Chapter 36 -- Antitrust

Antitrust law is a system of federal and state law intended to promote competition by prohibiting acts
and practices that may lead to monopolies and unreasonable restraints of trade. 

Five federal acts and the court interpretations of these enactments constitute the heart of American
antitrust laws.  The five acts are the Interstate Commerce Act (1887), the Sherman Antitrust Act
(1890), the Clayton Act (1914), the Federal Trade Commission Act (1914), and the Robinson-Patman Act
(1936).  Activities prohibited by these laws include monopolization, conspiracies and attempts to
monopolize, market allocations among competitors, price fixing and discrimination, group boycotts,
tying arrangements, and any other unfair or deceptive practice that may reduce competition. 

The U.S.  Justice Department is the primary government enforcer of the antitrust laws.  Private parties
are encouraged to enforce antitrust laws through civil actions for injury as a direct result of
violations.  Successful private litigants normally recover treble damages and court costs, including
attorney's fees. 

Chapter 36 -- Outline
 36.1 Basic Concepts
      A.  History
      B.  The Primary Purpose of Antitrust Law
      C.  Federal Antitrust Statutes

 36.2 Sherman Act, Section One -- Restraints of Trade

      A.  Two Approaches
      B.  Unreasonable Restraint of Trade -- The Rule of Reason
      C.  Per Se Unreasonableness

 36.3 Sherman Act, Section Two -- Monopolies

      A.  Scope of Prohibition
      B.  Monopolization
      C.  If It Is Not a Monopoly, Is It an Oligopoly?

 36.4 Clayton Act

      A.  Scope of the Clayton Act
      B.  Price Discrimination
      C.  Tying Contracts and Exclusive Dealing Agreements
      D.  Mergers
      E.  Interlocking Directorates

 36.5 Robinson-Patman Act

     A.  Price Differentials and Discrimination
      B.  Discrimination Required
      C.  Injury Required
      D.  Defenses to Liability
      E.  Hart-Scott-Rodino Antitrust Improvements Act of 1976

 36.6 Federal Trade Commission Act

      A.  FTC Functions
      B.  The FTC
      C.  Little FTC Acts

36.1 BASIC CONCEPTS A.  History

B.  The Primary Purpose of Antitrust Law
C.  Federal Antitrust Statutes

A. History.  Antitrust law refers to a system of federal and state law intended to promote competition
and to prohibit monopolistic trade-restraining practices. 

1. A monopoly exists in a business environment in which a seller or a buyer has a dominant market
position. 

a. Monopolistic power refers to the ability of a single entity to control exclusively both
the supply and the prices of a product or service. 

2. In the U.S., a heightened concern over monopolies arose following the Civil War. 

a. Many large corporate enterprises attempted to reduce competition, fix prices, freeze out
competitors, and thereby increase profits. 

1) Each of two or more corporations would cause a majority of its shareholders to

transfer their shares to a trust.  (A trust is a legal entity in which a trustee
holds legal title to property and the beneficiary of the trust enjoys beneficial or
equitable ownership.)

a) The trustee(s) would issue trust certificates to the shareholders in exchange for
their shares. 

b) The trust certificates gave the owners the right to any dividends declared by the
trustees. 

c) The board of trustees could control the election of the board of directors of each
member company of the trust. 
 d) The directors of these member companies cut prices below the cost of production in
geographic areas where small competitors operated. 

i) The small competitors were driven out of business. 

ii) The monopolistic trusts then boosted prices to an exorbitant level. 

3. Congress responded to such harms by enacting antitrust laws aimed at limiting the monopolies'
power.  These laws supplemented the common-law rules that protected competition. 

a. The first laws were aimed specifically at the then existing monopolistic trusts, hence
the term "antitrust."

1) Today, antitrust regulation is not limited to trusts but regulates a variety of

commercial enterprises. 

B. The Primary Purpose of Antitrust Law.  The primary purpose of antitrust law is to foster
competition.  Antitrust laws seek to ensure a system in which prices in a free and competitive
market are a result of consumer demand and are not a result of conspiracies among competitors. 

1. Many scholars believe that efficient allocation of scarce resources, lower prices, higher-
quality products, and increased innovation are very important by-products of increased
competition in a free and open market. 

C. Federal Antitrust Statutes.  Antitrust law in the U.S.  began in 1887 with enactment of the
Interstate Commerce Act, aimed at curbing abusive practices of the large railroads. 

1. In 1890, Congress enacted a landmark in legislation, the Sherman Antitrust Act, aimed at the
anticompetitive practices of industrial trusts and monopolies. 

a. Section 1 of this act prohibits "contracts, combinations, and conspiracies in restraint

of trade."

b. Section 2 prohibits "monopolization, attempts to monopolize and conspiracies to

monopolize."

2. In 1914, Congress enacted the Clayton Act to reinforce antitrust laws.  The Clayton Act focuses
primarily on price discrimination, exclusive dealing agreements, mergers, and interlocking
directorates. 

a. Additionally, Congress passed the Federal Trade Commission Act enabling the FTC. 

3. In 1936, Congress passed the Robinson-Patman Act, which amended Section 2 of the Clayton Act in
an effort to strengthen the law opposing price discrimination. 

4. The antitrust laws apply to activity that either restrains commerce that is interstate in
character itself or has a substantial effect on interstate commerce. 

a. They also apply to intrastate activity that affects interstate commerce, even if the
effects are indirect. 

b. Regulated industries are not expressly exempt from the antitrust laws.  However, there is
an implied exemption to the extent of their regulation by federal or state government. 

1) However, to the extent that an enterprise of a regulated industry acts in an

anticompetitive manner outside of the areas in which it is regulated, those acts may
be illegal. 

5. The Justice Department and the Federal Trade Commission are the primary government enforcers of
the antitrust laws. 

a. Sanctions that may be imposed on violators include the following:

1) Seizure of property illegally shipped in interstate commerce

2) Suspension of any right to engage in interstate commerce for not more than 1 year

3) For a corporation, fines of up to $1 million or twice the illegal profits, for each
offense

4) For any other person, a fine of up to $100,000, imprisonment for as much as 3 years,
or both, for each offense, and injunctions against further wrongful acts

6. A private person (including businesses, corporations, etc.) whose business or property is

injured as a direct result of a violation of antitrust laws may sue the violator. 

a. A consumer may sue for a violation of the antitrust laws only if (s)he purchased a
product or service directly from the person who violated the antitrust laws.  There must
be a direct connection. 

b. The private person can also recover treble damages under most
statutes. 
 36.2 SHERMAN ACT, SECTION ONE -- A.  Two Approaches
RESTRAINTS OF TRADE B.  Unreasonable Restraint of Trade -- The Rule of Reason
C.  Per Se Unreasonableness

A. Two Approaches.  The Sherman Act was passed to regulate interstate commerce by prohibiting
anticompetitive practices.  It consists of two main sections that are quite different.  Section 1
provides that

Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of

trade or commerce among the several states, or with foreign nations is hereby declared illegal.

1. Taken literally, this prohibition would invalidate all contracts.  That is, the statutory
language of Section 1 proscribes every contract, combination, and conspiracy in restraint of
trade.  To avoid such an impractical application, the courts have interpreted this section to
invalidate only those contracts that unreasonably restrain trade. 

a. The Supreme Court has stated

The true test of legality is whether the restraint imposed is such as merely regulates
and perhaps thereby promotes competition or whether it is such as may suppress or even
destroy competition.  To determine that question the courts must ordinarily consider the
facts peculiar to the business to which the restraint is applied; its condition before
and after the restraint was imposed; the nature of the restraint and its effect, actual
or probable.  The history of the restraint, the evil believed to exist, the reason for
adopting the particular remedy, the purpose or end sought to be attained, are all
relevant facts.  This is not because a good intention will save an otherwise
objectionable regulation or the reverse; but because knowledge of intent may help the
court to interpret facts and to predict consequences.

2. The Court has developed two fundamentally different approaches in analyzing proscribed
behavior.  It has concluded that some forms of behavior always have a negative effect on
competition.  Such behavior is classified as per se unreasonable.  Behavior that is not
classified as per se unreasonable is judged under the rule of reason. 

B. Unreasonable Restraint of Trade -- The Rule of Reason.  The enunciation of the Supreme Court,
reproduced above, is known as the rule of reason. 

1. The rule-of-reason test resulted in an array of perplexing problems being presented to the
courts. 

a. By requiring that courts balance the anticompetitive effects of every questioned

restraint against its pro-competitive effects, a significant burden was imposed on the
judicial system. 

b. The Supreme Court responded by declaring certain categories of restraints to be

unreasonable by their very nature, and thus illegal per se. 

1) All restraints of trade not categorized as illegal per se are judged by the rule-of-
reason test. 

2. Section 1 of the Sherman Act does not prohibit unilateral conduct.  The essence of the illegal
activity is the agreement or the act of joining together in order to unreasonably restrain
trade. 

3. Restraints may be classified as either horizontal or vertical. 

a. A restraint is horizontal if it involves collaboration among competitors at the same

functional level in the chain of distribution emanating from the manufacturer, e.g., two
manufacturers or two wholesalers or two retailers. 

b. A restraint is vertical if it is made by parties that are not in direct competition at

the same functional level of distribution.  It can be upwardly vertical or backwardly
vertical from the manufacturer or source. 

C. Per Se Unreasonableness.  The Supreme Court set forth its definition of per se unreasonableness in
two landmark decisions.  The reasoning in these cases excerpted below clearly illustrates that
certain types of restrictive activities are so inherently anticompetitive that it can be stated as
a matter of law that they unreasonably restrain trade.  If an activity is illegal per se, mere
proof of the activity is sufficient to establish its anticompetitive nature. 
1. The aim and result of every price-fixing agreement, if effective, is the elimination of one form of
 competition.  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 change become the unreasonable price of tomorrow.  Once
established, it may be maintained unchanged because of the absence of competition secured by the
agreement for a price reasonable when fixed.  Agreements which grant such potential power may well
be held to be in themselves (" per se ") unreasonable or unlawful restraints, without the necessity
of minute inquiry whether a particular price is reasonable as fixed and without placing on the
government in enforcing the Sherman Law the burden of ascertaining from day to day whether it has
become unreasonable through the mere variation of economic conditions.
2. There are certain agreements or practices which because of their pernicious effect on
competition and lack of any redeeming virtue are conclusively presumed to be unreasonable and
therefore illegal without elaborate inquiry as to the precise havoc they have caused or the
business excuses for their use.  This principle of per se unreasonableness not only makes the
type of restraints which are proscribed by the Sherman Act more certain to the benefit of
everyone concerned, but it also avoids the necessity for complicated and prolonged economic
investigation into the entire history of the industry involved, as well as related industries,
in an effort to determine at large whether a particular restraint has been unreasonable.
3. Price fixing is the primary example of a per se violation of the Sherman Act. 
a. Price fixing includes any agreement between sellers to establish either minimum or
maximum prices. 
4. Market allocations between competitors have been declared illegal per se. 
a. A market allocation between competitors exists when competitors agree not to compete with
each other in specific markets, which markets may be defined by any one of the following:
1) Geographical area
2) Type of product or service
3) Type of customer
5. Group boycotts are prohibited.  Therefore, a manufacturer violates Section 1 if it induces
other manufacturers to refuse to deal with wholesalers or retailers who do not adhere to
suggested price guidelines. 
6. Some tying arrangements are illegal per se. 
a. A seller of a product or a service may condition its sale upon the buyer's purchasing a
second item (the "tied" product) from the seller. 
1) Tying arrangements limit the freedom of choice of buyers and may exclude
competitors. 
2) A tying arrangement exists when a seller exploits his/her economic power in a market
to expand his/her market share of sales of another product. 
a) EXAMPLE: Manufacturer holds patent on an idea for a product which, when layered
over computer screens, reduces radioactive emissions such that they do not exceed
statutorily imposed federal maximums.  It is the only product currently available
that both is transparent and can enable monitors to meet the federal standards. 
Manufacturer also produces industrial fire extinguishers.  It conditions contracts
for sale of the screen-cover product on concurrent requirements contracts for fire
extinguishers.  The screen-cover product is a tying product.  The fire
extinguishers are tied products. 
3) A tying arrangement will be considered illegal per se when either of the following
conditions exists:
a) The seller has considerable economic power in the tying product. 
b) A substantial amount of interstate commerce in the tied product is affected. 

36.3 SHERMAN ACT, SECTION TWO -- MONOPOLIES A.  Scope of Prohibition

B.  Monopolization
C.  If It Is Not a Monopoly, Is It an
Oligopoly?

A. Scope of Prohibition.  Section 2 of the Sherman Act prohibits monopolization, conspiracies to

monopolize, and attempts to monopolize.  Economic studies have indicated that a monopolist tends to
use its power to limit production and increase prices.  Consequently, a monopolistic market may
produce fewer goods at a higher price than a competitive market. 

1. Section 2 outlaws monopolizing, attempting to monopolize, and conspiring to monopolize any part
of interstate or foreign commerce. 

a. Monopoly power is the ability to control prices or to exclude competitors from the
marketplace. 

2. Courts have taken different approaches as to what must be proved to show a violation of this
section. 

a. Generally, it is necessary to show an objective intent to monopolize.  It is not

necessary to show that the defendant already has monopoly power for an attempt to
monopolize. 

b. Monopoly power may be obtained lawfully if superior business acumen or product positions
the defendant as a monopolist. 

c. A combination of market power must be coupled with either the unfair attainment of such
power or the intent to exercise such power once lawfully obtained. 

3. Failure to comply with Section 2 is a felony and subjects the offender to fine, imprisonment,
or both. 

a. The federal courts are empowered to issue injunctions. 

b. Anyone injured by a violation is entitled to recover, in a civil action, treble damages

(three times the amount of the loss actually sustained). 

B. Monopolization.  Section 2 of the Sherman Act provides that

Every person who shall monopolize, or attempts to monopolize, or combine or conspire with any other
person or persons to monopolize any part of trade or commerce among the several states, or with
foreign nations, shall be deemed guilty of a felony.

1. Three distinct forms of conduct constitute offenses under Section 2.  A violator is one who
does any of the following:

a. Monopolizes

b. Attempts to monopolize

c. Combines or conspires to monopolize

2. Two elements must be proved to establish criminal or civil liability for monopolization under
Section 2:

a. The acquisition of monopoly power

b. The general intent to monopolize

3. The issue of monopolistic power requires defining what degree of market dominance constitutes a
monopoly. 

a. Courts consider many factors in determining whether a firm has a monopoly to control
prices or exclude competitors in a relevant market.  Some of the factors include

1) The size of the market share

2) Whether the size of the firm was achieved through internal "natural growth" or by
acquiring competitors or assets

3) The number of competitors, their financial strength, and the degree of concentration
of the market by the four largest firms

4) Whether the defendant engaged in unlawful exclusionary practices to prevent entry

into the market by potential competitors

5) The extent to which the defendant used unduly coercive tactics to suppress
competition

4. The prevalent test used by the courts is the market share test. 

a. Although there are no precise formulas, a market share of 75% or greater generally
indicates a monopoly exists, while a share less than 50% may not.  If a defendant has
between 50% and 75% of the market share, courts will examine other relevant factors. 

5. A key issue to be considered is: "What is a relevant market?"

a. Generally, a relevant market consists of both of the following areas:

1) The geographic area of effective competition in which a particular product is traded

2) The market area for close substitute products with which the particular product is
interchangeable

b. The relevant product market consists of products that can be closely substituted for the
firm's product on the basis of price, quality, and demand. 

c. The relevant geographic market is that territory in which the firm makes sales of its
products or services. 

6. Section 2 also prohibits attempts to monopolize. 

a. An attempt to monopolize involves deliberate conduct, the result of which produces a

strong probability that monopolization may occur. 

1) Specific intent to monopolize is proved if it is shown that the single firm is

engaged in predatory activities such as

a) Injuring actual competitors

b) Excluding potential competitors

c) Erecting barriers to market entry

d) Deliberately lowering the price of products to marginal levels until competitors

are driven out of the market ("predatory pricing")

NOTE: The courts are divided on the issues of how to measure "costs" and how to
define "predatory" pricing. 
C. If It Is Not a Monopoly, Is It an Oligopoly? Monopolistic power in American industry often arose
because of superior business acumen or historical accident, or perhaps ownership of a valuable
patent. 

1. The mere size of a firm is not in and of itself a violation of Section 2 of the act. 

2. In an absence of a concerted effort to fix prices or to engage in anticompetitive conduct,

firms that exist in an industry in which a very small number account for substantially all
of that industry's output are together considered an oligopoly (literally, "a few
sellers") and may not be subject to Section 2 liability in the absence of some form of
combination. 

36.4 CLAYTON ACT A.  Scope of the Clayton Act

B.  Price Discrimination
C.  Tying Contracts and Exclusive Dealing Agreements
D.  Mergers
E.  Interlocking Directorates

A. Scope of the Clayton Act.  In 1914, Congress strengthened the Sherman Act by adopting the Clayton
Act.  From its inception, the Sherman Act was considered too broad.  The Clayton Act was designed to
make the Sherman Act more specific. 

1. The Clayton Act does not provide for criminal penalties, only for civil actions. 

a. The Department of Justice and the Federal Trade Commission are authorized to bring civil
actions. 

b. Civil actions may be brought by private parties in federal court for treble damages and
costs, including attorneys' fees. 

2. The Clayton Act exempts labor, agricultural, and horticultural organizations from all antitrust
laws. 

3. The substantive provisions of the Clayton Act deal with price discrimination, tying contracts,
exclusive dealing arrangements, mergers, and interlocking directorates. 

B. Price Discrimination.  Section 2 of the Clayton Act prohibits price discrimination if it directly or
indirectly substantially lessens competition such that it tends to produce a monopoly.  Price
differentiation can be justified based on "grade, quality, or quantity of the commodity sold."

1. EXAMPLE: Z-Mart Corp.  has an established nationwide distribution network for consumer goods,
which enables it to order manufactured products in relatively immense quantities.  Its market
research department has predicted a substantial demand for in-line skates for not less than the
next 10 years.  It enters into a contract for purchase of immense quantities of in-line skates
with NuToys Corp.  The Z-Mart contract will account for 75% of NuToys' output of in-line
skates.  Economies of scale from planned production of 100,000 units per month will reduce
costs by $2 per unit.  Z-Mart negotiates for a price of $1.50 per unit lower than the other in-
line skate customers of NuToys, based on the relatively immense number of items it purchases
from NuToys each month.  The price discrimination may not be a violation of the Clayton Act,
even though it tends to reduce competition between Z-Mart and other sellers of NuToys' skates. 
However, a price to Z-Mart of $2.00 per unit lower than to NuToys' other customers may be
prohibited in that 25% of NuToys' economies of scale are attributable to its other customers. 

2. However, any seller can refuse to sell to a buyer if his/her refusal is not designed to
restrain trade.  Moreover, a seller is free to alter his/her price in response to market
conditions. 

a. EXAMPLE: Assume that four different retailers, Z-Mart, Y-Mart, X-Mart, and W-Mart,
purchase 25% each of NuToys Corp.'s output of in-line skates.  Modern Toys Co.  starts to
sell its own in-line skate production to Y-Mart, which is the only one of the four
retailers in business in state Y, at a lower price than the price of NuToys' skates. 
(Modern Toys has developed a process for manufacturing wheels at a lower cost than NuToys
can make them.  It is still a small producer, however, and has found a market for all its
production in state Y.) NuToys, upon noting that Y-Mart has reduced orders by 50%,
reduces its price to Y-Mart by 10% but does not reduce prices to its other customers. 
The price differentiation in response to market conditions may not be illegal under
Section 2 of the Clayton Act. 

C. Tying Contracts and Exclusive Dealing Agreements.  Section 3 of the Clayton Act prohibits tying
agreements. 

1. Tying agreements have been labeled by the Supreme Court as serving "hardly any purpose beyond
the suppression of competition."

a. EXAMPLE: Shospital provides surgical services.  It has an agreement with Sanesth that she
will provide all anesthesiology services required by Shospital.  It refuses to allow
patients to use the services of any other anesthesiologist for surgery in the facility. 
Thirty percent of persons hospitalized in the locality enter Shospital.  The remainder
(70%) are admitted to other hospitals.  Shospital does not, without more, have sufficient
market power to indicate that the services of Sanesth are forced on unwilling patients. 
If it did, it might drive out other providers of anesthesia services operating in the
local market.  Furthermore, surgery and anesthesia need not be viewed as separate
services economically.  Shospital does not acquire additional market power by the
(forced) sale of the two together.  Thus, the arrangement may have little anticompetitive
effect but might improve the quality of the package of services provided by Shospital. 
The tie-in is not a per se violation of antitrust law. 

2. Exclusive dealing occurs when a supplier conditions its sales upon the buyer's promise not to
use or deal in goods of the seller's competitors. 
 a. Exclusive dealing arrangements are not per se unreasonable.  However, if such an
arrangement tends to produce a monopoly or lessen competition substantially, it will be
treated as a violation of Section 3. 

b. Reciprocal dealing occurs when one company uses its purchasing power to require the
company from whom it purchases to buy its products. 

c. Under the Sherman Act, both exclusive and reciprocal dealing arrangements are considered
illegal per se if the power to exert this pressure exists, based on the relative size and
purchasing volume of the parties. 

D. Mergers.  Section 7 of the Clayton Act is the primary authority in the merger and acquisition area. 
It was originally adopted in 1914 and later amended by the Celler-Kefauver Act of 1950. 

1. Section 7, as amended, provides that no business engaged in commerce shall acquire any of the
stock or assets of another such business if the effect may be to substantially lessen
competition or to produce a monopoly in any segment of commerce in any area of the country. 

a. However, a firm may purchase stock for investment if there is no attempt to lessen
competition. 

b. A corporation is permitted to form a subsidiary to carry on a part of its business when

the effect of such formation is not to substantially lessen competition. 

2. The goal of Section 7 is to maintain competition in the marketplace despite the frequency of
corporate mergers. 

a. Mergers may be classified as

1) Horizontal, wherein a company acquires all or part of the stock or assets of another
(competing) company

2) Vertical, wherein a company is acquired by either a customer or a supplier

a) A vertical merger is a forward merger if the acquiring company purchases a

customer. 

b) A vertical merger is a backward merger if the acquiring company purchases a

supplier. 

3) A conglomerate merger is a merger between two unrelated firms not in competition with
each other because they are in different product or geographic markets and they do
not have a supplier- customer relationship. 

3. In determining whether or not a merger or an acquisition is illegal under Section 7, courts

examine the relevant markets or lines of commerce.  The analysis is similar to, although more
extensive than, that used for a monopolization case under Section 2 of the Sherman Act; e.g.,
courts analyze the size of the market share, the number of competitors and their financial
strength, etc. 

a. The relevant markets or lines of commerce are

1) Relevant product market

a) EXAMPLE: Producer manufactures 75% of the cellophane sold in the U.S.  Producer
may monopolize cellophane trade and commerce in the U.S.  Wax paper and aluminum
foil are other flexible packaging materials, however, which serve as substitutes
for cellophane.  Sales of the alternatives increase or decrease in rough
proportion to decreases and increases in the price of cellophane.  The relevant
product market includes cellophane, wax paper, and aluminum foil.  Producer does
not monopolize the relevant product market.  A merger of Producer with a
corporation that produces 80% of the wax paper sold in the U.S., however, may be
illegal under Section 7 of the Clayton Act. 

2) Relevant geographic market or area of effective competition

a) EXAMPLE: City Cab Co.  provides service to Midtown.  The pool of customers are
residents of and visitors to Midtown.  Persons needing or using cab service in
Midtown rarely, if ever, call for a cab from Westown, the only other town within
70 miles.  Thriftee Cab Corp., the only other provider of transportation-for-hire
in Midtown, has steadily increased its number of passengers per week relative to
City Cab in its 3 years of operation.  The relevant geographic market is probably
Midtown.  If an airport and an industry affecting interstate commerce operate in
Midtown, acquisition by City Cab Co.  of all of the stock of Thriftee Cab Corp. 
may be prohibited under the Clayton Act. 

b. In determining whether a merger is illegal, both the product market and the geographic
market of both businesses are factual issues considered by the court. 

c. After determining the relevant product and geographic markets, the plaintiff must prove,
and the court must find, that the effect of the merger may be to lessen competition
substantially or to tend to produce a monopoly. 

1) Antitrust law focuses on the size of the merged firm in relation to the relevant
market and not on the absolute size of the resulting entity. 
 2) The Department of Justice published guidelines for mergers and acquisitions in its
amended Mergers Guidelines in 1984. 

a) These guidelines use a statistical test for determining whether to challenge

horizontal mergers. 

i) The statistical test is known as the Herfindahl-Hirschman Index (HHI). 

 Under the HHI formula, the postmerger market share of each firm is
calculated by summing the squares of the individual market shares of
all firms in the market. 

 The guidelines use three categories of market concentration to analyze

horizontal mergers and determine whether the Department of Justice will
challenge the merger. 

b) The Department of Justice and the FTC will consider other relevant factors when
making a determination of whether to challenge a merger; e.g., is there a trend in
the particular industry toward concentration?

4. The failing-company doctrine provides that a merger that may reduce competition is allowable if
the company acquired is failing and there is no other purchaser whose acquisition of the
company would reduce competition less. 

5. The Department of Justice and the Federal Trade Commission (FTC) have both indicated that they
are primarily concerned with horizontal mergers in highly or moderately concentrated
industries. 

a. The Antitrust Improvements Act of 1976 required corporations with annual sales or assets
exceeding $100 million to give advance notice to the Department of Justice and the FTC of
any acquisition of a corporation with annual sales or assets of $10 million or more. 

E. Interlocking Directorates.  Section 8 of the Clayton Act prohibits a person from being a member of
the board of directors of two or more competing corporations. 

1. Section 8 is applicable under the following conditions:

a. One of the corporations has capital, surplus, and undivided profits totaling more than $1
million. 

b. The elimination of competition by agreement between the corporations would amount to a

violation of any of the antitrust laws. 

2. Section 8 prohibits interlocking directorates in competing corporations.  It does not apply to

a director who serves on the board of two firms that are vertically associated or to one person
serving as an officer of two competing corporations. 

a. EXAMPLE: Strategic Planner developed a national reputation as architect

of corporate takeovers.  She now derives superb income in fees from
speaking at seminars and serving as an independent director on the board
of many powerful corporations.  Three of these corporations control 97%
of the supply of comptutors worldwide.  The smallest of them had net
undistributed capital surplus of $95 million at the close of its most
recent fiscal year.  The potential exists for concentration of control
among corporations that otherwise should be in healthy competition with
each other.  Section 8 of the Clayton Act was intended to remove the
opportunity or temptation to defeat antitrust laws indirectly by using
interlocking directorates.  Because elimination of competition by
agreement between the three corporations that control comptutor supplies
would probably be a violation of an antitrust law, Strategic Planner's
role as independent director of each probably represents an unlawful
interlocking directorate. 

36.5 ROBINSON-PATMAN ACT A.  Price Differentials and Discrimination

B.  Discrimination Required
C.  Injury Required
D.  Defenses to Liability
E.  Hart-Scott-Rodino Antitrust Improvements Act of 1976

A. Price Differentials and Discrimination.  The purpose of the Robinson-Patman Act is to limit
excessive purchasing power of large buyers, such as chain stores, to prevent unfair advantage over
smaller competitors.  (Note that the act does not apply to retail sales.)

1. The Robinson-Patman Act prohibits price discrimination in interstate (as opposed to intrastate)
commerce of products of like grade and quality. 

a. Sellers of goods are prohibited from granting, and buyers from inducing, unfair discounts
and other preferences, including

1) Allowances for advertising

2) Counter displays

3) Samples

4) Rebates
 b. The act is intended to eliminate the advantage a buyer might demand over a smaller buyer
merely because of the larger buyer's quantity purchasing ability. 

2. Price differentials are permitted when justified by proof of either a cost savings to the
seller or a good-faith price reduction to meet, but not beat, the lawful price of a
competitor. 

B. Discrimination Required.  To establish price discrimination, it must be shown that

1. In the course of interstate commerce, there were two or more sales of commodities (as
distinguished from services). 

2. The commodities were of like grade and quality. 

3. Two or more purchasers bought the commodities at about the same time. 

4. The commodities were purchased at discriminatorily different prices. 

5. The pricing could injure competition. 

C. Injury Required.  Section 2(a) of the Robinson-Patman Act applies if the plaintiff can prove that
the price differentials may tend to result in a monopoly in any line of commerce or to injure,
destroy, or prevent competition. 

1. Courts presume that competition has been harmed when the price discrimination involves
competing purchasers from the same seller. 

2. The act is aimed at preventing competitive injury to

a. Competitors of the seller (primary injury)

b. Buyers (secondary injury)

c. Customers of buyers (tertiary injury)

d. Competitors of the buyer's customer

3. A competitive injury must result from the price discrimination. 

a. Two customers situated in different geographic markets are not competing.  Hence, there
is no competitive injury if one of them receives a favored price from a discriminating
supplier. 

4. Competitive injury generally does not result when a supplier sells to buyers at different
prices if the buyers are differentiated by function, e.g., supplier charging wholesalers less
than retailers. 

a. Courts reason that buyers who perform different functions are not competing with each
other; therefore, the price differential cannot injure competition. 

D. Defenses to Liability.  Sellers use two principal defenses to avoid liability under the Robinson-
Patman Act:

1. The price differentials are justified by differences in the cost of manufacture, sale or
delivery resulting from differing methods or quantities involved, and by a good-faith price
reduction to meet the low price of a competitor (or the furnishing of services or facilities to
compete with those furnished by a competitor). 

a. The price differentials are commonly referred to as functional discounts when the buyers
are differentiated by function, such as manufacturers and installers. 

b. Section 2(a) permits a seller, accused of discrimination because of the lower price
charged, to defend itself by showing that economies realized by large-quantity sales
justify the lower per-unit selling price. 

2. Section 2(b) provides that, when a seller has been shown to have charged a discriminatory
price, it may defend itself by showing that the price was lowered (or the services or
facilities were furnished) to any other purchaser or purchasers in good faith to meet an
equally low price of a competitor (or to compete with the services or facilities furnished by a
competitor). 

a. The "meeting of competition" defense is not available to a seller who knowingly goes
below the competitor's price to undercut it. 

b. However, a seller is permitted to make a good-faith competitive price reduction to retain

an old customer and may also quote the same price in order to attract a customer away
from a competitor. 
EXAMPLE: Retail Chain Stores negotiates with Dairy Provider to acquire milk, at lower
cost, to be sold under a generic rather than a name-brand label.  Dairy Provider offers
the milk at a price that will save Retail Chain $400,000 each year.  Retail Chain
solicits and receives a better price offer from Another Provider.  Dairy Provider is
dependent on Retail Chain's business.  It submits a new offer, which will produce annual
cost savings of $800,000 for Retail Chain.  Retail Chain accepts.  The FTC finds that
Retail Chain (the buyer) knowingly induced or received price discrimination from Dairy
 Provider (the seller), and thereby violated the Robinson-Patman Act.  Retail Chain
advances the "meeting the competition" defense.  Because Dairy Provider, as seller, had a
good-faith belief (albeit not certainty) that the price concession was offered to meet an
equally low price offered by a competitor, Retail Chain, even as buyer, can effectively
assert the defense. 

E. Hart-Scott-Rodino Antitrust Improvements Act of 1976.  The Hart-Scott-Rodino (HSR) Act of 1976
requires merging parties to alert the Department of Justice and the Federal Trade Commission (FTC)
of impending mergers. 

1. The purpose of the HSR Act is to allow parties to ascertain the legality of a merger before it
occurs (premerger notification). 

2. The HSR Act amends Section 7 of the Clayton Act. 

a. At least one merging party must affect interstate commerce. 

b. The acquiring party must obtain at least $15 million or 15% of the assets or voting
securities of the acquired company. 

c. The premerger notification applies to

1) Corporations

2) Partnerships

3) Unincorporated associations

4) Natural persons

5) Foreign governments

3. There is a 30-day waiting period for all parties to a proposed merger (covered by HSR) after
the Department of Justice and the Federal Trade Commission have been informed of the proposed
merger. 

a. The 30-day waiting period can be extended. 

4. Failure to comply with HSR carries civil penalties of $10,000 per day. 

36.6 FEDERAL TRADE COMMISSION ACT A.  FTC Functions

B.  The FTC
C.  Little FTC Acts

A. FTC Functions.  The Federal Trade Commission (FTC) was authorized by the Federal Trade Commission
Act of 1914. 

1. The FTC's primary functions can be grouped into two categories:

a. The maintenance of economic competition

b. Consumer protection (Refer to Chapter 37.)

2. The functions of the FTC include not only investigation of possible violations of antitrust
laws but also investigations of unfair methods of competition such as

a. False or misleading advertisements

b. Inadequate labeling of products

1) EXAMPLE: Citrus Growers Cooperative processes and concentrates orange juice and
produces a product that it freezes within 5 minutes of processing.  The product,
after it is thawed and water is added, approximates fresh orange juice due to a 10%
grapefruit pulp additive.  The product trade name is "Coop's Fresh Orange Juice."
After harvest season, Cooperative retains the "freshness" of the juice for more than
6 months by its patented "Insta-freeze" process.  The FTC might order seizure of the
product if it determines that the juice should not be sold to consumers as "fresh."
Furthermore, the product will be required to be labeled to inform consumers of its
composition. 

c. Discriminatory rebates and discounts

d. Any unfair or deceptive trade practices

1) EXAMPLE: The FTC determined that it was deceptive for a corporation to solicit calls
to a 900 number by way of an advertisement in a newspaper in the employment section
without disclosing that each call would cost the caller $15.  Its determination was
upheld by a federal court. 

3. The FTC has not defined the words "unfair" and "deceptive."

a. In the 1980s, the FTC issued two policy statements addressing the meanings of unfair and
deceptive. 
 1) To justify a finding of unfairness, the injury must satisfy three tests:

a) The injury must be substantial. 

b) It must be an injury that consumers themselves could not reasonably have avoided. 

c) The injury must not be outweighed by any countervailing benefits to consumers or

competition produced by the practice. 

i) EXAMPLE: Treatment Corp.  entered into a contract with Homeowner under which
Treatment guaranteed lifetime protection against termite damage.  Homeowner
agreed to pay a fixed fee for an annual treatment.  Treatment notified
Homeowner a few years later that the fee had increased due to inflation. 
Homeowner was now to be required to pay substantially higher fees to receive no
additional countervailing benefits.  Furthermore, Homeowner could not
reasonably have avoided the increased price demanded because the agreement
expressly precluded it.  The unilateral fee increase is an unfair trade
practice. 

2) The FTC will find an act or practice to be deceptive if

a) There is a representation, omission, or practice that is likely to mislead the

consumer. 

b) The act or practice is unreasonable from the perspective of the consumer. 

c) The act or practice is material. 

i) The act or practice is material if it is likely to affect the consumer's

conduct or decision with regard to the product or service. 

B. The FTC.  With the passage of the Clayton Act, Congress simultaneously enacted the Federal Trade
Commission Act.  The Federal Trade Commission Act authorized the Federal Trade Commission (FTC). 

NOTE: The FTC Act is not an "antitrust act" for purposes of Section 4 of the Clayton Act and, thus,
does not provide a private remedy. 

1. The FTC is a bipartisan, independent administrative agency headed by five commissioners, no

more than three of whom can be of the same political party. 

2. The FTC has authority to conduct investigations relating to violations of antitrust statutes
and to make reports and recommendations to Congress regarding legislation. 

3. The FTC can promulgate rules and general statements of policy with respect to unfair or
deceptive acts or practices. 

a. The FTC has congressional authority to prosecute for any practice that it considers
anticompetitive, subject to judicial review. 

4. The three most important FTC enforcement devices are its procedures for facilitating voluntary
compliance, its issuance of trade rules and regulations, and its adjudicative proceedings. 

a. The FTC issues informal advisory opinions to assist cooperative behavior in various
industries.  It is not required to issue such opinions, and it may rescind them at its
pleasure. 

b. The FTC is authorized to issue trade regulations that address unfair or deceptive acts or
practices.  Unlike advisory opinions, trade regulations are formal written rules with the
force and effect of law. 

c. The FTC can proceed against violations via an adjudicative proceeding before an
administrative law judge (ALJ).  The ALJ's decision can be appealed to the FTC's five
commissioners, then to the federal courts of appeals, and ultimately to the U.S.  Supreme
Court. 

C. Little FTC Acts.  Individual states have enacted laws, known as Little FTC Acts, which may provide
more extensive protection and remedies to consumers for deceptive and unfair trade practices. 

1. A Little FTC Act may provide a remedy for conduct that does not satisfy the standard required
under federal law. 

a. Thus, for example, mere capacity to deceive may render a solicitation deceptive and
unlawful in the state. 

2. Protection might extend to entities other than individual consumers. 

3. Sizeable damage awards might be recoverable by private plaintiffs, e.g., treble damages