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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