Chapter 26 - Antitrust Laws

Question 1

antitrust law

Answer 1

• The body of federal and state laws and statutes protecting trade and commerce from unlawful restraints, price discrimination, price-fixing, and monopolies
• the principal federal antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914

Question 2

attempted monopolization

Answer 2

• any actions by a firm to eliminate competition and gain monopoly power

Question 3

concentrated industry

Answer 3

• an industry in which a large percentage of market sales is controlled by either a single firm or a small number of firms

Question 4

divestiture

Answer 4

• the act of selling one or more of a company’s parts, such as a subsidiary or plant; often mandated by courts in merger or monopolization cases

Question 5

exclusive-dealing contract

Answer 5

• an agreement under which a seller forbids a buyer to purchase products from the seller’s competitors.

Question 6

group boycott

Answer 6

• the refusal to deal with a particular person or firm by a group of competitors
• prohibited by the Sherman Act

Question 7

horizontal merger

Answer 7

• a merger between two firms that are competing in the same market

Question 8

horizontal restraint

Answer 8

• any agreement that in some way restrains competition between rival firms competing in the same market

Question 9

market concentration

Answer 9

• a situation that exists when a small number of firms share the market for a particular good or service
• for example, if the four largest grocery stores in Chicago accounted for 80 percent of all retail food sales, the market clearly would be concentrated in those four firms

Question 10

market power

Answer 10

• the power of a firm to control the market price of its product
• a monopoly has the greatest degree of market power

Question 11

monopolization

Answer 11

• the possession of monopoly power in the relevant market and the willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of superior product, business acumen, or historic accident
• the United States Supreme Court has defined monopolization as involving the following two elements :
  1. The possession of monopoly power in the relevant market
  2. “The willful acquisition or maintenance of the power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident

Question 12

monopoly

Answer 12

• a term generally used to describe a market in which there is a single seller or a limited number of sellers

Question 13

monopoly power

Answer 13

• the ability of a monopoly to dictate what takes place in a given market

Question 14

per se violation

Answer 14

• a type of anticompetitive agreement - such as a horizontal price-fixing agreement - that is considered to be so injurious to the public that there is no need to determine whether it actually injures market competition ; rather, it is in itself (per se) a violation of the Sherman Act

Question 15

predatory pricing

Answer 15

• the pricing of a product below cost with the intent to drive competitors out of the market
• occurs when one firm (the predator) attempts to drive its competitors from the market by selling its products at prices substantially below the normal costs of production
• once their competitors are eliminated, the predator presumably will raise its prices far above their competitive levels to recapture its losses and earn higher profits

Question 16

price discrimination

Answer 16

• setting prices in such a way that two competing buyers pay two different prices for an identical product or service

Question 17

price-fixing agreement

Answer 17

• an agreement between competitors in which the competitors agree to fix the price of products or services at a certain level; prohibited by the Sherman Act

Question 18

resale price maintenance agreement

Answer 18

• an agreement between a manufacturer and a retailer in which the manufacturer specifies the minimum retail price of its products
• resale price maintenance agreements are illegal per se under the Sherman Act

Question 19

restraint of trade

Answer 19

• any contract or combination that tends to eliminate or reduce competition, effect a monopoly, artificially maintain prices, or otherwise hamper the course of trade and commerce as it would be carried on if left to the control of natural economic forces

Question 20

rule of reason

Answer 20

• a test by which a court balances the positive effects (such as economic efficiency) of an agreement against its potentially anticompetitive effects
• in antitrust litigation, many practices are analyzed under the rule of reason

Question 21

treble damages

Answer 21

• damages consisting of three times the amount of damages determined by a jury in certain cases as required by statute

Question 22

tying arrangement

Answer 22

• an agreement between a buyer and a seller in which the buyer if a specific product or service becomes obligated to purchase additional products or services from the seller

Question 23

vertical merger

Answer 23

• the acquisition by a company at one stage of production of a company at a higher or lower stage of production (such as its supplier or retailer)

Question 24

vertical restraint

Answer 24

• any restraint on trade created by agreements between firms at different levels in the manufacturing and distribution phase

Question 25

vertically integrated firm

Answer 25

• a firm that carries out two or more functional phases - such as manufacture, distribution, retailing- of a product

Question 26

SAMPLE TEST QUESTIONS

1. Congress enacts a statute to outlaw a specific type of anticompetitive business agreement. Like other laws that regulate economic competition, this law is referred to as :
   a. a federal trade commission act
   b. an antitrust law
   c. an interstate commerce act
   d. a suppressive restraint on trade

Answer 26

ANSWER :
(B)
CORRECT :
(B) an antitrust law

Question 27

SAMPLE TEST QUESTIONS

2. Discount Retail Corporation may be engaging in conduct that violates the Sherman Act. To bring an action against the firm requires that it’s conduct have a significant impact on :
   a. international commerce
   b. Internet commerce
   c. interstate commerce
   d. intrastate commerce

Answer 27

ANSWER :
(C)
CORRECT :
(C) interstate commerce

Question 28

SAMPLE TEST QUESTIONS

3. Soft Drink Corporation is charged with violating the Sherman Act through conduct subject to the rule of reason. When applying the rule of reason in this situation, a court will not consider :
   a. the purpose of the agreement
   b. the parties’ market ability to implement the agreement
   c. the effect of the agreement on international trade
   d. the potential effect of the agreement on competition

Answer 28

ANSWER :
(B)
CORRECT :
(C) the effect of the agreement on international trade

Question 29

FACT PATTERN 26-1B
Natural Gas, Inc., and Olio Energy Company refine and sell natural gas. To limit the supply of natural gas on the market and thereby raise prices, Natural Gas and Olio Energy agree to buy “excess” supplies from dealers and “dispose” of it.

Question 30

FACT PATTERN 26-1B

4. Refer to Fact Pattern 26-1B. The agreement between Natural Gas and Olio Energy is :
   a. a horizontal restraint
   b. none of the choices
   c. a resale price maintenance agreement
   d. a vertical restraint

Answer 30

ANSWER :
(C)
CORRECT :
(A) a horizontal restraint

Question 31

FACT PATTERN 26-1B

5. Refer to Fact Pattern 26-1B. The Natural Gas and Olio Energy deal is :
   a. a deal that neither restrains trade nor harms competition
   b. a legal restraint of trade
   c. a per se violation of antitrust law
   d. subject to analysis under the rule of reason

Answer 31

ANSWER :
(C)
CORRECT :
(C) a per se violation of antitrust law

Question 32

SAMPLE TEST QUESTIONS

6. Fine Food Company, Gourmet Cheeses, Inc., and Healthy Eats, Inc., agree to exchange information and share advertising. This trade association is :
   a. a deal that neither restrains trade nor harms competition
   b. a legal restraint of trade
   c. a per so violation of antitrust law
   d. subject to analysis under the rule of reason

Answer 32

ANSWER :
(A)
CORRECT :
(D) subject to analysis under the rule of reason

Question 33

SAMPLE TEST QUESTIONS

7. The Association of Organic Food Producers, which does not include all organic farmers and ranchers, refuses to deal with any parties who do not carry the products of its members. This group boycott is :
   a. a situation that neither restrains trade nor harms competition
   b. a legal restraint of trade
   c. a per se violation of antitrust law
   d. subject to analysis under the rule of reason

Answer 33

ANSWER :
(C)
CORRECT :
(C) a per se violation of antitrust law

Question 34

SAMPLE TEST QUESTIONS

8. Office Warehouse Inc. and Paperclips Inc. are the chief competitors in their market. They agree that Office Warehouse will operate only east of the Mississippi River and Paperclips will operate only west of the waterway. Under antitrust law, this is most likely :
   a. a per se violation
   b. a violation only if their competitors make similar deals
   c. a violation only if their customers agree to honor the deal
   d. not a violation

Answer 34

ANSWER :
(A)
CORRECT :
(A) a per se violation

Question 35

SAMPLE TEST QUESTIONS

9. Frictionless Lubricant Corporation and Grease, Inc., are the principal suppliers of their product in their market. They agree that Frictionless will sell exclusively to retailers and Grease will sell exclusively to wholesalers. Under antitrust law, this is most likely :
   a. a per se violation
   b. a violation only if their competitors make similar deals
   c. a violation only if their customers agree to honor the deal
   d. not a violation

Answer 35

ANSWER :
(B)
CORRECT :
(A) a per so violation

Question 36

SAMPLE TEST QUESTIONS

10. Bill’s Barber Supplies, Inc., is the major distributor of barber supplies in the state of Colorado. Bill’s closest competitor is Donna’s Beauty Products Company, another Colorado firm. They agree that Bill’s will distribute its products in western Colorado and Donna’s will distribute its products in the eastern part of Colorado. This is :
    a. a group boycott
    b. a market division
    c. none of the choices
    d. a tying arrangement

Answer 36

ANSWER :
(B)
CORRECT :
(B) a market division

Question 37

SAMPLE TEST QUESTIONS

11. Smart Tablets, Inc., requires all distributors of its products to sell them at a specified minimum price. This is a violation of antitrust law :
    a. if the anticompetitive effects outweigh the competitive benefits
    b. if the competitive benefits outweigh the anticompetitive effects
    c. under any circumstances
    d. under no circumstances

Answer 37

ANSWER :
(A)
CORRECT :
(A) if the anticompetitive effects outweigh the competitive benefits

Question 38

SAMPLE TEST QUESTIONS

12. Golf & Tennis LLC makes and sells golf clubs, tennis racquets, and related sporting goods. By selling its products at prices substantially below the normal cost of production, Golf & Tennis hopes to drive its competitors from the market. This is :
    a. market power
    b. predatory pricing
    c. price discrimination
    d. none of the choices

Answer 38

ANSWER :
(B)
CORRECT :
(B) predatory pricing

Question 39

SAMPLE TEST QUESTIONS

13. A suit is filed against DrillBits Corporation, alleging that the firm committed the offense of monopolization. To determine whether DrillBits gas monopoly power requires looking at :
    a. the price of a share of DrillBits’ stock
    b. DrillBits’ size alone
    c. DrillBits’ production methods and marketing techniques
    d. the relevant market

Answer 39

ANSWER :
(D)
CORRECT :
(D) the relevant market

Question 40

SAMPLE TEST QUESTIONS

14. Glassworx Corporation has exclusive control over the market for its products. Under antitrust law, this is :
    a. a per se violation
    b. a violation if it acquired this power through “business judgement”
    c. a violation if it acquired this power through “anticompetitive means”
    d. not a violation

Answer 40

ANSWER :
(C)
CORRECT :
(C) a violation if it acquired this power rough “anticompetitive means”

Question 41

SAMPLE TEST QUESTIONS

15. Speedboat Corporation refuses to sell its products to Water World, Inc., a recreational water products dealership. This is a violation of antitrust laws if it :
    a. has an anticompetitive effect on a particular market
    b. results in lower prices for consumers
    c. provides no economic benefits for consumers
    d. is likely to increase competition

Answer 41

ANSWER :
(A)
CORRECT :
(A) has an anticompetitive effect on a particular market

Question 42

SAMPLE TEST QUESTIONS

16. To drive its competitors out of a certain geographic segment of its market, Fryin’ Potatoes, Inc., sets the prices of its products below cost for the buyers in that area. This is :
    a. a refusal to deal
    b. none of the choices
    c. predatory bidding
    d. price discrimination

Answer 42

ANSWER :
(C)
CORRECT :
(D) price discrimination

Question 43

SAMPLE TEST QUESTIONS

17. Disc & Shoe Brakes Corporation, a brake manufacturer, sells its products to Eastside Motors, a retailer, at lower prices than it charges Fast Brake, a competitive retailer. This price discrimination is legal :
    a. under any circumstances
    b. unless it’s effect is to cause a competitor a loss of any business
    c. unless it’s effect is to substantially lessen competition
    d. unless there is no effect on a competitor

Answer 43

ANSWER :
(A)
CORRECT :
(C) unless it’s effect is to substantially lessen competition

Question 44

SAMPLE TEST QUESTIONS

18. City Manufacturing Corporation conditions shipments of its products to Exurb Stores, Inc., on Exurb’s agreement not to buy products from Regional Works Company, City’s competitor. This is :
    a. an exclusive-dealing contract
    b. a tying arrangement
    c. none of the choices
    d. a price-fixing agreement

Answer 44

ANSWER :
(A)
CORRECT :
(A) an exclusive-dealing contract

Question 45

SAMPLE TEST QUESTIONS

19. Mango Corporation believes that Melon Corporation engages in anticompetitive behavior in an attempt to drive Mango and its other competitors out of the market. Antitrust laws can be enforced against Melon by :
    a. Mango and Melon’s other competitors
    b. Mango and Melon’s customers
    c. any federal government agency
    d. any business with a significant impact on interstate commerce

Answer 45

ANSWER :
(C)
CORRECT :
(A) Mango and Melon’s other competitors

Question 46

SAMPLE TEST QUESTIONS

20. Big American Oil Company joins with a foreign cartel to control the price of oil. If the cartel has a substantial effect on U.S. commerce, a suit for violation of U.S. antitrust laws can be brought against :
    a. Big American Oil and the foreign cartel
    b. the foreign cartel
    c. Big American Oil
    d. all of the choices

Answer 46

ANSWER :
(C)
CORRECT :
(D) all of the choices

Question 47

Sherman Act (also known as the Sherman Antitrust Act)

Answer 47

• passed in 1890 by Congress as “An Act to Protect Trade and Commerce against Unlawful Restraints and Monopolies”
• sections 1 and 2 contain the main provisions of the Sherman Act :
  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 hereby declared to be illegal [and is a felony punishable by fine and/or imprisonment]
  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 is similarly punishable]
• applies only to restraints that have a significant impact on interstate commerce
• federal courts have exclusive jurisdiction over antitrust cases brought under the Sherman Act
• state laws regulate local restraints on competition, and state courts can decide claims brought under those laws

Question 48

Section 1 of the Sherman Act

Answer 48

• underlying assumption is that society’s welfare is harmed if rival firms are permitted to join an agreement that consolidates their market power or otherwise restrains competition
• types of trade restraints that generally fall under Section 1 are : horizontal restraints and vertical restraints
• when analyzing an alleged Section 1 violation under the rule of reason, a court will consider :
  1. The purpose of the agreement
  2. The parties’ ability to implement the agreement to achieve that purpose
  3. The effect or potential effect of the agreement on competition
  4. Whether the parties could have relied on less restrictive means to achieve their purpose
• to prove a group boycott violation of Section 1, the plaintiff must demonstrate that the boycott or joint refusal to deal was undertaken with the intention of eliminating competition or preventing entry into a given market
• it is a per se violation of Section 1 of the Sherman Act for competitors to divide up territories or customers
• vertical restraints encompass the entire chain of production

Question 49

Section 2 of the Sherman Act

Answer 49

• condemns “every person who shall monopolize, or attempt to monopolize
• two distinct types of behavior are subject to sanction under Section 2 : monopolization and attempts to monopolize
• one tactic that may be involved in either offense is predatory pricing
• attempted monopolization requires proof of three elements :
  1. Anticompetitive conduct
  2. The specific intent to exclude competitors and garner monopoly power
  3. A “dangerous” probability of success in achieving monopoly power. The probability cannot be dangerous unless the alleged offender possesses some degree of market power

Question 50

Clayton Act

Answer 50

• act was aimed at specific anticompetitive or monopolistic practices that the Sherman Act did not cover
• Section 2 prohibits price discrimination
• to violate Section 2, the seller must be engaged in interstate commerce, the goods must be of like grade and quality, and the goods must have been sold to two or more purchasers
• price discrimination claims can arise from discounts, offsets, rebates, of allowances given to one buyer over another
• statutory defenses to liability for price discrimination :
  1. Cost justification
  2. Meeting a competitor’s prices
  3. Changing market conditions
• Section 3 - sellers or lessor’s cannot sell or lease goods “on the condition, agreement, or understanding that the … Purchaser or lessee thereof shall not use or deal in the goods … of a competitors of the seller
  
  • exclusive dealing contract is prohibited if the effect of the contract is “to substantially lessen competition or tend to create a monopoly”
• under Section 7- a person or business organization cannot hold stock or assets in more than one business when “the effect … may be to substantially lessen competition
  
  • is the statutory authority for preventing mergers that could result in monopoly power or a substantial lessening of competition in the marketplace
  • applies to both horizontal and vertical mergers
  • violation of Section 7 if the merger will make it more difficult for potential competitors to enter the relevant market
• Section 8 : deals with interlocking directorates, which is the practice of having individuals serve as directors on the boards of two or more competing companies simultaneously
  
  • no person may be a director for two or more competing corporations at the same time if either of the corporations has capital, surplus, or undivided profits aggregating more than $28,883,000 or competitive sales of $2,888,300 or more

Question 51

Enforcement and Exemptions

Answer 51

• the federal agencies that enforce the federal antitrust laws are the U.S. Department of Justice (DOJ) and the Federal Trade Commission (FTC), which was established by the Federal Trade Commission Act of 1914
  
  • Section 5 condemns all forms of anticompetitive behavior that are not covered under other federal antitrust laws
  • only DOJ can prosecute violations of Sherman Act, which can be criminal or civil offenses
  • violations of Clayton Act are not crimes, but the act can be enforced by either the DOJ or the FTC through civil proceedings
• FTC has sole authority to enforce violations that are effected through administrative orders, but if a firm violates an FTC order, the FTC can seek court sanctions for the violation
  
  • the president plays a role in establishing enforcement policies at the agencies
• most of the statutory and judicially created exemptions to the antitrust laws in such areas as labor, insurance, and foreign trade
• one of the most significant exemptions covers joint efforts by businesspersons to obtain legislative, judicial, or executive action

Question 52

ENFORCEMENT AND EXEMPTIONS

Private Actions

Answer 52

• a private party who has been injured as a result of a violation of the Sherman Act or the Clayton Act can sue for treble damage and attorneys’ fees
• in some instances, private parties may also seek injunctive relief to prevent antitrust violations
• required elements - a party wishing to sue under the Sherman Act must prove that :
  1. The antitrust violation either caused or was a substantial factor in causing the injury that was suffered
  2. The unlawful actions of the accused party affected the business activities of the plaintiff that were protected by the antitrust laws

Question 53

European Union Enforcement

Answer 53

• the EU’s laws promoting competition are stricter in many respects than those of the United States and define more conduct as anticompetitive
• actively pursued antitrust violators, especially individual companies and cartels that allegedly engage in monopolistic conduct

Question 54

Increased Enforcement in Asia and Latin America

Answer 54

• Japanese antitrust laws forbid unfair trade practices, monopolization, and restrictions that unreasonably restrain trade
• China’s antitrust rules restricting monopolization and price fixing (although the Chinese government may set prices on exported goods without violating these rules)
• Indonesia, Malaysia South Korea, and Vietnam all have statutes protecting competition
• Argentina, Brazil, Chile, Peru, and several other Latin American countries have adopted modern antitrust laws as well