MGMT 311 Exam 3 - FLASHCARDS - Chapter 27
What is a market in which there is a single seller or a firm that, although not the sole seller in the market, can nonetheless substantially ignore rival firms in setting a selling price for its product or can in some way limit rivals from competing in the market?
Monopoly
What is the power to control prices or exclude competition in a relevant market?
Monopoly power
What is the ability to raise prices above those that would be charged in a competitive market?
Market power
What is any agreement between firms that has the effect of reducing competition in the marketplace?
Restraint of trade
Is amazon a monopoly?
Yes
Are all monopolies illegal?
No
What is the purpose of antitrust laws?
Regulate business conduct to promote forms of competition that benefit society
Why did the need for antitrust laws arise after the Civil War?
declining competition from actions of business persons legally tying themselves together in business trusts
What was an example of a company that had a trust after the Civil War?
John D Rockefeller and the Standard Oil trust. Rockefeller controlled almost all oil refining and distribution in the US and much of the world’s trade by 1882.
What was the first provision of the Sherman Antitrust Act?
“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].”
What was the second provision of the Sherman Antitrust Act?
“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].”
What is the purpose of section 1 of the Sherman Antitrust Act?
Aimed at stopping companies who wield unchecked market power
What is the purpose of section 2 of the Sherman Antitrust Act?
Aimed at stopping companies wielding unchecked monopoly power
What is the main difference between section 1 and section 2 of the Sherman Act?
S1 = A group of people vs S2 = 1 person or more
True or false: section 1 requires 2 or more people since you can’t conspire or contrat with yourself. The illegal activity is joining together to exclude others
TRUE
True or false: with section 1, cases are often concerned with finding an agreement that leads to a restraint of trade?
TRUE
True or false: section 2 can apply with either 1 or 2 or more people because it refers to every person. So unilateral can violate section 2
TRUE
True or false: with section 2, cases deal with the structure of a monopoly that exists in the marketplace, or the so called issue of monopoly power in the marketplace
TRUE
What are per se violations?
Violation of the law
What is an example of a per se violation?
Price fixing - There are two grocery stores in a small town and there is a rumor that a third grocery store will be opening. The two grocery stores come together to keep prices so low that the new store wouldn’t be able to compete
What are rule of reason violations?
Establishes that a business practice is illegal if it unreasonably restricts trade. Under the rule of reason, courts examine both the positive and negative effects of an agreement before determining whether it violates antitrust laws
Under what section of the Sherman Act do per se and rule of reason violations fall?
Section 1
What factors does the court use in rule of reason?
a. the purpose of the agreement
b. the parties power to implement the agreement to achieve the purpose
c. the effect or potential effect of the agreement on competition
d. whether the parties could have relied on a less restrictive means to achieve their purpose.
What are horizontal restraints?
any agreement that in some way restrains competition between rival firms competing in the same market. This is between companies at the same level of operation and in direct competition with each other, such as Target and Walmart
What are examples of horizontal restraints?
Price fixing
Group boycotts
Horizontal market divisions
Trade associations
Joint ventures
What are examples of per se violations?
Price fixing
Group boycotts
Horizontal market divisions
What are examples of rule of reason violations?
Trade associations
Joint ventures
Territorial or Customer Restrictions
Resale Price Maintenance Agreements
What is the act of restricting output by eliminating price competition in which companies seek to sell more by charging less than their rivals?
Price fixing
Is reasonableness of a per se violation ever considered by the courts?
No
What is an agreement by 2 or more sellers to refuse to deal with another person or company?
Group boycotts
What is an agreement to divide up the market between rival companies?
Horizontal market divisions
Do horizontal market divisions include dividing up the territory or dividing up types of customers?
Yes
What are trade associations?
Businesses in the same general industry or profession organizing to pursue common interests like ad campaigns, lobbying congress, etc
What is it when 2 or more individuals in business entities join together in a particular commercial enterprise?
Joint ventures
What type of violation is price fixing?
Per se
What type of violation is group boycotts?
Per se
What type of violation is a horizontal market division?
Per se
What are trade associations judged by?
Rule of reason
What are joint ventures judged by?
Rule of reason
What are vertical restraints?
any agreement between firms at different levels in the manufacturing and distribution process. Vertical relationships encompass the entire chain of production – purchases of inputs, basic manufacturing, distribution to wholesalers, and retail sales.
What are examples of vertical restraints?
Territorial or Customer Restrictions
Resale Price Maintenance Agreements
What are Territorial or Customer Restrictions?
manufacturers instituting territorial restrictions or attempting to prohibit wholesalers or retailers from reselling the products to certain classes of buyers, such as competing retailers.
What are Resale Price Maintenance Agreements?
an agreement between a manufacturer and a distributor or retailer in which the manufacturer specifies what the retail prices of its products must be. (Maximum resale price maintenance agreements could increase competition and benefit consumers.)
What two types of behavior violate section 2 of the Sherman Act?
- Conduct pursued by a firm that is already a monopolist is condemned as monopolization if the conduct interferes with free trade and is intended to preserve the firm’s monopoly.
2. Conduct intended to capture monopoly power is condemned as an attempt to monopolize.
What is an example of conduct intended to capture monopoly power?
Predatory pricing
What is predatory pricing?
when one firm attempts to drive its competitors from the market by selling its product at prices substantially below the normal costs of production. This eliminates the competition and then the predator raises the prices well above the normal competitive level to recoup its’ loses and earn higher profits.
What does the US Supreme Court define monopolization as?
a. “The possession of monopoly power in the relevant market and
b. 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.”
How does price fixing differ from predatory pricing?
Price fixing is a section 1 violation that requires 2 or more people or businesses to be involved in bahavior. Predatory pricing is a section 2 violation and involves only 1 company
How does a plaintiff prove a violation of section 2?
They have to prove monopoly power and intent to monopolize
How does a plaintiff prove monopoly power?
Plaintiff must show the firm has a dominant share of the relevant market and there are significant barriers for new companies entering that market.
Before a court can determine whether a firm has a dominant market share, what must be defined?
A relevant market
What market includes all products with identical attributes (products are made by different manufacturers) and are interchangeable: sugar, stevia, stevia cane, equal, sweet-n-low, etc?
Product markets
What market includes geographic area in which the company and competitors sell the product/services; nationwide vs. local markets?
Relevant geographic market
What must be proven in an attempt to monopolize?
- Anticompetitive behavior
2. Specific intent to exclude competition and garner monopoly power.
3. “Dangerous” probability of success in achieving monopoly power.
True or false: violations of the Chayton Act are criminal, not civil?
False. Violations of the Clayton Act are only civil violations and not criminal
What are the four activities made illegal under the Clayton Act?
- Price Discrimination – when a seller charges different prices to competing buyers for identical goods or services.
- Exclusionary Practices (exclusive-dealing contracts and tying arrangements)
3. Corporate Mergers
4. Interlocking Directorates
What is it when a seller charges different prices to competing buyers for identical goods or services?
Price discrimination
What three defenses could be used in price discrimination situations?
- cost justification
2. meeting a competitor’s prices
3. changing market conditions
What are the two types of exclusionary practices?
exclusive-dealing contracts and tying arrangements
What is a contract under which a seller forbids a buyer to purchase products from the seller’s competitors?
Exclusive dealing contracts
What is it when a seller conditions the sale of a product on the buyer’s agreement to purchase another product produced or distributed by the same seller?
Tying arrangments
Who enforces federal antitrust laws?
Department of Justice (DOJ) and the FTC
True or false: The DOJ can prosecute violations of the Sherman Act as civil or criminal?
TRUE
What do both the FTC and DOJ enforce the Clayton Act as?
Civil cases
What do civil penalties include?
divestiture of assets and dissolution of companies
True or false: 90 percent of modern antitrust cases are based on private plaintiffs?
TRUE
What can private parties injured due to violations of the Sherman/Clayton Acts sue for?
Treble damages, attorney’s fees, in some cases injunctive relief
What are the four exemptions for antitrust laws (what type of businesses are exempt)?
Labor unions
Insurance companies
Exporters
Business persons’ joint efforts to get governmental action to help a certain industry
True or false: the Clayon Act permits labor unions to organize and bargain without violating antitrust laws and specifies that strikes and other labor activities normally do not violate any federal law?
TRUE
True or false: the McCarran Ferguson Act exempts the insurance business in states in which the industry is regulated?
TRUE
Penguin Airlines coordinates with other airlines to set standard prices for air travel and to coordinate their markets. Has Penguin Airlines and the other airlines violated the Sherman Act?
Yes, they have because price fixing is a violation of Section 1 of the Sherman Act.
No, they have not because the Federal Aviation Administration (FAA) has primary regulatory authority over airlines.
Yes, they have because price fixing is a violation of Section 2 of the Sherman Act.
No, they have not because air travel is not a commercial activity and, therefore, does not fall under the Sherman Act.
No, they have not because the Federal Aviation Administration (FAA) has primary regulatory authority over airlines.
The Federal Trade Commission (FTC) files suit against Yange Corp. under Section 2 of the Sherman Act. To be successful, the FTC must prove that Yange Corp. possesses monopoly power in the relevant market and that the monopoly power was obtained by illegal means. The FTC has no direct evidence that Yange is using its power to control prices and restrict output. The FTC, therefore, must show that Yange Corp. has monopoly power indirectly, by showing that Yange Corp. has a dominant share of the relevant market and that there are significant barriers for new competitors entering that market. The FTC can calculate the market share that Yange Corp. has by
showing the net revenue that Yange Corp. had during the applicable period.
taking the company’s sales over the applicable period and dividing it by the total sales of the industry over the same period.
showing the total sales that Yange Corp. had during the applicable period.
taking the total sales of the industry over the applicable period and dividing it by the company’s total sales over the same period.
taking the company’s sales over the applicable period and dividing it by the total sales of the industry over the same period.
