Antitrust Class Notes

Class 3/27

Mergers
Merger guidelines that the SCT has issued, so hardly any DOJ involvement
Thus, we are skipping merger cases
Why should we be concerned about mergers?
o Is market power created in some way? Is there some increase in
market power?
o We saw in Standard Oil that the merger created a monopoly
Rockefeller created a merger that overtook the entire industry,
all of the refineries across the country (thats an easy case)
Its a harder case when we talk about Vons Grocery
Imagine youre creating market power with some kind
of (?)
Increase the possibility of collusion, oligopoly
o Makes it easier to collude if you have pure
competitors in the market
o Not really proven, but there is some evidence of
price increases in these horizontal mergers, but
also a lot of evidence of cost inefficiencies
o How about a vertical merger?
How can we acquire market power through a vertical merger?
Vertical integration very similar to tying arrangement
How do you lever market power from one place to another in
the supply chain?
Tying arrangement
o What about a conglomerate?
Harder to tell than vertical mergers
In 1970s, 1980s, we tried to limit conglomerates, but on what
grounds?
If diversification is valuable, then this is actually a good
thing
You dont see much market power here

Three types of mergers
Horizontal mergers merger b/ween a manu and manu
o Standard Oil, Northern Pacific
Vertical merger merger b/ween a manu and wholesaler
o Columbia Steel, Brown Shoe
Conglomerate mergers merger b/ween a manu in one industry and a manu
in another industry and a manu in another industry

Mergers and the law
Considered under 2 of the Sherman Act
o Standard Oil, Northern Securities
Clayton Act - 7 prohibited stock, NOT ASSET, acquisitions
o Criticism of this
o Columbia Steel vertical integration, but some horizontal aspects to it
o People also think that the prohibition against stock, not asset, acq is a
big problem
Priest: This relates to the substantive due process era of SCT
Right to private property
Change in SCT jurisprudence before (?) Depression
Remember in Northern Securities the dissent said, X can still
buy what he wanted.
In the 1950s, were passed that
o Sherman Act becomes a commercial, regulatory statute, not simply
deriving from the common law
Seller (?) Act
o Prohibited asset acquisitions
o First case to get to the SCT was Brown Shoe

Brown Shoe Co. v. United States
Very odd, complicated case
Facts
o Very small shoe manu acquiring a retailer of shoes
Retailer had manu arm
o Brown had a 4% market share; was acquiring the Kinney chain, which
had a 0.5% of market share
o Kinney had 1.2% share of retail sales
Browns retail sales were not mentioned in the opinion
Independent research: 1.1% share
o Court said if they merged, theyd have a 7.4% (?) of retail sales over
the country, 4.5% of manu market share
Peterman (scholar): 2.3% share
In some cities, this was different
Example: 23% market share of womens shoes in some
cities
SCT had to consider what market power the merger had in each market (the
merged company operated in many cities)
Priest: This can support any argument you want to make in front of the SCT
This is the first case to take the market defn seriously
o Who are the competitors in the market
o You didnt see this in U.S. Steel, Northern Securities (well, a little in the
latter)
There was also a new standard under the Clayton Act
o Concern about incipiency (market power in its incipiency)
o A lot of companies expanding their reach (just like this merged
company of Brown and Kinney)
Analysis: Priest do you think we have a monopoly here?
o This conclusion is hard to reach
Brown is doing this through acquisition, rather than internal expansion
o Court said that Brown should do this through internal expansion, not
acq
Foreclosure theory: Brown by acquiring Kinney is foreclosing Kinney from
buying from other shoe manu
o Brown cuts Kinney off from buying from other manu
Does this (the foreclosure theory) make any sense?
o Heres the problem: If this was efficient for Kinney (to buy from other
manu, not from Brown), why would Kinney want to change?
o However, if Kinney is maximizing its sales through other shoe manu,
why would it want to change?
o The idea here is foreclosure and how does that make any sense
whatsoever? Does it make any economic sense to foreclose?
Court makes no attempt to explain what the econ benefit
would be from foreclosure, but shows that there must be econ
power
Why would Brown have econ power to foreclose?
o When youre dealing with market share as small as this, why do we
even care?
They dont produce much of value
o Court invokes incipiency focus on other shoe manu acquiring shoe
retailers
o This isnt U.S. Steel where there are a lot of startup, sunk costs
Not a lot of capital for setting up a shoe store
Maybe the concern is oligopoly (only a few firms in the industry)
o Oligopoly is more likely to explicitly collude
Few firms in the industry
o Tacit collusion among the firms the firms dont explicitly agree, but
they watch each other
If one firm raises prices, the other ones raise prices
o But Court can wait until this happens and then act

United States v. Vons Grocery
Facts
o Acq. Another grocery firm in the LA market
Vons had a market share of 4%
The other grocery firm (Shopping Bag food stores) had a
market share of 3.5%
o Horizontal merger
Not really the same sense of horizontal merger operated in
different areas of LA
Priest: They were NOT competitors; counts as expansion as
Brown Shoe was, too
SCT supported DOJ
o Found the merger to be illegal
o Ordered the divestiture of Shopping Bag from Vons
Priest: These are trivial market shares
o This case, along with Brown Shoe, signaled that the Court was going to
prohibit anything the DOJ brought
This led the DOJ to publish merger guidelines two years after this case
(1968)
o Heres when were going to challenge a merger . . .
This market share and this market share (merged) we will
challenge it
Used this case as a measure of this
o Provided a great deal of information to the business community
Informed merger practice thereafter
o Merger guidelines have changed
o Court seldom sees any merger cases (if the DOJ attacks the merger,
thats it)
o We will discuss this later, especially the current merger guidelines

First Eighty Years of SCT Jurisprudence on Antitrust Law
Since Thurmon Arnold and the New Deal, there was a steady advance in the
prohibition of practices by the antitrust laws
o Thurmon Arnold Interstate Circuit, Socony Vacuum Oil
Manipulated evidence
o Per se prohibition of price fixing
Steady advance in per se prohibitions
Sherman Act: 1890 1975
o Per se prohibitions and rule of reason distinguished
o Rule of reason announced in Standard Oil and elaborated in Chicago
Bd. of Trade
o Per se prohibition of price fixing in Socony Vacuum Oil
Per se prohibitions
o Minimum price fixing (resale price maintenance)
Dr Miles
o Maximum price fixing
Albrecht
o Division / allocation of the market
Addyston Pipe
o Group Boycotts
Fashion Orig. Guild
Klors
o Tying arrangements
Intl Salt
Northern Pacific
o Vertical territorial restrictions
Schwinn
Made a similar distinction b/ween transfer by
consignment and transfer by sale
o Vertical price restrictions
Schwinn
o Predatory pricing
Utah Pie
o Extremely severe restrictions on mergers
Brown Shoe
Vons
Per se means if it falls within the categories, it was illegal
o NO explanation needed
In the 1940s, there was a steady academic criticism of these doctrines
o It wasnt just on the per se rules, but the antitrust analysis of the Court
in general
o Especially on vertical mergers (vertical territorial restrictions, tying
arrangements, vertical price restrictions)
o Bork he had a strategy
Per se prohibitions on horizontal price fixing
How do you justify this?
Horizontal price fixing impeded consumer welfare
In the 1960s, there have been some criticisms of the article, but
it has stood
If you accept the per se prohibition of horizontal price fixing,
then you have to endorse the principle of enhancing consumer
welfare
Then you have to reanalyze all your prohibitions of per se rules
because they enhance consumer welfare, not decrease
consumer welfare
If you believe in the per se prohibition of price fixing, you cant
believe in the per se prohibition of all of these restrictions
SCT violating its own prohibitions
Addyston Pipe was the greatest opinion ever written, but he
didnt have a high opinion of Klors
Whats the ground for prohibiting these?
Consumer welfare
No consumer welfare argument for prohibiting these vertical
price fixing and other per se prohibitions
Bork consumer welfare was a neutral principle; the Court
could administer it without getting involved in politics
o When Nixon resigned, Ford became President and appointed John
Paul Stevens
o Bork and Stevens moved these ideas into the mainstream

Goldfarb v. Virginia State Bar
Private action
Easy case: Are the learned professions immune from the antitrust laws? No.
Horizontal merger case
Facts
o Needed a title search
o Couldnt negotiate a fee reduction from the lawyers
o Got a 1% quote from the lawyers
o Filed a class action
Does the Sherman Act apply to learned professions?
o Priest: Well, why not? They can charge prices too
State action exemption
o Parker v. Brown
1950, late 40s case
State of California regulated raisin production; specified prices
for raisin production
Why would Calif. crop up raisin prices? For the producers
(limit production)
Federalism if the state does it, its okay to do it
Holding: Learned professions, including lawyers, are subject to the antitrust
laws
Other commentary
o Why do lawyers have to be involved?
In California, title search is done by notaries
Similar to Chicago School everything is commerce
o Legal profession in Va. has market power

Class 4/3
First merger cases we studied were Brown Shoe and Vons Grocery
o Basically, if the DOJ brings a merger case, the United States always
wins
o After Vons Grocery, the DOJ promulgated merger guidelines, the first
of which were promulgated in 1968
Admin regulation that indicated when the DOJ was going to
challenge a merger and when it was not

1968 Merger Guidelines (Priest: This wont be on the exam)
We look at market share for the products that were reasonably
interchangeable
o DOJ two sets of industries
Highly concentrated market share of the four largest firms
added together were 75%
In a highly concentrated industry: If an acquiring firm
had 10% market share and the other one had 2%
market share, theyd be challenged
Same with 4% market share and 4% market share
All other
Is there a theory in what the DOJ is doing?
o Cant be market power
o It could, however, be diffusing collusion

1982 Merger Guidelines
Guidelines changed under Reagan
First, he adoped the Hirschman Herfindal Index (HHI)
o If an industrys HHIs > 1,800
A merger that led to an increase in the index by 50 would be
questionable
A merger that led to an increase in the index by 100 would be
challenged
o If an industry had an HHI from 1,000 to 1,800
A gain of 100 challenged
o If an industry had an HHI of less than 1,000
No challenge
HHI calculated market share by squaring the percentage of market of each
firm
o Firms market shares are 20%, 20%, 20%, 20%, and 1% * 20
o = 400 *4 + 20 = 1,600 + 20 = 1,620
o Assume you had a merger of the two top firms, 40%, 20%, 20%, and
1% * 20
o = 1600 + 400 + 400 + 20 = 2420
This would be challenged
These guidelines are carried to through today
Definition of market changed
o This had a big effect
o Pg. 790: Market is defined as a product/group of products and a geo
area in which it is sold / produced such that a hypothetical profit-
maximizing firm, not subject to price regulation, that was the only
present and future producer or seller of those products in that area
likely would impose at least a strong but significant and
nontransitory increase in price, assuming the terms of sale of all
other products held constant.
Merging firm wants a larger market, while the DOJ wants a smaller market
DOJ had to show that the merger would lead to a small but significant
increase in price
Baxter set up these guidelines; he was an antitrust minimalist
o His strategy was adopt numbers that are not that different, but then
define the market in a way that these numbers become lower
o The larger the market, the numbers go down
Adopted the SSNP test (small but significant, intransitory increase in price)
o If the reduction of sales of the product would be large enough that a
hypo monopolist would not find it profitable to impose such an
increase in price
You see a vastly different approach from the approach in 1968 and the EU
o The standard in the EU is whether the merger will increase market
dominance
GE and Honeywell merger
EU didnt let the merger go through increase
dominance
o Because of the efficiencies, we have to turn down
the merger
In the United States, efficiencies are a defense
In 1982, the DOJ challenge to mergers has changed substantially
o Very fewer mergers are challenged today than before 1983
o Market is now defined to include potential entrants and firms that
might shift their production to compete with other firms
Nothing like Brown Shoe or Vons Grocery would be challenged again
Hart-Scott-Rodino Act: Must submit a filing to the DOJ before they merge
o DOJ and FTC will meet and allocate the industry/merger
o They have 30 days to ask for a second filing
o If they ask for a second filing, it means they have some concerns
o With regard to the first filing, there would be some kind of argument
as to how to define the market
o If they get a request for a second filing, you bring in an economist who
can do the empirical work
Lots of efficiencies
Include something else in the market
o Typically, if the DOJ decides to challenge the merger, it fails

Class 4/22
24 hour take home exam
o Write answer
o Edit
o Submit
No real answer
Problems that Prof. Priest cant figure out
Page limits for each question three questions
o Two page page limit
No citations, no graph, no references to other sources
Continue the class
o Something interesting
o Something new
Extension of the course

Leegin Creative Leather Products v. PSKS, Inc.
Overturns 100 years of resale price maintenance
Takes on the issue of stare decisis
Priest: Quite a remarkable opinion
Facts
o Manu of fashion belts who wants to fix minimum resale prices
SCT rejects common law principles dealing with restraint on alienation
o When the manu had sold, rather than consigned, the products to the
dealers, that made a big difference
o No more common law
The importance here is comp, in particular interbrand comp
Resale price maintenance enhances services
o Facilitates market entrance
There is an argument here about price and what the price effect is
o Just because prices are higher doesnt cost anything
o Compare nominal prices and the value of the services
RPM states services, availability
Colgate doctrine is a little stronger than shifting the rule of reason
o Must show that its totally unilateral
o Holmess statement in Dr. Miles
o A unilateral action is not subject to antitrust scrunity
No smoking in the store
General Electric (the entire lightbulb industry) had resale price maintenance
o Cartel b/c the patent arrangements
o You cant value the services, so you dont know if its a cartel
Ultimate impact of this opinion resale price maintenance is legal
o Colgate immunizes a firm that acts unilaterally
o Parke, Davis: Carbon-copying the dealers makes it more complicated

American Needle
Facts
o Thirty-two teams decide to quit their distribution for jerseys
o Exclusive dealing arrangement for the manufacturer
o American Needle is one of the previous companies who made this deal
o Sues b/c its cut out by exclusive dealing arrangement
SCT finds this to be a violation
Should it be viewed as a violation? How should we analyze this?
o Thirty-two teams acting together
o Cut out American Needle from producing the product
Priest thinks that this is nonsense
o Would a fan of the Washington Redskins want to buy a New York
Giants jersey because its cheaper?
o Is there some restraint of comp for having an exclusive dealing
arrangement?
The claim here is monopsomy (manu buying all these products
at low prices)
Buyer pays too low
Complaint is combination
o These teams are not competing
The fan base in Washington is much more avid than the fan
base in Denver
Themes of this class: Since the 1970s, the SCT has been adopting more
sensible econ analyses, but this case doesnt make sense
This was done concertedly
Priest wouldve dismissed this case

Twombly v. AT&T
Related to the discussion about the 1996 Telecommunications Act
The claim in this case is that the baby bells got together and thought of ways
to keep out comp for local telecom service
Even given the claim that there is parallel conduct, it might be sensible for
them to operate the same way
Lets say you have firms that have adopted the same price, same product,
same services
Does this mean that there is a cartel here?
Or does it mean there is perfect competition
o Each firm wants to satisfy the needs/preferences of its consumers
You cant distinguish these firms by looking at these facts
We still have the FCC regulating this industry
o In the old days, the FCC had primary jurisdiction over these matters
This is like Trinko
Understanding Twombly as an antitrust case, its not so surprising
Procedurally, its not the earthquake that most people have regarded

Summary of the course
During the development of the Sherman Act, we have per se rules adopted
for
o Horizontal price-fixing (Socony Vacuum Oil)
o Vertical price-fixing
Minimum resale price maintenance (Dr. Miles, Parke, Davis)
Maximum price fixing (Albrecht)
o Horizontal territorial allocation (Addyston Pipe)
o Vertical territorial restrictions (Schwinn)
o Tying arrangements (International Salt, Northern Pacific)
o Predatory pricing (Utah Pie)
o Exclusive dealing arrangement (Standard Section)
o Boycotts (Fashion Originators)
Strong prohibitions against mergers (Browns Shoe, Vons)
Strong restrictions against monopolization (Aspen Skiing)
Adoption of the rule of reason
o Horizontal Price Fixing still there
But is it still valid? BMI
o Vertical price fixing
Minimum
Leegin
Monsanto
Business Electronics
Maximum
State Oil Co.
o Horizontal Territorial Allocation
Addyston is still standing
GTE Sylvania
o Tying arrangments
Jefferson Parish: Pretty much rule of reason
o Predatory Pricing
Matsushita
o Exclusive dealing has never been per se, but we dont have a modern
case
o Boycotts
Northwestern Wholesale
o Mergers 1982 Guidelines
o Monopolization
Aspen Skiing is still valid, but we have Trinkos and Microsoft

Rule of Reason
Rule of reason antitrust laws are supposed to protect consumer welfare
and interbrand competition
o Bob Borks antitrust laws
The course has been about the change in rule of reason