Antitrust Laws


Antitrust laws, or competition laws, are laws which prohibit anti-competitive behavior and unfair business practices. The laws make illegal certain practices deemed to hurt businesses or consumers or both, or generally to violate standards of ethical behavior. Government agencies known as competition regulators regulate antitrust laws, and may also be responsible for regulating related laws dealing with consumer protection.

The antitrust laws comprise what the Supreme Court calls a "charter of freedom," designed to protect the core republican values regarding free enterprise in America. The main goal was never to protect consumers, but to prohibit the use of power to control the marketplace. Although "trust" had a technical legal meaning, the word was commonly used to denote big business. As Senator John Sherman put it, "If we will not endure a king as a political power we should not endure a king over the production, transportation, and sale of any of the necessaries of life." The Sherman Antitrust Act passed Congress almost unanimously in 1890 and remains the core of antitrust policy. The Act makes it illegal to try to restrain trade, or to form a monopoly. It gives the Justice Department the mandate to go to federal court for orders to stop illegal behavior or to impose remedies.

The Sherman Act:



The Sherman Act provides: "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 declared to be illegal" The Act also provides: "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. The Act put responsibility upon government attorneys and district courts to pursue and investigate trusts, companies and organizations suspected of violating the Act.

Although the Act was aimed at regulating the businesses of the time, it was not specific (prohibiting combinations in restraint of trade). It was used for many years as an anti-union tool, until that use was finally revoked in 1914 by the Clayton Antitrust Act, which contained the word monopoly.
The Act was intended to prevent arrangements designed to, or which tend to, increase the cost of goods to the consumer. It was not specifically intended to prevent the dominance of an industry by a specific company, despite misconceptions to the contrary. The law attempts to prevent the artificial raising of prices by restriction of trade or supply

The Clayton Act prohibits:


  • price discrimination between different purchasers if such discrimination substantially lessens competition or tends to create a monopoly in any line of commerce
  • sales on the condition that (A) the buyer or lessee not deal with the competitors of the seller or lessor("exclusive dealings"), or that the buyer also purchase another different product, but only when these acts substantially lessen competition
  • mergers and acquisitions where the effect may substantially lessen competition so prevent any person from being a director of two or more competing corporations

Cellar-Kefauver Act


United States federal law passed the Cellar-Kefauver Act in 1950 that reformed and strengthened the Clayton Antitrust Act of 1914 which had amended the Sherman Antitrust Act of 1890. The Cellar-Kefauver Act was passed to close a loophole regarding certain asset acquisitions and acquisitions involving firms that were not direct competitors. While the Clayton Act prohibited stock purchase mergers that resulted in reduced competition, shrewd businessmen were able to find ways around the Clayton Act by simply buying up a competitor's assets. The Cellar Kefauver Act prohibited this practice if competition would be reduced as a result of the asset acquisition.


Mergers


Mergers are a tool used by companies for the purpose of expanding their operations and increasing their profit.
Usually mergers occur in a consensual setting where executives from the target company help those from the purchaser in a due diligence process to ensure that the deal is beneficial to both parties. Acquisitions can also happen through a hostile takeover by purchasing the majority of outstanding shares of a company in the open market against the wishes of the target's board. In the United States, business laws vary from state to state whereby some companies have limited protection against hostile takeovers. One form of protection against a hostile takeover is the shareholder rights plan, otherwise known as the "poison pill".


Horizontal Mergers


A horizontal merger is when two companies competing in the same market merge or join together. This type of merger can either have a very large effect or little to no effect on the market. When two extremely small companies combine, or horizontally merge, the results of the merger are less noticeable. These smaller horizontal mergers are very common. If a small local drug store were to horizontally merge with another local drugstore, the effect of this merger on the drugstore market would be minimal. In a large horizontal merger, however, the resulting ripple effects can be felt throughout the market sector and sometimes throughout the whole economy.


Vertical Mergers


A vertical merger is one in which a firm or company combines with a supplier or distributor. This type of merger can be viewed as anticompetitive because it can often rob supply business from its competition. If a contractor has been receiving a material from two separate firms, and then decides to acquire the two supplying firms, the vertical merger could cause the contractor’s competitors to go out of business. Antitrust concerns are a focal point of investigation if competition is hurt. The Federal Trade Commission can rule to prevent mergers if they feel they violate antitrust laws.

Tying


Tying is the practice of making the sale of one good (the tying good) to the de facto or de jure customer conditional on the purchase of a second distinctive good (the tied good). A classic example of de facto tying is the selling of razors at a loss and making the profit on the blades. Another example would be to sell a X-Ray machine to a hospital, and the profit would be made on the future purchases of the film the X-Ray machine will use on patients.
Some kinds of tying, especially by contract, have historically been regarded as anti-competitive as it is implied in this that one or more components of the package are sold individually by other businesses as their primary product, and thereby this bundling of goods would hurt their business. It is also implied that the company doing this bundling has a significantly large market share so that it would hurt the other companies who sell only single components.
Tying has been defended as maximizing overall welfare in a variety of circumstances. If the main product works better with the tied product than with others, the manufacturer may tie the products to avoid quality problems that could lead to product liability lawsuits or loss of reputation. Tying may also be a form of price discrimination: people who use more blades, for example, pay disproportionately more than those who just need a one-time shave, and this may improve overall welfare, benefitting most consumers as well as the manufacturer. Tying may also be used with or in place of intellectual property to help protect entry into a market, encouraging innovation.
Tying is often used when the supplier makes one product that is critical to many customers. By threatening to withhold that key product unless others are also purchased, the supplier can increase sales of less necessary products.

Types of tying


Horizontal tying is the practice of requiring customers to pay for an unrelated product or service together with the desired one, for example, if all of Bic's pens came with Bic lighters.
Vertical tying is the practice of requiring customers to purchase related products or services from the same company. For example, a company's automobile only runs on its own proprietary gas and can only be serviced by its own dealers. In an effort to curb this, many jurisdictions require that warranties not be voided by outside servicing

Exclusive Dealings:



An exclusive dealing contract is another business practice that may impede efficiency and therefore violate antitrust laws. An exclusive dealing occurs, for example, when a manufacturer allows only one distributor to sell its product or products in a market area. Economists consider an exclusive dealing arrangement as one of several types of vertical restrictions that often take place between manufacturers and distributors. Vertical restrictions are viewed as an alternative to a vertical merger, where firms at different stages of production, such as a manufacturer and distributor, merge their operations. Other types of vertical restrictions include exclusive territories, resale price agreements, tying contracts, and franchise arrangements.
Restrictions can have anticompetitive or procompetitive impacts and thereby potentially harm or benefit consumers. In terms of exclusive dealings, consumers may be harmed if rival manufacturers are foreclosed from offering their products through the distributor in a market area. The foreclosure limits competition and raises product prices.
Exclusive dealings contracts can also reduce the free-rider problem that sometimes accompanies exchanges between manufacturers and distributors. For example suppose that two manufacturers in the same industry, A and B, want to sell their reasonable similar products through a distributor in a market area. Further suppose that manufacturer A invest a considerable sum of money training the staff of the area distributor. Consumers gain from the advertising message and when they purchase quality products from an informed distributor. It also follows that manufacturer A may have to charge a higher price for it's product to cover the training and advertising costs and the establishment and updating of the customer list.

Sources:


Santerre and Neun, Health Economics, Edition 4, copyright 2007
http://en.wikipedia.org/wiki/Tying
http://en.wikipedia.org/wiki/Mergers_and_acquisitions
http://www.learnmergers.com
http://en.wikipedia.org/wiki/Clayton_Antitrust_Act
http://en.wikipedia.org/wiki/Celler-Kefauver_Act


Questions:
1. What is the point of Antitrust Laws?

Antitrust laws are primarily concerned with promoting competition among the firms within an industry and prohibiting firms from engaging in certain types of market practices that may inhibit efficiency.

2. Which act states: "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."
A. Clayton Act of 1914
B. The Sherman-Antitrust Act of 1890
C. Cellar-Kefauver Amendment of 1950
D. Federal Trade Commission Act of 1914
The Sherman Antitrust Act is the cornerstone of all antitrust laws. This is from section 2 of the Act. It is one the first important provisions.

3. What is the difference between vertical and horizontal merger? Give a health related example of each.
Vertical mergers are when a firm or company combine with a supplier or distributor.-- An example of a vertical merger would be if Eli Lilly merged with Walgreens and only allowed them to sell their prescription medications.

Horizontal mergers are when two companies in the same market merge or join together.-- An example of this would be a merger of the 600-bed Indiana Medical Center and the 400-bed Reid Memorial Hospital. This could save the companies around $10.5 million annually during the first 2 years of the merger.

4. Explain a "real world" health related example of tying.
An example of vertical tying would be receiving surgery from a particular health care service center and then you must return to the same facility for your physical therapy. The surgery would be performed at a lower cost if they make their return visits to the facility.

5. Why do exclusive dealing contracts violate Antitrust Laws?
Exclusive dealings is a practice that may impede efficiency which violates antitrust laws. Exclusive dealings is for example when one manufacturer only allows one distributor to sell its product in a market area. This violates the antitrust laws because the laws that prohibit ant-competitive behavior.