Hypo – house flippers
You and your friend both have side hustles where you flip houses. You buy a house at a foreclosure auction, you fix it up, and then you sell it at a profit to a family who plans to live in it. Your friend does the same thing. Since you often show up at the same foreclosure auctions and bid against one another, you’ve sometimes driven up the price on one another. So you make an oral agreement that before going out for a day of auctions, you’ll divide up the list of properties according to a professional-sports-style draft system. That way you won’t be bidding against each other.
Hypo – telecom merger
You represent wireless telecom company G-Mobile, which would like to merge with Dash telecom. In terms of market share, your two companies are well back in third and fourth place behind giants OT&T and Zerivon. Privately, your clients expect that they will be able to raise prices and get more customers after the merger, although doing so may cause OT&T and Zerivon to lower their prices somewhat. You know that G-Mobile may be able to roll out the next generation of wireless technology to rural customers faster if the merger goes forward.
Hypo – new dentist
You are a newly graduated dentist. Eager to start practicing, you agree to buy an existing dental practice from Dr. Flossy, a dentist who has practiced for 40 years and is eager to take a step back. The agreement is to buy the office and equipment, the trademark, customer lists and files, and the “goodwill” of the business. You worry that after the sale Dr. Flossy could open a new office under a new trademark and take all his old patients back, leaving you without all those customers and income. So you require as part of the deal that Dr. Flossy agree not to compete with you – specifically, that he won’t practice dentistry within 20 miles of you for the next two years.
Hypo – new dentist
No worries!
This is beyond fine. Antitrust enforcers couldn’t care less about this …
unless they need dental work! Do you take FEDVIP dental insurance?
Hypo – telecom merger
Hmm. I’m not sure. Well, okay. I guess it’s okay.
Antitrust enforcers may hem and haw about this. They might request information before allowing the merger to go unchallenged. But they may well decide to just let it go – and yet live to regret that years later. Worst case, it’ll be talked about as a live-and-learn thing.
Hypo – house flippers
You’re going to JAIL
This is a clear violation of the Sherman Act – the kind the FBI likes to investigate and DOJ criminally prosecutes.
Sherman Act of 1890
Sherman Act §1
agreements in restraint of trade
Sherman Act §2
monopolization
Sherman Act §1 (15 U.S.C. §1)
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”
Sherman Act – overall
- The Sherman Act is essentially a federal common law. (And it’s understood that that’s what Congress intended in passing it in 1890.)
- The Sherman Act is understood to have one uniting theoretical concept, one singular goal: competition is good.
- In essence, if some business deal or activity inhibits or gets in the way of the competitive process, it is prohibited by antitrust law.
- If it’s good for competition, antitrust law is okay with it.
Vertical describes relations between firms in different levels of the distribution chain. Distributor to retailer is a vertical relation.
Horizontal describes relations between firms in the same level. A retailer’s relationship with another retailer is a horizontal relation.
Per se and rule of reason
Certain things are “per se” illegal under §1:
- Horizontal price fixing
- Horizontal output caps
- because of economics (supply and demand), fixing output generally has same effect as fixing price
- Horizontal market division
- allows mini-monopolies such that participants can set price or output at profit maximizing level
- Bid rigging is considered a form of price fixing / market division
- Essentially every other combination or agreement is considered under “rule of reason” analysis as to whether it is illegal under §1
- This comes down to balancing the procompetitive justifications against the anticompetitive effects
Bid rigging as per-se illegal under §1
- Bid rigging is a form of per-se illegal price fixing, where price is determined by competitive bidding.
- Bid rigging can be on the seller side (e.g., construction companies taking turns on who will submit the winning bid for construction contracts, essentially market division)
- Bid rigging can also be on the buyer side, esp. in auctions.
- Bid rigging is a frequent focus for federal prosecutions.
- Bid rigging by real-estate speculators at foreclosure auctions in CA, GA, NC, & AL has resulted in more than 130 prosecutions since 2010 through a joint DOJ-Antitrust-Division/FBI task force.
- Aubrey McClendon (co-founder and former CEO of Chesapeake) was indicted in 2016 for a bid rigging conspiracy to buy oil and gas leases. (He died the next day in a single-vehicle collision.)
Sherman Act §2 (15 U.S.C. §2)
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.”
Sherman Act §2
§1 only reaches conduct involving at least two parties. §2 is importantly different in that it is capable of reaching unilateral conduct (although it doesn’t have to be unilateral)
We have three offenses under §2:
- (1) monopolization
- (2) attempted monopolization
- (3) conspiracy to monopolize
FTC Act §5
“Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”
Everything that violates §2 for monopolization will also violate FTC Act §5.
But §5 is broader, reaching unilateral anticompetitive conduct even where there’s not monopoly power.
Yet, as we know, only the FTC can enforce FTC Act §5. Also, the remedies are limited to prospective relief.
Mode of analysis
Monopolization claims proceed under a rule-of-reason sort of analysis, but courts tend not to use the label “rule of reason” for §2 claims like they do for §1 claims.
Monopolization elements
“The offense of monopol[ization] under §2 of the Sherman Act has two elements: (1) the possession of monopoly power in [a] relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.”
United States v. Grinnell Corp., 384 U.S. 563, 570–71 (1966)
(1) monopoly power in a relevant market
(2) anticompetitive conduct
a/k/a “monopoly conduct,” “predatory conduct,” “exclusionary conduct” (some sources may draw distinctions among various terms, but they are often used interchangeably)
What’s a relevant market?
What constitutes monopoly power in that market?
This is the question of “market definition”
product market
geographic market
Product Market
“In considering what is the relevant market for determining the control of price and competition, no more definite rule can be declared than that commodities reasonably interchangeable by consumers for the same purposes make up that ‘part of the trade or commerce’, monopolization of which may be illegal.”
U.S. v. E. I. du Pont de Nemours & Co., 351 U.S. 377, 395 ("The Cellophane Case") (1956)
Geographic Market
A geographic market is the geographical area in which customers are willing to go to find substitutes in response to an increase in price and where suppliers are willing to come in response to an increase in price.
Consider:
- Every gas station within a three-block radius of the law school raises prices by 5% over rivals outside that zone.
- Every gas station in Norman raises prices by 5% over rivals outside the city.
- Every gas station in Oklahoma raises prices by 5% over rivals outside the state.
When we hit the point where you and others would just pay the higher price rather than travel, that suggests we’ve found the outer bounds of the geographic market.
Consider:
- Every Ford dealer within Norman raises prices by 5% over others outside that zone.
- Every Ford dealer in the Oklahoma City metro area raises prices by 5% over others.
- Every Ford dealer within a one-hour drive raises prices by 5% over those further away.
- Every Ford dealer within a two-hour drive raises prices by 5% over those further away.
- Every Ford dealer within a three-hour drive raises prices by 5% over those further away.
The extent of the geographic market is going to depend on the product …
Monopoly power
Monopoly power is “the power to control prices or exclude competition.”
United States v. E. I. du Pont De Nemours & Co., 351 U.S. 377, 391 ("The Cellophane Case") (1956)
- Theoretically, monopoly power can be proved by direct evidence.
- But this is rarely available, so ...
- Generally, courts look to market share.
Monopoly-level market share
The law doesn’t say exactly what market share constitutes monopoly power (MP), but some flags have been planted by various courts:
- 90% is enough for MP (L. Hand, J., in Alcoa)
- 87% “leaves no doubt” that MP exists
- 80-95% is enough for ∏ to survive summary judgment on MP
- 75% means MP “may be assumed”
- min. 70-80% is what lower courts “generally require”
- >66% might be MP
- 60-64% is doubtful for MP (L. Hand, J., in Alcoa)
- 50% is the bare minimum for MP for many lower courts
- 30% is insufficient even for §1 market power
- (sources: p.21 of DOJ ’08 report; p. 226 of Elhauge casebook, 3d ed.)
It’s mostly about market share ...
But also relevant are:
- barriers to entry
- future capacity constraints
- changing consumer demand
- demand elasticity (i.e.: how responsive demand is to changes in price; how much consumer demand goes down when prices go up)
Barriers to entry
Key point: Even if a firm has 100% market share, there will be no monopoly power if there are no barriers to entry – meaning it is very easy for competitors to jump into the market.
Monopolization analysis to-do list
(1) monopoly power in a relevant market
figure out a relevant product market
figure out a relevant geographical market
look at the market share
consider barriers to entry
consider whether future capacity constraints, changing consumer demand, or demand elasticity might let an alleged monopolist off the hook
(2) anticompetitive conduct
[covered next ... ]
Anticompetitive Conduct
What counts?
The key idea of anticompetitive conduct …
It is not:
Profiting from the monopoly
It is:
Seeking to perpetuate or extend the monopoly
What counts as anticompetitive conduct?
What counts as anticompetitive conduct?
Must look to economic realities of the situation.
Must be injury to competition.
Injury to competitors is not enough.
Note: Charging monopoly prices is not anticompetitive conduct! (In fact, it's often the opposite.)
Examples
Acquisition of competitors
this eliminates competition
Acquisition and retiring of assets
when the assets (factories, machinery) could be used to compete against the monopolist
Predatory pricing
pricing below cost to drive competitors out of business
This tactic was widely attributed to Standard Oil.
Raising competitors’ costs
Refusals to deal with those who deal with competitors
Lorain Journal (U.S. 1951): local newspaper refused ads from businesses who placed ads with a local radio station
hypothetical example: if Visa were to refuse to deal with businesses that accept Discover or Amex
Refusals to deal with competitors
Aspen Skiing (U.S. 1985): owner of three of four resorts in valley eliminates all-valley lift pass
realothetical example: phone maker refuses to allow connections with feature-rich messaging or video calling
Preventing second-hand market formation
Used-goods markets can spur new retailers, repair services, etc., which could eventually mature into full competitors.
Setting and controlling standards
This is a continual issue in the tech sector.
Coercing a competitor’s suppliers/partners
This can be a quite common real-world scenario.
Tying
tying is when to buy one thing, you have to buy something else
hypothetical example: when you subscribe to a music streaming service, it comes with audio books
Loyalty rewards
realothetical example: A small city has one airline. When second airline begins service at lower prices, established airline matches prices. No one will switch to new airline because of mileage-based perks (status, upgrades, fares purchasable with miles).
Loyalty discounts, bundled loyalty discounts
Initial observations
- There’s surprisingly little case law on mergers.
- What’s interesting mostly has to do with what mergers the government agencies (i.e., DOJ or FTC) decide to challenge.
- And if there’s a challenge, resolving it will mostly be about applying DOJ/FTC’s own guidelines. It’s not about statutory text. It’s not really about case law either.
- The analysis comes down to considering anticompetitive effects, procompetitive virtues, and redeeming efficiencies.
- (And from a law-student perspective, those concepts can be learned from the case law in non-merger Sherman Act §1 & §2 cases.)
Kinds of mergers
- Horizontal mergers
- Vertical mergers
- Conglomerate mergers
Potential benefits of mergers
- All kinds of efficiencies
- Economies of scale
- Preserving firms that would fail
- The list is endless ...
Potential problems with mergers
- Unilateral effects – market/monopoly power of the merged firm
- Oligopoly effects – concentration of a market that can cause prices to increase, either through:
- purely self-interested/independent decision-making of firms, or
- oligopolistic coordination (e.g., legal “conscious parallelism”)
- According to research, five significant firms in a market tends to be enough to prevent oligopolistic coordination
Applicable law
- Mergers and acquisitions can be challenged under Sherman Act §1 or §2, or FTC Act §5, but generally they are challenged under the Clayton Act §7.
- Clayton Act §7 allows the blocking of mergers and acquisitions where “the effect of such ... may be substantially to lessen competition, or to tend to create a monopoly.”
Hart-Scott-Rodino Act
15 USC §18a
Pre-merger filing with DOJ/FTC is required where:
- the stock acquisition value exceeds $50M and the acquirer and target have assets or annual sales in excess of $10M for one and $100M for the other (either way), OR
- the stock acquisition value exceeds $200M
- (Amounts are in 2004 dollars. Adjusted numbers are published periodically.)
- There’s a passive investor exception.
DOJ/FTC challenge
- DOJ and FTC split up merger reviews between them.
- After the HSR filing, the agency has 30 days in which to make a “second request” for additional information (15 days for cash tender offers).
- This might happen 2% to 5% of the time.
- The agency then engages in a detailed analysis.
- Third parties can weigh in.
- To avoid adverse effects on competition, the merging firms can offer to divest themselves of certain assets or bind themselves to certain conduct.
- Often a merger dies if the agency opposes the merger.
- If the agency is opposed and the merging parties want to forge ahead, the dispute goes to court.
- Courts tend to evaluate mergers largely by the DOJ/FTC guidelines(!).