Scenario:

1

• Scenario
• A small Hungarian town is segregated by religion.
  It has only three pharmacists. One pharmacist
  is Catholic, another Protestant, and another
  Jewish. The north side of the town is
  predominantly Christian the southeast side
  Jewish, and the southwest side Protestant.
• The three pharmacists agree that each will
  refrain from advertising their products to
  customers on the others side of town.
• Every Sunday, the three pharmacists meet in the
  park and arrange to sell their products at
  identical prices.
• VIOLATION OF ANTITRUST/COMPETITON LAWS?

2

• Why do governments create competition laws?
• Concerned with
• Fears of concentrations of economic power in the
  hands of a few
• harmful effects of some forms of business
  cooperation
• misuse of monopoly power
• Simultaneous rise of regulatory agencies and
  antitrust law / government ownership
• National laws 1800s through early 1900s
• EU laws 1980s

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Overview of Antitrust/Competition Laws

• Antitrust/Competition laws place faith in the
  competitive market.
• EC Art. 81 prohibits agreements which have as
  their object or effect the prevention,
  restriction or distortion of competition within
  the common market. Also outlaws abuse of a
  dominant position in the market.
• US Sherman Act outlaws "every contract,
  combination . . . , or conspiracy, in restraint
  of trade"

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• Economic definition of monopoly vs. Legal
  definition of monopoly
• KEY market power
• Is simply having market power illegal?

5

• Market Power

BAD ACT Collusion Market share Monopoly power
in another market Etc.
Power to increase prices above competitive price
Is the power to increase the market price
sustainable? Ease of entry to market
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• Who decides what is reasonable or
  unreasonable?
• National competition authorities
• US FTC/Justice Dept ? US courts
• EU European Commn Competition Directorate
  ECJ
• Focus on harm to consumer

7

• Scenario
• A small Hungarian town is segregated by religion.
  It has only three pharmacists. One pharmacist
  is Catholic, another Protestant, and another
  Jewish. The north side of the town is
  predominantly Christian the southeast side
  Jewish, and the southwest side Protestant.
• The three pharmacists agree that each will
  refrain from advertising their products to
  customers on the others side of town.
• Every Sunday, the three pharmacists meet in the
  park and arrange to sell their products at
  identical prices.
• VIOLATION OF ANTITRUST/COMPETITON LAWS?

8

• Horizontal Market Divisions
• Any effort by a group of competitors to divide
  its market is a violation of EC Article 81 and
  the Sherman Act Section 1.
• Customer divisions
• By class (religion)
• Geographically (side of town)
• Supply divisions
• We wont sell X in competition with you, if you
  dont sell Y in competition with us.
• E.g., two hardware stores in a small town agree
  that one will not stock plumbing equipment while
  the other will not stock electrical equipment

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• Horizontal Market Divisions
• What about joint ventures between competitors?
• What about professional codes of conduct dont
  these restrict competition?
• What about franchising operations? Arent these
  geographic market divisions?
• What about OPEC production quotas?

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• Horizontal Agreements
• Price Fixing and Bid Rigging
• When competitors agree on the prices at which
  they will buy or sell, their price-fixing is a
  per se violation of EC Article 81 and 1 of the
  Sherman Act.
• Airline ticket prices / retail gasoline prices
• Sports club owners
• World steel market and the EU
• Beer distributors and credit terms
• Trade shows
• Bid-rigging public contracts

11

• Scenario
• Hotels and restaurants in the city of Malaga,
  Spain wish to attract more convention business to
  Malaga. They form the Malaga Tourism
  Association, through voluntary contributions
  from members.
• Since all food and hotels and service industries
  benefit from increased tourism in Malaga, they
  encourage all such businesses to join and
  contribute to the venture.
• They agree that members will no longer do
  business with nonmembers, in order to encourage
  maximum membership.

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Illegal Horizontal Agreements (contd)

• Refusals to Deal / Boycotts
• Concerted refusals to deal vs. individual
  refusals
• A refusal to deal violates the law if it harms
  competition.
• South Improvement Scheme
• U.S. v. Hilton Hotels

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• Scenario
• 1. Canon makes high speed office copiers.
  Service companies provide service for Canon
  copiers under Canon service contracts (sold along
  with the copier) and separately. These service
  providers use Canon parts in their work. Canon
  decides in 2006 to sell its copier parts only to
  repair service providers who work exclusively
  under Canon service contracts.
• 2. Acme Auto Accessories makes floor mats for
  BMW automobile dealers in Germany and Austria,
  and has for 23 years. In 2006, BMW includes
  floor mats in all their cars, thereby putting
  Acme Auto Accessories out of business.
• VIOLATION OF ANTITRUST LAWS?

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Illegal Competition Tying Arrangements

• Selling a product on the condition that the buyer
  also purchases a different (or tied) product.
• To determine if it is illegal, ask
• Are the two products clearly separate?
• Is the seller requiring the buyer to purchase the
  two products together?
• Does the seller have significant power in the
  market for the tying product? Standard Oil case.
• Is the seller shutting out a significant part of
  the market for the tied product?

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Illegal Competition Predatory Pricing

• Predatory pricing occurs when a company lowers
  its prices below cost to drive competitors out of
  business.
• The Walmart problem

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Illegal Competition Predatory Pricing

• To prove predatory pricing, show
• The defendant is selling its products below cost.
• The defendant intends that the plaintiff goes out
  of business,
• If the plaintiff does go out of business, the
  defendant will be able to earn sufficient profits
  to recoup its prior losses.
• Bad intent is not enough bad intent fatal
  damage to competitor may not be enough
• Why have such a test for predatory pricing?

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Illegal Vertical Arrangements Exclusive Dealing

• Contract in which buyer agrees not to buy from
  sellers competitors
• Usually between manufacturer/supplier and
  retailer
• Illegal if the effect is to substantially lessen
  competition
• Toys R Us and Mattel

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• Scenario
• .
• Office Depot sells office supply equipment
  through its retail stores, as does Office Max.
  Office Depot has a 30 market share and Office
  Max a 30 market share.
• Will regulators approve this merger?

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Mergers and Joint Ventures

• Horizontal Mergers
• A horizontal merger involves companies that
  compete in the same market.
• FTC and European Commission halt/approve mergers,
  based on likely impact on competition
• HHI as measure of market concentration too much
  concentration creates rebuttable presumption of
  violation

Herfindahl-Hirschman Index Calculator sum of
the squares of the market shares of firms in
industry. Threshold inquiry.
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Mergers and Joint Ventures

• Horizontal Mergers
• FTC and European Commission halt/approve mergers,
  based on likely impact on competition
• HHI as measure of market concentration too much
  concentration creates rebuttable presumption of
  violation
• What is market?
• Product market
• Geographic market

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• Office Depot/Office Max Merger

Office Depot Office Max Other office supply
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• Hewlett-Packard / Compaq merger

Product Market? Geographic Market?
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• Hewlett-Packard / Compaq merger

Product Market? Geographic Market?
ALCOA case
Access Devices?
HHI
Laptops PCs workstations
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• Hewlett-Packard / Compaq merger

• Product Market?
• Market shares?
• Access devices?
• Entry level servers?
• Geographic Market? EEA

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Monopoly History of Antitrust John D.
Rockefeller believed that monopoly was beneficial
because it protected members of an industry from
destructive competition. What does that
destructive competition mean? Destructive to
whom? Who was hurt by Standard Oils business
practices? Do you agree or disagree with
Rockefellers view?
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Monopolization

• Under 2 of the Sherman Act, it is illegal to
  monopolize or attempt to monopolize.
• EC Art. 82 outlaws abuse of a dominant
  position in the market
• To tell if a monopoly is illegal, ask
• What is the market?
• Does the company control the market?
• No matter what your market shares, you do not
  have a monopoly unless you can exclude
  competitors or control prices.

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Monopolization (contd)

• How did the monopolist acquire or maintain
  control?
• Possessing a monopoly used to be illegal
  probably not any more
• using bad acts to acquire or maintain one is.
• What kind of bad acts? Anticompetitive behavior
• Other antitrust violations
• Predatory pricing
• Tying arrangements
• Exclusive dealing/refusals to deal
• KEY did/will behavior diminish competition

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Microsoft

• Does defendant have monopoly power?
• Market share 70 rule of thumb
• What market?
• Did defendant misuse it?
• Microsoft I Caldera v. Microsoft
• Microsoft II The U.S. case - settled
• Microsoft III The European case

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• MICROSOFT ARGUMENT
• Our monopoly cannot hurt consumers for two
  reasons
• Innovation in the computer industry is so fast
  that any monopoly is inherently unstable. If we
  are inefficient, we will lose our monopoly.
• Our industry is characterized by network
  effects i.e., the value of the product
  increases as it is more widely used.
• These two characteristics mean that consumers
  benefit (and costs of production decrease) from a
  monopoly, AND that the monopoly nevertheless
  must be efficient (keep costs down) to survive.

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Microsoft II US

• Microsoft and Netscape Meeting of Gates and
  Barksdale threats to Apple
• Microsoft and Sun Microsystems Java agreement
• Microsoft and Intel Intels initial venture
  into software development threatened delayed
  licensing and witholding information
• Microsoft and Apple Quicktime joint venture
  proposal
• Microsoft and IBM competition from OS2 and
  office suite delayed licensing and witholding
  information

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Microsoft III E.U.

• Bundling Windows Media Player into Windows
• Why do this?
• 2. Failing to share Windows information with
  Server manufacturers
• Why do this?

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