QUESTION TYPE 2: ISSUE SPOTTER



QUESTION TYPE 2: ISSUE SPOTTER

2A. As of 1990, there are five major manufacturers of legal textbooks. They are listed here with their 1989-90 market shares:

Little, Brown 34%

West 26%

Foundation Press 19%

Matthew Bender 11%

Michie 7%

Foundation Press and Little, Brown also manufacture textbooks in other fields. They sell 4% and 3% respectively of all textbooks sold in the U.S. None of the other legal text manufacturers sell more than 1/2 of 1% of American textbooks. None of the five sells more than 1% of all hardcover books.

In the summer of 1990, West decides to purchase the legal textbook division of Foundation Press. It files the appropriate paperwork with the Department of Justice. The government chooses not to challenge the transaction, which becomes effective in August.

Because of the size of its new operation, West is able to reduce its cost per text to approximately $27. While Little, Brown has a comparable per text cost, the smaller companies spend about $35 on average to produce legal texts. Each company prices its texts at an average of about $45.

In December, 1990, a marketing manager at West circulated the following memo to management:

The market shares of Michie and Matthew Bender are vulnerable. We can increase our share at their expense by playing hardball. I suggest the following four-point plan:

1) Lower prices to approximately $38 in subjects like Torts and Property where we compete with the smaller companies. Raise prices slightly in subjects where we are alone or only compete with Little, Brown.

2) Target Michie & Matthew Bender popular authors; see if we can convince them (without illegally tampering with existing contracts) to publish with us.

3) Lobby the state and federal government in favor of changes in complex statutes. We are in a better position than the smaller companies to do revisions of casebooks and statutory supplements.

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4) Do a big advertising push to law professors extolling the virtues of our lower prices, our (hopefully) new authors, and our up-to-date materials.

West adopted the plan for the 1991-92 school year. During the year, West succeeded in luring 3 popular authors away from Michie. In addition, Congress enacted several statutory changes for which West had lobbied, and West immediately published and sold appropriate statutory materials. Meanwhile, Little, Brown chose to adopt the same pricing policy as West (lowering prices where it competed with Michie and Matthew Bender; raising prices where it did not).

The percents of legal textbooks sold in 1991-92 were as follows:

West-Foundation 50%

Little, Brown 36%

Matthew Bender 8%

Michie 4%

Identify and analyze the violations of the antitrust laws that arguably arise from this scenario and briefly discuss who might have standing to sue.

2B. Commercial passenger airline transportation is handled within the US by a few major carriers that operate nationwide and several small carriers that operate only in one state or region of the country. The industry has high fixed costs. The cost of aircraft and related servicing equipment and fixed personnel and management costs make up a much greater percent of the airlines' costs than do the fuel and per passenger costs associated with each flight. However, an airline must have quite a few planes to compete success-fully even on just a few routes. On the other hand, once an airline is operating, it can easily shift its planes and personnel around to serve new routes or to provide expanded service for current ones. The main cost in entering a new city is renting gate and hangar space at the airport.

One of the major "byproducts" of the airline industry is the computerized reservation system (CRS). A CRS provides travel agents with information regarding flight times and fares for all airlines and allows them to book tickets online. Four of the major airlines, Divided, National, Gamma, and Southeast, operate CRS's by compiling relevant information, inputting it on to a computer system, and leasing terminals and software to travel agents. Almost all airline bookings currently take place through CRS's.

Early in the development of CRS's, the airlines that operated them used them to gain a competitive edge by displaying their own flights first when travel agents requested information. After a federal investigation, regulations were issued limiting the ability of the carriers to discriminate to their own advantage on CRS's.

In the past few years, the American domestic passenger air transport market has undergone substantial upheaval. Several of the leading players have disappeared via bankruptcy and merger, and others are in severe financial difficulties. By the beginning of 1991, the industry was dominated by two major airlines, Divided and National. However, some individual routes were dominated by other companies. The chart on the last page lists early 1991 market shares of the key players nationwide and on several key routes.

Early in 1991, the management of Trans-America Airlines (TAA) announced that to avoid bankruptcy, it wished to sell its planes and its rights to gate space at US airports. Gamma Airlines agreed to buy the TAA assets. After reviewing the parties' Hart-Scott-Rodino filings, the federal government chose not to challenge the asset sale. Shortly afterward, TAA sold its remaining assets and dissolved.

In the two years following the merger, prices industry-wide stayed about the same on average, but there were some routes that saw changes. Prices for round-trip flights from New York to Los Angeles, for example, dropped from an average of $358 round trip in early 1991 to $298 by 1993. On the other hand, round-trip fares from Atlanta to Los Angeles which had averaged $366 in 1991 rose to about $408 by 1993. The changes in market share over the same period are laid out on the chart on the last page.

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During these same two years, a small competitor, the Grump Shuttle, made a concerted effort to expand its presence on the New York to Chicago route. By using smaller planes, more flights and reduced-price fares, Grump more than doubled its share of passenger miles on the route. The total number of flights on the route for all airlines increased 17% and the average round-trip fare fell from $259 to $198 between 1991 and 1993.

Grump's frequent schedule and fare changes made it a constant problem for CRS's, which had to input new data almost daily. As a result, Divided and Gamma independently notified Grump that they would stop including it on their CRS's unless its operations "stabilized." After several months with no change, in mid-1992 Divided announced that it would no longer carry Grump flights on its CRS. Within days of the public announcement, the other 3 CRS's dropped Grump as well. These cutoffs did not violate any existing regulations regarding CRS's. Despite this setback, Grump continued to increase its market share into early 1993, although not at the rate it had before the CRS cutoff.

It is now Spring 1993 (my, how time flies). Identify and analyze any violations of the antitrust laws that arguably arose from this scenario. The chart on the next page provides market share information and HHI calculations for your convenience. Assume my math is correct!!

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Question 2B: Airline Market Share Figures and HHI's 1991, 1993

Carrier 1991 1993

National Commercial Airline Passenger Miles

Divided 31% 29%

National 27% 28%

Gamma 16% 27%

Southeast 14% 11%

TAA 8% --

Others 4% 5%

HHI 2210 2480

New York-Los Angeles

Divided 44% 42%

National 37% 34%

TAA 1 9% --

Gamma -- 24%

HHI 3666 3496

Atlanta-Los Angeles

Gamma 43% 67%

Divided 22% 20%

Southeast 19% 13%

TAA 16% --

HHI 2950 5058

New York-Chicago

National 32% 26%

Divided 30% 24%

Gamma 14% 29%

TAA 14% --

Grump 10% 21%

HHI 2416 2534

2C. Since its deregulation in 1978, the airline industry has undergone significant changes. One of the most important has been the development of Frequent Flyer programs. Under these programs, air travellers earn bonus points for each mile they fly with a particular airline. When they acquire a specified number of points, they get free tickets or other benefits from the airline running the program. Because higher point totals yield more valuable prizes, air travellers have an incentive to become regular customers on one airline.

One important effect of the frequent flyer programs has been to alter the habits of business travellers. Encouraged by receiving benefits based on air miles they don't them-selves pay for, many business travellers prefer to book flights on their regular airlines (largely ignoring price) in order to build up mileage bonuses. American, United and Delta, which can offer foreign travel as part of their plans, and which fly to more US cities than other airlines, have been particularly successful in attracting business travellers.

An additional effect of deregulation has been the development of the hub system described in your materials. Each airline tends to charge significantly higher fares in and out of cities where it is the only major airline with a hub. A Department of Transportation official was quoted as saying the airlines "compete between their hubs, not at them."

Assume that in early 1993, the Clinton Administration brings a Section 2 action against American, Delta, and United, claiming that their use of frequent flyer programs constitutes monopolization or attempted monopolization of the markets for business travel to and from certain cities (those at which only one airline has a hub). Assume that the government produces the following evidence about conditions in the industry between 1989 and 1992:

1) The three airlines' fares for flights where the passenger stays over Saturday night at the destination city were approximately one-half the fares for flights where the passenger does not stay over Saturday night.

2) The three airlines' fares for passengers booking their flights more than 30 days in advance averaged 30% less than those booked within 30 days of the travel date.

3) At a number of major hub cities, the dominant airline had at least 60% of the domestic flights. These included San Francisco, Denver, and Orlando (United), Atlanta and Cincinnati (Delta), and Nashville, Raleigh-Durham, Dallas and San Jose (American).

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4) Fares for flights from or into each of these cities were 11% higher than the average fare for other flights of the same length.

5) Of passengers flying from or into each of these cities, the dominant airline carried over 70% of those whose travel dates did not include a Saturday night stayover and over 75% of those who booked flights less than 30 days in advance.

Discuss whether the Section 2 action is likely to succeed. Note any other information that you would find helpful in resolving the case.

2D. Americans can purchase clothing and household items from a wide variety of sources. Department stores offer wide selection and service, but charge high prices. Boutiques and specialty shops may have better offerings for consumers who know what they want, but they also can be expensive. Discount stores provide low prices, but less service and selection. Chain drugstores and mom-and-pop groceries often are open long hours, but have fairly limited selections in addition to high prices.

A recent development in American retailing is the "Mega-Warehouse store." Mega-Warehouses are very large retail establishments that sell a wide variety of consumer household products and clothing. They combine low-cost surroundings, very limited service, department store selection, and discount pricing. They maintain low prices by locating further outside urban areas than traditional malls, by limiting service personnel, and by volume purchasing. If consumers are willing to undertake what is often a considerable drive to find them, Mega-Warehouses can provide inexpensive one-stop shopping. Although a few major cities have several Mega-Warehouse outlets, most metropolitan areas have no more than two at the present time.

As of the beginning of 1993, there were several major Mega-Warehouse operations in the U.S. Although between them, they made less than 4% of all retail sales in the U.S., they each did substantial business in terms of the dollar value of merchandise sold. Their relative size is indicated on the chart below, measured as a percentage of the total retail sales made by Mega-Warehouse stores:

Paul-Mart 34%

Bergacker's 32%

Discount Club 16%

Lhota Merchandise 13%

Thus, if Mega-Warehouse sales were defined as a market, the nationwide HHI would be around 2610 when the smaller players are included. If all retail sales constitute the market, the nationwide HHI is under 100.

Early in 1993, Discount Club and Lhota Merchandise decided to merge. They filed appropriate papers and were cleared by the FTC. The new firm, called the Lhota Discount Club (LDC), was able to get greater volume discounts in purchasing both merchandise and advertising. It thus could lower its prices even further.

McKinney's Drugs was an established drug store chain operating in several mid-Western states. Like the Mega-Warehouses, it also sold a variety of household items. Early in 1993, it announced that it was having financial difficulties. Subsequently, without communicating among themselves, Paul-Mart, Bergacker's, and LDC all began having sales on items sold by McKinney's in the areas in which McKinney's operated.

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They accompanied these sales with massive advertising. McKinney's' sales plummeted, and it closed its doors in January, 1994, after a very weak Christmas season. In the ensuing year, all three of the Mega-Warehouse stores raised their prices above pre-sale levels in the areas where McKinney's had been.

Gonzalez & Gonzalez (G&G) is a drugstore chain similar to McKinney's. It operates in the Southwestern United States. Earlier this year, it announced it was having financial difficulties. Shortly thereafter, Paul-Mart, Bergacker's, and LDC all began sales in their stores in and around cities where G&G has stores, accompanied by extensive advertising. G&G felt particularly threatened by LDC because a majority of the Mega-Warehouse stores that seem to compete directly with G&G are LDC stores. Thus, G&G filed suit under Clayton Act Section Seven (15 U.S.C. ss18) challenging the merger that created LDC. The suit was filed within the applicable statute of limitations.

Discuss:

(1) Does G&G have standing to challenge the merger?

(Suggested time allotment: 15-20 minutes)

(2) Assuming G&G has standing, did the merger violate §7?

(Suggested time allotment: 40-45 minutes)

2E. One of the great one-hit wonders of the rock world in the 1980s was the band Smilin’ Salamander. In 1984, the song “No Newts is Good Newts” that the band both wrote and recorded hit the top of the charts. However, although they made four albums, no other song they recorded ever was very popular. When they broke up in 1987, the members of the band sold all rights to their songs to their manager, Les.

In 1993, “No Newts is Good Newts” was used as the theme song for 20th Century Frog’s hit movie, Amphibian Invasion and once again radio stations played the song regularly. Musicians across the U.S. searched for the sheet music, which was out-of-print. Les decided not to reissue the sheet music individually, because it would sell for merely three or four dollars for the one song. Instead, he published a book that included the music for all of the band’s songs, entitled Smilin’ Salamander: Smooth Sounds, Special Songs. Although the book did not sell as many copies as the individual sheet music would have, Les made much greater profits on the book than he would have selling the song individually.

In early 1994, Les set out to organize a sheet music song book called Greatest Hits of 1984. He negotiated with the owners of the rights of the 13 other best selling songs of 1984 to work out the details for producing the album. The rights to the second best selling song of that year, “Orwell That Ends Well,” were owned by record mogul Michael Moore. Michael and Les simultaneously were negotiating a contract for an album for one of Les’s clients on one of Michael’s record labels. The record contract fell through, and Michael instead signed a rival of Les’s client to a major contract. Subsequently, Les convinced the other participants in Greatest Hits of 1984 to exclude “Orwell That Ends Well” from the album. He also got them to agree that they would not allow their songs to be used in any other songbook for at least five years. The songbook proved to be a great best seller. Despite many requests, Les refused to issue individual sheet music for “No Newts is Good Newts” or to allow it to be used in any songbooks except the two noted here.

Although the two songbooks proved popular, they represented only a tiny fraction of the total number of songbooks sold in 1994. And although fans could not get new copies of “No Newts is Good Newts” in stores except by buying the songbooks, they had several other avenues available to them. A few copies of the song remained in circulation from the original publication of the sheet music. Musically adept fans could copy out the music after listening to the song several times. And of course many fans simply photocopied the music to the song illegally. “Orwell That Ends Well” is available to its fans in individual sheet music and in several other songbooks.

Assume that the copyright laws allow Les and the other song owners to control the publication of their songs in the manner described. Assume also that there is no question that the agreements between Les and the other song owners would satisfy the concerted action element of Sherman Act §1. Discuss both of the following issues:

(1) Does Les’s refusal to sell sheet music for “No Newts is Good Newts” except in the two songbooks constitute an illegal tying arrangement?

(2) If Michael Moore sued the song owners claiming that the agreement to exclude “Orwell That Ends Well” from their songbook constituted an illegal boycott, should the court judge the agreement among the song owners under the per se rule or the rule of reason?

2F. Tugender Township is a political subdivision of the State of Equilibrium. It is shaped roughly like a square, each side of which is about 35 miles long. It includes a number of rural and suburban communities with a total population of about 120,000. Most of the population of Tugender is in the eastern third of the Township, the region closest to the neighboring large city of Jacobsberg (population 360,000).

Tugender Township contains 3 hospitals. Christian Congregations is a religious non-profit hospital that is part of a regional chain. St. Stephen’s is a religious non-profit hospital run by the local Roman Catholic Archdiocese, and is not part of a chain. Lasting Love is part of a national chain of for-profit hospitals. In addition, there are eight hospitals in the city of Jacobsberg. From the geographical center of Tugender Township, the Jacobsberg hospitals on average are 50 minutes away by car if there is no significant traffic; the closest is 35 minutes away. There are no other hospitals within a 2-hour drive of the center of Tugender. Tugender residents tend to use Jacobsberg hospitals primarily for more complicated procedures that require specialists not found in the Township.

Most women bearing children in the state of Equilibrium do so in hospitals attended by obstetricians (M.D.’s specializing in childbirth). Equilibrium also licenses Nurse-Midwives to deliver children. Nurse-Midwives are trained professionals who usually assist women who prefer natural methods of childbirth. Typically, births assisted by Nurse-Midwives involve home delivery and fewer drugs. They also cost less because, if all goes well, no hospitals or M.D.’s are directly involved. In the rare case when the birth becomes complicated, Nurse-Midwives typically will call in an obstetrician. To ensure the provision of back-up medical services in an emergency, Equilibrium requires its licensed Nurse-Midwives to enter into a cooperating agreement with a local hospital before they can begin providing childbirth services.

Marta’s Midwives, Inc., founded in 1991, provides licensed Nurse-Midwives for Tugender Township residents. Since its inception, it has had a cooperating agreement with Christian Congregations. Marta’s Midwives has tried several times to obtain cooperating agreements with Lasting Love and St. Stephen’s, but both these hospitals, independently, have refused. The company has never tried to enter cooperating agreements with any Jacobsberg hospital.

During 1995, women residing in Tugender Township used medical providers for childbirth in the following proportions:

Lasting Love 34%

St. Stephen’s 32%

Christian Congr.* 21%

Marta’s Midwives* 9%

Various Jacobsberg Hospitals 5%

* Slightly less than 1% of births used services of both Marta’s Midwives and Christian Congregations.

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Two other types of medical services are relevant here. Neurosurgery is surgery performed on the brain and central nervous system. More than half of the neurosurgery performed in 1995 on Tugender residents took place in Jacobsberg. Most of the rest was divided between Christian Congregations and St. Stephen’s.

Oncology consists of testing and treatment related to cancer. Oncology services are sometimes performed in hospitals and sometimes in outpatient or nursing facilities dedicated to cancer patients. None of these dedicated facilities are located in Tugender. In 1995, Tugender residents used local hospitals for about 60% of the oncology services they received, mostly divided between Lasting Love and Christian Congregations. Most of the remainder of the oncology services were provided by hospitals and dedicated cancer-treatment facilities in Jacobsberg; a few Tugender residents went further away.

Late in 1995, at the behest of local employers concerned about rising medical costs, representatives from the three Tugender hospitals met to discuss ways to save money. They agreed to a plan entitled “Efficiency Agreement,” which provided that, beginning January 1, 1996, each hospital would eliminate non-emergency service in one specialty area. Specifically, Christian Congregations would eliminate childbirth, Lasting Love would eliminate neurosurgery, and St. Stephen’s would eliminate oncology. The hospitals believed that the Efficiency Agreement would lower costs by reducing training, staffing, supplies, and equipment needed in each hospital, and providing economies of scale through greater utilization of each hospital’s specialties. The hospitals also believed that the agreement would improve patient care by spreading staffs less thinly and allowing them to focus more on their specialties.

Several developments followed the implementation of the Efficiency Agreement:

- By the end of 1996, all three hospitals had experienced the cost savings anticipated by the Efficiency Agreement.

- Compared with prior years, only a few more patients utilizing the three relevant services went to Jacobsberg in 1996; most continued to use the Tugender hospitals that still provided them.

- A state report found fewer patient complaints and malpractice suits regarding the relevant services in the Tugender hospitals in 1996 than in 1995.

- During 1996, Christian Congregations’ prices remained the same. Lasting Love raised prices 3% for all services. St. Stephen’s kept prices the same for many services, including neurosurgery; it increased prices about 10% for a few services, including childbirth.

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- Once Christian Congregations had eliminated childbirth services, Marta’s Midwives could no longer provide these services itself unless it entered a cooperating agreement with one of the other hospitals. It tried unsuccessfully to enter agreements with St. Stephen’s and Lasting Love, and declared bankruptcy in late 1996.

Marta’s Midwives sued the three Tugender hospitals under a variety of state and federal legal theories. The complaint included a claim for damages resulting from a horizontal market division in violation of Sherman Act §1. Discuss whether Marta’s Midwives would be successful on this market division claim. Assume that the Efficiency Agreement itself is sufficient to meet the concerted action requirement. Assume that the product market in which the legality of the market division will be judged is the market for medical services related to childbirth.

2G. In the Spring of 2001, the new Dole administration dropped the government’s still-pending suit against Visa and MasterCard, issuing a statement saying that the intense competition among card issuers protected consumers from any harm resulting from supposed collusion among the managers of the two leading payment systems. Encouraged by the government’s stance, Visa and MasterCard merged into a single entity called VistaCard. The government did not challenge the merger. In 2002, the first full year of operation for the new entity, the shares of the leading players in the market (by dollar amount charged) were:

Payment Card Systems Payment Card Issuers

VistaCard 65% American Express 25%

American Express 25% Citicorp 12%

Discover 8% Discover 8%

First Chicago 5%

HHI 4912+ MBNA 5%

Chase Manhattan 5%

HHI 908+

Early in 2003, engineers at VistaCard patented a new identification system that included new cards and new merchant verification machines. Each new card came with a one-inch square in one corner of the card that was covered by a peel-off plastic sticker. Consumers would peel off the sticker and immediately place their thumb on the exposed surface, which would take an impression of the thumbprint and quickly dry. When they purchased a product, consumers placed the new card and their thumbs into designated slots in the new verification machines. The machine would then (1) verify (through the thumbprint) that the consumer was the owner of the card; (2) indicate to the merchant whether the consumer had adequate credit to cover the sale; and (3) post on a screen visible only to the consumer the amount of credit the consumer had available on that card.

By the end of 2003, VistaCard had provided the new verification machines free to all their existing merchants. The accurate identification feature and the credit balance feature proved very popular with consumers.

Under the new system, as in the past, VistaCard charged merchants a percentage of each transaction. However, in conjunction with the new machines, VistaCard instituted volume discounts that allowed merchants to pay smaller percentages of their total transactions if the total reached certain benchmarks. For example, the VistaCard charge was 0.85% for merchants having up to $100,000 in VistaCard transactions in any given month; 0.83% for merchants with between $100,000 and $200,000; 0.8% for merchants between $200,000 and $500,000, etc.

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As a result of the volume discounts, many merchants encouraged their customers to use only VistaCard. Some merchants stopped accepting Discover and American Express. As a result, for the first half of 2004, the shares of the leading players in the market (by dollar amount charged) were:

Payment Card Systems Payment Card Issuers

VistaCard 73% American Express 20%

American Express 20% Citicorp 18%

Discover 5% First Chicago 8%

Chase Manhattan 8%

HHI 5754+ MBNA 7%

Discover 5%

HHI 926+

Discover and American Express asked to purchase licenses to use the new technology, but VistaCard refused to negotiate with them. Worried by their declining market shares, Discover and American Express decided to merge. Their internal studies suggested that the new joint entity would better be able to develop services that could compete with VistaCard.

(1) Discuss whether any of VistaCard’s post-merger activities violate the antitrust laws. Do not discuss the legality of the initial merger between Visa and MasterCard.

(2) Discuss the legality of the proposed merger between Discover and American Express.

Assume that the relevant geographic market for both questions is the U.S.

2H. Specter, Inc. was the only department store in Thomasville, a small midwestern city. In order to purchase appliances in Thomasville, consumers either had to shop at Specter or at one of three smaller discount appliance stores, Thurmond's, The Electronics Hatch, or Half-Price Heflin's. Of course, consumers always could drive 35 miles to the much larger metropolis, Silver City, where there were numerous appliance dealers, or could order appliances through mail order catalogues. Of sales made by Thomasville retailers of certain major appliances, including VCR's, televisions, microwave ovens, and refrigerators, Specter made between 45-55% and the three smaller appliance dealers split the rest roughly evenly. In the greater Silver City metropolitan area as a whole, Specter sold less than 5% of any one type of appliance. Specter's prices generally were slightly higher than those in Silver City itself, although rarely by more than 5%.

Earlier this year, Specter embarked upon a plan to increase its market share. First it entered identical contracts with the two newspapers that distributed Sunday editions in Thomasville. The contracts guaranteed that on Sundays, the newspapers would publish advertising for appliances only from Specter and not from the three smaller Thomasville dealers. The newspapers remained free to run appliance advertising from retailers from Silver City. In addition, Specter began running regular sales on popular brand-name appliances, such as the Biden-Your-Time VCR. Because it could get volume discounts, Specter was able to price these items just above its own costs, but below the costs that would be incurred on the same items by the three smaller dealers. In the first two months after implementing its plan, Specter increased its total sales by about 5%.

The three smaller dealers had previously spent much of their advertising budgets on ads in the Sunday newspapers. Deprived of this outlet, they jointly printed and delivered to most Thomasville residences on Sundays a four-page advertising flyer. Because the distribution costs were so high, the retailers could only afford to use the flyer if they worked on it jointly. As part of the arrangement, the three dealers agreed to advertise and sell certain key items at the same price. Thus, one week, the front page of the flyer said that all three dealers would sell the Simple Simon Easy-To-Use Microwave for $299.99. By listing only one price for all three dealers, they saved advertising space and could display more products in the flyer for less money. They also avoided customer confusion. Their agreement on price only applied to items advertised in the flyer during the week after the flyer was circulated.

Discuss whether these facts give rise to any of the following antitrust violations:

1) Attempted Monopolization by Specter

2) Illegal Concerted Refusal to Deal between Specter and the newspapers

3) Illegal Price-Fixing by the three smaller dealers

Question 2J: Bates is a city of about 150,000 people located in a large Western state, more than 150 miles from any other significant population center. Many of its residents are employees or students at the state university (“the U”) located in the city. The media in Bates consist of:

- four local television stations, whose call letters are CGR, EGL, GFR and WLF;

- nine radio stations, including KIOT, which is owned and operated by the U;

- one daily newspaper and the university newspaper (published three times a week when school is in session).

All four TV stations and three of the radio stations (including KIOT) run regular news programming that includes coverage of local news. No media located outside Bates regularly cover local news from Bates.

The news shows produced by WLF were the most popular in Bates. WLF presented news from 5:30-6:30 p.m. and again from 10:30-11:30 p.m. It had photogenic news anchors*, a popular folksy cheerful weatherman, and a sportscaster who graduated from the U and had been an Olympic diver. As of late 1998, the percentages of news viewers in the relevant time periods watching each station’s news were as follows:

Early Evening (5-6:30 pm) Late Evening (10-11:30 pm)

CGR 13% 20%

EGL 16% 15%

GFR 7% 6%

WLF 64% 59%

Because of WLF’s larger following, it charged advertisers more for commercials during the news. However, the number of people watching all these news programs together never exceeded 40% of the people watching TV at any one time. The cost of ads during the news, even at WLF, remained well below the cost of ads during sports broadcasts, talk shows, and soap operas.

Early in 1999, WLF hired both the weather person from EGL’s early evening news show and CGR’s best sports reporter to work full-time doing feature stories and to sit in for the regular weather and sports reporters as needed. It advertised the new hires heavily (“WLF Evening News, now featuring … as well as your old favorites …”). WLF suggested that more hiring raids were possible (“You never know who will be next to join the most popular news team in Bates.”) even though none in fact were planned.

Alarmed, the producers of the news at EGL and CGR met to discuss ways to protect themselves from WLF. They decided to include KIOT in their plans. After extensive discussions, the three stations reached an agreement in August 1999 that included the following provisions:

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Pooling. EGL, CGR and KIOT will pool newsreporting. One reporter representing all three stations will cover each story. Each station will retain separate news anchors, weather and sports reporters, but will use all the reporters in the pool for on-site news and feature stories. CGR, EGL and KIOT will jointly select the most effective and popular reporters from all three stations to serve in the pool.

Allocation of Territories. Bates will be divided into two areas, North and South. EGL reporters will cover the North, CGR reporters will cover the South, and KIOT reporters will cover the campus. CGR and EGL will each, in alternate weeks, provide camera crews for the KIOT reporters. CGR and EGL will provide audio tapes of their own reporters’ stories for KIOT to use on its radio news broadcasts.

Allocation of Time Slots. CGR will broadcast TV news in the evenings only from 5-6 pm and 11-11:30 pm. EGL will broadcast TV news in the evenings only from 6-6:30 pm and 10-11 pm. No limits are placed on KIOT’s transmission schedule.

The August Agreement proved very effective in a remarkably short time. CGR and EGL used some of the cost savings stemming from the pooling arrangement to broadcast the news with fewer advertisements and heavily promoted this new arrangement (“Now with fewer commercials and more of the news you need.”). By March 2000, the percentages of news viewers in the relevant time periods watching each station’s news had altered to the following:

Early Evening (5-6:30 pm) Late Evening (10-11:30 pm)

CGR 22% 32%

EGL 29% 19%

GFR 5% 3%

WLF 44% 46%

In March 1999, the producers of GFR news asked if they could join the reporting pool. After discussions, CGR, EGL and KIOT refused the request, saying that GFR did not have any reporters with sufficient popular appeal to justify interfering with an arrangement that was working well. Shortly thereafter, GFR abandoned its evening news programs entirely, broadcasting reruns of old TV comedies in the relevant time slots.

You are an FTC attorney assigned to investigate the events described above. Your research has determined that the following state regulation is the only relevant provision governing conduct of the U:

Programs at state universities are authorized to enter into joint ventures with for-profit businesses. Such joint ventures may include the sales and marketing of exclusive rights to the university logo and mascot and to intellectual property created by university students and faculty.

Identify possible violations of the antitrust laws that might have occurred and, for each possible violation, discuss whether the FTC should take legal action and how likely it would be to succeed if it did. Assume that none of the conduct described here would violate any other state or federal law.

2K. Based on the following facts, discuss whether the antitrust laws we have studied would be violated by (a) the exclusion of CHAD and DRAG from PLATTS; and/or (b) the proposed merger of CHAD and DRAG.

The market for legal services in Anchorage, Alaska, is divided up among several different types of entities. There are four major law firms with their main offices in Anchorage. From largest to smallest, they are:

Gibson, Eckert, Miller & Schumann (GEMS)

Stern, Cohen, Albu & Myers (SCAM)

Cadet, Holman, Alfonso & Diaz (CHAD)

Durkin, Rabbitt, Auborg & Gutierrez (DRAG)

The basic hourly charges for these firms, arrived at independently, range between about $150 for junior associates to about $350 for senior partners. These firms do most of the basic corporate legal services for the largest local businesses including contracts, real estate transactions, tax, labor, pensions and basic litigation. In addition, all but GEMS do trusts and estates work for local financial institutions and for relatively wealthy individuals. CHAD and DRAG also do some family law and white collar criminal defense work, also for relatively wealthy clients.

When Anchorage businesses have engaged in complex deal-making or litigation, they traditionally have employed law firms from Seattle. Although this practice has diminished as the four biggest Anchorage firms have become more sophisticated, the five largest Seattle law firms still do a substantial amount of work for Anchorage clients. The hourly rates for these firms range from about $225 to about $500.

In addition, many smaller firms and solo practitioners do business in Anchorage. These lawyers handle plaintiff’s tort claims, employee’s labor and discrimination issues, smaller family cases, criminal defense, trusts and estates, tax, etc. They charge a wide range of fees, but except for a few very specialized small firms, their hourly rates are not above $200.

In 2000, GEMS and SCAM agreed to jointly establish a business to provide litigation support for large civil cases. The business, known as Professional Litigation and Trial Technology Services (PLATTS) primarily organizes and summarizes documents and prepares trial exhibits. PLATTS allows GEMS and SCAM to provide these services more efficiently than they had in the past and more cheaply than the Seattle firms can. PLATTS provides its services to GEMS and SCAM and to some other Anchorage law firms, but will not do business with CHAD, DRAG or the Seattle firms.

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As a result of PLATTS, GEMS and SCAM were able to draw litigation business away from both the Seattle firms and from CHAD and DRAG. The charts at the bottom of the page show the extent of the changes from 1999, the year prior to the creation of PLATTS, to 2001, the first year it was fully operable, under two plausible definitions of the relevant market.

Early in 2002, CHAD and DRAG began negotiations to merge in order to compete more effectively with GEMS and SCAM. The charts at the bottom of the page show effects of the potential merger under the same two definitions of the relevant market. If all Anchorage law firms and solo practitioners are included in the market, you can assume that the relevant HHI figures both before and after the proposed merger would be well below the thresholds that attract scrutiny under the Merger Guidelines.

(1) Market Shares/HHI

(measured in billable hours)

(If Market = Large Anchorage Firms)

| |1999 |2001 |If Merger |

|GEMS |36 |40 |40 |

|SCAM |28 |30 |30 |

|CHAD |20 |15 |30 |

|DRAG |16 |15 |-- |

|HHI |2736 |2950 |3400 |

(2) Market Shares/HHI

(measured in billable hours)

(If Market = Large Anchorage Firms

+ Anchorage business of Seattle firms)

| |1999 |2001 |If Merger |

|GEMS |27 |32 |32 |

|SCAM |21 |24 |24 |

|CHAD |15 |12 |24 |

|DRAG |12 |12 |-- |

|SEATTLE 5 |25* |20** |20 |

|HHI |1672 |1978 |2266 |

* 7 + 5 + 5 + 5 + 3 = 25

** 6 + 5 + 4 + 3 + 2 = 20

2L: Discuss whether any of the conduct described in the following scenario violates Sherman Act §2 or Clayton Act §3. Assume that any relevant geographic markets are national.

“Organic” baby food differs from non-organic baby food in three important ways. First, the FTC only allows the baby food to be designated “organic” if it meets several criteria:

• it includes only fruits and vegetables grown “organically”, which means, among other things, that the farmers use no pesticides and only natural fertilizers.

• it includes only animal products processed in particular ways that are considered less cruel to the animals

• it includes no artificial coloring, flavoring or preservatives

Second, “organic” baby food generally is not sold in ordinary grocery stores, but in health and natural food stores, through the internet and by mail order from ads found in health-focused periodicals. By contrast, non-organic baby food is marketed through grocery stores in roughly the same way as described in the Antitrust Revolution case study of the failed merger attempt by Heinz and Beech-Nut.

Third, as of late 2003, organic baby food typically retailed at prices 40-60% higher than those for the non-organic products of Gerber (the leading manufacturer). For example, a 4-ounce jar of Gerber non-organic strained carrots normally retailed for 79¢, while a similar jar of “organic” carrots cost $1.15 per jar by mail order and often retailed for $1.29 in natural food stores.

Earth’s Best manufactures “organic” food products, including 92% of the “organic” baby food sold in the U.S. in 2003 (the other 8% was produced by very small local companies). In addition, Earth’s Best owns and operates a monthly magazine called “Child of Nature,” targeting parents who wish to raise their offspring in an “organic lifestyle.”

At the very end of 2003, testing by an independent consumer group revealed traces of a dangerous pesticide in two of the baby food flavors sold by Heinz. The press publicized this news extensively and sensationally (“Are You Giving Your Baby Poison for Xmas?”). Gerber products had recently been tested by the same consumer group and found to be safe, so Gerber was able to do quick and extensive publicity to protect its sales.

Because of the baby food “crisis” and Gerber’s fast response, many consumers switched from Beech-Nut and Heinz to Gerber and to “organic” baby foods. Earth’s Best quickly found itself manufacturing at maximum capacity and arranged to build an additional plant that it expects to complete in 2007. During the first four months of 2004, Earth’s Best made 97% of the “organic” baby food sold in the U.S., and was able to raise its prices by 10-15% without losing sales. The percentage of all baby food sold in the U.S. by the four largest manufacturers had shifted as follows:

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2003 2004(Jan-Apr)

Gerber 65% 76%

Heinz 17% 6%

Beech Nut 15% 12%

Earth’s Best 2% 4%

On May 1, 2004, Gerber introduced an “organic” baby food of its own called “Baby’s All Natural from Gerber’s” (BANG). It sold BANG at prices about 25% higher than those it charged for its non-organic products. BANG was not an instant success. Many consumers wondered why they should pay more for BANG when ordinary Gerber’s was safe. Some grocery stores and some natural food stores independently decided not to stock BANG.

Gerber tried to purchase ads for BANG in Child of Nature, but the magazine refused to run them. In addition, the magazine ran a column in its July 2004 issue, negatively “reviewing” several BANG flavors, concluding,

The attempt by the ultra-corporate megafirm to take advantage of the recent pesticide crisis to belatedly enter the health food business has resulted in bland and unappealing mush. We expect that “BANG” will soon be “DEAD.”

As of November 30, Gerber had only managed to capture about 8% of the US sales of “organic” baby food and had not significantly altered its share of all baby food sales. Earth’s Best continued to sell out all the baby food it produced. As of December 1st, Gerber embarked on the following three-prong plan to try to capture market share from Earth’s Best:

(1) Gerber required grocery stores which purchased its non-organic baby food to devote 20% of their Gerber shelf space to BANG products.

(2) Gerber had discovered that Earth’s Best used several types of genetically modified vegetables in its baby food. Gerber knew that neither published reports nor its own internal studies showed any evidence that using genetically-modified vegetables created any risks for consumers. However, it hired a lobbyist to try to convince the FTC to change the criteria for “organic” baby food to exclude genetically modified vegetables.

(3) Earth’s Best had been buying most of its baby food jars from Gerber under a contract that was due to expire at the end of 2004. Although the parties had been in negotiations and were close to completing a deal to renew the contract, Gerber suddenly announced it had decided not to renew.

2M. Based on the following scenario, discuss whether any of E-Swap’s actions taken in 2010 would violate Sherman Act §2. In your answer, identify and explain the possible significance of any plausible evidence or facts not provided here (and not inconsistent with the facts you have) that you think might be important to the legal analysis.

E-Swap is a web-based business that facilitates barter transactions in which two parties exchange goods for other goods. It began operations in 2005. Basic use of the E-Swap website works as follows:

1. Only registered participants may search the website and engage in trades. Participants can register for free, but must provide a credit card number that will be billed for future transactions. Each registered participant gets an online page on the website called a “Trading Post.”

2. On their Trading Post, participants describe items they want to trade away. For each item, they fill out a short form online that allows E-Swap to index the posting by searchable categories and to determine shipping fees. Each Trading Post also has a “Wish List” of items the participant would particularly like to get in return.

3. Participants looking to acquire goods can search postings and Wish List entries that fit relevant categories or can use a random search function called “Get Lucky.”

4. When participants find posted items they wish to acquire, they send a message to the Trading Post in question proposing to trade one or more items they have posted themselves for the ones they want. The parties then can negotiate.

5. If they agree on a deal, they fill out and file a transaction form. Pursuant to an agreement E-Swap has with United Parcel Service (UPS), filing the transaction form automatically triggers UPS pick-up and delivery of the items being traded.

6. Just before completion, every deal is assessed a “shipping fee,” which incorporates payment to UPS for delivery service each way (at a discounted rate) and a very small additional payment to E-Swap for facilitating the transaction. By filing the form and finalizing the transaction, each party approves the shipping fee. At that point, each party’s credit card is billed for half of the fee.

The operation of the website and the electronic interface with UPS are controlled by software developed and owned by E-Swap. The formulas for calculating overall shipping fees and for dividing fees between UPS and E-Swap are set out in a contract between the two companies.

During its first two years, E-Swap frequently received two requests from participants. First, people who lived near each other wanted to be able to trade items online without using UPS shipping. Second, people wanted to be able to jointly operate Trading Posts to enable them to package items together for better trades.

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In response, E-Swap developed new software that allowed multiple participants to create group Trading Posts called “Village Markets.” The software, which E-Swap provided for free to any group of people that registered together, had the following new features:

1. An unlimited number of people could become “villagers” and list items for trading on the same Village Market webpage. Thus, items posted by different villagers could be added together to make trades with other trading posts and Village Markets.

2. Villagers in the same Village Market could trade with each other online, making their own arrangements to physically exchange their goods. These transactions involved no shipping fees and E-Swap did not charge for them in any other way.

3. The software provided each Village Market options for managing trades with outsiders that involved goods coming from more than one villager. This software included several ways to appropriately credit each villager’s individual contribution and several procedures for determining how trades were approved.

Village Markets proved to be immensely popular in settings as diverse as extended families, church congregations, college dorms, workplaces, and condominium associations. In January 2009, a Newsweek cover story* would report accurately that over 85% of online bartering was taking place on E-Swap, noting the special appeal of Village Markets:

Although almost everything posted on E-Swap is available in exchange for money from stores, online shopping sites, or online auction sites, many “villagers” have fallen in love with bartering. Some especially like the fact that trades within the Village Market are free. Some note that the huge number of people participating—the number of “villagers” in the U.S. alone is conservatively estimated at 38 million—makes it possible to find “absolutely anything you want.” Others love the “adventure” of searching with the “Get Lucky” random search engine.

Over the course of 2009, E-Swap participants frequently reported two problems. First, sometimes they would make offers to trade for an item listed on a Trading Post or a Village Market only to find out that the desired item had already been sold on E-Bay or bartered away on a different online barter site. Second, some other online barter businesses had entered into contracts with individual Village Markets to manage their operations using E-Swap’s site and some additional software and were charging fees even for the normally free trades between members of the same Village Market.

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In response, E-Swap announced two new rules for its participants early in 2010. First, participants had to agree that any item posted for trade on E-Swap could not be posted on any other online auction, sale or trading site. Second, Village Markets had to agree that no fees beside E-Swap shipping fees would be charged to villagers for transactions made on E-Swap. Penalties ran from warnings the first violation of these rules to complete exclusion from the site after several incidents.

Also in early 2010, UPS and E-Swap renewed their contract for five more years. The renewed contract included new exclusivity provisions that require E-Swap to use UPS for shipping and prohibit UPS from setting up similar arrangements with other online barter companies.

By the end of 2010, several companies that ran smaller online barter websites had folded. They attributed their collapse to E-Swap cutting them off from Village Markets, UPS, and duplicate postings.

* “News anchors” are the “stars” of news programming. They sit at the main desks, read the major stories, and introduce on-the-scene reporters and the people who do sports and weather.

* Featuring a picture of the CEO of E-Swap with President-Elect Clinton and the title, “The New Barter Economy: It Takes a Village Market.”

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