Vertical Restraints

Question 1

Two ways to evade § 2 liability for vertical intrabrand price restraints

Answer 1

1. The agreement was reasonable (it was not an “unreasonable restraint on trade”)
2. There was never an agreement.

Question 2

Fundamental Fact to Understand RPM Economics

Answer 2

Manufacturer sells to retailer at wholesale price. The difference between the wholesale price and the retail price = the retail margin (or retail markup).
The retail markup is the manufacturer’s “cost” of the retail service.

When a manufacturer imposes min RPM it INCREASES the retail margin/markup (since competition can’t keep forcing retailers to keep lowering price). The increase in retail margin/markup GOES TO THE RETAILER.
Which is “bad” for the manufacturer (it wants the markup/margin to be as small as possible consistent with efficient distribution of their product). So there MUST be procompetitive reasons they are doing this…

Question 3

Anticompetitive red herrings for min RPM

Answer 3

1. Reduces intrabrand competition
   This is true… but anytime a manufacturer sets any kind of standard about how its product is to be sold it reduces competition between retailers.
   Sometimes, restraints on intrabrand competition are necessary to promote interbrand competition. So this is not an anticompetitive harm.
2. Min. RPM raises prices
   True… but there mere fact that something a manufacturer does raises prices does not mean that practice is anticompetitive (ex: advertising raises prices and is incredibly competitive).

Question 4

Actual anticompetitive harms of min RPM

Answer 4

1. Facilitates retailer collusion
   Two big hurdles to collusion are establishing an agreement and policing an agreement.
   Min. RPM makes both of these a lot easier. Easier to spot cheating. Easier to make an agreement.
2. Facilitates Manufacturer level collusion
   - reduces incentive for manuf to cheat (min RPM insures cheater won’t increase sales)
   - makes cheating more visible
3. Exclusionary Device for Dominant Manufacturer
   - Retailers love RPM (guaranteed profit margin & know rivals can’t undersell you)
   - If the dominant manufacture has RPM, they may exclude other manufacturers from shelves.
4. Exclusionary Device for Dominant Retailer
   - If there is a dominant retailer that manufacturers HAD to be in business with, the dominant retailer could demand RPM (to prevent being undersold by online/other retailers) or they won’t buy/give desirable shelf space.

Question 5

Procompetitive benefits of min RPM

Answer 5

1. Avoids free riding on point of sale services
   - Manufacturer wants retailer to have POS services to make their product more attractive to consumers.
   - People will go get the POS services, then buy online/bix box–running POS service dealer out of business.
2. Facilitates entry of new brands
   - The first retailers to give up shelf space for a new brand, “pioneer retailers,” incur costs by promoting this new product. Once brand is established and other retailers want in, without RPM, other retailers could undersell the pioneer retailer.
3. Encourages sales-enhancing retailer services that are not subject to free riding (favorable shelf space, attractive product displays, etc.)
   - RPM markup incentivizes retailers to give products better shelf space because they get a better/guaranteed cut from the retail margin.
   - Can set min RPM with liberal termination clause if the retailer doesn’t sell enough units.
   This incentivizes retailer to come up with the best ways to sell the product, rather than having manuf. trying to contract for them.

Question 6

Min RPM ROR overview

Answer 6

(1) Plaintiff must prove the pre-requisites to one of the 4 theories of RPM anticompetitive harm. (if not, D wins). Plaintiff’s prima facie case

(2) Defendant must prove that the RPM achieves one of the 3 procompetitive benefits. (if not, P wins)

(3) Plaintiff may then show that the procompetitive benefit could be achieved equally effectively using substantially less restrictive means. (if P makes that showing, P wins)

(4) If P doesn’t show substantially less restrictive alternative ^^ then court balances the likely competitive effects.

Question 7

Min RPM ROR AT Harm Prerequisites: Facilitates Dealer/Retailer Collusion

Answer 7

(1) Dealers/Retailers stand to benefit from it. This requires:
(A) Retailer’s market is susceptible to collusion (some can’t be – too many dealers, susceptible to cheating, etc) AND
(B) Either:
- Manufacturer has market power (Brand without close substitutes) OR
- Basically all manufacturers use RPM (so customers can’t switch away)

(2) Manufacture has to concede to it (which they won’t want to since they want retail margins as low as possible). So when would they concede? Only if:
- (A) Dealers have market power AND
(Manufactuer REALLY wants dealer to carry their brand so has no choice but to give into the higher margins)
- (B) Forward integration is impracticable
(Manufacturer can’t just open a retail outlet themselves and bypass the retailers)

Question 8

Min RPM ROR AT Harms Prerequisites: Facilitates Manufacturer Collusion

Answer 8

(1) Manufacturer market is susceptible to collusion
- Concentrated,
- Fungible, or
- Barriers to entry
(2) Retail Price Maintenance is widely used among manufacturers
- If only one is using, it is not likely being used to sure up manufacturer-level collusion.

Question 9

Min RPM ROR AT Harm Prerequisite: Exclusionary Device for Dominant Manufacturer

Answer 9

(1) RPM must be a significant benefit to dealers (provide a nice profit margin)
(2) Dealers subject to the RPM comprise a cobstantial portion of available market outlets for competing manufacturers products
- If rivals loose access to favorable shelf in a grocery store, but have a ton of other places they sell a lot of product still, not as big of a deal.

Question 10

Min RPM ROR AT Harm Prerequisite: Exclusionary Device for Dominant Retailer

Answer 10

(1) Initiated by a dealer with market power
- If the manufacturer initiated, it’s not likely being used for this purpose.

(2) Brands upon which dealer procured RPM comprise a significant portion of sales in the dealer/retailer market.

Question 11

Min RPM ROR: How can D evade liability if they cannot prove RPM achieves a procompetitive benefit?

Answer 11

The Colgate exception for purely unilateral action
The manufacturer simply announces its intention not to do business with dealers that sell below a certain price level and then does no more than abide by that announced policy.

Park Davis: If the manufacturer does anything more than announce its policy up front and then follow it—for example, if it “reminds” dealers of its policy or encourages them to abide by the resale restriction—the Colgateexception will not apply. (The court will infer that any dealer who follows the pricing policy after having been “reminded” or “encouraged” has agreed with the manufacturer. Thus the weird procedures used by Ping.)

Question 12

How do we treat Maximum Resale Price Maintance (RPM)

Answer 12

Since state oil = not a single successful max RPM case. We can pretty confidently say max RPM is per se legal. Only ever saw in Globe democrat scenerio: worried about distributors exercising market power so they limit their price
Since that’s the only place we ever see it, we can say its per se legal

Question 13

How do we treat Consumer restriction agreements

Answer 13

Still theoretically able to establish liability, but the only real viable theory is dealer/retailer collusion (don’t want to compete for market, so let’s have manufacturers split up market for us).

Plaintiff has to demonstrate that this is what was going on when the manufacturer set up exclusive sales territories.

But most of the time the manufacturer set up these exclusive sales territories to avoid freeriding, so there aren’t a lot of successful challenges to these practices.

Question 14

Avoiding Vertical Intrabrand “Agreements”

Answer 14

1. Confinement (Agency)
   - Manufacturer who wants to control can retail title even after it passes into the hands of the retailer.
   - Technically no RPM because no sale.
   - AND two parties that are part of the same economic enterprise cannot conspire – Copperweld
   But kind of dead/less applicable now since Dr. Miles (per se RPM) is dead (RPM is ROR).
2. Colgate Exception **
   There was never an agreement, it was just a unilateral announcement of our policy (policy is = we don’t sell products to retailers who sell under $X). So no agreement between anyone. This is just what we do.
   CANNOT do anything beyond announcing the policy and enforcing the policy. Warnings, reminders, encouragement, discussing boundaries, etc. will be held to be evidence an agreement, and courts will infer one. – Park Davis
   - Ping Brief points out how hard it is to comply with Colgate. Colgate policies are difficult to implement because if basically do anything, taken to agree with dealer and hence liable.

Question 15

Exclusive Dealing Anticompetitive harms

Answer 15

1. Anticompetitive foreclosure of available marketing outlets (*biggest one)
   - If the exclusive dealing arrangements foreclose so many sales opportunities (marketing outlets) that your rivals costs (RRC raise rivals cost) are raised either because
   - (A) Dominant firm has taken up so many of the available marketing opportunities it drives rivals to cut back on production and thus fall below minimum efficient scale
   - (B) Dominant firm forecloses opportunities that forces rivals to be relegated to costlier marketing/sales outlets, driving up their cost.
2. Reduced price competition
   - Incidents of price competition are reduced.

Question 16

Exclusive dealing procompetitive benefits

Answer 16

1. Secures distributional efficiencies by allowing “partial” vertical integration
   - Exclusive dealing allows manufacturers to get the best of both worlds. They get the benefit of outsourcing distribution to professionals, don’t have as high of transaction costs, and don’t have to monitor as much to ensure they aren’t favoring other brands.
2. Guaranteed demand or supply
   - this has a lot for obvious benefits. But a less obvious one is that it can encourage expansion because E/D will guarantee demand once the expansion is complete (don’t have to worry about not being able to recoup investment)
3. Avoidance of inter-brand freeriding (*big one)
   - If it’s possible for the manufacturer to want to invest in the retailer (to make them more attractive), then inter-brand freeriding is a concern.

Question 17

POLICING E/D: When are exclusive dealing arrangements unreasonable restraints?

Answer 17

Qualitative Foreclosure Test – Tampa Electric

1. Assess the degree of foreclosure
   - define product market
   - define geographic market (form perspective of rival manufacturer)
   - Assess the foreclosure percentage of the market due to the E/D
   (sales covered by exclusive dealing)/(total amount of sales in market)
   <15% = legal
   >40% = presumptively illegal.
   15%-40% = look at the EFFECT (fact-specific) of what the foreclosure is going to do. Intensive ROR required (this is the second half of Tampa Electric)
2. After looking at the foreclosure percentage, now you have to look at the actual or likely effects of this foreclosure.
   (1) Do we think this level of foreclosure would hold rivals under minimum efficient scale?
   - Hard to know what min eff. scale really is, but we can get a sense of it by asking if the industry has a few really big companies (like auto)? Just a gut check here: Wow all the firms here are really big and little firms can’t stay in business and this E/D will prevent rivals from being big enough to stay in business.
   (2) What about procompetitive justifications?
   - Ex: is there a great need for a guaranteed source of demand or supply??
   (3) Is this an industry where we are really concerned with interbrand freeriding?
   - Aka: is this the type of industry where manufacturers typically invest in retailers? If so, more reasonable.
   (4) Duration
   - The shorter it is, the less problematic. Lots of courts have adopted a brightline rule that E/D of 1 year or less is per se legal.

Question 18

Tying vocab: Tied product; tying product

Answer 18

Tying product = market/monopoly market product

Tied product = competitive product

Question 19

INCORRECT anticompetitive effect that International Salt used to establish per se treatment of tying

Answer 19

The incorrect belief that tying allows monopolists to immediately enhance their monopoly profits.

Debunked by the “Single Profit Monopoly Theory”
- If you are a monopoly, there is only one monopoly profit available (there is only 1 Pm). You cannot enhance it by tying in something and charging more. That will actually result in a REDUCTION of profit.

If you have a monopoly on A product, you are going to charge the profit-maximizing price for A, Pm.
The B product is subject to normal competition. So in B’s market, the Pc is going to be close to or equal to marginal cost.
Consumers are going to be thinking about how much the B product costs when they buy your tied product of A & B.
The profit-maximizing cost for the tying is the Pm of A + the Pc of B.
ANY increase trying to charge more for the B product is tantamount to an increase of price on the tying product, which moves the price OFF Pm, and therefore would REDUCE profit.

Question 20

Economic Harms of tying

Answer 20

(1) Enhance market power in the tied product market.
- use tying to foreclose rival market opportunities force them out of business/below min eff. scale to create a monopoly in tied market

(2) Enhance market power in the tying product market.
- If a monopoly is afraid of a company in tied market may evolve to threaten its monopoly in tying market, they could use tying to foreclose tied market opportunities to weaken or eliminate the threat.
- Microsoft Windows tying internet explorer to foreclose the threat of java + netscape becoming a substitute operating system.

Question 21

Procompetitive benefits of tying

Answer 21

(1) Protect Brand (Procompetitive)
If you sell a product with some kind of input and the quality of your product depends to some degree on the quality of input, you may want to require people use your high quality thing

(2) Elimination of Double Marginalization (Procompettiive)
If you have market power and sell a product that has a compliment and the compliment also has a monopoly you would be worried the compliment product will cause double marginalization

Question 22

Economic effects of tying that could be good or bad…

Answer 22

(1) Using Tying to Evade Rate Regulation
- A tie-in can enable a price-regulated seller who is forced to sell below Pm to avoid or conceal avoidance of price regulation.
- depends on why the rate regulation is in place
- TL doesn’t think A/T law should govern this issue

(2) Price discrimination / surplus extraction
(A) Via “metering” tie-in (aka “variable proportion requirements ties”)
- When the tied product is a requirement (like printer ink, printer paper to printers) charging less than Pm on tying product, and then charging supracompetitve price on the tied product.
- Economically extremely efficient (kind of like price discrimination). Low user may not have entered the market if monopoly charged Pm on tying product.
(B) Stigler-Type Bundling
- Bundling goods that consumers value differently in order to extract the most profit
- “if you want one of the favors you have to buy all of the flavors”

^^ are these good or bad?
- If you subscribe to consumer welfare model of AT = bad. Shifting surplus to producers
- If you subscribe to the maximization of output model (TL) then these things are good.

Question 23

Policing Tying — how do courts treat tying?

Answer 23

Quasi Per Se rule: tying is per se illegal if
(1) Two separate products are invovled in the tie-in sale;
(2) Seller has market power over the tying product
**this is always the one that makes or breaks the analysis
(3) tie in effects a “not insusbstantial” dollar value of commerce in the tied market.
If meets these 3 elements = per se illegal.

If not, ROR based on degree of foreclosure of opportunities for rivals in tied market (similar to E/D ROR).

Question 24

Quasi per se rule: Element 1.

How do we know when there is two products?

Answer 24

Current test (O’Conner dissent from Jefferson Parish)
Ask: Are there obvious efficiencies to selling them together?
If so = they should be viewed as a single product
If not = two products.

Translation: ask “is the TYING product regularly sold in competitive markets without the TIED product?
If yes = separate products
If no = single product
Make sure you get this ^ question right. Tires are often sold without cars, but that’s the wrong question.

Question 25

Patents & Market power

Answer 25

Independent Ink = the mere fact that it is a patented product does not create market power.

Could be a patent over a really cool garbage can lid technology that automatically lifts… but that doesn’t give them market power in garbage cans.

Maybe a monopoly over that exact technology in garbage can lids, but that is too narrow of a product market to be a real market

Question 26

Tying: if you can’t meet quasi per se elements

Answer 26

Qualitative foreclosure analysis (LINK TO ED)

Question 27

Tying: why do we call it “quasi” per se?

Answer 27

The point of per se rule is judicial convenience.

But this doesn’t have the convenience, we have to decide whether there are two products AND define the market (one of the hardest things to do in AT law)

Basically the “cost” of a ROR analysis without the benefit of being more accurate. Doesn’t allow us to look at the actual economic/output effects because it’s per se, but doesn’t give us the administrative efficiences of per se.

Question 28

Types of claims under § 2 of Sherman Act

Answer 28

(1) Monopolization (grinell?? / Trinko)
1. Monopoly power in relevant market
2. Unreasonably exclusionary conduct

(2) Attempted monopolization
1. Unreasonably exclusionary conduct
2. Specific intent to monopolize
Intending using the exclusionary conduct to drive your rivals form the market using these means.
3. “Dangerous probability of success” (i.e., market power)
- What is dangerous probability of success?
Firms don’t have monopoly market power yet… but they are getting close. They have market power.

Both monopolization and attempted monopolization have a power requirement and a conduct requirement.

(3) Conspiracy to monopolize
1. Agreement
2. Specific intent to monopolize
Overt act in furtherance of conspiracy

Question 29

Power element of a § 2 claim: How to assess market power:

Answer 29

1. Direct evidence (Rare)
   Learner Index = (Pm – marginal cost) / (Pm)
   The closer to 1 the more market power you have.

This is a direct measurement of market power. But this is really hard to figure out because we never actually have good data about marginal cost. Instead, we just look to market share.

2. Market Share — substitute for market power.

How do you determine market share?
Step 1: Define market
Step 2: Figure out total dollar volume of sales in the market. That’s the denominator.
Step 3: Figure of what the defendant’s sales are. That’s the numerator.
Step 4: Divide.
If >70% = Monopoly power
If >40%-50% (likely closer to 50) = Market power

Question 30

Power element of a § 2 claim:

How to define a market

Answer 30

Start with product market
- Start with the smallest group of products that could conceivably be a market and then hypothesize a SSNIP (small but significant nontransatory increase in price) usually +5%. (aka: hypothetical monopolist test)
- Ask: “If this product group had one seller and raised price by 5% for 1 year would they increase their profits? Or would they lose so many sales to the next closes substitutes that the price increase would not be profitable?”
- If NOT profitable (bc would lose sales to substitutes) expand your market group a little bit and repeat the SSNIP.
- If YES profitable = that is your market. Product market is the smallest group of products that satisfies this test

Next, do the exact same analysis to define the geographic market
- Start with the smallest geographic area
- SSNIP until it’s profitable.

Question 31

Unilateral Refusal to deal as a § 2 claim

Define and explain problems with it as an AT violation

Answer 31

When a firm with market or monopoly power (bc that is needed for § 2) refuses to deal with rivals in a way that disadvantages and excludes rivals from the market.

Problems with forcing a party with market power to deal with its rivals - Trinko
1. If you make a monopolist deal with rivals by giving them access to technology/facilities then you are reducing incentive to create those things. Why would the rivals create them? Also creating them in the first place is deminished if you know you have to sahr
2. Someone has to set terms of dealing setting prices and what not and that requires the court to do it which is beyond court’s comeptitence
3. Forcing rivals to deal together makes it more likely for them to collude – the supreme evil of antitrust law.

Question 32

Unilateral refusal to deal as a § 2 claim

Test for legality

Answer 32

There IS a duty to deal (AT violation if you don’t) if:
1. Dominant firm had engaged in a prior voluntary course(s) of dealing with the rival;
2. It would be profitable to deal with rival, so the refusal to deal sacrifices profits; AND
3. The deal would require the dominant firm to sell something they already sell / have sold.

Question 33

Single Product Predatory Pricing as a § 2 claim

Answer 33

Two elements for predatory pricing to be unreasonably exclusionary:
(1) Price charged is below its incremental cost (cost of producing that unit)
(2) Likelihood of recouping the losses form the predatory pricing scheme (phase where you hike up your prices)
- If it’s really easy to enter the market, you aren’t going to be able to recoup.
- So what this really means is there needs to be barriers to entry.

Question 34

Bundle discounts as a § 2 claims

What is it and how are they policed?

Answer 34

Bundle discount = Package discount. Seller sells multiple products and will sell them separately (why it’s diff than tying), but if you buy both of the products they will charge you a lower price than if you bought them separately.

Policing: Lambert’s Discount Attribution Test - Peacehealth
If you have a bundle discount from a firm that makes multiple products and a rival with a less diverse product line complains about it the way to assess liability is to
1. Take the entire amount of the discount and allocate it to the competitive product (product sold by the firm with the less diversified product line) and ask,
2. “Is the bundling firm charging below cost on the competitive if we put the entire amount of the discount on that product?”
- If so, it is predatory. There is antitrust liability.
- If no, still above cost = no liability