Economics 411 Handout 1 Professor Tom K



Economics 411 Handout 1 Professor Tom K. Lee

Part 1: Review of economics concepts and theories

Market price is the price determined by the actions of all the

buyers and sellers of a market.

Demand price of a product is the maximum amount a consumer is

willing to pay for the last unit of a product.

Two views of a demand curve: positive versus normative views

Consumer surplus is the difference between the maximum amount that

a consumer is willing to pay for the quantity demanded and the

actual payment of the purchase.

The First Law of Demand states that as the market price of a

product increases the quantity demanded of the product

decreases.

Own-price demand elasticity is the percentage change in the

quantity demanded of a product per percentage change in the

market price of the product.

Cross-price demand elasticity is the percentage change in the

quantity demanded of a product per percentage change in the

price of another product.

Supply price of a product is the minimum that one has to pay to

induce a seller to produce and supply the last unit of a

product.

Two views of a supply curve: positive versus normative views

Producer surplus is the difference between the actual amount a

seller receives and the minimum that the seller is willing to

accept for the quantity supplied.

The First Law of Supply states that as the market price of a

product increases the quantity supplied of the product

increases.

Own-price supply elasticity is the percentage change in quantity

supplied of a product per percentage change in the market price

of the product.

Cross-price supply elasticity is the percentage change in the

quantity supplied by all other firms in an industry of

differentiated products per percentage change in the price of

the product of one firm.

Equilibrium price is that price where quantity demanded equals

quantity supplied.

Equilibrium price and quantity determination

The Law of Supply and Demand states that, whenever the market

price deviates from the equilibrium price, there are market

forces that would bring the market price back to the equilibrium

price so that transactions take place at the equilibrium price.

Economics 411 Handout 2 Professor Tom K. Lee

Perfect competition model -many small price-taking buyers

-many small price-taking sellers

-no transaction cost(free entry & exit)

-perfect information

-homogeneous private product

-no externality

Short-run profit maximization conditions of a competitive firm:

-price equals to short-run marginal cost.

-short-run marginal cost is increasing.

-price is no less than average variable cost.

Long-run profit maximization conditions of a competitive firm:

-price equals long-run marginal cost.

-long-run marginal cost is increasing.

-price is no less than minimum long-run average cost.

Zero profit equilibrium conditions of a competitive industry

-price equals long-run marginal cost.

-long-run marginal cost is increasing.

-price equals minimum long-run average cost.

Efficiency of zero profit equilibrium of a competitive industry

A perfectly contestable market is when

-entrant firms and existing firms are symmetric in information,

technology, quality of product and market.

-no sunk costs, i.e. all costs associated with entry are fully

recoverable.

-entry lag is less than the price adjustment lag for existing

firms.

Perfectly contestable market equilibrium is efficient.

Sources of monopoly(market) power -essential input

-economies of scale

-product differentiation

-government regulation

-entry barrier

Lerner’s index of market power is the price-cost margin.

Natural monopoly is a one seller situation where for all relevant

levels of demand the average cost curve is declining.

Entry barrier is the situation when potential entrants have higher

costs for all output levels than existing firms.

Entry barrier(Stigler) is the extra cost of production which must

be borne by entrant firms but is not borne by existing firms.

this could occur in face of market imperfections or

incompleteness.

Limit Pricing is the maximum price a seller can set without having

to face entry.

Predatory pricing is the situation where existing firms will lower

price to drive out entrant firms and when entrant firms exit the

market, the existing firms will raise price up again.

Economics 411 Handout 3 Professor Tom K. Lee

Problems of existing rules for testing predatory pricing

-the Areeda-Turner rule:

A price at or above reasonably anticipated average variable

cost (or better, marginal cost if you can get the data) should

be conclusively presumed legal; otherwise it is illegal.

-the Marginal Cost rule:

Post-entry output greater than pre-entry output is legal only if post-entry price is no less than short-run marginal cost.

-the ATC rule:

Pricing below ATC plus substantial evidence of predatory

intent is illegal.

-the Output Restriction rule:

Post-entry output greater than pre-entry output is illegal.

-the Joskow-Klevorick Two-Stage rule:

Stage one: is market structure likely to have successful

predation? If not, stop; if yes, proceed to stage

two.

Stage two: use one of the above cost-based or pricing behavior

tests.

Pure monopoly model -many small price-taking buyers

-one price-setting seller

-no entry

-no substitutes

-perfect information

-no externality

Total revenue, average revenue and marginal revenue curves

Short-run profit maximizing conditions of a monopoly:

-marginal revenue equals marginal cost.

-change in marginal cost exceeds change in marginal revenue.

-price is no less than average variable cost.

Social costs of a monopoly - Harberger's triangle

- rent-seeking cost

- dynamic cost

- X-inefficiency

Two-part tariff monopoly is a single seller charging a entry fee

and a per unit price of a product to its customers.

All-or-nothing monopoly is a single seller set a price per unit of

a product and a fixed quantity of purchase or no deal.

Monopsony is a one price-setting buyer & many price-taking sellers market situation.

The Structure-Conduct-Performance Model of Industrial Organization

A market consist all products with large cross-price elasticity of

demand and all participants with large cross-price elasticity of

supply.

The n-firm concentration ratio is defined as the share of the

total industry sales accounted for by the n largest firms.

Economics 411 Handout 4 Professor Tom K. Lee

The Herfindahl Hirschman Index of Concentration is defined as the

sum of square of the market share of all firms in an industry.

With a single firm in an industry, HHI attains its maximum

value of 10,000. An HHI value of 1500 is considered to be

critical by the antitrust agencies.

The Collusion Hypothesis states that the more concentrated an

industry is, the less competitive are firms and thus the higher

the price-cost margin. It treats concentration as exogenous.

Demsetz’s Differential Efficiency Hypothesis states that there is

no causality in high concentration and price-cost margin.

Instead concentration of an industry is endogenous. E.g. a few

firms in an industry have a cost advantage will be highly

concentrated and those firms will have high price-cost margin as

well.

Conditions of price discrimination

-market power

-ability to separate consumer groups

-no resale

1st degree price discrimination is the charging of different

prices for different units of a product to each consumer.

2nd degree price discrimination is the charging of different

prices for different blocks of units of a product to each

consumer.

3rd degree price discrimination is the charging of different

prices to different consumers(possibly in different markets).

4th degree price discrimination is the charging of the same price

for a product or service to different consumers, but the cost of

providing the product or service differ across consumers.

The inverse demand elasticity rule

Output effect versus allocative efficiency

Monopolistic competition model

-many small price-taking buyers

-many small price-setting sellers

-product differentiation

-zero transaction cost(free entry & exit)

-perfect information

-no externality

Zero profit equilibrium of a monopolistic competitive industry:

-marginal revenue equals marginal cost

-change in marginal cost exceeds change in marginal revenue

-price equals long-run average cost

Inefficiency of monopolistic competition

-price > marginal revenue = marginal cost

-long-run average cost > minimum long-run average cost

Economics 411 Handout 5 Professor Tom K. Lee

Excess Capacity Hypothesis states that at the zero profit

equilibrium of a monopolistic competitive industry, average cost

is not at the minimum average cost, that is further increase in

output will lower average cost.

Dominant-firm price leadership model and residual demand

Oligopoly: Cournot(quantity) versus Bertrand(price) rivalry

Game theory -number of players

-information sets of players

-preferences of players

-strategy sets of players

-equilibrium concepts, e.g. Nash equilibrium

Prisoners’ Dilemma game

Determinants of cartel stability

-demand elasticity

-number of sellers and/or industry concentration

-degree of product differentiation

-organization cost of cartel/ cost of detecting cheater(s) &

demand & cost uncertainty/ best price sale policy/ ease of

entry/ ease to punish cheaters/ symmetry of cartel members

-interest rate

-antitrust enforcement effort

Entry in normal versus extensive game form and sub-game perfect

equilibrium

Chain-Store Paradox

Part 2: Introduction to antitrust

(CH 1, pp 1-5, CH 4)

Antitrust is public policies to prohibit monopolization, attempt to monopolize (but not monopoly because of patent, copyright laws

and government regulation), and unfair and deceptive trade

practices that may deter competition.

Rationale for antitrust: to promote static and dynamic economic

efficiency.

The wealth of a nation, as defined by Adam Smith, is measured by

how much the consumers consume today and in the future and

not by how much profits firms make.

Antitrust agencies

-Department of Justice: Antitrust Division

-Federal Trade Commission

Private antitrust lawsuits through U.S. District Courts have been

the major form of antitrust enforcement for the last fifty

years. Over 85% of antitrust cases per year are private ones.

They typically involve practices such as tying, exclusive

dealing, dealer termination, and price discrimination. Almost

90% either settled or voluntarily dropped by the plaintiff.

Economics 411 Handout 6 Professor Tom K. Lee

However, the most lengthy and costly cases are government cases.

About two-thirds of DOJ cases have involved horizontal price

fixing, with the second most frequent cases being

monopolization. Most cases ended by consent decree, or orders.

Two rules of antitrust:

-per se rule applies when a business practice has no beneficial

effects but has harmful effects.

-rule of reason applies when per se rule is not applicable. It

consists of two parts, the first being the “inherent effect”

of market shares, and the second being the “evident purpose”

or intent of the business practice.

Part 3: Introduction to Antitrust Laws

(CH 3 pp66-74, CH 7 pp 208-210))

The Sherman Act of 1890:

-Section 1 prohibits contracts, combinations, and conspiracies

in restraint of trade, specifically price-fixing arrangements.

-Section 2 prohibits monopolization, attempts to monopolize, and

combinations or conspiracies to monopolize "any part of the

trade or commerce among several states, or with foreign

nations," specifically for market dominance.

Horizontal restraint of trade is the concerted actions among firms

to reduce potential or actual competition with one another.

(i) Actual and implied horizontal price-fixing is per se

illegal. Collusion to raise prices for the sole purpose of

reducing competition is called “naked” price fixing and

is per se illegal. Agreement on a price range is not

allowed.

(ii) Horizontal agreements that affect prices are illegal per

se, e.g. agreements on common standards for the purpose of

affecting price is illegal.

(iii) Output restriction in which competitors act in

concert to limit supply in order to raise prices is

illegal.

(iv) Competitors’ agreements to divide territory markets or

customers are per se illegal.

(v) Sellers concerted refusal to deal with a known price

cutter, or buyers joint boycott of a high price seller are

per se illegal.

Direct or circumstantial evidences may be sufficient to prove

illegality. Parallel action alone will not be sufficient to

prove violation of antitrust laws. However, if a price leader

raises price in a declining market and in an industry with

overcapacity, and then all firms match the price increase, it

can be construed be sufficient evidence of price fixing.

Economics 411 Handout 7 Professor Tom K. Lee

Vertical restraint of trade is the concerted actions of sellers

and buyers to reduce potential and actual competition either in

the sellers’ market or the buyers’ market or both.

Vertical price-fixing in which a seller and a buyer agree with respect to price at which the buyer will resell is illegal per se. An example will be retail price maintenance agreement. Maximum retail price maintenance agreement is guided by rule of reason. Manufacture retail suggested price is allowed. In consignment sales to a true agent, a seller is free to set the price at which his products are sold, even though the agent is otherwise an independent business.

Non-price vertical restraints are governed by rule of reason.

i) Exclusive selling agreements (e.g. exclusive

franchise to a particular dealer in a specified territory) is allowed.

ii) Territorial and customer restrictions (e.g. orderly

marketing plans are subject to rule of reason,

depending on whether the anticompetitive effect of the

restraint on intra-brand competition is outweighed by the

pro-competitive effect of inter-brand competition

generated by strengthening the seller’s ability to

compete) are subject to rule of reason.

iii) Section 3 of the Clayton Act prohibits exclusive dealing agreements in which a buyer has to purchase all its requirements for the product from a seller, if these agreements are likely to substantially lessen competition.

iv) Sherman Act and Section 3 of the Clayton Act prohibit tying agreements. Tie-in are per se illegal if a seller possesses sufficient market power in the tying product, and coerces a buyer to buy the tied product of substantial value as a condition to buy the tying product, when the buyer can buy the tied product elsewhere at a lower price.

v) Refusals to deal are usually subject to the rule of reason. However, a seller agrees with some buyers not to sell to another buyer who is a price cutter is per se illegal.

The Clayton Act of 1914:

-Section 2(a) outlaws price discrimination if it substantially

lessens competition. (However, price discrimination of

consumers or buyers who do not resale is legal.)

-Section 2(b) allows “good faith” defense to meet competition,

i.e. to meet but not to beat a low price offer of a rival, or

to charge different prices due to differences in cost of

manufacturing, sale or delivery.(What is the problem here?)

Economics 411 Handout 8 Professor Tom K. Lee

-Section 2(c) forbids hidden form of price discrimination such

as claiming a discount as a brokerage commission.

-Section 2(d) and 2(e) prohibit discriminatory behavior in

providing promotional allowances and services.

-Section 2(f) prohibits a large buyer to extract illegal

concessions from a relatively small seller.

-Section 3 prohibits tying clauses, requirement contracts,

exclusive dealings and territorial restraints that lessen

competition.

-Section 4 allows any person injured in his business or property

due to violation of antitrust laws to sue in any district

court of the United States to recover treble damages, and the

cost of the lawsuit, including a reasonable attorney’s fee.

-Section 4(b) sets a four-year statute of limitations, unless

there is government action pending. The four-year period does

not begin until the victims discover (or should have

discovered) the antitrust violations. In addition, a court of

appeals ruled that “So long as a monopolist continues to use

the power it has gained illicitly to overcharge its customers,

it has no claim on the repose that a statute of limitations is

intended to provide”.

-Section 5(a) makes a judgment in a suit brought by the United

States “prima facie evidence” in a private suit, thus giving

private plaintiffs an advantage as a result of a government

victory without subjecting them to any disadvantage from a

government loss. However, this section shall not apply to

consent judgments or decrees entered before any testimony has

been taken. (This encourages settlement before costly trial.)

-Section 5(b) to 5(h) require the United States to publish for

public comment any proposed consent judgment that would settle

a case in which it is a plaintiff. The Government must

summarize the competitive effects of the settlement. After a

period in which comments may be submitted, the district judge

must determine whether the proposed judgment is in the public

interest. The court can reject a proposed settlement if it

determines that the proposed decree is not in the public

interest. If it is rejected, the case must be tried.

-Section 7 prohibits interlocking directorates, and

mergers between competitors to the extent that they would

substantially lessen competition or tend to create a

monopoly, but exempts labor unions.

Price discrimination in sales of goods of like grade and quality

is illegal only if it is likely to result in substantial injury

to buyers’ competition(injury in the secondary line) or to

sellers’ competition (injury in the primary line).

To prove injury in the secondary line, the buyers must be

competing geographically and be on the same functional line. Economics 411 Handout 9 Professor Tom K. Lee

Primary line injury requires stronger prove of actual or

likely impairment of competition.

In primary line (sellers) injury, a seller sells a substantially

lower price in an area facing competition from other sellers,

but at a substantially higher price in an area facing no

competition may be illegal, but selling at a lower price in good

faith to meet the equally low ( but not lower) price of a

competitor is a good faith defense.

If a direct-buying retailer is charged less than a wholesaler

whose retail customers compete with the favored direct-buying

retailer is illegal.

Price discrimination to a wholesaler (who does not compete with

a retail buyer) and a retail buyer is allowed.

Promotional allowances of unequal terms are not allowed.

If a large buyer is the one who induce a seller to price

discriminate, the buyer may be found in violation of the

Robinson-Patman Act.

Fourth degree price discrimination is allowed.

Same f.o.b. price to all buyers plus freight cost that varies

among buyers are allowed.

The Federal Trade Commission Act of 1914 under section 5 outlaws

unfair and deceptive business practices and creates the Federal

Trade Commission to perform investigatory and adjudicative

functions. Sherman Act is a subset of the FTC Act.

The Webb-Pomerene Act of 1918 exempts export cartels from

antitrust.

The Capper-Volstead Act of 1922 exempts agricultural cooperatives

from antitrust.

A 1922 Supreme Court decision exempts professional sport teams.

The Robinson-Patman Act of 1936 amends Section 2 of the Clayton Act

largely to protect small, independent retailers from the newly

emerging chain stores, e.g. A&P, through outlawing price

discrimination among large and small buyers of products for

resale.

The Miller-Tydings Act of 1937 exempts state fair trade laws that

allowed minimum RPM from antitrust to protect small, independent

retailers from large chain store competition. This law is

repealed by the Consumer Goods Pricing Act of 1975 making RPM

per se illegal again.

The Celler-Kefauver Act of 1950 amends Section 7 of the Clayton

Act to read: “That no corporation engaged in commerce shall

acquire, directly or indirectly, the whole or any part of the

stock or other share capital and no corporation subject to the

jurisdiction of the Federal Trade Commission shall acquire the

whole of any part of the assets of another corporation engaged

also in commerce, where in any line of commerce in any section

of the country, the effect of such acquisition may be

substantially to lessen competition, or to create a monopoly.”

Economics 411 Handout 10 Professor Tom K. Lee

The Hart-Scott-Rodino Act of 1976 adds section 7a to the Clayton

Act requiring the prior notification of large proposed mergers

to both the FTC and DOJ for review before merger can occur. E.g.

in 1997, 52 of the 3,702 merger proposals were eventually

challenged through court or administrative actions and

settlement proceedings, and 7 were abandoned by the firms

involved before enforcement action was announced.

Beginning in the late 1990s, the antitrust division offers amnesty

to the first corporate co-conspirator in a price-fixing case to

confess. E.g. in May 1999 the world’s two largest vitamin

producers, Hoffman-La Roche and BASF AG, were fined $725

million by the DOJ and the third largest vitamin producer,

Rhone-Poulenc of France, received amnesty for cooperation with

the DOJ.

Part 4: Major Antitrust Cases

(CH 9 pp 263-277 291-292, CH 7 pp 201-208, CH 5 pp 122-134)

Major antitrust cases are developed over four time periods

-1890-1914: the first 25 years under the Sherman Act

I) defining jurisdiction & scope of the Act

U.S. v. E.C. Knight Company (the sugar trust)

156 U.S. 1 (1895)

II) horizontal restraint of trade

U.S. v. Addyston Pipe & Steel Co. (price fixing)

175 U.S. 211 (1899)

III) monopolization & merger

Standard Oil Co. of New Jersey v. U.S.

221 U.S. 1 (1911)

U.S. v. American Tobacco Co. 221 U.S. 106 (1911)

IV) vertical restraint of trade & RPM

Dr. Miles medical Co. v. John D Park & Sons Co.

220 U.S. 373 (1911)

-1915-1939: the rule of reason period

I) defining the rule of reason

U.S. v. U.S. Steel Corp. 251 U.S. 417 (1920)

II) interplay of patents & antitrust laws

U.S. v. GE 272 U.S. 476 (1926)

Standard Oil Co. (Indiana) v. U.S. 221 U.S. 1 (1931)

III) limits to rule of reason

U.S. v. Trenton Potteries Co. 273 U.S. 392 (1927)

IV) interplay of regulation & antitrust laws

the Keogh case

Appalachian Coals, Inc. v. U.S. 288 U.S. 344 (1933)

V) settlement before trial

U.S. v. IBM (1932)

Economics 411 Handout 11 Professor Tom k. Lee

-1940-1974: the per se rule & focus on market structure period

I) horizontal restraint of trade

1) Price fixing

U.S. v. Socony-Vacuum Oil Co.,

310 U.S. 150 (1940)

Charles Pfizer & Co., Inc. et. al. v. U.S.

City of Philadelphia v. Westinghouse Electric

2) Boycotts

Fashion Originators’ Guild of America v. U.S.

312 U.S. 457 (1941)

3) Market division

Timken Roller Bearing Co. v. U.S.

White Motor Co. v. U.S., 372 U.S. 253 (1963)

4) Price discrimination

FTC v. Morton salt 334 U.S. 37 (1948)

5) RPM

Klor’s, Inc. v. Broadway-Hale Stores

359 U.S. 207 (1959)

II) monopolization

U.S. v. Alcoa (1945)

American Tobacco case, 328 U.S. 781 (1946)

U.S. v. IBM (1952)

U.S. v. United Shoe Machinery Corp.

U.S. v. E. I. du Pont (the cellophane case)

351 U.S. 377 (1956)

U.S. v E.I. du Pont, 353 U.S. 586 (1957)

Utah Pie Co. v. Continental Baking Co.

386 U.S. 685 (1967)

III) vertical arrangements

International Salt Co. v. U.S., 332 U.S. 392 (1947)

U.S. v. Loew’s Inc., 371 U.S. 38 (1962)

Siegel v. Chicken Delight, Inc.

Standard Oil Co. (California) v. U.S.,

337 U.S. 293 (1949)

IV) merger

Brown Shoe, Co., Inc. v. U.S., 370 U.S. 294 (1961)

U.S. v. Alcoa et.al. (1964)

U.S. v. Von’s Grocery Co. et. al.,

384 U.S. 270 (1966)

FTC v. Proctor & Gamble Co. et. al.,

386 U.S. 568 (1967)

V) limits to per se rule

U.S. v. Container Corp. of America,

393 U.S. 333 (1969)

U.S. v. Topco Associates, Inc., 405 U.S. 596 (1972)

Economics 411 Handout 12 Professor Tom K. Lee

-1974-present: modern development of antitrust laws

I) per se rule v. rule of reason

1) Horizontal restraint of trade

A) price fixing

California Dental Association v. FTC

National Society of Professional Engineers

v. U.S., 435 U.S. 679 (1978)

Broadcast Music, Inc. v. Columbia

Broadcasting System, Inc., 441 U.S. 1 (1979)

Goldfarb v. Virginia State Bar,

421 U.S. 773 (1975)

NCAA v. Board of Regents of the U. of

Oklahoma, 468 U.S. 85 (1984)

The NASDAQ case

B) Boycotts

Northwest Wholesalers, Inc. v. Pacific

Stationery & Printing Co.,

472 U.S. 284 (1985)

C) Market division

Jay Palmer v. BRG of Georgia, Inc.

Monsanto Co. v. Spray-Rite Services Corp.,

465 U.S. 752 (1984)

Continental TV, Inc. v. GTE Sylvania

433 U.S. 36 (1977)

2) Monopolization

Aspen Skiing Co. v. Aspen Highlands Skiing

Corp., 472 U.S. 585 (1985)

The Xerox case

Berkey Photo, Inc. v. Eastman Kodak Co.

The Kellogg case

The ATT case

3) Vertical arrangements

Eastman Kodak Co. v. Image technical Services, Inc., 504 U.S. 451 (1992)

4) Exclusionary conduct

Microsoft case

II) antitrust as an administrative process

1) Horizontal Merger guideline

2) Vertical Merger guideline

3) Guideline for collaborations among competitors

4) Guideline for Licensing of Intellectual Property

Economics 411 Handout 13 Professor Tom K. Lee

The 1895 United States v. E.C. Knight Co. (the Sugar Trust Case)

-Prior to March 1892, the American Sugar Refining Co. had

acquired all but five of the sugar refineries in the United

States. During March 1892, America Sugar Refining acquired the

four of the “holdouts” that were based in Philadelphia by

exchanging shares of its own stock for shares of theirs. The

fifth firm remaining refined only 2% of the U.S. sugar. By 1985

the portion of U.S. sugar not refined by American Sugar

Refining had risen to 10%. The trial court dismissed the case.

The Appeal Court and the Supreme Court affirmed. The courts

reasoned that commerce is not a part of manufacturing. An

attempt to monopolize, or actual monopoly of, the manufacture

was not an attempt to monopolize commerce.

The 1898 United States v. Addyston Pipe & Steel Co.

-The United States filed suit to enjoin six manufacturers of

cast-iron pipe from allocating among themselves the right to

serve particular customers through four steps:

1) The firms designated “reserved cities” in which one of their

member was granted the right to make all pipe sales by

having that member firm bid the lowest price while the other

firms all bid higher prices to make it appeared legal.

2)Firms that won the contracts paid part of the profit into a

pool to be divided among the other firms.

3)If a firm sold outside of their territory, the firm had to

paid a specific portion of the profit into a common fund for

distribution to other firms.

4)At a later stage of the cartel, member firms bid among

themselves for the right to get particular contract, that is

whoever willing to pay the most to the pool had to right to

win that contract.

Evidence showed that sometimes a firm outside the cartel could

underbid their designated winner when the cartel set the

winning bid too high. Also when member firms sold in “free”

territory, i.e. territory outside the “reserved cities”, they

sold for less even though they faced higher shipping costs.

The trial judge dismissed the case, but on appeal, the Appeal

Court reversed the dismissal and ordered the perpetual

enjoining of the defendants from maintaining the combination

in cast-iron pipe.

The 1911 Standard Oil Co. of New Jersey v. United States case

-the Rockefeller brothers built their trust by acquiring more

than 120 rivals to achieve a 90% share of the production,

refining, distribution, and sale of petroleum products in the

1870s to 1890s. They were accused of predatory pricing to drive

competitors out of business, of buying up pipelines in order to

foreclose crude oil supplies to rivals, of securing

discriminatory rail freight rates. The Supreme Court created

thirty-three companies by geographical regions out of John D.

Rockefeller’s Standard Oil.

The 1911 United States v. American Tobacco Co. case

-in 1890, five leading firms that accounted for 95% of cigarette

production in United States merged and formed the American

Tobacco Co to enjoy economies of scale in production and to

reduce advertising costs. American bought up its competitors

for their brand name cigarettes and closed their inefficient

factories down, but entry to cigarette manufacture was

relatively easy. Its share of the cigarette market declined to

74% in 1907. From 1895 to 1907, the price of leaf tobacco per

pound rose from 6 to 10.5 cents. Through acquisition it

manufactured and sold 80% of the nation’s snuff in 1902. By

acquiring almost all the producers of licorice paste, an

essential input to chewing tobacco production, it captured 95%

of the chewing tobacco market. Justice White of the Supreme

Court cited the following facts: (1) the original combination

of cigarette firms in 1890 was “impelled” by a trade war; (2)

an “intention existed to use the power of the combination as a

vantage ground to further monopolize the trade in tobacco”,

and the power was used; (3) the Trust attempted to conceal the

extent of its control with secret agreements and bogus

independents; (4) American’s policy of vertical integration

served as a “barrier to the entry of others into the tobacco

trade”; (5) American expended millions of dollars to purchase

plants, “not for the purpose of utilizing them, but in order

to close them up and render them useless for the purposes of

trade”; and (6) there were some agreements not to compete

between American and some formerly independent tobacco

manufacturers. He ordered to break up American Tobacco Company

according to product lines.

The 1911 Dr. Miles Medical Co. v. John D. Park & Sons Co.

-Dr. Miles Medical Co. was engaged in the manufacture and sale

of proprietary medicines, prepared by means of secret methods

and formulas and identified by distinctive packages, labels and

trademarks. It fixed the price of its own sales to jobbers and

wholesale dealers and the wholesale and retail prices. Dr.

Miles Medical Co. sued John D. Park & Sons Co. for inaugurating

a “cut-rate” or “cut-price” system at the wholesale level

causing harm to its profits and that of its other agents. The

Circuit Court dismissed the case and the Appeal Court confirmed

stating that the case was not about the process of manufacture,

but the manufactured product, and that Dr. Miles Medical Co.

was looking to sale and not to agency for its products. What

Dr. Miles Medical Co. was doing was resale price maintenance

and was illegal.

The 1920 United States v. US Steel Corp. case

-in 1901, 180 independent steel producers that accounted for 80

to 95% of U.S. production of iron and steel products merged to

form United States Steel Corporation. Since its formation,

United States Steel found its market share fell steadily to

40% by 1920. The Supreme Court ruled in favor of United States

Steel for lack of substantial monopoly power.

The 1926 United States v. General Electric Co.

-General Electric Co. had three patents covering the process of

manufacturing tungsten filaments, the use of tungsten filaments

in the manufacture of electric lamps, and the use of gas in the

bulb by which the intensity of the light was substantially

heightened. The Government alleged that General Electric Co.

fixed the resale prices of lamps in the hands of purchasers and

a licensee, Westinghouse Co. that make, use and sell lamps. The

District Court dismissed the case and the Supreme Court

confirmed stating that the owner of patents was not violating

antitrust laws by seeking to dispose of its patented products

directly to consumers and fixing the price by which its agents

transfer the title from it directly to such consumers.

The 1927 United States v. Trenton Potteries Co.

-Twenty three corporations engaged in the manufacturing or

distribution of 82 % of the vitreous pottery fixtures produced

in the United States for use in bathrooms and lavatories. They

were members of a trade association known as the Sanitary

potters’ Association. They fixed and maintained uniform prices

for the sale of sanitary pottery and limited sale of pottery to

a special group of “legitimate jobbers”. The Supreme Court

ruled that the aim and result of every price-fixing agreement,

if effective, was the elimination of one form of competition.

The power to fix prices, whether reasonably exercised or not,

involved power to control the market and to fix arbitrary and

unreasonable prices. The reasonable price fixed today might

through economics and business changes became the unreasonable

price of tomorrow. The Supreme Court reversed the Appeals Court

and reinstated the District Court conviction of violation of

the Sherman Act.

The 1931 Standard Oil Co.(Indiana) v. United States

-in 1913 Standard Oil Co. (Indiana) perfected the process of

cracking in the production of gasoline. Three other companies

secured numerous patents covering their particular cracking

processes. To avoid the litigation and losses due to these

patents, each firm was allowed to use these patents, empowered

to extend license of its process to independent concerns. Each

firm was to share in some fixed proportion the fees received

under these multiple licenses. Up to 1920 all cracking plants

in the United States were owned by Standard Oil Co. (Indiana)

alone, or were operated by licenses from it. In 1924 and 1925,

after the cross licensing arrangements were in effect, the four

companies owned or licensed only 55% of the total cracking

capacity, and the remainder was distributed among 21

independently owned cracking processes. This development and

commercial expansion of competing processes was clear evidence

that the cross licensing arrangement did not slow competition.

The output of cracked gasoline was about 26% of the total

gasoline production in those years. Ordinary gasoline was

indistinguishable from cracked gasoline and the two were either

mixed or sold interchangeably. The Supreme Court ruled in favor

of Standard Oil Co. (Indiana).

Economics 411 Handout 14 Professor Tom K. Lee

The 1932 United States v. IBM case

-IBM and Remington Rand, Inc. entered into agreements

a) to lease only and not sell tabulating machines;

b) to adhere to minimum prices for the rental of tabulating machines as fixed by IBM; and

c) to require customers to purchase their card requirements from the lessor or pay a higher price for the rental of machines.

The restrictive agreements between IBM and Remington Rand, Inc. were cancelled in 1934 prior to trial and the antitrust case was dropped.

The 1933 Appalachian Coals, Inc. v. United States

-Throughout the 1920s the economic condition of the coal

industry was deplorable. Due to the large expansion under the

stimulus of the Great War, the bituminous mines in United

States had a developed capacity of 700 million tons with a

demand of less than 500 million tons. Coal had been losing

markets to oil, natural gas and water power and to greater

efficiency in the use of coal. There existed organized buying

agencies and large consumers buying substantial tonnages, thus

creating a buyers’ market of coal. Numerous producing companies

had gone into bankruptcy or in the hands of receivers, many

mines had been shut down, the number of days of operation per

week had been greatly curtailed, wages to labor had been

substantially lessened, and the concerned states had difficulty

in collecting taxes. Governors of concerned states held a

general meeting in December 1931 to recommend the organization

of regional sales agencies, leading to 137 producers of

bituminous coal in the Appalachian territory to form the

Appalachian Coals, Inc. as an exclusive selling agency. The

United States sued the combination in violation of sections 1

and 2 of the Sherman Act. The Supreme Court ruled against the

government stating that the Sherman Act did not preclude

business entities to make an honest effort to remove abuses, to

make competition fairer, and thus to promote the essential

interests of commerce.

The 1945 United States v. Alcoa case 148 F. 2d 416 (1945)

-District Court Judge Caffey cleared Alcoa of all wrongdoing. On

appeal by the government to the Supreme Court, the Supreme

Court was unable to hear the case because four of its justices

had previously participated in antitrust actions against Alcoa

when they served at the DOJ. After more than two years of

delay, Congress passed a special act on June 9, 1944, allowing

a U.S. Circuit Court of Appeals to hear the case. Circuit Court

Judge Learned Hand in 1945 ruled against Alcoa for illegal

monopolization even though there were no anticompetitive

behavior. He included Alcoa’s own fabricated ingot use, and

excluded secondary ingot use to arrive at the conclusion that

Alcoa virgin aluminum production market share of 90% as a

measure of Alcoa monopoly power. The building of capacity ahead

of demand growth from Alcoa new use development was considered

an intent to monopolize. Subsequently many of the government

aluminum production plants from the war effort were sold to

Reynolds Metal and Kaiser Aluminum to create competition in the

aluminum industry.

The 1946 American Tobacco Co. et. al. v. United States case

-the Supreme Court found the big three tobacco firms: Reynolds,

American and Liggett & Myers, guilty of conspiracy based on

conscious parallelism, i.e. based on observable

anticompetitive behavioral conduct.

The 1947 International Salt Co., Inc v. United States case

-the Supreme Court ruled against International Salt Company for

violating section 1 of the Sherman Act and section 3 of the

Clayton Act in tying its patented salt-dispensing machines

used in food processing and salt and salt tablets supplied by

the company.

Economics 411 Handout 15 Professor Tom K. Lee

The 1948 FTC v. Morton Salt case

-the Supreme Court concurred with the FTC (and reversed a

Circuit Court of Appeals) in ruling against Morton Salt in

violating section 2 of the Clayton Act that although Morton

Salt offered volume discount to all retailers, wholesalers and

to chain stores, only five customers (of which four are large

chain stores) ever took advantage of the large volume discount.

The 1952 United States v. IBM

-IBM was charged with violations of Section 1 and 2 of the

Sherman Act in owning 90% of all tabulating machines in the

United States and manufacturing and selling about 90% of all

tabulating cards sold in the United States. The suit was

terminated by the entry of a consent judgment in January 25,

1956.

The 1953 United States v. United Shoe Machinery case 110F.Supp.295

-the District Court ruled against United Shoe for monopolizing

75 to 90% of the markets for shoe machinery and parts in the

United States through acquisition, and in restricting entry by

not selling 178 of 342 its machines but leasing them on ten

year terms with free repair services and requiring lessees to

use United machines if work was available and to pay the

balance of the lease payments even if the machine was returned

before the lease expired. United Shoe was required to end its

restrictive lease agreements, to make any machine for lease for

five years and for sale (at comparable price), to separate

service charge from leased machine charge, and to restrain from

acquisition. The DOJ appealed to the Supreme Court in 1967, and

the Supreme Court agreed 391 U.S. 244 (1968) and ordered a

lower court to work out a divestiture. United was ordered to

divest itself of shoe machines, manufacturing assets, and

patents. United was ordered to provide service and parts for

the divested independent competitor, Transamerican Shoe

Machinery Corporation, and to refrain from active competition

with Transamerican for a period of five years.

The 1957 United States v. E.I. du Pont case

-the Supreme Court ruled against du Pont under the amended

section 7 of the Clayton Act by noting that du Pont was not a

major GM supplier until after its purchase of 23% of GM stocks

in 1917-1919. By 1946 du Pont supplied 67% of GM’s

requirement for finishes and 52.3% of GM’s fabric needs, but

there were du Pont products that were not chosen by GM.

Economics 411 Handout 16 Professor Tom K. Lee

The 1961 City of Philadelphia v. Westinghouse Electric case

-seven middle-management executives of General Electric,

Westinghouse, Allis-Chalmers, and Federal Pacific involved with

secret meetings were sentenced to jail for thirty days, the

firms were fined almost $2 million for price-fixing, and the

total treble damages awarded to harmed customers in subsequent

civil cases were approximately $400 million.

The 1962 Brown Shoe v. United States case

-Brown Shoe, the fourth largest shoe manufacturer in the United

States, proposed to acquire G.R. Kinney Company, the twelve

largest shoe retailer. While these two firms had a combined

share of about 4% of the national market, they had 57% of the

market for woman’s shoes in Dodge City, Kansas. The Supreme

Court ruled against the merger under the Clayton Act arguing

that all other shoe manufacturers would be in a competitive

disadvantage to Brown when Kinney purchased shoe for sale in

their retail stores.

The 1962 United States v. Loew’s Inc. case

-the Supreme Court ruled against Loew’s, Inc. for distributing

pre-1948 copyrighted movies for television broadcasting on

block booking basis. This constituted a violation of section 1

of the Sherman Act.

The 1964 United States v. Alcoa et. al. case

-the Supreme Court ruled against the acquisition of Rome Cable

by Alcoa. Alcoa produced bare aluminum wire and cable and

insulated aluminum wire and cable while Rome Cable produced

the copper counterpart. Only the insulated aluminum wire and

cable competed with the copper counterpart. Rome Cable was a

substantial and aggressive competitor of Alcoa in that market.

The 1966 United States v. Von’s Grocery Co. et. al. case

-the case involved Von’s, the third largest grocery chain in the

Los Angeles area in 1960, and Shopping Bag Food Stores, the

sixth largest. The two firms had the combined share of 7.5% of

the market. The Supreme Court, citing that the number of single

store owners dropped by 35% between 1950 and 1963, stated,

“The basic purpose of the 1950 Celler-Kefauver Act was to

prevent economic concentration in the American economy by

keeping a large number of small competitors in business.”

The 1967 FTC v. Proctor & Gamble Co. et. al. case

-the Supreme Court ruled against Proctor & Gamble in its

acquisition of Clorox citing that Proctor & Gamble was the

most likely entrant to the liquid bleach market where Clorox

has a 49% of the national market. This violated Section 7 of

the Clayton Act.

Economics 411 Handout 17 Professor Tom K. Lee

The 1967 Utah Pie v. Continental Baking case

-the Supreme Court ruled in favor of Utah Pie, a local Salt Lake

City firm, and against Continental Baking, a national firm, in

setting prices less than its direct cost plus an allocation of

overhead and in charging prices less in markets with

competition than in markets without competition. This

constituted a violation of sections 1 & 2 of the Sherman Act

and section 2a of the Clayton Act.

The 1969-1982 IBM case

-in 1969 IBM was charged with violations of Section 2 of the

Sherman Act in attempt to monopolize and in monopolizing 76% of

the value of all purpose digital computers through

manufacturing and marketing policy that prevented competing

manufacturers from having an adequate opportunity effectively

to compete for business in the general purpose digital computer

systems and peripheral equipment markets. The case was

dismissed by William F. Baxter of the DOJ in January 8, 1982

after incurring over $200 million in legal costs, and after a

related case Telex v. IBM lost on the Appeals Court.

The 1972 Siegel v. Chicken Delight, Inc. case

-the Supreme Court ruled against Chicken Delight in requiring

licensed franchises to purchase specific cookers, fryers,

package mixes, and spices from Chicken Delight, but allowed

Chicken Delight, Inc. to collect royalty on its franchises.

The 1973 Charles Pfizer & Co., Inc. et. al. v. United States

-the Supreme Court ruled that the parallel pricing of Pfizer,

Cyanamid, Bristol, Upjohn, and Squibb did not indicate price

fixing.

The 1973 SCM Corp. v. Xerox Corp. case

-on July 31, 1973 SCM Corporation sued Xerox Corporation for

violation of sections 1 and 2 of the Sherman Act and section 7

of the Clayton Act. The district court dismissed the case. SCM

Corporation appealed and the Appeal Court affirmed the district

court decision on March 12, 1981.

The 1975 Goldfarb v. Virginia State Bar case

-the Supreme Court found the Virginia State Bar in violation of

Section 1 of the Sherman Act in suggesting minimum attorney’s

fees for various services for lawyers to be in good standing.

The 1975 Xerox case

-in January 1973 the FTC filed a complaint against Xerox

Corporation for violation of section 2 of the Sherman Act. On

July 29, 1975 the case was settled by consent decree that Xerox

would license patents, supply “know-how” to competitors, sell

as well as lease copy machines, and alter its pricing policies.

Economics 411 Handout 18 Professor Tom K. Lee

The 1977 Continental T.V., Inc. v. GTE-Sylvania Inc. case

-the Supreme Court ruled in favor of GTE-Sylvania in imposing a

territorial restriction on its franchisee, Continental, citing

the declining market share of GTE-Sylvania and so the “rule of

reason” applied.

The 1979 Berkey Photo, Inc. v. Eastman Kodak Co. case

-the Second Circuit Court of Appeals ruled in favor of Kodak

citing that Kodak did not have to pre-disclose information

about its 110 Pocket Instamatic photographic system to its

rivals even though the system required a new Kodacolor II film.

Kodak had the right to profit from invention.

The 1981 Kellogg case

-in April 26, 1972 the FTC filed Docket No. 8883 to complain

against Kellogg, General Mills, General Foods, and Quaker Oats

with the four firms selling 90 percent of the ready-to-eat

cereals market. The firms almost always follow Kellogg when

charging their market prices. The firms maintain their market

position by introducing dozens of new cereal types. Quaker Oats

was subsequently dropped from the case. In 1981, FTC Judge

Alvin Berman ruled in favor of Kellogg that brand

proliferation was a legitimate means of competition even

though Kellogg has 45% of the ready-to-eat cereals market.

The 1982 ATT case

-the case was settled by consent decree that ATT divested it

telephone-operating companies and to separate the regulated

telephone utilities from their unregulated equipment supplier,

Western Electric.

The 1984 NCAA v. University of Oklahoma et. al. case

-in 1981 the NCAA negotiated contracts with ABC and CBS that

limited the number of games that could be broadcasted by each

member university and the price each member university could

receive per broadcast. While the lower court used the per se

rule to find NCAA practice as illegal, the Supreme Court used

the rule of reason (because NCAA is a non-profit organization)

to find NCAA practice as illegal under section 1 of the Sherman

Act. The Court recognized the NCAA’s exemption from the Sherman

Act on efficiency ground on some activities such as game

scheduling, rule interpretations, etc.

The 1992 Eastman Kodak v. Image Technical Services, Inc. case

-the Supreme Court ruled against Kodak in a tying case of repair

services to parts for Kodak photocopiers foreclosing

independent service companies from repairing Kodak

photocopiers.

Economics 411 Handout 19 Professor Tom K. Lee

The 1994 NASDAQ case

-a class action suit was filed by investors against thirty-seven

NASDAQ dealers in quoting almost exclusively in even eighths

when the rules of NASDAQ enforce the minimum spread to be one-

eighth for stocks whose bid price exceeds $10. In December

1997, thirty-six of those NASDAQ dealers agreed to an out-of-

court settlement of around $1 billion without admitting any

wrongdoing.

In 1990 FTC began investigating Microsoft’s acquisition and

maintenance of monopoly power in operating system software

market. FTC deadlock 2-2 in deciding whether to file a

complaint against Microsoft and suspended the investigation.

In 1993 Novell, a rival software vendor, filed a complaint with the

Directorate General IV of the European Union alleging that

Microsoft was tying its MS-DOS operating system to the

graphical user interface provided by Windows 3.11. Before the

introduction of Windows 95, which integrated the two, Microsoft

marketed the DOS component and the Windows component of the

operating system separately, and Windows 3.11 could be operated

with other DOS products. Novell, which marketed a competing DOS

product, DR-DOS, complained that by means of licensing

practices such as “per processor and per system” licenses,

Microsoft was forcing OEMs to preinstall MS-DOS as well as

Windows 3.11 to force out its competitors.

The 1994 United States v. Microsoft Corp. case

-In July, 1994 DOJ filed a civil complaint under the Sherman Act

charging Microsoft with unlawfully maintaining a monopoly of

operating system for IBM-compatible PCs and unreasonable

restraining trade in that market through anticompetitive

practices which consisted of: (i) the use of contract terms

requiring original equipment manufacturers(OEMs) to pay

Microsoft a royalty for each computer the OEM sells containing

a particular microprocessor (namely, an x86 class

microprocessor), whether or not the OEM has included a

Microsoft operating system with that computer, (ii) executing

contracts with major OEMs requiring minimum commitments and

crediting unused balances to future contracts and

(iii) imposing nondisclosure agreements on some independent

software vendors(ISVs) which would restrict their ability to

work with competing operating systems companies and to develop

competing products for an unreasonable long period of time. A

consent decree to last for 78 months was proposed by DOJ which

prohibits Microsoft from entering per processor licenses,

licenses with term exceeding one year, licenses containing a

minimum commitment, licenses that are expressly or impliedly

conditioned upon: (i) the licensing of any Covered Product,

Operating System Software product or other product, or (ii) the

OEM not licensing, purchasing, using or distributing any non-

Economics 411 Handout 20 Professor Tom k. Lee

Microsoft product, and unduly restrictive nondisclosure

agreements on Microsoft’s most popular operating system

products(MS-DOS, Windows and Windows 95) but does not cover

Windows NT products. In February, 1995 the district court

Judge Sporkin issued an order denying DOJ’s motion to approve

the consent decree charging that the consent decree did not

contain provisions that would (1) bar Microsoft engaging in

vaporware (which is public announcement of a product before it

is ready for market to deter consumers from purchasing a

competitor’s product), (2) establish a wall between the

development of operating system software and the development of

applications software, and (3) require disclosure of all

instruction codes built into operating systems software

designed to give Microsoft an advantage over competitors in

application software market. In June 1995 the United States

Court of Appeals reversed and ordered the consent decree,

citing that Judge Sporkin had exceeded his authority to include

charge of vaporware that was not included in the government

original charges, and the observed biasness of Judge Sporkin in

allowing three anonymous companies, known as the “Doe

Companies”, to participate as plaintiff. A new district court

judge, Thomas Jackson, was assigned to handle the case. In

August 1995 Judge Jackson ordered the consent decree.

The 1997 United States v. Microsoft Corp. case

-The first three versions of Internet Explorer (IE) were

included on the Windows 95 master disk supplied to OEMs. IE 4.0

was initially distributed on a separate CD-ROM and OEMs were

not required to install it. When DOJ learned that Microsoft

intended to start requiring OEMs to preinstall IE 4.0 as part

of Windows 95 in February 1998, DOJ filed a petition seeking

to hold Microsoft in civil contempt of the 1994 consent

decree, and requesting the district court to order Microsoft

to cease and desist from employing similar agreements with

respect to any version of IE. Finding the language of the

1994 consent decree ambiguous, Judge Jackson denied DOJ’s

contempt petition, but entered a preliminary injunction on

Microsoft’s practice to licensing with the stipulation that

Microsoft would be in compliance with the injunction if it

extended the options of (1) running the Add/Remove Programs

utility with respect to IE 3.x and (2) removing the IE icon

from the desktop and from the Programs list in the Start menu

and making the file IEXPLORER.EXE “hidden”. In June 1998 the

United States Court of Appeals found that the district court

erred procedurally in entering the preliminary injunction

without notice to Microsoft, and substantively in its implicit

construction of the consent decree on which the preliminary

injunction rested. IE 4.0 and Windows operating system are

complements used in fixed proportions. IE 4.0 provides system

Economics 411 Handout 21 Professor Tom K. Lee

services (such as the HTML reader) to enhance the functionality

of many applications and to upgrade some aspects of the

operating system (such as customizing the “Start” menus and

making possible “thumbnail” previews of files on the

computer’s hard drive) unrelated to Web browsing. Product

design should not be overseen by antitrust laws and

enforcement.

The 1998 United States v. Microsoft Corp. case

-on May 18, 1998 DOJ along with representatives from 20 state

governments filed an antitrust suit against Microsoft. It is alleged that Microsoft violated Section 2 of the Sherman Act

in predatory conduct to thwart the development of emerging

technologies that would allow application, such as word

processors, games, and other useful programs, to be written

so they would run on operating systems other than Microsoft’s

Windows without costly adaptation; and to protect its monopoly

from erosion by Netscape Navigator Web browser and Sun’s Java

software that can be run on a wide variety of operating

systems. It is also alleged that Microsoft violated Section 1

of the Sherman Act in tying its Internet Explorer web browser

with Windows. On November 5, 1999, the District Court Judge

Jackson entered its Finding of Facts and ordered the parties

to engage in mediation before Chief Judge Posner of the U.S.

Court of Appeals for the Seventh Circuit. On April 3, 2000,

after four months of intensive mediation efforts that

ultimately failed, the district court entered its Conclusions

of Law holding that Microsoft violated Sections 1 and 2 of the

Sherman Act. On June 7, 2000, the district court entered a

Final Judgment that requires Microsoft to submit a plan to

reorganize itself into two separate firms: an “Operating

System Business” and an “Applications Business”. Microsoft

appealed the case to the United States Court of Appeals on

grounds that the District Court failed to allow Microsoft an

evidentiary hearing on disputed facts, and that the trial judge

committed ethical violations by engaging in impermissible ex

parte contacts and making inappropriate public comments on the

merits of the case while it was pending, thus compromising the

District Judge’s appearance of impartiality.

Economics 411 Handout 22 Professor Tom K. Lee

The 2001 United States v. Microsoft case

-the Appeals Court affirmed in part and reversed in part the

District Court’s judgment that Microsoft violated section 2 of

the Sherman Act by employing anticompetitive means to maintain

a monopoly in the operating system market; reverse the District

Court’s determination that Microsoft violated section 2 of the

Sherman Act by illegally attempting to monopolize the internet

browser market; and remand the District Court’s finding that

Microsoft violated section 1 of the Sherman Act by unlawfully

tying its browser to its operating system. The Appeals Court

vacate the Final Judgment on remedies because the District

Court failed to hold an evidentiary hearing to address

remedies-specific factual disputes, and because the trial judge

engaged in impermissible ex parte contacts by holding secret

interviews with members of the media and made numerous

offensive comments about Microsoft officials in public

statements outside of the courtroom, giving rise to an

appearance of partiality. The Appeals Court remanded the case

for reconsideration of the remedial order, and required that

the case be assigned to a different judge on remand.

The 2002 United States v. Microsoft

-Without admission to guilt by Microsoft, District Judge Judy

Colleen Kollar-Kotelly ordered and decreed the Final Judgment

on Microsoft:

Microsoft shall not retaliate against an independent hardware vendor (IHV), independent software vendor(ISV), original equipment manufacturer(OEM).

1) Microsoft shall provide Windows Operating System Product to OEMs with uniform license terms and conditions.

2) Microsoft shall not restrict IHV, ISV, and OEM in using, distributing, launching or offering users options to launch any Non-Microsoft Middleware.

3) Microsoft shall disclose the application programming interfaces (APIs) and related Documentation.

4) Microsoft shall make available any Communication Protocol for use by third parties on reasonable and non-discriminating terms.

5) Microsoft shall not enter into any exclusionary agreement with any internet access provider (IAP), internet content provider (ICP), IHV, ISV, or OEM.

6) Microsoft shall allow end users and OEMs to enable or remove access to, or to interchange Microsoft Middleware Product and Non-Microsoft Middleware Product.

7) The Windows Operating System Product shall not automatically alter an OEM’s configuration of icons, shortcuts or menu entries.

Economics 411 Handout 23 Professor Tom K. Lee

8) Microsoft shall offer to license to IAPs, ICPs, IHVs, ICVs and OEMs any intellectual property rights owned or licensable by Microsoft that are required to exercise to the above orders.

9) Microsoft shall not be required to document, disclose or license to third parties API, Documentation or Communications Protocols that might jeopardize the integrity and security of any Microsoft product against piracy, virus, encryption or willful violation of intellectual property rights.

The 1997 Staples-Office Depot case

-an FTC administrative judge issued an injunction to block a

proposed merger of Staples and Office Depot citing that

Staples’ prices were significantly lower in cities where

Staples competed with Office Depot than in cities without

Office Depot.

Part 5: Merger

(CH 7 pp192-198)

Five merger waves

-the 1890-1904 merger for monopoly wave, e.g. US Steel, GE,

American Can, du Pont, Eastman Kodak, and American Tobacco.

-the 1916-1929 merger for oligopoly wave, e.g. Bethlehem Steel.

-the post-war conglomerate merger wave

-the 1980s leverage buyout wave, e.g. Philip Morris’s purchase

of Kraft, Campeau Corporation purchase of Federated Department

Stores, and Kohlberg, Kravis, Roberts & Co. purchase of RJR-

Nabisco.

-the 1990s deregulation and efficiency wave, e.g. Travelers

Group-Citicorp merger, SBC-Ameritech merger, Bank of America-

Nationsbank merger, and Exxon-Mobil merger

Reasons for merger -monopolization

-economies of scale & economies of scope

-reducing management inefficiencies

-diversification of risk

-others e.g. retirement, empire building

The 1997 DOJ/FTC Horizontal Merger Guidelines

The 1997 DOJ/FTC Non-horizontal Merger Guidelines

Economics 411 Handout 24 Professor Tom K. Lee

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,

a Premerger Notification and Report Form is required if:

1) either firm to the proposed merger has annual net sales or

total asset of at least $100 million and the other firm has

annual net sales or total assets of at least $10 million;

and

2) as a result of the impending merger, the acquiring firm will hold more than $15 million of the acquired firm’s stock and/or assets. An acquisition of another firm’s voting securities of less than $15 million also require reporting if, as a result of the impending merger, the acquiring firm will hold 50% or more of the voting securities of the acquired firm that has $25 million or more annual net sales or total assets.

After the acquiring firm pays $45,000 filing fee, the two firms cannot consummate the impending merger for a period of 30 days (15 days for cash tender offers) unless the government decides before the 30-day period is over that the impending merger poses no threat to competition. If the impending merger appears to pose a threat to competition, the government may issue a

“Second Request” for information. After the compliance to the second request, there is an additional 20 days (10 days for a cash tender offer) waiting period. If the government opposes the impending merger, it can seek an injunction in federal court and seek relief in partial divestitures or other behavioral relief.

The FTC Guides Against Deceptive Pricing

The FTC Guides Against Bait Advertising

Suggested antitrust cases for term paper

1. 1899 United States v. Addyston Pipe & Steel Co.

175 U.S. 211

2. 1911 Standard Oil Co. of New Jersey v. United States

221 U.S. 1, 31 S.Ct.502, 55 L.Ed. 619

3. 1911 United States v. American Tobacco

221 U.S. 106, 31 S.Ct. 632, 55 L.Ed. 663

4. 1920 United States v. US Steel Corp.

251 U.S. 417, 40 S.Ct. 293, 64 L.Ed. 343

5. 1926 United States v. G.E., 272 U.S. 476

6. 1933 Appalachian Coals, Inc. v. United States

288 U.S. 344

7. 1941 Fashion Originators’ Guild of America v. US

312 U.S. 457

8. 1945 United States v. Alcoa, (monopolization case)

148 F.2d 416

9. 1946 American Tobacco Co. et. al. v. United States

328 U.S. 781, 66 S. Ct. 1125, 90 L.Ed. 1575

10. 1947 International Salt Co., Inc. v. United States

332 U.S. 392, 68 S. Ct. 12, 92 L.Ed. 20

11. 1948 FTC v. Morton Salt,

334 U. S. 37, 68 S.Ct. 822, 92 L.Ed. 1196

12. 1953 United States v. United Shoe Machinery, 110 F.Supp. 295

13. 1956 United States v. E.I. DuPont (cellophane case)

351 U.S. 377, 76 S.Ct. 994, 100 L.Ed. 1264

14. 1957 United States v. E.I. DuPont

353 U.S. 586, 77 S. Ct. 872, 1 L.Ed.2d 1057

15. 1959 Klor’s, Inc. v. Broadway-Hale Stores

359 U.S. 207

16. 1961 City of Philadelphia v. Westinghouse Electric

210 F. Supp. 483

17. 1962 Brown Shoe v. United States

370 U.S. 294, 82 S.Ct. 1602, 8 L.Ed.2d. 510

18. 1962 United States v. Loew’s Inc.

371 U.S. 38, 83 S.Ct. 97, 9 L.Ed.2d 11

19. 1963 White Motor Co. v. US, 372 U.S.253

20. 1964 United States v. Alcoa et. al. (merger case)

377 U.S. 271, 84 S.Ct. 1283, 12 L.Ed.2d 314

21. 1966 United States v. Von’s Grocery Co. et. al.

384 U.S. 270, 86 S.Ct. 1478, 16 L.Ed.2d 555

22. 1967 FTC v. Proctor & Gamble Co. et. al.

386 U.S. 568, 87 S.Ct. 1224, 18 L.Ed.2d 303

23. 1967 Utah Pie v. Continental Baking

386 U.S. 685, 87 S.Ct. 1326, 18 L.Ed.2d 406

24. 1969 United States v. International Business Machine

U.s. D.Ct. S.D.NY, Civil Action No. 69 Civ. 200

25. 1972 Siegel v. Chicken Delight, Inc.

405 U.S. 955, 448 F.2d 43(9th Cir.)

26. 1973 Charles Pfizer & Co., Inc. et. al. v. United States

367 F.Supp. 91 (S.D.N.Y.)

27. 1975 Goldfarb v. Virginia State Bar, 421 U.S. 773

28. 1975 SCM v. Xerox, 463 F.Supp.2d.

29. 1977 Continental T.V., Inc. v. GTE-Sylvania Inc.

433 U.S. 36, 97 S.Ct. 2549, 53 L.Ed.2d 568

30. 1979 Berkey Photo, Inc. v. Eastman Kodak Co.

603 F.2d 263 (2d Cir. 1979)

31. 1981 FTC v. Kellogg, FTC Docket No. 8883, April 26, 1972

32. 1982 MCI v. AT&T, 708 F.2d 1081 (7th Cir. 1983)

33. 1984 NCAA v. University of Oklahoma et. al.

468 U.S. 85, 104 S.Ct. 2948, 82 L.Ed.2d 70

34. 1992 Eastman Kodak v. Image Technical Services, Inc.

504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed2d 265

35. 1995 United States v. Microsoft Corp.

56 F.3d.1448, 504 U.S. 451, 112 S.Ct. 2072, 119 L.Ed.2d 265

36. 1998 United States v. Microsoft Corp.

147 F.3d 935

37. 1999-2000 United States v. Microsoft Corp.

84 F.Supp.2d 9, 87 F.Supp.2d 30, 97 F.Supp.2d 59,

530 U.S. 130

38. 2001 United States v. Microsoft Corp.

No. 00-5212, No. 00-5213, U.S. Court of Appeals for the District of Columbia Circuit, decided June 28, 2001

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