Transcript Slide 1

Legal Framework of
U.S. Antitrust Law
Douglas H. Ginsburg
Moscow, July 8, 2010
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Introduction
• The purpose of antitrust (competition) law
is to increase consumer welfare by
making sure businesses compete
• Law prohibits certain
– Agreements between businesses
– Activities by a single business, and
– Mergers
If they make competition less likely
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Economic Background
• Perfectly competitive market:
– Price of every good is the cost to
manufacture the last unit (marginal cost)
– Every person willing to pay that price is able
to buy it
Hovenkamp, Federal Antitrust Policy § 1.1a
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Economic Background
Major harm of a monopoly =
deadweight loss
Deadweight
Loss
Pmonopoly
Pcompetitive
Marginal cost
Loss to people who would buy
a product at the competitive
price but cannot because the
price has been raised above
marginal cost
Demand
Qfixed
Qcompetitive
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Economic Background
• Two types of activities can alter
competition
– Coordinated activity of two or more firms
• By contract
• By tacit agreement
– Activity of a single firm
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Coordinated Activity: Horizontal
• Coordinated activity (agreements) between firms at
same level in chain of distribution, for example, retail
• Called horizontal conduct and unlawful if:
–
–
–
–
Fixing prices or quantity
Dividing a market, for example, by territory or customer
Mergers
Trade associations (legitimate but can violate laws if used to
monopolize)
– Standard setting (legitimate but can violate laws if used to
monopolize)
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Coordinated Activity: Vertical
• Coordinated activity (agreements) between firms at
different levels in chain of distribution
• Called vertical conduct. For example:
– Retail price maintenance
– Coordinating distribution (e.g., diving the market
geographically)
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Single-Firm Activity
• Some conduct by a single firm demands
scrutiny, even absent coordination with
other firms
– Predatory pricing
– Tying
– Exclusive dealing
– Refusals to deal
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Market power
• Market power is a firm’s ability to increase
profits by
– Reducing output and
– Pricing above marginal cost.
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Market power
• Market power is a firm’s ability to increase
profits by
– Reducing output and
– Pricing above marginal cost.
Deadweight
Loss
Pmonopoly
Pcompetitive
Marginal cost
Demand
Qfixed
Qcompetitive
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Defining the market
• A relevant market is the smallest grouping of products
for which a monopolist could profitably reduce output
and increase price substantially above marginal cost.
• A grouping of sales is not a relevant market unless both
the elasticity of demand and the elasticity of supply are
sufficiently low. This is simply another way of saying that
(1) customers must not be able to find adequate substitutes easily
in response to the price increase; and
(2) other firms must not be able to enter the market so as to
compete away sales by asking a lower price.
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Market definition example
Ford cars
American passenger cars
All passenger cars
All motor vehicles (including motor bikes, etc.)
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Market definition example
Ford cars
Imagine Ford increases the price of its cars by
5%. Many customers would turn to other
American brands, e.g., Chevrolet. As a result,
the price increase would probably not be
profitable for Ford, so this market is too
narrow to be the relevant market.
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Market definition example
American cars
Imagine a monopolist increases the price of
all American cars by 5%. Many customers
would turn to non-American, e.g.,
Japanese, cars so this is probably too
narrow of a market as well.
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Market definition example
Passenger cars
Imagine a monopolist increases the price of
all passenger cars, from all countries, by
5%. Few consumers would turn to motor
bikes and entry into car making is difficult
and would take a long time; therefore the
monopolist probably could profitably sustain
the price increase, and “passenger cars” is
the relevant market.
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Market definition example
All motor vehicles
Imagine a monopolist increases the price of
all motor vehicles (including motor bikes) by
5%. The monopolist could profitably sustain
the price increase. The relevant market,
however, is the smallest such grouping.
Therefore the relevant market is still
“passenger cars” rather than “all motor
vehicles” because “passenger cars” is a
smaller group.
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Defining the market
Market definition is based upon evidence:
(1) “that buyers have shifted or have considered shifting
purchases between products in response to relative changes in
price or other competitive variables;
(2) “that sellers base business decisions on the prospect of
buyer substitution between products in response to relative
changes in price or other competitive variables;
(3) about “the influence of downstream competition faced by
buyers in their output markets; and
(4) about “the timing and costs of switching products.” Merger
Guidelines § 1.11
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False precision & administrability
•
Defining the market assumes knowledge of
consumers’ responses to changes in price.
This type of data is rarely available directly, so
economists create models to predict consumer
responses.
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False precision & administrability
•
•
These economic models report detailed results but
the results may not be as precise as they appear
because the models must rely upon uncertain
assumptions. For example, many models rely upon
estimations of a firm’s marginal cost. Marginal cost,
however, is an economic construct that is not reflected
in firms’ accounting records.
Parties may challenge the computation of marginal
cost and small differences in the estimates can have
tremendous consequences when multiplied over
millions of units.
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False precision & administrability
•
The judge faces a challenge when
determining the legitimacy of the models and
the underlying assumptions.
–
–
It is impractical for judges to become economic
experts.
But a judge may demand that evidence be
expressed in terms an intelligent non-economist can
understand and that technical evidence be
explained in a way that makes it accessible.
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Mergers
• Mergers are reviewed by competition agencies in order
to avoid the creation of monopolies and the
aggregation of market power short of monopoly.
• Requires some way to measure market power
– U.S. previously used concentration ratios, that is, percentage
of sales by top 4 or top 8 firms in the relevant market.
– Now we use HHI, an index that adds together the squared
market share (percentages) for each company in the relevant
market.
– These measurements are just proxies. They indicate when a
more thorough investigation may be worthwhile.
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Mergers
• Most mergers are completely innocuous but
some deserve scrutiny and a few should be
rejected.
• In the US, UK, EU, and other jurisdictions,
Merger Guidelines:
– Enhances predictability of law and therefore
– Helps companies in planning transactions
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Mergers
• The entire case often turns on defining
the relevant market.
• Example: XM/Sirius satellite radio merger
(2008)
– If the market is “all radio service,” then
merger is no problem because the industry
is not concentrated.
– If the market is “satellite radio service” then
the merger would create a monopoly.
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Mergers
• Examples
– 3 to 2: Baby food merger blocked (2000)
1.
2.
3.
•
•
Gerber (73%)
Beech Nut (13%)
Proposed merger
Natural Goodness (11%)
Proponents argued the merger would create gains in
efficiency
Agency blocked the merger because it expected prices to
rise
– 3 to 2: Citicorp buys Quotron (1986)
•
Acquired firm had not invested in next generation
technology and therefore had no future as an effective
rival .
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Enforcement
• Courts review the actions of the antitrust
enforcement agencies.
– Civil cases: enforcement agency may issue
order to the company but the company may
appeal to a court.
– Criminal cases: enforcement agency must
go to court and seek judgment of violation
and penalty
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Penalties
Individuals
Civil
Criminal
Money
damages
Fines, prison
Corporations Money
damages
Fines
• Criminal penalties reserved for unambiguously anticompetitive
conduct, such as price fixing by competitors.
• Private parties may sue for money damages
– Consumers: overcharges by price fixing, market division, etc.
– Competitors: damages and injunctions against attempts to
monopolize and abuse of market power (“abuse of dominance”)
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