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Government Regulation of Competition and Prices

The Sherman Antitrust Act prohibits monopolies and restraint of trade.  For example, several suppliers of widgets get together and agree they will all sell widgets for $1.00 to stores, and no less. This hurts competition. This Act prohibits:  (1) a conspiracy by two or more persons to unreasonably restrain trade (i.e., to unreasonably limit competition; (2) an unlawful monopoly or an attempt to monopolize an industry; and (3) price fixing.

Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions so that the price is maintained at a given level by controlling supply and demand. Two main types of price fixing between competitors is prohibited.  This is called horizontal price fixing. Vertical price fixing is also prohibited.  This is when a manufacturer and an independent retailer agree on a resale price of a product.

The Sherman Act does not regulate how big a company may get unless the company continues to buy up other companies in such a way as to:

  • substantially lessen competition; and
  • tend to create a monopoly.

The breakup of AT&T is an example of breaking up a monopoly in order to create more competition.

The Robinson-Patman Act prohibits price discrimination between buyers of a product if discrimination substantially hurts competition.  For example, ABC, Inc., can’t sell widgets to XYZ Corp. for $1.00 each and to Acme for $1.50 each if this drives Acme out of business.  There are exceptions such as difference in quantity.  For example, XYZ might get a favored price if it buys 1,000,000 widgets and Acme only buys 100,000.

The Clayton Act prohibits a corporation from acquiring an interest in the stock or assets of another corporation if doing so substantially lessens competition or may create a monopoly.  A Federal Court may enter a divestiture order making the guilty party give up the property it acquired.

Mergers of large companies may have to be approved by FTC and Antitrust Division of U.S. Justice Department.  (Hart-Scott-Rodino filing).  You may see this when two airlines merge.

There must be some sort of interstate commerce for federal laws to apply. With regard to Sherman Act jurisdiction, you have a very broad standard.  Even intrastate activities can be covered if they affect interstate commerce.  Jurisdiction under the Clayton Act is about the same.  The Robinson-Patman Act has the strictest jurisdiction standards regarding the interstate activities necessary.  Under this Act, the seller must actually be engaged in interstate commerce and the sales that are being complained about must be across state lines.  Firms are not subject to this Act if they only sell to persons in the same state.

Horizontal restraints of trade are designed to lessen competition among a firm’s competitors.  For example, if Ford and GM get together and fix prices to drive Chrysler out of business, that would be a horizontal restraint of trade.

Monopolizing is prohibited by Section 2 of the Sherman Act.  However, some monopolies are permitted.  For example, newspapers can be a monopoly in a town that cannot support but one.  Also, a monopoly which is the result of superior skill, foresight, and industry will be permitted.  West Publishing Company had a monopoly for a long time regarding the publishing of legal opinions.  They were the first publishing company, to my knowledge, to publish state and federal appellate court opinions on a large scale basis.  They are still the best in the business, although they do have a little competition.  The Internet is eventually going to hurt their business, since court opinions are now being put on the web.

The elements of monopolization are twofold:

  • possession of monopoly power in a relevant market; and
  • willfully acquiring or maintaining that power.

Monopoly power is the power to control prices or exclude competition in the relevant market.  A court will examine a firm’s market power to see whether or not the firm’s product has an inelastic demand curve, i.e., people or not willing to take substitutes.  This would be evidence of monopolization. An elastic demand curve means that there is significant competition.  Also, a firm’s percentage share of the market will be examined.  There is no magic percentage.  A court will also examine the relevant market to determine market share.  This will involve both the geographic market as well as the product.  As far as the geographic market, national sales of a product may be 50% while local sales may be only be 20% in an area. There would therefore be no monopoly in the local market.  As far as the product is concerned, courts will look at the cross-elasticity of demand — are customers willing to substitute goods? For example, will consumers substitute Hershey’s chocolate chip cookies for Nestle’s chocolate cookies.  If so, this would be evidence that there was no monopoly.  The decision on the relevant market can control whether there is monopolization.  For example, if Saran Wrap has 75% of the clear plastic wrap market, but only 20% of the food wrap market (foil, wax paper, and plastic bags), they would not have a monopoly regarding food wrap.

In order to prove monopolization, one must show that the defendant did the acts in question on purpose.  For example, you must show that the monopoly has resulted from something other than superior skill, foresight, and industry.  Or you must show predatory pricing — pricing below cost for a temporary period to drive others out.  Or you must show exclusionary conduct — conduct that would prevent a competitor from entering the market.  An example would be interfering with a competitor’s purchase of a factory that would have promoted more competition.

The Sherman Act can be violated by attempts to monopolize.  The plaintiff must show the dangerous probability of monopolization.

The Sherman Act prohibits price-fixing.  This is some type of collaboration among competitors for the purpose of raising, depressing, fixing, or stabilizing the price of a commodity.  Price fixing is a per se violation of the Sherman Act.  This type of conduct is considered unreasonable and illegal, and there is no defense.  Setting minimum prices is unlawful since it discourages competition even if the prices are reasonable.  Setting maximum prices is also illegal since this has a tendency to stabilize prices. An agreement of competitors to use list prices as a guideline is an exchange of price information that hurts the market and is therefore unlawful.

Production limitations control supply, therefore control prices and is therefore illegal. Limitations on competitive bidding is a per se violation and illegal.  An example would be where engineers agree not to bid on projects since low bidding can cause safety risks due to cost cutting. It is a per se violation of the Sherman Act for competitors to divide up markets since it lessens competition in the market that has been divided.

Another type of Sherman Act violation has to do with group boycotts and refusals by competitors to deal with certain buyers unless conditions are met.  The boycotters may have the best intentions in the world, but such boycotts are still illegal.  For example, garment manufacturers have boycotted buyers who sold knockoff goods.[1]  These are goods that carry counterfeit trademarks.  Such a boycott is a violation of the Sherman Act.

A joint venture is a relationship between two or more people who combine their labor or property for a single business under­taking.  They share profits and losses as provided in the joint venture agreement.  The single business undertaking aspect is a key to determining whether or not a business entity is a joint venture as opposed to a partnership.  An example of a joint venture might be an oil corporation working with an engineering firm for the development of a new drill. They would be business partners for that limited business purpose.  A joint venture is very similar to a partnership.   The main difference between a partnership and a joint venture is that a joint venture usually relates to the pursuit of a single transaction or enterprise even though this may require several years to accomplish.  A partnership is generally a continuing or ongoing business or activity.

As far as antitrust considerations, courts follow the rule of reason standard.  A joint venture is not unlawful per se.  Courts will consider the benefits and detriments of the joint venture in determining its legality.

One exception to federal antitrust legislation is the Noerr-Pennington doctrine.  This doctrine allows competitors to work together for governmental action such as lobbying and other political efforts.  Due to First Amendment protection, Congress can’t restrain this kind of activity.  In a 1991 U.S. Supreme Court case, the court held that lobbying by a company that controlled the outdoor advertising market was still exempt from antitrust laws under this doctrine even though the company was trying to protect its market control.

The Local Government Antitrust Act exempts state and local governments from antitrust suits.  The Joint Venture Trading Act allows joint ventures for international competition.  However, prior approval of the Justice Department is required.  The Shipping Act of 1984 allows joint ventures among shippers in order to promote better international competition.

The Clayton Act prohibits interlocking directorates.  Directors of firms with one million dollars or more in capital are prohibited from being a director for a competitor.  This law lessens the likelihood that anticompetitive information will be exchanged.

In a consolidation of two or more corporations, their separate existences cease, and a new corporation with the property and the assets of the old corporations comes into being.  A merger is different from a consolidation in that when two corporations merge, one absorbs the other. One corporation preserves its original charter and identity and continues to exist.  The other corporation disappears, and its corporate existence terminates.

Generally, the corporate entity which continues the business after a merger or a consolidation will succeed to all of the rights and property of the predecessors and will also be subject to all of the debts and liabilities of the predecessor corporations.  For example, A merges into B.  Suppose A had a contract with C.  B did not.  After the merger, B is liable to C on the contract.

A corporation may merely purchase the assets of another business.  This would not be a merger or consolidation.  In an acquisition, the purchaser does not become liable for the obligations of the business whose assets are being purchased.

Horizontal mergers are mergers between competitors.  There is a presumption that such mergers are illegal.  In other words, you have to disprove their illegality.  Courts look at the market share of the companies involved and the surviving company to determine legality.  There are basically two exceptions:

  • failing company doctrine where the purpose of the merger is the asset acquisition; and
  • small company defense where two small companies merge in order to compete better with larger firms.

Vertical restraints of trade involve parties in the chain of distribution, e.g., the manufacturer to the wholesaler to the retailer.  One example of a vertical restraint of trade would be retail price maintenance.  This would involve an attempt by a manufacturer to control the price that retailers charge for a product. This is a per se violation of section one of the Sherman Act.  This would apply to minimum as well as maximum prices.  It is also a violation to attempt to control retail prices through consignments.  This would be where a manufacturer makes the retailer its agent for the sale of goods and gives the retailer a commission for each sale.

Suggested retail prices are not unlawful as long as the manufacturer or wholesaler does not try to enforce the suggested price in some.  An example would be refusing to sell to a retailer unless the suggested price were used.

What about sole outlets and exclusive dealerships?  This is where the manufacturer appoints a distributor or retailer as the exclusive outlet.  This type of situation is not an automatic violation of the Sherman Act.  The courts use a rule of reason test.  The freedom of manufacturers to pick and choose dealers is protected as long as there is sufficient interbrand competition.  For example, Coke can have exclusive distributors as long as there is sufficient competition from other soft drink manufacturers like Pepsi.

Another vertical restraint of trade involves customer and territorial restrictions.  For example, a manufacturer might restrict by territory whom a dealer can sell to.  The legality of such an arrangement is again subject to a rule of reason analysis.  A court will consider the amount of interbrand competition.  Having an exclusive Ford dealership in a tri-county might even cause interbrand competition to increase.  GM and Chrysler dealerships might want to come in and compete with this one Ford dealership.

Courts will also look at the market power of the manufacturer.  The more market power, the less interbrand competition you will have.  In other words, the consumers will have fewer substitute goods to choose from.  The more market power a manufacturer has, the more likely it is that a court will strike down this vertical type restraint.

Another vertical restraint involves tying arrangements.  This involves requiring a buyer to buy an additional product in order to get a product it needs.  An example is of requiring the buyer of a copier machine to buy the seller’s paper when other brands of paper would be acceptable.  The copier machine is the tying product and the paper is the tied product.  Tying can be a violation of the Clayton Act regarding contracts for the sale of goods and the Sherman Act regarding the sale of services.  What the courts look at is whether or not the tying product is unique.  If it is, then there is an antitrust violation unless the sale comes within one of the two defenses that courts have recognized.

One defense is the new industry defense.  This is where the tying product, let’s say solar water heaters, is permitted to have a tied product, let’s say certain plumbing, in order to provide quality control so that the new industry will succeed.  The other defense is quality control for the protection goodwill.  This would apply if the specifications for the tied goods were so complicated or unique that only the manufacturer could supply them.

Another type of vertical restraint of trade is an exclusive dealing or requirements contract.  This is where a buyer agrees to only handle the seller’s goods and will not carry those of the competition.  Another example would be where the buyer agrees to buy all of its needs from the seller and no one else.  Before this type of agreement would be declared illegal, it must involve a substantial share of the market.

As previously stated, price discrimination is prohibited by the Robinson-Patman Act, which is an amendment to the Clayton Act.  Basically, this is selling the same product to different buyers at different prices. There are four elements that must be proven in a price discrimination case:

  • interstate commerce;
  • price discrimination between purchasers of the same goods;
  • the goods have to be of like grade and quality; and
  • competition must be harmed in some way.

First, the seller must be actually engaged in interstate commerce in the sense that one of the transactions in question must actually be across state lines.

Second, there must be an actual purchase involved.  Leases and consignments are not included.  Also the purchases must occur at about the same time.  The price discrimination can come from indirect charges like charging one purchaser more for shipping than another.

Third, the goods sold must be of like grade or quality.  For example, the sale of one shipment of hamburger meat at $1.00 per pound would be ok even if another buyer paid $.75 per pound if the cheaper meat was of inferior quality to the more expensive meat.

Finally, the sales must hurt competition.  This can be proven by showing that there is a substantial price cut in a certain area with the effect of injuring a smaller competitor.  Predator pricing is illegal.  This is pricing below cost for a temporary period in order to drive others out of the market.

There are defenses to price discrimination.  One is that a seller may charge less in one market than in another in order to meet the competition in that market.  Another defense is where there are cost differences that must be offset such as different shipping costs in one market than in another.  The last defense deals with market changes, inflation and material costs.  The seller must simply establish that a price change was initiated in response to one of these factors.

Because the level of international competition has increased, the U.S. now allows joint ventures in international markets that would not be permitted within the U.S.  The reason such joint ventures are now allowed is obviously to help U.S. firms compete with foreign firms.  For example, General Mills was allowed to purchase Nabisco’s cold cereal business in the United Kingdom and in the U.S. so it could compete more effectively in North American and European Markets.

The U.S. probably has the most stringent antitrust laws in the world.  This puts U.S. countries at a disadvantage when competing in world markets.  While normally the U.S. is not allowed to prosecute international cartels like OPEC, because of sovereign immunity, it can prosecute foreign companies that engage in commerce in the U.S.

[1] Knock off goods are an identical unauthorized, but cheaper. copy of a patented, trademarked, or copyrighted product or work.


Author: William Glover

I received my B.B.A. from the University of Mississippi in 1973 and his J.D. from the University of Mississippi School of Law in 1976. I joined the firm of Wells Marble & Hurst in May 1976 as an Associate and became a Partner in 1979. While at Wells, I supervised all major real estate commercial loan transactions as well as major employment law cases. My practice also involved estate administration and general commercial law. I joined the faculty of Belhaven University, in Jackson, MS, in 1996 as Assistant Professor of Business Administration and College Attorney. While at Belhaven I taught Business Law and Business Ethics in the BBA and MBA programs; Judicial Process and Constitutional Law History for Political Science Department; and Sports Law for the Department of Sports Administration. I still teach at Belhaven as an Adjunct both in the classroom and online. In 2004 I left Belhaven for a short stay at Wells Marble & Hurst, PLLC, and then joined the staff of US Legal Forms, Inc., 2006 where I draft forms, legal digests, and legal summaries. My most recent publications and presentations include: • Author: Sports Law Handbook for Coaches and Administrators, Sentia Publishing, 2017. • Co-Author: In the Arena published by the New York State Bar Association in 2013; • Co-Author: Criminal Justice Communications - Corinthian Colleges, Inc. in 2014. • Co-Author: Business Law for People in Business, Sentia Publishing, 2017.