The Basics of Antitrust Law


Hornbooks that teach the fundamental principals of antitrust law consume hundreds of pages. Lacking the luxury to devote innumerable paragraphs to explain basic antitrust law, I can only provide a brief overview and beg the readers indulgence with a book review, rather than a tome.

Antitrust law can be defined in a single sentence. Antitrust law is the law that protects competition in order to maximize consumer welfare. But that sentence is packed with complex meaning. For example, what does it mean to say that the antitrust laws protect competition? It is perhaps best to define the protection of competition with drawing a distinction between the protection of competition and the protection of competitors. It is a fundamental tenet of antitrust law that protection of competition does not equate with protection of competitors. The competitive process is often brutal good competitors dream of trouncing their rivals and, if they do so by introducing a better product or service or by achieving lower production costs and prices than their rivals offer or achieve, those rivals will be hurt severely. The rivals may find themselves driven from the marketplace because consumers do not want to buy their inferior or more expensive products. At the same time, however, consumers will benefit because of lower prices or better products. If antitrust law were to protect competitors, it would forbid a company from hurting its rivals by offering better or cheaper products than its competition would offer. But doing so would not maximize consumer welfare. The distinction between protecting competition and protecting competitors can perhaps be best understood by resorting to a professional sports analogy since sports involves competition. No one would complain if a professional athlete (or team of athletes) worked harder and longer than his (or its) rivals yet those efforts to be superior would hurt those rivals, who might be defeated or even humiliated on the playing field. A rule protecting competitors, as opposed to competition, might limit how hard or long an athlete could work and such a rule would hurt consumers (those who view the sport) by depriving them of the opportunity to see well-trained athletes . A rule protecting competition, however, would not hurt the quality of the athletic contest for example, a rule prohibiting throwing games or outlawing alterations to standardized sports equipment (e.g., jet- powered running shoes, corked baseball bats, etc.). Like sporting rules, antitrust laws permit companies to compete , and thereby inflict wounds on their rivals, and in antitrust law, hurting a competitor is permissible as long as consumers benefit from the competitive process, typically through lower prices and/or greater quantity or quality of output.

It is also important to define the word competition. In simple terms, competition is the process of making sales at the expense of others; such sales can usually be won only by providing cheaper or better quality goods or providing superior service. Antitrust law is concerned with preserving competition that is significant. In a broad sense, every product that consumers buy competes with every other item on which consumers can spend money; no one has unlimited sources of funds and every dollar spent on one product is money that cannot be spent on other products. Probably everyone has encountered a situation where they saw something in a store they would like to buy perhaps an expensive clothing item but they decided not to purchase the item because they needed to spend the money on something else they needed more perhaps food, or housing, or life insurance. In that broad sense, expensive items of clothing could compete with food or life insurance, but that competition is not significant enough to be protected by antitrust law; the products are too diverse in nature. One customer who foregoes purchasing an expensive suit or dress may use the money saved to buy life insurance while another might forego purchasing the same clothing item in order to purchase an entirely different item, such as food. In general, significant competition between two products exists if the sellers of one product perhaps a brand of mid-size automobiles will adjust their prices in response to changes in the other product, perhaps another brand of midsized automobiles. It may seem intuitive that one brand of mid-size automobiles competes significantly with another until the concept of geography is introduced. For example, does a dealer selling a brand of mid- size cars in San Diego compete with a dealer selling the same brand of automobiles in Boston? In general, it is often dangerous to rely on intuition to resolve that kind of question. Antitrust law typically resorts to some sophisticated quantitative economic analysis to determine whether the pricing of one product responds to the pricing of other products and it is not possible to describe those analytical methods here.

Even the definition of the word consumer is subtle. In popular terminology, a consumer is an individual, as opposed to a company, who spends money. In antitrust terminology, the meaning is closer to the literal meaning one who consumes (in the sense of using up, as opposed to ingesting). An individual who buys a carbonated soft drink for drinking is a consumer of soft drinks. A soft drink company, however, is also a consumer of sweeteners, flavorings, carbon dioxide, aluminum (for cans), and plastic (for bottles).

Broadly speaking, in protecting competition, the antitrust laws govern two types of conduct: first, they regulate joint conduct, especially where two competitors are acting jointly, through some broad prohibitions; and, second, they regulate unilateral conduct in a narrow set of circumstances where the actor is a monopolist or near monopolist. In each case, the goal is to protect consumers by keeping prices low and output high.

With respect to joint conduct, the antitrust laws regulate conduct by competitors in terms of agreements with one another, for example, agreements to fix prices or allocate customers. Other joint conduct involving competitors addressed by the antitrust laws includes mergers and acquisitions (including joint ventures and strategic alliances) and boycotts (e.g., where competitors jointly agree they will refuse to deal with someone for example, all the software companies agreeing they will not sell to any company who has been caught illegally copying software). Joint conduct involving a seller and a buyer is also regulated by the antitrust laws but with far fewer constraints than those that exist for joint conduct by competitors. For example, it is illegal for a seller to impose minimum resale prices on his customers; in certain circumstances, imposition by a seller of a requirement that the its customer resell the product only in a specific territory or class or trade can be illegal, as can a requirement that the customer refrain from buying from the sellers competitors.

The monopolization provisions of the antitrust laws apply to unilateral conduct by dominant sellers (companies that are monopolists or near monopolists). These provisions regulate the actions that dominant sellers can take if those actions are going to give them monopoly power, or increase their monopoly power, but importantly do not apply to prohibit the possession of monopoly power not obtained by improper means. A key test of legality is whether those acts improve consumer welfare. Antitrust law will not condemn acts that lead to the acquisition or enhancement of monopoly power through offering better or cheaper products: indeed, if a company made products that were far superior to what anyone else could make, one would expect that all consumers would want to buy those products. But if a company achieved or enhanced its monopoly position by burning down the plants of its competitors or by purchasing the entire supply of a key input when it could not possibly use all that it purchased, such conduct would be condemned as acts of monopolization under the antitrust laws.

There is a fine line between lawful competition on the merits and improper exclusionary practices, and often courts get confused about what is legitimate competition and what is not. Part of the problem is terminology especially when some older decisions articulate the test as one of fairness. The antitrust laws do not and should not depend on some vague equitable notion of whether conduct seems fair or not. Rather, the critical issue is whether the conduct will enhance consumer welfare. The answer often depends on the particular facts of each case. For example, you could have a situation in which a company has monopoly power over one product -- every customer has to go to that company because it is the only source of supply. That company makes another product over which it does not have any significant power, but it says to all of its customers, If you want our product which you can only buy from us, you also have to buy this other product we make, where we are one of several suppliers. And that practice could conceivably give them a monopoly position over that second product. If this arrangement actually threatens to create monopoly power over the second product, in most cases the arrangement will be illegal. But a slight twist in these facts can change the outcome. Suppose a gasoline company has developed a patented gas pump that it puts its trademark on. Because it has developed the gas pump and wants it to be used only at its stations , it tells the gas station owner that, if he wants to use the gas pump at his station, he has to buy his gas from that company. The patent may or may not give him a monopoly -- it may make him the sole source of that special gas pump which may give him monopoly power. In that case the company has a monopoly over the gas pump but faces competition in gasoline because there are other suppliers. Leveraging the gas pump monopoly by forcing users of the pump to purchase the companys gasoline could lead to a monopoly in the gasoline market. If so, the general rule would suggest that the company has engaged in unlawful monopolization. But under these facts, the company has an interest in seeing that only its gasoline is dispensed from the pump that has its trademarked name on it. Why? Because if the gas station were to purchase gasoline from another source and that gasoline was defective -- full of impurities because it has been lying around in the bottom of a tank somewhere -- when the gas station buys it, and it ruins the engines of all the cars into which it has pumped, the reputation of the company with the trademarked gas pump will be ruined. All of the customers who bought the bad gasoline will assume it came from the company because its name was on that pump and they thought they were buying gasoline made by that company. There are benefits to consumers being able to identify a product with a trade name (imagine how a consumer would feel it he or she entered a restaurant called MacDonalds and found that no hamburgers were sold by the restaurant). So there is an example where you could justify the conduct as enhancing consumer welfare: Under these facts, the monopolists requirement that you buy his gasoline to sell through his patented gas pump is likely to be a permissible practice.

Antitrust law has other problems with terminology. The very definition of monopoly power is often a source of confusion. Older cases take the position that market power is the power to exclude competition or raise prices, while monopoly power is the power to both exclude competition and raise prices. This has led to perverse results: for example, someone who possesses a patent has the power to exclude anyone from practicing the patented invention which means that the patent holder also has some power to raise prices. Under the older formulations of monopoly power, a patent holder would always possess monopoly power. But this is nonsense just ask most patent holders whether they are monopolists and they will likely inform you that their patented invention competes with many other products. Indeed, there are dozens of patents on common every day products like car parts and light bulbs yet no rational person would find that there are dozens of light bulb or car part monopolists. The courts have come around to the position that the grant of a patent does not convey monopoly power. Yet, the courts have been slow to revise the definition of monopoly power to make sense. Compounding this problem is that in the field of economics, monopoly power and market power both connote the power to raise price above a competitive level. Under that standard, the number three car company (as well as the number one and two car companies) would be a monopolist -- it has some loyal customers who will buy its products even if they are priced a little higher than competing automobiles. Fortunately, courts have rejected the notion that there can be more than one monopolist in the market after all, the word monopolist derives from the Greek word for one in the market. But even many of these enlightened courts have not come around to revising the definition of monopoly power. I think a truly enlightened court would define market power as the power to raise price above a competitive level and monopoly power as the power to set price without concern that others in the relevant market could expand output sufficiently to force a reduction in the price it sets.

Certain industries are more prone to antitrust problems. In terms of antitrust exposure for collusive activities, industries that are characterized by commodity products are very prone to antitrust problems. Industries that have somewhat differentiated products but who have a lot of foreign competitors, particularly competitors in jurisdictions that do not have antitrust regimes themselves, are often prone to antitrust risk. I think there are certain industries in the United States that are just not very popular, and plaintiffs will often select them not so much because there is a real antitrust problem in the industry but because jurors are not going to be very sympathetic to competitors in those industries. In that category I would probably include computers and computer software, pharmaceuticals , and perhaps automobiles. With respect to antitrust exposure unrelated to collusion, I think it is very hard to generalize that any particular industry is more prone than another to antitrust problems.




Inside the Minds Stuff - Inside the Minds. Winning Antitrust Strategies
Inside the Minds Stuff - Inside the Minds. Winning Antitrust Strategies
ISBN: N/A
EAN: N/A
Year: 2004
Pages: 102

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