Sherman Act

The Sherman Act is the cornerstone of U.S. antitrust laws. Signed in 1890 by President Benjamin Harrison, it was named after Senator John Sherman. The law was part of an effort to control the anticompetitive activities of large trusts that started to exercise growing influence over corporate America. The trusts were often under the control of major banks, such as Morgan Bank. These trusts gained voting power over large amounts of equities of various companies and then used the voting rights associated with these shares to merge and combine various companies. The goal of these transactions was to try to create larger and more economically viable entities.

It is ironic that just after the passage of the country’s first major piece of antitrust legislation, the first merger wave took place.³ Between 1898 and 1904, a major wave of mergers and acquisitions occurred. This wave featured many horizontal combinations that resulted in markedly increased concentration in many industries. There are several reasons why the Sherman Act did little to influence the large number of horizontal combinations. Among them was the difficulty that the enforcers at the Justice Department had in interpreting a law that they wrongly believed was so broad that it could be applied to any commercial transaction. That, combined with the limited resources of the department, led them to put the Sherman Act to little use during the merger wave.

The two main sections of the Sherman Act are described in Table 11.1.

Given the uncertainty on the part of the courts and the Justice Department about how the Sherman Act should be used to foster competition, legislators passed two other laws in 1914 to facilitate antitrust enforcement. These were the Clayton Act and the Federal Trade Commission Act.

Clayton Act, 1914

There are four main components of the Clayton Act; they are described in Table 11.2 along with the section of the act to which they apply.

Federal Trade Commission Act

In 1914, the Federal Trade Commission Act was passed at the same time as the Clayton Act. Among its purposes was to establish an agency charged with the enforcement of anticompetitive practices and mergers. In 1938, the law was expanded to also focus on false or deceptive advertising. The commission was given investigative powers and the ability to hold hearings and issue cease‐and‐desist orders.

Celler‐Kefauver Act

The Celler Kefauver Act, passed in 1950, strengthened the Clayton Act while also amending the Sherman Act. It has been referred to by some as the anti‐merger act. It closed the asset loophole in the Clayton Act that had allowed asset acquisitions that were anticompetitive. The Celler Kafeuver Act also gave the government the ability to halt vertical and conglomerate acquisitions that it believed were anticompetitive. The passage of this law set the stage for some of the intense antitrust enforcement that took place in the 1950s and 1960s.

Hart‐Scott‐Rodino Improvements Enforcement Act of 1976

The Hart‐Scott‐Rodino Act was designed to prevent the completion of mergers and acquisitions, which regulatory authorities might find objectionable. Under Hart‐Scott‐Rodino, a merger or acquisition cannot be completed until either the Justice Department or the Federal Trade Commission gives its approval. This approval process requires that the merging firms submit a 16‐page form that includes various business data broken down by Standard Industrial Classification (SIC) codes. The Justice Department and the Federal Trade Commission decide between themselves which has jurisdiction.

Following the submission of the required forms, the regulatory authorities respond within certain stipulated time periods (which vary depending on whether the deal is a cash or securities offer). The authorities can extend the response period to an additional number of days; this is usually a sign that they have problems with the deal. Given the more relaxed pattern of antitrust enforcement in recent years, merging companies have been asking for an early termination of the Hart‐Scott‐Rodino waiting periods based upon a lack of antitrust concerns.⁴

Basic Concepts Underlying Antitrust Enforcement

Antitrust law is designed to prevent private sector companies from engaging in conduct that reduces economic welfare. Companies may increase their market power through legitimate means such as through fair competition. However, when market power is increased though noncompetitive means, then it may draw the attention of antitrust regulators. However, market power that is achieved through legitimate competition is normally thought of as not being an antitrust violation. We say normally in recent years some tech companies have achieved very dominant positions in the marketplace and this has raised some concerns as to whether their mere size and power preempts future competition.

There are two major steps in the analysis of actions that may warrant the attention of antitrust regulators. The first is an examination of the conduct at issue to determine if it was anticompetitive. An example of such conduct could be price fixing. In fact, price fixing is considered per se illegal, which means the conduct is illegal and it is not necessary to determine if the conduct resulted in economic harm. Per se illegality is based upon the implicit assumption that a reduction in economic welfare will likely occur while it is also likely that increased economic welfare will not occur.

There are several main means that have often been used to achieve enhanced market power. One is through mergers and acquisitions. Through such deals a company may possibly achieve a market share that allows it to dominate rivals and hurt consumers. Another means could be when competitors collude with each other in a manner that reduces economic welfare. Still another is through exclusionary conduct, which, for example, may possibly push rivals out of the market or weaken them so that they are not able to compete effectively.

The second step in the process involves an analysis of the impact on economic welfare. Regulators must prove not only anticompetitive conduct but also why that conduct adversely affected the level of competition in the market. As the U.S. Supreme Court noted in Brunswick v. Pueblo, antitrust laws are designed to protect the level of competition, not specific competitors.⁵ There are several reasons why this is important for antitrust regulators to keep in mind. Effective regulation can be a time‐consuming and costly process and many apparent violations may not be worth pursuing. However, the whole issue of not protecting competitors from large, winner‐take‐all, firms is being reevaluated in light of the great consolidation that has occurred in many US industries.

Use of Standard Economic Models

Standard economic models of market structure, such as the model of a purely competitive market compared to a monopolistic market structure, are based upon certain simplifying assumptions that may not compare well to specific firms and industries that may be involved in antitrust litigation. While these models may yield strong and convenient conclusions, they cannot be blindly applied if they do not fit the facts. This was the case in Concord Boat Corp. v. Brunswick Corp., where the court excluded an economist’s testimony who opined that in a two‐firm market, the assumptions of equal market shares drawn from a standard Cournot duopoly model should apply and that one company had a share greater than 50%; this had to be attributable to wrongful conduct. In this case the court concluded that the assumptions from the standard Cournot model – that the products and their costs be identical – would normally not be the case in a typical industry. Here the expert failed to adapt the model to fit the real‐world differences between the two producers and too blindly applied the simple textbook microeconomics.

Antitrust Injuries

For a plaintiff in an antitrust case to collect damages, the harm must be caused by an antitrust injury. An antitrust injury is one that is caused by anticompetitive behavior that is proscribed by the relevant antitrust laws. The focus of the enforcement of antitrust laws is on the consumer and opposed to protecting competitors. Anticompetitive behavior that has adverse effects on consumers will draw the attention of enforcement authorities more than competitors who may have been harmed by the anticompetitive behavior. This is due to the fact that enforcement authorities consider their role to be one of protecting consumers as opposed to protecting competitors from each other. This is not a new concept. In fact, in Brown Shoe v. United States, the first case in which the Supreme Court interpreted the Celler‐Kefauver Act, the court made this point clear when it said, “It is competition not competitors which the Act protects.”⁸ This has been the position of the courts in the United States and also is how competition policy is enforced in the European Union.

In trying to establish damages, it is not enough for the plaintiff to show it has incurred damages. It must show that it has incurred antitrust damages. In Brunswick Corp. v. Pueblo Bowl‐O‐Mat, the Supreme Court unanimously found that the plaintiff did not incur an antitrust injury. In its opinion, the Court stated, “For plaintiffs in an antitrust action to recover treble damages on account of § 7 [Clayton Act] violations, they must prove more than that they suffered injury which was causally linked to an illegal presence in the market; they must prove injury of the type that the antitrust laws were intended to prevent and that flows from that which makes the defendants’ acts unlawful. The injury must reflect the anticompetitive effect of either the violation or of anticompetitive acts made possible by the violation.”⁹

Fact Versus the Amount of Damages in Antitrust Cases

Economic analysis in antitrust cases can be divided into two parts: establishing the fact that damages occurred and actually measuring the damages. The analysis of antitrust cases is similar to the analysis of other types of cases, such as employment and personal injury analysis. First, it must be established that the plaintiff incurred measurable damages that were caused by the actions of the defendant. Some courts have referred to this process as establishing the fact and the amount of damages. The fact of damages itself has two parts: proving that the plaintiff was damaged and that these damages were caused by the defendant.¹⁰ Establishing the fact of the damages is the key first hurdle that an antitrust plaintiff must traverse. Courts have used phrases such as reasonable probability¹¹ and reasonable certainty¹² when describing the standard to be used in establishing the fact of damages and the causal relationship between the defendant’s actions and the damages incurred by the plaintiff.

The strict requirements in establishing the fact of the damages present many opportunities for defendants to find other factors that could have caused the plaintiff’s damages. These factors will vary from case to case, but often they may be found in the economic and industry analysis that was covered in Chapters 3 and 4. The defendant may accomplish its goals even if it cannot conclusively prove that such other factors caused the plaintiff’s damages. The defendant may be able to accomplish its goal by raising doubts about the causal link put forward by the plaintiff. For example, in the United States Football League v. National Football League, the defendant was able to establish that factors such as mismanagement were important explanatory variables.¹³

A good example of a defendant finding relevant factors other than the anticompetitive conduct is the Brunswick Boat Motor case.¹⁴ In this case, the plaintiff’s expert assumed that in a world without the anticompetitive behavior of the defendant, the plaintiff’s product and the defendant would have equal market shares. In the actual world, the defendant had a 70% market share, and the plaintiff’s expert assumed that the difference in market shares was the result of the alleged behavior. However, the defendant was able to show that the plaintiff’s expert ignored some very important other factors, such as the fact that the plaintiff’s product had major product defects, which led to a large‐scale product recall, which, in turn, caused buyers to switch to the defendant. This underscores the fact that each expert has to be knowledgeable about the conditions and major events occurring in the industry. Often an industry expert, and a candid client, can be quite helpful to the damages expert in this regard.

Once the fact of the damages has been established, courts tend to apply a more relaxed standard to measuring the amount of the plaintiff’s damages.¹⁵ This is partially due to the fact that once the world has been changed by the defendant’s conduct, it is difficult to reconstruct the position of the plaintiff. While the burden of proof may be less for measuring damages, the analysis still must be nonspeculative. If the defendant can show that the plaintiff’s damages analysis is speculative, then such damages may not be recoverable.

Initial Comments

In this section of this chapter we devote space to reviewing the cases that underlie the development of antitrust law. At first this may not seem very useful in light of the fact that the U.S. economy has changed so much over the past century that one might question the relevance of laws designed to regulate old economy companies in the age of new economy companies, such as Facebook, Google, and Amazon. However, that difference is the point of this review. The current U.S. antitrust laws are old laws that have been changed little and are not well equipped to deal with the nuances of modern companies. The application of the “old laws” has, unfortunately, evolved in a limited way, through various legal decisions that have tried to apply them to new companies and their modern technologies. The problem is lawmakers have been more focused on political fights than on the job that they were actually hired for: passing laws that are relevant and facilitate economic growth and the welfare of the people who elected them.

Evolution of the Application of Antitrust Laws

In the early part of the twentieth century, the courts focused on a combination of structure and conduct. They sought companies that clearly had very large market shares, but they also considered their anticompetitive conduct. These decisions quickly evolved into the rule of reason, in which behavior became the main focus of the court.

Early Cases

In 1911, two major antitrust cases were brought against two companies that held dominant positions that they achieved through the use of various forms of anticompetitive behavior. The first of these is the Standard Oil case. The Court focused on the many anticompetitive acts in which the company engaged to garner a 90% market share of the petroleum industry.¹⁶ The large market share raised the Court’s suspicions. It was even more concerned, though, with the variety of anticompetitive behaviors that the company engaged in to drive out competitors in order to achieve this market share. Such behavior included industrial espionage and local price wars. The court’s solution was to require dissolution of the company; it was disassembled into 34 separate companies.¹⁷

In the same year, the U.S. Supreme Court ruled against American Tobacco for similar reasons.¹⁸

Rule of Reason and the U.S. Steel Case

The evolution of the rule of reason took a major step with the U.S. Steel case.¹⁹ Here U.S. Steel was shown to have a dominant position as evidenced by its market share – which was far larger than that of any of its competitors. The firm was formed through a consolidation of many different plants and competitors, leaving it with the majority of the market’s production. This process was part of an overall consolidation that was occurring throughout the U.S. economy and constituted the first merger wave in American economic history. However, the court concluded that even though U.S. Steel did possess market power, it did not engage in any offensive conduct. The court found that even though the company accounted for approximately one‐half of the market, its market share had actually fallen from as high as 66%.

In the U.S. Steel case, the court focused on the fact that the company did not make any attempt to price its products in a manner that would drive out competitors. In its decision, the court stated that size alone was not anticompetitive, and U.S. Steel did not use its dominant position to limit competition.

Structure and the Alcoa Case

The position of the court shifted in 1945 when it moved away from the rule of reason and began to consider size by itself to be objectionable. In his decision, Judge Learned Hand found that Alcoa had built up its bauxite reserves with the intention to monopolize the aluminum industry.²⁰ He was particularly impressed by the dominant position of Alcoa. Hand was concerned that even if the company had not used its market power to engage in anticompetitive conduct, the mere possession of such power, and the clear ability of a firm to dominate markets, was sufficient to constitute an antitrust violation. Judge Hand’s solution was to force Alcoa to sell off parts of the company to competitors Reynolds Metals and Kaiser Aluminum and not to build any more plants for a period of time.

It is noteworthy to mention that the Alcoa decision was followed by another major antitrust decision in the following year. In 1946, the court continued a pattern of more intensive antitrust enforcement when it found the management of A&P guilty of anticompetitive behavior.²¹ In the same year, the big three tobacco companies, American Tobacco, Liggett and Myers, and R.J. Reynolds, which controlled 75% of the market, were found guilty of monopolization.²² In later years, however, the “Alcoa doctrine” was discredited, and the mere possession of a monopoly position was not construed to be a violation of antitrust laws.

1950s–1960s

Following the Alcoa and the A&P decisions, antitrust enforcement grew intense. Antitrust laws were buttressed by the passage of the Celler‐Kefauver Act in 1950, which strengthened the Clayton Act. It bolstered the decisions of the 1940s to create an environment in which the Justice Department and the Federal Trade Commission wielded considerable power. The fact that there were not as many landmark decisions in this period is not indicative of the intensity of antitrust enforcement. Companies were often reluctant to pursue a case through trial and ended up settling by entering into agreements with the Justice Department.

When companies wanted to expand in the 1960s, they ran into extremely stringent antitrust enforcement. It limited their ability to expand within their own markets or even outside their usual industries. The intense antitrust enforcement of this period combined with the desire of companies to expand following the longest recovery in modern U.S. economic history caused the third merger wave. This wave, which took place in the late 1960s, featured conglomerate mergers – mergers outside of the company’s industry.²³ Companies were reluctant to expand within their own industries because they knew that such moves were often challenged. The antitrust enforcement became so intense that even conglomerate mergers were questioned.

On January 17, 1969, the last day of the Johnson administration, the government began its famous lawsuit against IBM.²⁴ The case dragged on for years but finally went to trial in 1975. The government alleged that IBM, which commanded approximately three‐quarters of the mainframe computer market, engaged in various anticompetitive actions (such as predatory pricing), tying of various computer products (such as hardware and software), and other acts. The case was very costly and very time consuming; in the end, the case was dismissed. Some have termed this case the Justice Department’s Vietnam.

1970s–1980s

The 1970s and 1980s were periods of more relaxed antitrust enforcement. More pro‐business administrations in Washington, DC, came to power and placed similarly minded individuals in positions of power at the Justice Department. These individuals held the belief that even in oligopolistic market structures, there can be significant competition among the participants of the industry. Broader definitions of markets were applied, and consideration was given to factors such as global competitiveness.

One landmark antitrust development that took place in the 1980s was the dismantling of the Bell System. This event can be traced to a 1974 Department of Justice lawsuit that contended that AT&T was hindering competition of fledgling rivals such as MCI and that AT&T obstructed telecommunications equipment companies from selling to the components of the Bell System that it controlled. The suit contended that AT&T used its monopoly of the local telecommunications market to dominate the long‐distance and equipment markets. AT&T argued that its control of the Bell System had resulted in the finest telecommunications system in the world. It stated that their dominant market position was actually good for the market. However, fearful that the ultimate legal result might be adverse, AT&T agreed to a consent decree, which broke up the system. This breakup separated the operating systems from the long‐distance entity while also releasing the equipment component from the combined entity. The operating companies were grouped into seven large regional holding companies, which were consolidated in later years through mergers and acquisitions. It is ironic that in the 1990s and 2000s, these holding companies would compete with AT&T and one of them, SBC Corp., acquired AT&T in 2005 and assumed the AT&T name. SBC Corporation – which stands for Southwestern Bell Corporation, a former Baby Bell – had already acquired Pacific Telesis, another former Baby Bell spun off in the breakup of AT&T. Thus the acquisition of AT&T by SBC reconstituted much of the former AT&T without the vertical integration component of AT&T. Verizon, another former Baby Bell, is another part of the old AT&T and represents the merger of two other former Baby Bells, Nynex and Bell Atlantic.

The two‐decade period from 1970 to 1989 saw the rise of what is referred to as the Chicago School influence on industry organization and antitrust law. Relationships, such as vertical relationships, some of which had been viewed by courts as being anticompetitive, were seen to have some beneficial aspects that might even work to the benefit of consumers. The change in thinking brought about by Chicago School professors such as Richard Posner, Robert Bork, and Sam Peltzman is still quite influential in court decisions to this day.²⁵

1990s

The 1990s marked a slight move away from the more relaxed posture of antitrust enforcement that was the norm during the 1980s. Mergers that may not have been questioned in the 1980s were given closer scrutiny by the Justice Department. Certain major firms that held dominant positions in markets, such as Microsoft, were watched carefully. They were challenged when they attempted acquisitions within their broadly defined industry category or when they tried to market products that could be construed as giving their products an unfair advantage over competitors. The Microsoft case was the highlight of the Justice Department’s increased aggressiveness in the enforcement of antitrust laws. The Justice Department’s suit alleged that Microsoft bundled its Web browser, Internet Explorer, with its dominant operating system in a manner that violated Section 1 of the Sherman Act.

The Justice Department argued that in doing so, Microsoft violated a 1994 order‐and‐consent decree when it bundled these products together in sales to original equipment manufacturers and consumers.²⁶ The Justice Department experienced an initial victory that was greatly tempered by subsequent setbacks. In United States v. Microsoft Corp., the U.S. District Court found that Microsoft violated Sections 1 and 2 of the Sherman Act through what this court saw as Microsoft’s efforts to use its Windows operating system to hold down competition in related areas such as Web browsers. The court based its decision in part on the Jefferson Parish Hospital District No. 2 v. Hyde and Northern Pacific Railway Co. v. the United States decisions.²⁷ However, the U.S. Appeals court for the D.C. Circuit affirmed the District Court’s decision on monopoly maintenance but reversed its decision on attempted monopolization and tying as well as the District Court’s suggested remedy.²⁸ The Justice Department declined to pursue a breakup of Microsoft, and in November 2001, the parties entered into a settlement agreement that placed restrictions on Microsoft’s behavior.

Market Definition

For a plaintiff to prove a monopolization claim, it needs to define the relevant geographic and product market.³³ The definition of a market determines the products and services that are competing with the product in question as well as the geographical area within which such competition occurs. Therefore, a market can be defined in two broad ways – geographic markets and product markets. Each way has its own quantitative measures that are employed.

Geographic Market Definitions

Geographic definitions of markets have varied considerably over time as the intensity of antitrust enforcement has varied. As markets have become broader and more internationalized, the definition of the relevant markets in some instances has widened. The degree to which increased internationalization is relevant to a case depends on the industry and the facts of the case.

Economists usually define the geographic boundaries of a market by judging whether an increase in the price in one market affects the price in another market.³⁴ Other factors related to this market’s definition are variables such as transportation costs that are incurred to move products from one market to the other. The more significant the transportation costs in the total costs of the product, the more likely that such costs might serve to segregate the market into separate markets. However, the expert needs to consider factors that could offset these costs, such as the existence of storage or distribution facilities.

Regulatory factors may play a role in the definition of a geographic market. For example, governmental regulations that prohibit selling the product or service outside certain boundaries may help define the geographical boundaries. Such factors have played an important role in the banking industry, although their importance has declined significantly as the industry has undergone deregulation.

If marketing and advertising play a major role in generating demand for the product or service, then the geographic limitations of the often‐used advertising media may help define the geographic market. However, as the marketing and advertising industry have themselves undergone major changes, the role of this factor may vary considerably.

In some cases, such as those involving hospital mergers, economists have tried to employ certain tests to understand the market. The Elzinga‐Hogarty test was introduced in the 1970s as an attempt to understand the movements of commodities.³⁵ An Elzinga‐Hogarty analysis examines the movements of products or services into and out of a possible geographic market area to draw conclusions regarding the relevant geographic market boundary. It has been used extensively in hospital‐related cases, although many criticize its use as the sole tool to determine geographic markets. Even though it has been used in antitrust cases involving hospitals, a debate exists as to how useful an Elzinga‐Hogarty analysis really is in an antitrust case. One drawback is that it examines historical flows and may not be as useful in determining future market activity.³⁶ Some also believe that it fails to define the market for antitrust purposes.³⁷ Another tool that is sometimes employed is critical loss analysis, which considers how much of a price increase a prospective monopolist could withstand before its profits would start to decline.

Product Market Definitions

The broader the market, the less likely it is that a given firm is found to have monopolized it. Competitive products are those that are substitutes for one another. Products X and Y are demand substitutes for each other if an increase in product X causes an increase in the quantity demanded of product Y. Products A and B are supply substitutes if an increase in the price of product A causes companies that are producing B to alter their production mix and increase their production of A.

Price and Substitutability

The degree of substitutability between two products is not constant; it varies as the price changes. At a low price, two products (X and Y) may not be substitutable, but at higher prices, they may become substitutes. There tends to be a price at which consumers look for substitutes. The fact that at a higher price of good X its seller faces competition from substitutes does not mean that the company selling X lacks market power. Its market power may lie in the fact that it has the ability to sell the products at as high a price as possible before it faces significant competition.

One classic example of the varying degree of substitutability as a function of price is the Cellophane case.³⁸ In this case the court concluded that DuPont did not have market power because at the prices that cellophane was selling for, there were a number of other substitutes, such as paper bags. The decision drew attention because it was clear that price exceeded marginal cost.

Determining the Existence of Substitutes

A simple method of determining the degree to which products are considered substitutes is to survey the marketing and sales professionals in the industry. Salespeople without any knowledge of economics may know very well who their competition is as they try to sell their products. Marketing professionals who develop marketing campaigns usually also have intimate knowledge of who their major competitors are.

CROSS‐PRICE ELASTICITY OF DEMAND

A quantitative measure that may be useful in assessing the extent to which two products are substitutes is the cross‐price elasticity of demand. It measures the percentage change in the quantity demanded of good X in response to a given percentage change in the price of good Y. This measure is expressed as shown in Equation 11.1.

(11.1)

Two goods can have three different values for the cross‐price elasticity of demand: positive, negative, or zero. Such values reflect the extent to which they are substitutes, complements, or have no interrelation in consumption. Substitutes are goods that can be used in place of the good in question because they have some similar characteristics in the eyes of consumers. Complements are goods that must be used together. Many consider tea and lemon complements; Coca‐Cola and Pepsi Cola are considered substitutes.

When the price of good Y increases and the quantity demanded of X increases, X and Y are said to be substitutes in consumption. When the price of Y rises and the quantity demanded of X decreases, the two goods are said to be complements. If there is no change in the quantity demanded of X when the price of Y changes, the consumption of the two goods may not be interrelated. This relationship is summarized as:

Concentration Ratios

Concentration ratios measure the amount of total market output that is accounted for by the top 4, top 8, or even top 12 companies in the industry. The greater the market share accounted for by a smaller grouping of firms, the closer an industry is to monopoly. Industries where the top 4 or 8 companies account for most of the industry output usually are considered oligopolies. An example of the wide range of concentration ratios in different industries can be found in the Census Bureau’s reports.⁴³ It is important to keep in mind that one cannot judge the degree of competition in an industry by looking at concentration ratios alone. An industry can have a significant degree of competition even when there are relatively few competitors. There is some support, however, for what is known as the differential efficiency hypothesis, which is the view that firms with high market shares will tend to have high price‐cost margins and profits. There is support in the empirical research literature for the differential efficiency hypothesis.

Increased Concentration and Its Effects

It is clear that regulatory authorities have allowed certain industries to become much more concentrated through mergers and acquisitions. One such industry is the airline industry.⁴⁴ Here mergers of large carriers have limited competition in certain markets and have even discontinued certain routes.

Grullon et al. have shown that over the last two decades, three‐quarters of U.S. industries experienced increased concentration.⁴⁵ They showed that this increased concentration was associated with higher profit margins and positive abnormal stock returns. They also were able to relate these changes to “lax enforcement of antitrust regulations,” especially as it relates to mergers and acquisitions.

Azar et al. have shown that the adverse effects of increased concentration may be more pernicious than what simple concentration ratios and HHI measures show.⁴⁶ This is due to the potential impact of common share ownership of competitors. In equity markets institutional investors, such as mutual funds, often hold large stock positions in companies that are competitors. Azar et al. have shown that this common ownership provides incentives for reduced competition. They traced these incentives to higher product prices.

Major concerns for the U.S. economy are that workers are not realizing significant real wage growth and there is a reason to believe that income inequality is rising. For example, David Autor et al. have shown that labor’s share of profits has declined.⁴⁷ These troubling trends arise at a time when concentration in many industries has risen significantly. Covarrubias, Gutierrez, and Philippon analyzed the trends in corporate profits, investment, and market shares over the past 30 years.⁴⁸ They found that in the 1990s, industry concentration was not as high, although increasing, yet price competition was greater and so was investment and productivity. However, they showed that after 2000, rising concentration and rising barriers to entry were associated with lower investment, higher prices, and reduced productivity. Indeed, Professor Philippon has opined that as the U.S. economy has gotten more concentrated and market power in certain industries has risen, partly due to the power of corporate lobbyists and how they influence U.S. politicians and their willingness to sell what little integrity they may have to the highest bidder, competition has declined, prices have risen above competitive levels, and productivity has declined. ⁴⁹

Herfindahl‐Hirshman Index

Concentration ratios are not very sensitive to changes in industry concentration caused by mergers among firms in the same size category. For example, if the top firms constitute 98% of total industry output and there is a merger between the sixth‐ and seventh‐ranked companies in the industry, the top eight concentration ratios will shed little light on the competitive effects of this change in control. To remedy such problems, regulatory authorities rely on the Herfindahl‐Hirschman Index (HHI). The index was created by economists Orris Herfindahl and Albert Hirschman. It is expressed as shown in Equation 11.4.

(11.4)

where:

• S_i = the market share of the ith firm

HHI can be expressed as decimals and thereby it can range between 0 and 1. However, more typically it is expressed as whole percentages, which means the values can vary between 0 to 10,000 (100²). A value of 10,000 means the industry is a monopoly.

Given that the market shares of the firms are squared, the index places disproportionately greater weight on larger firms. In the example, the merger between the sixth‐ and seventh‐largest firms has little impact on the top‐eight concentration ratio other than to promote the relatively small, previously ninth‐ranked firm to the number‐eight spot. However, the HHI may rise significantly when the sixth‐ and seventh‐ranked firms merge.

In an effort to prohibit types of mergers and acquisitions that are unacceptable, the Justice Department has created merger guidelines in terms of the Herfindahl‐Hirschman Index. A competitive market is one that has a score of 1,500 or lower. If the HHI value is between 1,500 and 2,500 the market is considered moderately concentrated. When the HHI value is above 2,500 the Justice Department considers the market highly concentrated and any merger that increases the HHI by 200 points could create antitrust concerns.

Exhibit 11.5 shows how the Herfindahl‐Hirschman index has markedly risen since 1987. This trend has come at a time when antitrust enforcement has declined. The combination of these two trends has raised concerns.

Concentration, Structure, and the Efficiency Debate

From a policy perspective, the importance of industry concentration is an outgrowth of the structure versus behavior and market efficiency debate that has been quite active since the passage of antitrust laws starting in 1890. Structure is important not just in the case of an outright monopoly but also in an oligopolistic market. Research studies that were published over a half century ago initially lent support to the importance of market concentration. For example, Joseph Bain analyzed the profitability of 42 different industries and found a relationship between greater concentration and higher industry profitability.⁵⁰ Bain’s study was followed by several other studies that, to different degrees, provided support for “structuralist” arguments. Policy makers then latched on to these findings and sought to take actions to “deconcentrate” industries.

The structuralist views were opposed by the Chicago School of efficiency theorists, who found the higher profitability of some more concentrated industries to be the product of the success of more efficient firms. These researchers contended that the higher market shares of some firms were the product of their success in being more efficient than their competitors.⁵¹ This debate on the importance and relevance of industry concentration continues today. In a litigation context, it is determined by the empirical findings specific to the industry in question.

Common Types of Antitrust Cases

With the dramatic increase in mergers and acquisitions that occurred in the 1980s and 1990s, lawsuits involving alleged increases in market power resulting from such transactions may require antitrust analysis. These cases draw on the type of analysis that was discussed earlier. However, in addition to allegations of basic monopolization of markets, certain other types of antitrust violations arise: predatory pricing and tying contracts. Predatory pricing is a violation of Section 2 of the Sherman Act; tying contracts violate Section 3 of the Clayton Act. There is an abundant literature on each of these types of violations that is well beyond the scope of this chapter. However, an introduction is provided to some of the issues and tools that may be employed in a litigation environment.

Mergers and Acquisitions Antitrust Analysis

The 1980s featured a dramatic increase in both the number and size of mergers and acquisitions (M&A). This period was the fourth merger wave that occurred in U.S. economic history. It ended in the late 1980s with the collapse of the junk bond market. This helped fuel the high number of hostile deals that occurred, as well as the overall slowdown in the economy. However, after a relatively short hiatus, the pace of mergers and acquisitions increased in 1993, and the resulting merger frenzy surpassed even the lofty levels reached in the 1980s. This period was the fifth merger wave.⁵² That wave ended with the recession of 2001. In the next few years, though M&A volume picked up again, this next merger period, the fifth wave, was partially driven by the rapidly growing demand from private equity funds. This continued until the latter part of 2007, when the subprime crisis began to unfold. By 2008, and the start of the Great Recession of 2008–09, M&A volume was way down as deal financing dried up. In fact, the cutoff in financing led to large‐scale deal cancellations. Once the economy began to recover and enter the longest expansion of post‐war U.S. economic history, high deal volume returned. This period also coincided with the tremendous growth of certain very large firms in the tech sector. Their growth and apparent dominance became a very controversial issue.

Regulatory Framework

Mergers and acquisitions are highly regulated. Purchases of stock beyond the 5% threshold require the filing of a Schedule 13D disclosure statement pursuant to the Williams Act or Section 13(d) of the Securities and Exchange Act; tender offers require the filing of a Schedule TO pursuant to Section 14(d) of the same law. However, in addition to these securities laws, a special disclosure‐related law exists for the antitrust ramifications of mergers and acquisitions. This law, the Hart‐Scott‐Rodino Improvements Act, requires the filing of a form that includes data on sales by SIC (or now NAICS) code for merger partners above a certain size. This form is filed with both the Justice Department and the Federal Trade Commission; they determine which has jurisdiction. If the transaction is objectionable, they may ask for more information (which is usually a sign of a potential problem), or they will indicate that they oppose the deal. The purpose of the law is to give merger partners an advance ruling. This prevents the government from having to file a lawsuit after the fact and having to try to disassemble the combined entities.

Horizontal Mergers and Acquisitions

Section 7 of the Clayton Act, which was amended in 1950 by the Celler‐Kefauver Act to include asset transactions, makes illegal those deals in “any area of commerce” or in “any section of the country” that lessen competition or tend to create a monopoly. The wording of these excerpts from the law is revealing. The term “any area of commerce” implies that the industry definition is flexible. In addition, regional concentration becomes an issue under the wording “any section of the country.” The phrase “tend to create a monopoly” makes the law applicable even if the deal did not result in a clear monopoly. Given its broad wording, this section of the Clayton Act and the Sherman Act are potent weapons in the hands of regulators who are predisposed to oppose such deals.

One of the most common antitrust complaints in mergers and acquisitions has to do with increases in market power caused by horizontal transactions, such as a merger between rivals. This claim was asserted more often in the mid‐1990s as the industry consolidations of the fifth merger wave started to have an effect on the degree of concentration in some industries. This led to the Justice Department playing a more active role in examining, not merely rubber‐stamping, the mergers that took place.

In an effort to establish standards that potential merger partners could look to try gauge the government’s position on the competitive effects of a given deal, the Justice Department, starting in 1968, began to issue merger guidelines. The original version of these guidelines consisted of concentration ratios for industry structures that the Justice Department would consider less concentrated versus those that it would consider highly concentrated. These early guidelines were somewhat simplistic and inflexible. They were changed in 1982 when the Justice Department put forward the use of the Herfindahl‐Hirschman Index as an alternative to simplistic concentration ratios. The department set forth particular values of the index that apply highly concentrated (greater than 1800) as opposed to less concentrated industries. The guidelines were updated in 1992 when the Justice Department allowed for the consideration of other economic factors, such as the price elasticity of demand and the effect that a given price increase, such as 5%, would have on quantity demanded by consumers. In 1997, there was still another iteration of the guidelines, which allowed for efficiency effects to be taken into account in mergers that might otherwise be considered anticompetitive.

Vertical Mergers

As we have noted, the Clayton Act also provides for challenges of vertical, and even conglomerate, mergers and acquisitions. Challenges to vertical mergers are much less common than challenges to horizontal deals. For example, over the period 2000–2017 the FTC pursued 22 challenges to vertical mergers – “about one per year.”⁵³

Vertical deals are those in which the participants have a buyer‐seller relationship (even if they were not necessarily buying/selling from each other at the time but were buying/selling to others in the same overall industry). The U.S. Supreme Court has decided relatively few major cases involving vertical mergers under the Clayton Act. The first in which it applied the Clayton Act was the DuPont case, where the Court found that DuPont’s acquisition of 23% of the shares of General Motors foreclosed a market to other suppliers of paint and materials that DuPont suppled.⁵⁴ This led the court to conclude that the deal was anticompetitive.

The DuPont decision was followed five years later by the Brown Shoe case.⁵⁵ Here the Court concluded that the primary vice of a vertical merger was the foreclosure of a market to competitors. In reaching its decision the court said market share might not be the critical factor, as opposed to horizontal deals where it is of primary importance. In vertical mergers the Court noted that other factors, such as the real purpose and goal of the merger, can possibly have greater importance.

Ten years after Brown Shoe, the Court found that Ford Motor Company’s decision to buy a spark plug manufacturer, Autolite, was anticompetitive, The Court also rejected Ford’s weak argument that by being combined with Ford, Autolite would be a more credible competitor in the spark plug business.⁵⁶

While the early cases in which the Supreme Court applied the Clayton Act projected a dim view of some vertical deals, some other lower federal court decisions, such as the Second Circuit decision in Fruehauf Corp. v. FTC, took a different view. In Fruehauf the court approved a merger that was opposed by the FTC. In its reasoning, the court pointed out that K‐H, a brake and wheel manufacturer, the target of the vertical acquisition by Fruehauf, the largest U.S. truck manufacturer, was too small to have any significant effect on its competitors.⁵⁷

In later decisions by other circuits, those courts looked to the potential efficiency enhancing effects of vertical mergers. These decisions seem to rely on the possibility of efficiency enhancements and costs savings being passed on to consumers even though there was not necessarily a basis to know that at the time of the decisions.⁵⁸

The positive view of vertical deals continued until the 2018 decision by the District Court for the District of Columbia in which the court ruled against the Justice Department.⁵⁹ “AT&T, a content distributor, and Time Warner, a content creator, argued that a merger was necessary in order to remain competitive with already vertically integrated companies such as Netflix, Hulu, and Amazon.”⁶⁰ In reaching its decision the district court did allow for the possibility that the combination could possibly reduce competition. However, the court also said the burden to prove that was the government’s and that it had failed to prove it sufficiently to stop the merger.

In recent years, concern about new large mega companies, ones that dominate industries, have brought a new focus on vertical deals. When a vertical target is acquired by a huge company with great cash resources, does the target thereby gain a large competitive advantage over rivals? If those rivals also vie for business with the huge buyer, do they lose their ability to compete?

It is ironic that the Justice Department has revised its merger guidelines several times since it issued its 1968 Merger Guidelines. In its 1982 revision it added the use of the Hirfindahl‐Hirschman measure. Its guidelines were later revised in 1992, 1997, and 2010. However, the guidelines that govern vertical mergers have been unchanged since 1982. As companies have grown and have used vertical mergers to facilitate that growth, calls for a new focus on vertical deals have increased.

Predatory Pricing

The term “predatory pricing” refers to the use of price competition to drive rivals out of business and to prevent competitors from entering into the firm’s market. Obviously, one of the key tasks in a predatory pricing analysis is to determine whether the price competition was the product of ordinary competitive actions or was part of a predatory process. This is one of the problems of predatory pricing economic analysis – distinguishing predatory pricing from ordinary competition.⁶¹ Courts have recognized that cutting prices is one of the main forms of competition.⁶² In order to determine this, one must compare price to some measure of the alleged predator’s costs. This usually involves showing that the predator incurred losses, usually short‐run losses, in order to generate long‐term gains.

Predation is more likely in markets where the predator has certain advantages over current or potential rivals. These advantages may come in the form of larger size or lower costs. Certain game theory issues arise when the competitors do not know the other firm’s cost structure; they merely formulate guesses based on a variety of observable variables, such as the rival’s prices and responses to the prices of competitors.

Recouping of Losses

One important result that one can derive from Brooke Group v. Brown & Williamson Tobacco is that the plaintiff must demonstrate that the defendant has a reasonable probability of recouping the losses it incurred by allegedly pricing below costs. This process involves showing that over some reasonable time period, the defendant would be able to increase price above the competitive level.⁶⁵ The present value of these future profits must offset the present value of the costs incurred through the losses caused by the below‐cost prices.

The ability of the defendant to recoup initial losses caused by the predatory price can enhance the ability of the plaintiff to prove its case. This was the case in Spirit Airlines v. Northwest Airlines, Inc., when the court accepted the plaintiff’s expert analysis, which indicated that the defendant could recoup its losses quickly.⁶⁶

Criticisms of the Economics of Predatory Pricing Claims

There has been much criticism of the appropriateness of predatory pricing claims. Much of this criticism revolves around whether predatory pricing can be an effective means of acquiring monopoly power.⁶⁷ Some question the sense of a competitor who prices at a level where it incurs losses simply to impose losses on other firms.⁶⁸ John McGee, a famous critic of rationality of predatory pricing claims, has emphasized that there are much less costly ways to obtain the same advantages that predators are seeking, such as mergers.⁶⁹

In addition, he points out that once competitors perceive that the predator’s actions are temporary, they may wait out the loss period with the predator. If the actions force them to leave the industry, McGee states that they may reenter. Others have questioned McGee’s criticisms, saying that they seem accurate in theory but do not hold up when confronted with the realities of certain market situations.⁷⁰ When the predator is far larger than the rivals, they may not be able to wait out the losses as easily as a well‐financed predator. In addition, rivals that were once forced out by losses incurred at the hands of a predator may think twice before devoting capital to an industry that has dealt them such unpleasant experiences. Other, more attractive opportunities may exist.

Credibility and Alleged Predation over Time

In Matsushita Electrical Co. Ltd. v. Zenith Radio Corporation et al.,⁷¹ the Supreme Court questioned the soundness of claims of predatory pricing that extended over two decades. The court concluded that it is not reasonable that any competitor would incur losses over such a long time period in the hope of recouping these gains at some indeterminate time in the future. Such a plan implies that the alleged predator is using a rather unreasonable discount rate in its competitive strategy. Ruling out such a strategy, the court concluded that the prices must be the product of normal competition. One lesson that arises from this case is that the time period over which the alleged predatory pricing occurred must be of a reasonable length. It cannot be so long as to make the claims lack credibility.

Predatory “Costing”

An interesting variant of predatory behavior is where a firm seeks to drive out rivals not by lowering their revenues through predatory pricing but by taking actions that increase their costs. Competitors that have their costs increased may reduce output, potentially allowing the predator to increase its market share.⁷²

Price Discrimination

Price discrimination is illegal under Section 2 of the Clayton Act, which was amended by the Robinson‐Patman Act of 1936. Under the Robinson‐Patman Act it is illegal to discriminate in the prices charged to purchasers of a product where the effect of that discrimination is to lessen competition or to create a monopoly.

The theoretical basis for price discrimination is well established in basic microeconomics,⁷³ which states that in order for price discrimination to be effective, sellers must be able to segregate customers according to their price elasticity of demand. It is also important that consumers in the relevant markets be kept separate so that product from the low‐price market does not “leak” into the higher‐price market.⁷⁴ There are many examples of this type of price discrimination in practice. For instance, discount ticket buyers of airline tickets have a significantly higher price elasticity than those who seek first‐class or unrestricted coach fares.

For companies that are the victim of higher prices, their damages may be the difference between the two prices times the quantity that is determined to be the relevant amount. However, each case is different and brings with it unique circumstances that may affect this determination.

Price Fixing

Price fixing is a violation of Section 1 of the Sherman Act. The law makes collusive behavior among competitors that seek to establish certain market prices illegal. This type of price fixing is called horizontal price fixing. Price fixing can also be vertical: a firm at one stage of the production‐distribution chain seeks to change prices at another stage. An example is the manufacturer who wants to require distributors or retailers to maintain prices above certain levels. We will discuss each situation separately.

Damages in Horizontal Price Fixing

In cases of horizontal price fixing, plaintiffs may pay higher prices than what they would have paid in the absence of price fixing. This difference in prices may be a measure of the plaintiff’s per‐unit damages. The price difference can then be applied to a quantity measure to arrive at a cumulative‐damages value. One of the difficult tasks facing the economist is to determine what prices would have been without the collusive behavior. One method that is used to determine such prices is the before and after method. This method looks to find a period of time during which there was no price fixing. Depending on the facts of the case, this time period could either be before or after the price fixing. The difference in prices between the “no price fixing” time and the price‐fixed period are then computed to measure the per‐unit damages. One important analytical element of the before and after method is the economic comparability of the two time periods to rule out any other economic factors that may have been responsible for the price difference. This is an area that defendants may want to explore. One issue that often is not considered by courts is the quantity variation that might have occurred in response to the varying prices.

If there are no time periods without the presence of price fixing, then an alternative to the before and after method is to find some proxy firms that are very similar but that are not involved in the price fixing. As was discussed in Chapter 2 of this book, this method is referred to as the yardstick method.⁷⁵

Measuring Damages in Vertical Price‐Fixing Cases

Vertical price fixing can involve the setting of a maximum or minimum price. It sometimes is referred to as resale price maintenance. Maximum price fixing occurs when a company, such as a manufacturer, establishes a limit that a price cannot exceed. Minimum price fixing can occur when a manufacturer requires that a seller not sell a product for less than a predetermined price.

The measurement of damages in a vertical price‐fixing case involves establishing the per‐unit damages as measured by the difference between the fixed price and an unaffected price. The expert may be able to find examples of both prices when there are marketers that sell under the fixed as well as the unfixed price policy. An example is the manufacturer of a product that requires its distributors to sell at certain minimum prices. If the distributors try to sell at lower prices and the manufacturer responds by taking certain actions (like cutting off the distributors’ supplies), there may be readily available evidence of both sets of prices in the market.

One important component of the analysis is to show that there actually are damages. It could be the case that the manufacturer is trying to extract economic rent by imposing its fixed prices. If the defendant can establish that the plaintiff would have sold at the disputed prices even without the actions of the defendant, then no damages will be found.

In June 2007, in the Leegin Creative Leather Products, Inc. v. PSKS, Inc. DBA Kay’s Kloset … Kay’s Shoes case, the U.S. Supreme Court struck down an antitrust rule that made resale price maintenance requirements by manufacturers and distributors illegal.⁷⁶ Resale price maintenance requirements have long been a point of dispute between manufacturers that want to maintain higher prices and profit margins and that assert that retailers that sell below the manufacturers’ suggested prices, such as discounters, erode the quality image of their brands. One of the relevant economic issues is whether there can be pro‐competitive effects from resale price maintenance and vertical price agreements in general. In a 5 to 4 decision, the Supreme Court instructed courts to follow the rule of reason and examine antitrust implications of a given pricing requirement on a case‐by‐case basis. The issue of having a per se rule against resale price maintenance has long been a point of debate by some economists who question the theoretical basis for such a rule. Some have debated how minimum resale price maintenance can actually stimulate competition among different brands. Part of this debate centered on the possibility that the resale price maintenance may allow for a higher‐quality sales environment at, say, the retail level, where the minimum price may allow for higher margins that enable retailers to be able to afford better service for the consumer.⁷⁷

In the Leegin decision, the Court stated that a per se rule, while administratively convenient, may not be economically correct in all cases. In reaching this conclusion, the Court indicated that the facts and circumstances of each case need to be examined in the context of any other anticompetitive conduct so as to make a determination on a case‐by‐case basis. The Court left plenty of room for parties in such suits to present their own economic expert testimony to argue for or against the competitive effects of such vertical price agreements.

Tying Contracts

Another common type of antitrust case is one in which there is an allegation of a tying contract. Tying contracts are agreements in which a seller requires a buyer to purchase products from it at certain prices that the buyer would otherwise not purchase. Stated alternatively, tying refers to selling a product (called the tying product) on the condition that the consumer purchase another product (the tied product).⁷⁸ Such contracts are illegal pursuant to Section 3 of the Clayton Act. Tying contracts are sometimes seen when the defendant is trying to extend the power it possesses in one market to another market where its lacks such power. This could occur, for example, if the defendant has a monopoly in one market but faces competition from several sellers in the other market. If the plaintiff needs both products for its production process, it can be forced to acquiesce to the seller’s requirements. A famous tying contract case was International Business Machines v. U.S.⁷⁹ The Supreme Court concluded that IBM’s requirement that buyers of its machines also purchase its computer cards was an example of IBM using its market power – derived from its preeminent position in the computer industry – to engage in price discrimination. The more intensive users of the machines would purchase more cards and would, therefore, pay more in total than those who used the machines less intensively. Tying contracts were the means through which IBM became what is referred to as a price‐discriminating monopolist.

A plaintiff pursuing a tying claim may try to portray the defendant’s actions as a per se violation to try to pursue a rule of reason analysis. “Per se liability exists where the defendant is found to have appreciable market power in the tying market. In such cases, the ability to leverage this power to restrain trade in the tied market is presumed and no inquiry need be made into the actual prevailing market conditions in that market.”⁸⁰ However, if a plaintiff is unable to prove a per se violation, then the plaintiff has to pursue the claim under the rule of reason, where it has the potentially more difficult task of showing that the tying arrangement unreasonably restrained competition in the market for the tied product.

Determining If Products Are Truly Separate

One of the tasks of the economic expert in a tying contracts case is to determine if the products are truly separate or if they are naturally bundled together. If the latter is the case, it may be a costly task to unbundle them – this process may work to raise the ultimate price to the consumer. For example, in Jefferson Parish Hospital District No. 2 v. Hyde, the court determined that the services of anesthesiologists were separate from the services that a hospital offers.⁸¹ The court concluded that the issue of there being two products centers not on their functional interrelationship but on the nature of the demand for the two products. That is, if the nature of the demand is such that there is a separate demand for each of the two products, then there are two products, not just one, that tie the two together.

A classic example of goods that are often tied together but do not necessarily have to be offered together are products that require service. The manufacturer may want to require buyers to purchase its service. One argument made by defendants in these types of actions is that substandard service may damage the product and affect the warranty.⁸² This argument is weakened if the plaintiff service organization can demonstrate that it is capable of offering services of similar quality. Such cases have arisen when former service employees of a defendant leave its employ after having provided service to the defendant’s consumers. After having been trained by the defendant, they enter into competition with the defendant in the services business. In such circumstances, the defendant needs to show why, in spite of these circumstances, there is a quality control issue.

One of the ways that manufacturers try to make it difficult for third‐party service organizations to enter the services market is to refuse to sell parts to such organizations. Faced with such a shortage of parts essential to provide timely service, these companies often resort to purchasing used equipment and dismantling it for parts. Even in this case, the manufacturer has an advantage in that it may be able to claim that it has only new parts. Competing services companies offer used parts that may not perform as well. Probably the most well‐known case in this area is Eastman Kodak Co. v. Image Technical Services.⁸³ The definition of market was crucial in this case. The independent services organizations (ISOs) conceded that Kodak, which had less than a 25% market share, did not have power in the market for the copiers that they sold and that were being serviced by the ISOs. However, the ISOs asserted that Kodak had a monopoly in the market for the parts used in Kodak’s own products. A divided Supreme Court concluded, however, that the absence of market power at the initial product level did not necessarily preclude the exercise of anticompetitive market power in the aftermarket.⁸⁴ Kodak had argued that assertions that it would raise prices in the aftermarket above competitive levels did not make sense. This is because the new prices would raise the total cost of the product, hurting Kodak’s competitive position in the equipment market.

This view is espoused by some economists who assert that the market power for these interrelated products and systems is very interdependent.⁸⁵ While some see this as a rejection of pure economic theory, the Court did conclude that markets may not work perfectly. These imperfections may make the simplistic theory of equipment market competition fail to prevent aftermarket anticompetitive activities.⁸⁶ Others do not see this as a rejection of pure economic theory, or what some refer to as Chicago economic theory. They see the courts moving to a more modern, or post‐Chicago, stance in which a variety of economic factors that include more recent developments in the field of industrial organization are taken into account in reaching modern antitrust decisions.⁸⁷ Other economists do not think that the Court went far enough and assert that the competition in the equipment market may have little effect on a manufacturer’s attempt to monopolize its aftermarket.⁸⁸ This remains hotly debated in the economics profession. It is useful to consider how the alleged tying affects the market and consumers. In Microsoft, the Court noted that not all ties are bad.⁸⁹ Prior cases such as Jefferson Parish only focused on the tying – it did not go further to determine if the tying was necessarily bad. However, the “Supreme Court has already held that tying arrangements as a category are a type of business relationship that experience has shown always hurts competition.”⁹⁰

Measuring Damages from Tying

Damages analysis for tied products is similar to the analytical process used for horizontal price fixing. The expert may measure the difference between the price that would have been paid had there not been tying and the price that was actually paid.⁹¹ This price difference can be applied to a measure of quantity to arrive at the amount of damages.

Part of the damages investigation process may be to try to determine if, but for the tying, there were other substitute products that were available at lower prices. If this cannot be done, then there may not be a basis for a damages claim. The expert’s research needs to establish that the products were comparable in their features and characteristics.

Distributor Termination and Antitrust

Termination of distributors is a common type of case in which there are antitrust allegations along with possible other claims, such as breach of contract. In order to seek relief under antitrust laws, the plaintiff ex‐distributor needs to show a conspiracy on the part of the defendant to terminate the distributor as part of a process to reduce competition or monopolize a given market.

The methods used to measure damages from a termination of a distributor’s agreement are similar to what has been discussed in this book. They often involve a measurement of reduced sales and an application of a relevant profit margin that will be applied to the amount of lost sales. One analysis that the expert may do in an antitrust case and not in another type of business interruption claim is an additional economic analysis. It is done to establish the economic effects of the anticompetitive behavior. This may be done to establish liability while the traditional damage measurement methods may be used to quantify the damages.

In cases where the terminated distributor has gone out of business, it may be necessary to do a business valuation. This is done for the entire business in cases where it has closed, or it is done for a component of the business that may have ceased operating. If the plaintiff can establish that this segment of its overall operation could have been sold separately in a market for such entities, then the valuation may be easier to perform. The valuation may show either a diminished value or a loss of the entire value in cases where the entity no longer exists. The process of business valuation is discussed at length in Chapter 8.

Just as in other types of damages analysis, the terminated distributor needs to take steps to mitigate its damages. This may involve locating alternative supply sources. If the plaintiff fails to take such reasonable steps, the court may find that the defendant is not liable for the plaintiff’s damages, for they could have been avoided.⁹²

However, changing suppliers may impose additional and unique costs on the plaintiff that may add to its damage claim. For example, the plaintiff may have incurred a variety of additional costs, such as a changeover of marketing materials, sales support items, and the like. These costs may be added to the total damages.