Although English Common Law Dealt with Some of the Antitrust Matters Long Time Ago, And

Three parts; First, Economics analysis: Antitrust law is also called antimonopoly law. The basic question here is that what is monopoly? Why are there laws against monopoly? These have long been the interests of economists. I begin the lecture from economics analyze. Second, antitrust law itself. What kind of laws have been enacted in the United State? What are the basic rules behind them? What paradox exists in the enforcement of those laws? Third, Three antitrust cases: ***. They can be looked as some milestones in the history of antitrust law. We will discuss why they are charged? What is opinion of the Chief Justice toward them? What is the challenge we can see from these cases.

I. Difference

No clear cut criteria that can be used to judge the monopoly; it is up to subjective evaluation.

Issues of social justice and equity: monopoly may grant a firm’s owners more political power e.g. if allowing a firm to dominate an industry vital to national security.

II. Economics

We talk about how economist analyze the monopoly first, though the legislation in this field was in fact far preceded the economics theory. As we know, the Sherman Act was passed in 1890; but until 1930s, Chamberlin’s Theory of Monopolistic Competition and Robinson’s The Economics of Imperfect Competition were published; and antitrust economics is mainly a post-World War II development. Basic idea of the incentive of monopoly in Economics: In a C. Market, the competition will drive down the price to the zero profit level. But a monopolistic firm will seek to maximize profits by producing at MC=MR.

Three situation will justify the existence of monopoly.

IRTS: This term focus on the production character of an industry. We keep both the output and input proportions λ fixed; if f(λx)> λf(x)

1 for any λ>1, then we say that IRTS prevail. In this case, the average costs of production will fall over a long range of production levels; as a result the very large firms have cost advantages and they can drive out the other firms from the market because they can produce more efficiently.

A typical example is as shown in the figure: units of output Y can be produced at a constant cost of input X except that in order to produce at all, a fixed setup cost is required.—but the existence of the setup cost will lead to the decreasing AC: the more you produce, the more efficient you can achieve. Setup cost: e.g. water transfer pipe—water company gain natural monopoly power.

Economies to scale: it is cheaper for firms to produce at higher output levels. This definition focuses on economies of a technical character. It is sometimes extended to cover business activities, such as marketing, financing, training and R&D, other than production. When discussing it, we usually keep the output constant, while the input proportions are adjusted in order to minimize expenditures.

Pure competition cannot prevail under the presence of IRTS or economies to scale. And, the leading economist in the beginning of the last century believed that the development of large scale enterprise represented a powerful historical force. As a result, they expressed the skepticism of the effectiveness of the laws, even the opposition to the antitrust policy.

Horizontal Mergers-- When the takeover comprises firms on a single level of the production-distribution system, we call it HM. E.g. the merger between Daimler-Benz and Chrysler. While conglomerate mergers bring together two or more enterprises engaged in unrelated lines of business, in terms of either activities or products. They calculate the premerger and postmerger concentration by using Herfindahl-Hirschman Index(HHI—summing the squares of the individual market shares of all the participants)

Cartels: when competitors seek to enter secret agreements to either fix prices or divide markets, they often form cartels. The

2 supreme court once declared in some cases that all price-fixing agreements and cutting up the market are per se illegal.

Price discri. : charge different prices to different purchasers. To do so, the firm must have some knowledge of consumers’ willingness to pay and to prevent resales.

A vertically integrated firm controls a number of successive stages of the production-delivery process. The vertical arrangements of firms can be explained not only by the profit maximization, but also by transaction cost minimization. So, VI can help firm achieve efficiency while making it increasingly difficult for other firms to enter the industry.

Ad. also has been pointed to as a method to increase monopoly power, mainly by establishing barriers to entry into the industry. It is argued that ad. makes possible effective product differentiation and prevents potential competitors from entering the industry. Some economists have tried to find the relationship between ad. and profits; but different researchers achieved different results. Generally we cannot make a conclusion that there exists a strong positive relationship between them.

A tie-in arrangement provides that the buyer can purchase one product from the seller only if he agrees to purchase another good. There are too kinds of tie-in sales: one is bundling/package tie-in sale, e.g. M.S.case. (where two or more products are sold only in fixed proportions. Another is requirements tie-in sale: where customers who purchase one product from a firm are required to make all their purchases of another product from that firm. For example: Polaroid is the only firm that can sell film to fit the cameras it manufactures.

There exist some justifications for Tie-in sales in theory: 1)Efficiency: Tie-in sales may be used to increase efficiency. E.g, laced shoes are typically sold with laces; so that you need not spend more time to find laces that match your new shoes. And an automobile can be regarded as a package including an engine, tires, and a car body. Obviously, most consumers desire assembled products, they come tied together.

3 2) It may assure quality: e.g. Kodak claimed that it tied the development of its film to its film sales because it did not believe that independent developers could develop Kodak film as skillfully as could Kodak. Otherwise, the consumer would be unable to distinguish whether the film was bad or the developer was bad if and independent developer made a mistake and produced poor pictures.

In the US, various statutes have injected govt. into a situation where its activities clearly interfere with the competitive behavior of markets. Resale price maintenance exists when manufacturers set a price floor below which retailers cannot resell their products. These agreements may serve to enhance the monopoly power of the participants. E.g., the retailers may push for a resale price floor to enforce a horizontal price fixing arrangement; similar pricing-fixing conspiracy can also be realized among manufacturers. But under the Mcguire-Keough Act passed in 1952, resale-price-maintenance contracts in interstate commerce are permissible.

As we know, the states have long exercised their power to provide for occupational licensing of law and medicine. During the latter part of the 1890s, states began to extend licensing control over more and more occupations, including physicians, psychologists, attorneys, dentists, real estate brokers, accountants, and plumbers. Occupational licensing is to limit the supply of trained labor to the market so as to increase the income of the current practitioners within the industry. On the other hand, some researchers show that it also increases the quality of services and its uniformity, e.g., dentistry. But it is not always true. For, in the Erron case, CPA (certified public accountants) have been found that they offered false audit results to the company. Why is there such a different effect while both are licensed occupation? For dentists, they need to offer the service to the customers face by face; but CPA are usually working with the managers of a company though they are supposed to work for the stock holder of that company. We can look the stock holder as a principle while the managers as agents. There are asymmetric information problems between the principles and the agents; and there is much more margin for corruption between the CPA and the managers. They are likely to collude if they get a chance or are willing to take the risks.

I. Law Although English common law dealt with some of the antitrust matters long before the united states, and many countries have adopted antitrust statutes, USA was the first to enact national legislation on monopolies and monopolization.

5 Agricultural cooperatives do not come under these acts. Most likely, Congress was persuaded that a host of small farmers exposed to the vagaries of nature and the often not insig. monopsony power of those who purchase from farmers deserve protection. (Monopsony: a firm that buys from many sellers is a monopsony, which results in a lower price than a competitive market would set and that has undesirable welfare implications)

Labor unions also are exempted from prosecution under the antitrust acts. This was not always the case. Initially, the Sherman act was applied to unions. However, matters changed in the early 1930s – I guess that is because at that time, socialism was showing their influence almost in every country in this planet. Anyway, Norris-La Guardia Act virtually eliminated the labor injunction and the Wagner act of 1935 in fact encouraged the formation of labor unions.

What is the similarity between the two groups? Both the union and the agricultural cooperatives are organized to protect themselves from monopsony power. Each farmer is a very small production entity/unit. In the Agri. products markets, their individual bargaining power is incommensurately weaker than the buyers. Similarly, each worker, if not organized, has no influence on the employer’s decision making on their salary. Unfairness

When economic analysis does not reveal that a practice is always harmful by nature, as are pure cartel arrangements, the court must pass on to the next two tests. For example, White thought mergers not inherently illegal. What additional facts, then, must be examined to determine a merger’s legal status? Both the bad influences on market price caused by dramatic change of market share after a merger and the proof of an evident purpose or an actual intent to gain or maintain monopoly would render the merger unlawful.

II. Case

Case I. First Weakness of White’s opinion: We can see that White attempted to preserve efficiency by distinguishing it from unnatural economic

6 conduct without giving us any general guide to what behavior was abnormal/unnatural. In fact such a distinction was potentially harmful if courts and legislators were unable to distinguish correctly between efficiency and other means of exclusion.

Whenever a competitor competes he intends to take business away from rivals, which involves excluding them. If he were completely successful in a market, he would thereby exclude them completely, and he would have intended to do so. So, some test other than an intent to exclude must be framed in order to distinguish exclusion through efficiency from exclusion by means unrelated to efficiency.

 Also, White (chief justice) built into the Sherman Act a principle of evolution controlled by the progress of economic understanding. Thus, SA becomes not a set of specific rules, but a direction to enforce the law’s rationale. Precedent is not ultimately controlling; economic argument is.

Case II:

Courts’ logic: Actual potential competition refers only to those firms that will enter the market even if price does not rise.

Perceived potential competition refers only to those firms that will enter the market if and only if price rise. So, it is perceived potential competition that can discourage firms from raising their prices. The more perceived potential entrants there is, the more pressure of keeping the price low within the industry and the less monopoly profits are available to the present firms.

Competitive advantage: P&G’s great capital resources could supplement Clorox’s limited advertising budget; so the merged company can take advantage of more advertising and promotion so that it can hold monopoly position in the industry.

When efficiency is not irrelevant and not a “barrier to entry”, it is bad anyway because Congress wanted to protect competition by protecting small business from the increased efficiency of rivals.

7 So this case fully reflected the conflict between the populist view and the efficiency view.

Paradox: If the merger restricts output, it is illegal because it hurts consumers, even though the higher prices would help small business. But, if the merger creates efficiency, it is also illegal because it hurts small businesses, even though the lower prices would help consumers.

It is intelligible social policy only in the sense that one can understand the separate words.

Case III.

One set of arrangements was with online and Internet service providers, such as American online and AT&T Worldnet, in which MS agreed to include a feature in its operating system that made it easy for a user to establish an account with a service provider, but only if the service provider agreed to deny most or all of its subscribers a choice of Internet browser.

Second set of agreements was made with personal computer manufactures, under which the manufactures could neither remove IE icon nor feature a rival browser more prominently than IE.

Finally, in the third set of agreements, MS offered Internet content providers preferential, no-cost placement on the IE “channel bar” in return for their agreement to promote IE as their browser of choice, not to accept compensation for featuring their content on Netscape’s brower.

Remedies:

On April 3, 2000, Judge Jackson found MS guilty of violating the Sherman Act. The government and MS then proposed remedies. Both parties proposed conduct remedies that would constrain certain aspects of MS’s behavior, such as the use of exclusive contracts and prohibitions on

8 removing the IE icon. The government proposed more extensive conduct remedies than did MS, as well as a structural divestiture of the company into two parts.

Structural remedies typically required less regulatory oversight. But it certainly entail substantial direct costs of reorganization. Besides, there is another concern w.r.t. pricing, i.e., “double marginalization problem”. When the MS analyze the effects of an increase in the price of the OS, it will take foregone application program sales into account. But if a separate firm sells the application, the OS monopolist will not count lost application sales as a cost and thus has less incentive to restrain price.

The law accepted the idea that there were such practices but found no general way of identifying them theoretically. The concept of incipiency added an energizing element with unforeseen consequences and empowered the courts to identify practices that were believed inherently exclusionary, regardless of underlying intent, even though the party employing them had no monopoly power.