-ToC)
(1) The defendant had monopoly power;
(2) There was a prior voluntary course of dealing/agreement between the monopolist and plaintiff;
(3) The monopolist stopped working with the plaintiff (refusal to deal);
(4) The defendant sacrificed short-run profits for long-term anticompetitive gain; AND
(5) That conduct would have been irrational but for the anticompetitive gain.
 No valid PJ for sacrificing short-term profits. (In Microsoft there was.)
 Implied immunity- based on the heavy regulatory scheme, an immunity is created. (Verizon v. Trinko)
 Alternative approach: (Steward Health v. Blue Cross of RI)
o The Aspen and Trinko rules are NOT rigid requirements but merely factors to consider.
 Creates a quasi-totality of the circumstances analysis on a “spectrum.”

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 MERGERS
Clayton Act § 7 – Vertical Mergers (United States v. AT&T)
 “No person engaged in commerce . . . shall acquire . . . another person engaged also in commerce . . .,
where in any line of commerce . . . in any section of the country, the effect of such acquisition may be
substantially to lessen competition . . . .”
 Must be harm/conduct that substantially lessens competition.
o In both large and small markets.
 Rigidly defining the market is not as tough or technical as other areas.
 Barriers to entry and possible efficiencies are part of the analysis.
 Plaintiff must prove:
o “Line of commerce” = product market definition;
o “Section of the country” = geographic market definition;
o “Maybe” = harm to occur in the future; AND
 (uncertain future harm, arguably, makes it harder for the plaintiff)
o “Substantially to lessen competition” = anticompetitive
 (e.g. price rises as output goes down or stifling innovation)
 (General harms include: leveraging, foreclosure, and forcing)
 Plaintiff CANNOT simply argue the vertical merger will make the market more concentrated.
 Arguments of “must have” products or services are rarely successful for the plaintiff.
 If plaintiff meets initial burden, then it shifts to defendant to offer valid PJs.
o Evidence that show the “post-merger efficiencies will outweigh its anticompetitive effects.”
o Alternatively, defendant can show there is no risk of harm due to low entry barriers for.
 At all times, either party may offer rebutting evidence.
o The burden of persuasion switches back and forth but the plaintiff always has the burden of proof.

Potential Benefits of Mergers

 Efficiency (cost saving), lowering the cost for consumers.
o Decreases transaction costs.
o The efficiency will ONLY be recognized if the benefit is passed on to consumers.
 EDM – elimination of double marginalization.
o Will not completely fix the market, but it will eliminate the “double monopoly” prices.
 Immediately acquire/develop a known brand. (possible)
 Executive compensation is often tied to firm size.

Horizontal Mergers
 Defining the market, identifying participants, distributing shares are even more important than § 2 claims.
o The market definition often drastically changes the case’s outcome.
 Need to define the market using HMT (SSNIP)
o SSNIP- a small but significant non-transitory increase in price.
 At least a 5% increase that lasts for at least two years.
 “If a hypothetical monopolist controlled the entire specific market, could that monopolist
raise prices by 5%?” (Broadened until this could no longer occur.)
 Plaintiff’s initial burden:
o Carried via structural presumption, OR
o Carried by offering direct evidence of unilateral and/or coordinated effects.
 If plaintiff succeeds, defendant must rebut by:
o Trying to show an entry/expansion would defeat the price increase;
o The efficiencies would offset the increase in market power; OR
 MUST be merger-specific.
o It is a “failing firm” otherwise (toughest to prove).

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Effects of Horizontal Mergers
 Unilateral effects-
o Lack of head-to-head competition.
 The pervious competitors are now merged and no longer compete.
 If merger goes through, next-closest substitute rises and price for consumers increases.
o Capacity/output reduction (with homogenous products).
 Only applies with a limited amount of output.
 The market-clearing price goes up.
 Coordinated effects-
o The less players there are in the market the more likely they are to act inappropriately.
 Can be shown through direct or indirect evidence.

Kicker Factors for Post-Merger Coordination

 A history of coordination in the market;
 Price transparency/monitoring in cartels; AND
 Elimination of a “maverick” in the market (did not previously go along with the cartel.)

Entry Barrier Examples

 Elimination/acquisition of a strong brand loyalty.

United States v. H&R Block – “Horizontal Merger”

 Lots of different alternatives for tax preparation.
o DOJ – wants the market to be specifically only DDIY preparation.
o Defendants – want the entire preparation market.
 Structural presumption of harm: (If shown, circumstantial effects are not necessary).
o Definition of the relevant market;
o Identify participants;
 (Current competitors and any “rapid entrants.”)
o Assign shares of the market to each participate; AND
o Assess the concentration of shares using HHI.
 Is it a highly concentrated market?
 Will the merging defendant(s) control a significant amount of that concentration?

HHI Market Concentration

(1) Determine each firm’s percentage share of the market.
o A = 62% B = 16% C = 13% D = 9%
(2) Square each firm’s share.
o A = 3,844 B = 256 C = 169 D = 81
(3) Add all of the squared numbers. (Total = 4,350)
o If the squared sum is greater than 2,500, it is a concentrated market.
(4) Now combine the merging firms’ shares and square the combined number.
o Now: (B + C)2 = 841
(5) Again, combine all the squared numbers.
o A2 + (B + C)2 + D2 = 4,766
(6) If the difference between the original combination and merged combination is greater than or equal to 200,
it presumed to be an enhancement in market power.
o 4,766 – 4,350 = 416

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