UNITED STATES ANTITRUST LAW AND ECONOMICS

UNITED STATES ANTITRUST LAW AND ECONOMICS by ElNER ELHAUGE Petrie Professor of Law, Harvard University FOUNDATION PRESS ^ANNIVERSARY] THOMSON "WEST

TABLE OF CASES xiii CHAPTER 1 Introduction 1 A. The Framework of Legal Issues Raised by Basic Antitrust Economics 1 B. An Overview of U.S. Antitrust Laws and Remedial Structure 10 CHAPTER 2 Which Horizontal Agreements Are Illegal? 48 A. Relevant U.S. Laws and General Legal Standards 48 Sherman Act 1, 15 U.S.C. 1 48 Sherman Act 2, 15 U.S.C. 2 51 Federal Trade Commission Act 5, 15 U.S.C. 45 52 B. Horizontal Price-Fixing 52 United States v. Trenton Potteries--- 52 Questions on Trenton Potteries 54 Broadcast Music, Inc. (BMI) v. Columbia Broadcasting System 55 Questions on BMI 63 Arizona v. Maricopa County Medical Soc'y 65 Questions on Maricopa 72 Texaco Inc. v. Dagher - 74 Questions on Texaco v. Dagher 76 C. Horizontal Output Restrictions 77 NCAA v. Board of Regents of Univ. of Oklahoma 77 Questions on NCAA 85 D. Horizontal Market Divisions- 86 Palmer v. BRG 87 Questions on Palmer v. BRG - 88 U.S. DOJ/PTC, Antitrust Guidelines for Collaborations Among Competitors 91 Questions on FTC-DOJ Guidelines 93 E. Horizontal Agreements Not to Deal with Particular Firms 94 1. Boycotts by Unrelated Rivals 95 Klor's Inc. v. Broadway-Hale Stores, Inc 95 Questions on Klor's 97 Fashion Originators' Guild of Am. u. FTC 97 Questions on Fashion Originators' 100 2. Exclusions or Expulsions from a Productive Collaboration of Rivals 101 United States v. Terminal Railroad Ass'n 101 Associated Press v. United States 105 Questions on Terminal RR and Associated Press 107 Northwest Wholesale Stationers v. Pacific Stationery 109 Questions on Northwest Stationers - 113

VI F. Are Social Welfare Justifications Admissible? 114 National Society of Professional Engineers v. United States 115 Questions on Professional Engineers 120 FTC v. Indiana Federation of Dentists 122 Questions on Indiana Dentists 126 FTC v. Superior Court Trial Lawyers Ass'n 127 Questions on Trial Lawyer's Ass'n 131 California Dental Ass'n v. FTC 132 Questions on California Dental 140 Note on Burdens and Orders of Theory and Proof after California Dental 141 Note on the Policy Relevance of Nonprofit Status 142 Note on the Legal Treatment of Nonprofits Under U.S. Antitrust Law - 143 United States v. Brown University 144 Questions on United States v. Brown 151 G. Does Intellectual Property Law Justify an Anticompetitive Restraint? 153 United States v. General Electric - 155 Questions on General Electric 156 United States v. New Wrinkle, Inc 158 Questions on New Wrinkle 160 U.S. DOJ/FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995) ----- 161 Questions on the U.S. Guidelines 169 H. Buyer Cartels --- 169 Mandeville Island Farms v. American Crystal Sugar 169 Questions on Mandeville-- 173 Note on Countervailing Power and the Problem of the Second Best - 174 CHAPTER 3 What Unilateral Conduct Is Illegal? - 178 A. Relevant Laws & Basic Legal Elements 178 Sherman Act 2, 15 U.S.C. 2-178 Federal Trade Commission Act 5, 15 U.S.C. 45 179 Robinson-Patman Act, 15 U.S.C. 13(a) 180 B. The Power Element 183 1. Economic and Legal Tests of Market Power Generally 184 2. Legal Tests of Monopoly Power or a Dominant Position 191 3. Market Definition 192 United States v. du Pont & Co. (The Cellophane Case) 193 Questions on du Pont (The Cellophane Case) - 199 U.S. DOJ/FTC, Horizontal Merger Guidelines - 202 Notes and Questions on the U.S. Market Definition Guidelines 207 Note on Technical Methods Used in Market Definition 212 4. Aftermarkets - 216 Eastman Kodak v. Image Technical Servs 216 Questions on Kodak 224 C. Second Element: Anticompetitive Conduct 225 1. General Standards 225 2. Predatory Pricing 228 a. Below-Cost Predatory Pricing 228 Brooke Group Ltd. (Liggett) v. Brown & Williamson Tobacco Corp 228

vil Note and Questions About Brooke--- 237 Note on U.S. Conflict on the Proper Cost Measure -. 240 Elhauge, Why Above-Cost Price Cuts to Drive Out Entrants Do Not Signal Predation or Even Market Power and the Implications for Defining Costs 241 b. Above-Cost Predatory Pricing - 243 Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transportation Industry -... -.. 244 Note and Questions on the Proposed U.S. Department of Transportation Enforced Policy -~- ~- 246 United States v. AMR Corp 247 Questions on American Airlines - 250 Note on Price Discrimination - ~~ 251 3. Exclusions from Owned Property-Unilateral Refusals to Deal.. 253 Otter Tail Power Company v. United States- - 254 Questions on Otter Tail - - 259 Aspen Skiing Co. v. Aspen Highlands Skiing Corp. 263 Questions on Aspen Skiing ~~ 270 Eastman Kodak v. Image Technical Servs. 273 Questions on the Kodak Duty to Deal With Rivals - 2 75 Verizon Commun. v. Law Offices of Curtis V. Trinko. 276 Questions on Verizon v. Trinko - 282 Einer Elhauge, Defining Better Monopolization Standards 283 Note on the U.S. Essential Facilities Doctrine 284 Note on Application of U.S. Antitrust Duties to Deal to Intellectual Property - 286 4. Price Squeezes and Predatory Overpaying. 287 Town of Concord v. Boston Edison Co 288 Questions on Town of Concord 296 Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber 297 Note and Questions on Weyerhaeuser 301 D. Causal Connection Between First and Second Elements Required? 302 Einer Elhauge, Defining Better Monopolization Standards 302 Note on Monopoly Leveraging -- 303 E. Attempted Monopolization. 304 Lorain Journal v. United States 304 Questions on Lorain Journal 306 United States v. American Airlines 306 Questions on American Airlines Attempted Cartel Case 309 Spectrum Sports v. McQuillan 309 Note and Questions on Spectrum Sports 312 CHAPTER 4 Vertical Agreements That Restrict Dealing With Rivals - - - - 314 A. Introduction - 314 Clayton Act 3, 15 U.S.C. 14- - - - 315 B. Exclusive Dealing - ----- 316 United States v. Griffith - - 321 Note on Griffith and Lorain Journal 324 Standard Fashion v. Magrane-Houston - - - 325 Questions on Standard Fashion - 326 Standard Oil and Standard Stations v. United States 326 Questions on Standard Stations - - - --- 331

viii FTC v. Motion Picture Advertising Service 333 Note on Cumulative Foreclosure 335 Tampa Electric v. Nashville Coal 337 Note and Questions on Tampa Electric 341 United States v. Microsoft 342 Note on the U.S. Lower Court Splits on Foreclosure Thresholds and Terminability Relevance 348 Questions on Microsoft's Exclusive Dealing Holdings 349 C. Tying 350 United Shoe Machinery v. United States 361 Questions on United Shoe Tying Case 363 International Salt v. United States 363 Questions on International Salt 365 Times-Picayune Publishing v. United States 366 Questions on Times-Picayune 371 Jefferson Parish Hospital v. Hyde 373 Questions on Jefferson Parish 383 Eastman Kodak v. Image Technical Servs 386 Questions on Kodak 392 Illinois Tool Works Inc. v. Independent Ink, Inc 393 Questions on Illinois Tool Works 397 United States v. Microsoft 398 Questions on U.S. Microsoft Case Holdings on Tying 405 D. Loyalty and Bundled Discounts 406 United States v. Loew's Inc 416 Questions on Loew's 418 FTC v. Brown Shoe 419 Questions on FTC v. Brown Shoe 421 Concord Boat v. Brunswick Corp. 421 Questions on Concord Boat 424 LePage's Inc. v. 3M 425 Questions on LePage's 431 Cascade Health Solutions v. PeaceHealth 432 Questions on Cascade Health 438 Note on the U.S. Lower Court Splits on Loyalty and Bundled Discounts 439 CHAPTER 5 Agreements and Conduct That Arguably Distort Downstream Competition in Distributing a Supplier's Products 441 A. Introduction 441 B. Intrabrand Distributional Restraints on Resale 444 1. Vertical Nonprice Restraints on Distribution 445 Continental T.V. v. GTE Sylvania 446 Questions on Sylvania 452 2. Vertical Maximum Price-Fixing 453 State Oil Co. v. Khan 455 Questions on State Oil v. Khan 460 3. Vertical Agreements Fixing Minimum Resale Prices 460 Leegin Creative Leather Products v. PSKS, Inc. -.. 460 Notes and Questions on Leegin 479

IX 4. How to Characterize Agreements 482 a. Are Dual Distribution Agreements Vertical or Horizontal? - 482 b. Vertical Agreements to "Boycott" the Rival of a Dealer Without Any Procompetitive Justification 484 NYNEXv. Discon. 484 Questions on NYNEX v. Discon 487 C. Price Discrimination that Arguably Distorts Downstream Competition 487 Robinson-Patman Act 2, 15 U.S.C. 13 488 FTC v. Morton Salt Co 489 Questions on Morton Salt 493 Texaco v. Hasbrouck 494 Questions on Texaco v. Hasbrouck 499 Volvo Trucks N.A. v. Reeder-Simco GMC 500 Questions on Volvo 504 Note on Other Robinson-Patman Act Provisions 506 CHAPTER 6 Proving An Agreement or Concerted Action 507 A. Are the Defendants Separate Entities? 507 Copperweld Corp. v. Independence Tube Corp 507 Questions on Copperweld Note on Agency Relations 511 513 B. Standards for Finding a Vertical Agreement Monsanto Co. v. Spray-Rite Service Corp 514 515 Questions on Monsanto - 518 C. Standards for Finding a Horizontal Agreement or Concerted Action - 520 1. Parallel Conduct Equally Consistent With an Independent Motive - 521 Theatre Enterprises v. Paramount Film Distributing 521 Questions on Theatre Enterprises - 523 Matsushita Electric v. Zenith Radio 523 Questions on Matsushita 528 Cement Manufacturers Protective Ass'n v. U.S 529 Questions on Cement Manufacturers 531 2. Parallel Conduct that Would Be Unprofitable if Not Engaged in by Other Firms 531 a. When Parallel Conduct is Implausible Without an Explicit Agreement 531 Eastern States Retail Lumber Dealers' Ass 'n v. U.S 531 Questions on Eastern States Lumber 533 American Column & Lumber v. United States 533 Questions on American Column 538 American Tobacco v. United States - 539 Questions on American Tobacco--- 541 b. When Parallel Conduct Follows Common Invitations or Secret Meetings 541 Interstate Circuit v. United States 541 Questions on Interstate Circuit 545 c. When Parallel Conduct Can Be Explained by Oligopolistic Price Interdependence--- 547

3. Agreements or Practices that Facilitate Oligopolistic Price Coordination 548 Maple Flooring Manufacturers Assn. v. United States - - - - 549 Questions on Maple Flooring 554 United States v. Container Corp 555 Questions on Container 559 United States v. United States Gypsum 561 Questions on Gypsum 564 FTC v. Cement Institute 565 Questions on Cement Institute---- 570 CHAPTER 7 Mergers 571 Clayton Act 7, 15 U.S.C. 18 572 A. Horizontal Mergers 575 1. Unilateral Effects 577 U.S. DOJ/FTC, Horizontal Merger Guidelines 577 Questions on the U.S. Guidelines on Unilateral Effects 583 FTC v. Staples, Inc 583 Questions on Staples 590 Note on U.S. Agency Enforcement Activity 590 U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines 591 Questions on U.S. Merger Commentary 602 2. Oligopolistic Effects & Collective Dominance 602 U.S. DOJ/FTC, Horizontal Merger Guidelines 602 Questions on U.S. Guidelines on Coordinated Effects 605 Note on Qualitative v. Empirical Assessments 606 FTC v. H.J. Heinz Co 606 Questions on FTC v. Heinz 611 U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines 613 Questions on U.S. Merger Commentary on Coordinated Effects 619 Note on Proving that a Merger Would Worsen Oligopolistic Coordination 620 3. Entry Barriers 620 U.S. DOJ/FTC, Horizontal Merger Guidelines 620 Questions on Entry Barriers 624 FTCv. Staples, Inc. 624 Questions on Staples 626 U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines 626 Questions on U.S. Merger Commentary on Entry Barriers 633 4. Efficiencies & Weighing the Equities 634 U.S. DOJ/FTC, Horizontal Merger Guidelines - 634 Questions on U.S. Guidelines 635 Merger Efficiencies and Total v. Consumer Welfare 636 Note and Questions on Consumer Welfare v. Total Welfare 637 Consumer Trusts and Other Coasian Solutions to the Total v. Consumer Welfare Debate 638 FTC v. Staples, Inc 639 Note and Questions on Staples 642 FTC v. H.J. Heinz Co 642 Questions on FTC v. Heinz - 648 Note on How to Balance the Equities in Merger Cases-- 649

xi U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines - - 649 Questions on U.S. Merger Commentary on Efficiencies 656 5. The Failing Firm Defense 656 International Shoe v. FTC 656 Note and Questions on International Shoe v. FTC 659 Citizen Publishing v. United States 659 Note and Questions on Citizen's Publishing - 661 U.S. DOJ/FTC, Horizontal Merger Guidelines - 662 Note and Questions on Merger Guidelines on the Failing Firm Defense 663 6. The Relevance of Buyer Power, Sophistication, or Views 663 a. Mergers Between Buyers that Create Buyer Power 663 U.S. DOJ/FTC, Horizontal Merger Guidelines - 665 U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines 665 b. Should Mergers Between Sellers Be Deemed Constrained By Buyer Power? 666 U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines 666 Questions on Whether Buyer Power Should Alter Assessments of Mergers That Otherwise Create Seller Market Power-- --. 666 United States v. Baker Hughes, Inc 666 Note and Questions on Baker Hughes 668 c. Should Buyer Views Alter Assessments of Mergers Between Sellers? - 669 U.S. DOJ/FTC, Commentary on the Horizontal Merger Guidelines 669 Note on Buyer Noncomplaints 669 B. Vertical Mergers - 672 U.S. DOJ, 1984 Merger Guidelines - 674 Note and Questions on U.S. Vertical Merger Guidelines..- 677 In the Matter of Cadence Design Systems, Inc 678 Questions on Cadence - 685 C. Conglomerate Mergers 687 U.S. DOJ, 1984 Merger Guidelines - 689 Note and Questions on U.S. Guidelines on Mergers Affecting Potential Competition 691 United States v. Marine Bancorporation 693 Note and Questions on Marine Bancorp 699 INDEX 701