Appendix N: Antitrust and Market Structure Law Restrictions on size of ownership, and on vertical and horizontal ownership Examples Entry control: gov. licensing Merger Approvals Divestiture Media Ownership Regulation The FCC s new rules regarding how many media entities a company can own The new rules would limit the number of radio and television stations that a company can own in a particular market http://www.law.com/jsp/article.jsp?id=1117530311367 TV Stations Ownership Policy Goal: diversity in outlets Originally, US ownership ceiling of 5 stations, then12, then 20. Then reach to 35% of all US households 2004: FCC tries to expand to 45%, rebuffed by Congress 1
No cross-ownership of TV stations in same market with newspapers telephone companies cable corporations Theory: market structure determines firm behavior and performance Problem: Can lead to microfindustry by management of government Major US Antitrust Laws Sherman Antitrust Act of 1890 Section 1: restrictive agreements Section 2: monopoly power Antitrust violations can be criminal or civil Sen. John Sherman Sherman Act Section I: Every contract, combination or conspiracy, in restraint of trade or commerce, is hereby deemed to be illegal 2
Section II: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with another person or persons to monopolize, any part of the trade or commerce if the several states or with foreign nations, shall be guilty of a felony Monopoly is not illegal per se But monopolies obtained through acquisitions, predatory pricing, exclusive dealing, or tying and bundling can be subject to challenge Suspect practices will be prohibited in the future or an acquisition or merger blocked Antitrust laws A firm could be split up This happened to (divestiture of theaters) Hollywood studios AT&T Microsoft (almost) NBC (one of its two radio networks) 1984: AT&T Divestiture. The Bell System broken into 8 pieces by antitrust case Competitive parts stay with AT&T (Long-distance, equipment). Monopolistic parts go to 7 RBOCs 3
US v. Microsoft 1998: US government and 20 states bring 2nd antitrust suit against Microsoft MS uses near monopoly the Windows 95 to dominate the Internet browser market US v. Microsoft 2000: District judge orders MS broken up in two parts 2001: judge partly overturned 2003: MS settlement with new administration Judge Thomas Pennfield Jackson Antitrust Supreme Court decided in Associated Press v. United States (1945) that antitrust laws apply also to mass media Clayton Act of 1914 1. Price Discrimination and price fixing 2. Tying and exclusive dealing contracts 3. Interlocking directors 4
Clayton Act of 1914 Prohibits Horizontal Agreements (Cartels) where Competitors restrict competition Price-fixing Restriction of output Group boycotts Market-division of territories or customers Restrictions of price advertising Anti-competitive Code of Ethics http://gbr.pepperdine.edu/022/images/ethics.gif Robinson-Patman Act (1936) Forbade price rebates to selected buyers in the form of fees for brokerage, g, handling, g,processing, or any other services when those same fees were not offered Ethics of Pricing First level of ethical constraints requires that all transaction be voluntary. 5
Second (higher standard) of ethical restraint condems transactions with unequal information about the exchange. Selling a used car with a known defect. Antitrust Cases on Pricing Price fixing was regarded as per se illegal Even if in done from benign motive The case law Today, Courts make an initial cost-benefit analysis before applying the per se rule Turning point: Broadcast Music, Inc. (BMI) case In BMI, 4,000 authors and composers were granted nonexclusive rights to a trade association to license their musical compositions for a fee. http://www.bmi.com/ 6
Licensees, like radio stations, were required to take a full ( blanket ) license to an artist s entire repertoire with fees based on the licensee s advertising revenues CBS challenged the blanket licensing arrangement as illegal price fixing by composers Court now required, for first time, that a price setting arrangement should first be examined to determine if it was efficient Court found that the BMI arrangement contained offsetting efficiencies. Reducing transaction costs Also, individual copyright owners could sell their compositions outside of the blanket license Principle: Agreements among competitors that raise, lower, or stabilize prices are per se unlawful Except when the restraint t is truly ancillary to a pro-competitive integration of the parties economic activities 7
Similarly, agreements among competitors to divide or allocate markets were held to be per se unlawful Today, courts may permit horizontal market and customer allocations that are ancillary to a pro-competitive integration of the parties economic activities Congress passed Newspaper Preservation Act (NPA) of 1970 to give daily newspapers some exemptions from antitrust laws Two newspapers pp within a market may form a joint operating agreement (JOA) when one is in probable danger of financial failure FCC and Justice Department also now consider impact on innovation Microsoft breakup proposal based on the argument that industry innovation was being slowed. Resistance to Innovationbased Antitrust policy Difficult to devise good remedies Hard to identify if specific cases where innovation is hurt by market power. 8
Not clear about effects of concentration on innovation Little evidence whether small or large companies have better track record with innovation Conscious Parallelism of Pricing? The courts have held that parallel behavior alone is insufficient to prove conspiracy Conscious Parallelism Requires evidence of correspondence or secret meetings, especially when quickly followed by simultaneous, identical actions on the part of the alleged conspirators, strong circumstantial evidence for agreement When defendants are unable to offer plausible legitimate business justifications for their communications or price actions. Market phenomena that cannot be explained rationally except as the product of concerted action (for example, price uniformity over a long period of time not caused by a rise in the cost of a common input ) have been held to be another factor 9
Matsushita Case In Matsushita, the alleged conspiracy consisted of a scheme by Japanese suppliers of electronics collectively to price below cost in the United States, to drive US firms from the market and later to raise prices to monopoly levels (a classic predatory pricing scheme) Matsushita Case the court held that the evidence of a conspiracy was insufficient Parallel pricing and related tactics ti are legal l ifthey are based on an independent business justification April 3, 2000: Judge rules that the software giant violated antitrust laws and consistently acted to hold onto its power over industry competitors. http://www.wired.com/news/antitrust/0,1551,35212,00.html June 7, 2000: Judge Jackson orders the break up of Microsoft into two companies. http://www.wired.com/news/antitrust/0,1551,35212,00.html 10
September 26, 2000: The Supreme Court refuses to hear the case. June 28, 2001: A federal appeals court reverses the breakup order. http://www.wired.com/news/antitrust/0,1551,35212,00.html September 6, 2001: U.S. Justice Department (under a new administration) i i says it no longer seeks the breakup of Microsoft and wants to find a quick remedy in the antitrust case. http://www.wired.com/news/antitrust/0,1551,35212,00.html Final Judgement: Microsoft must share its application programming interfaces with third-party companies http://www.usdoj.gov/atr/cases/f200400/200457.htm However, the DOJ did not require Microsoft to change any of its code nor prevent Microsoft from tying other software with Windows in the future. http://www.usdoj.gov/atr/cases/f200400/200457.htm 11
Microsoft Antitrust Europe March 24, 2004: European Commission requires Microsoft to unbundle Media Player from Windows and pay a $613 million fine for violating European Union antitrust law CNN (2004). Microsoft hit by record EU fine. Retrieved from: http://www.cnn.com/2004/business/03/24/microsoft.eu/, March 25, 2004 Microsoft Antitrust Europe December 2005: EU warning Microsoft that it did not disclose enough information about its server programs. July 12, 2006: EU fining MS for additional 357.3 mil $ for defiance Associated Press Financial Wire (2006). Microsoft lodges formal appeal against $357 million EU antitrust fine, October 3, 2006. Iowa antitrust suit: (filed in 2000), is one of the last remaining i state t antitrust t proceedings against Microsoft. The Iowa case is unique because it allows consumers, as opposed dto just equipment manufacturers, to sue Microsoft directly. Broache, Anne (2007). Did Microsoft want to 'whack' Dell over its Linux dealings? Retrieved from:http://news.com.com/did+microsoft+want+to+whack+dell+over+its+linux+dealings/2100-1014_3-6153904.html Broache, Anne (2007). Did Microsoft want to 'whack' Dell over its Linux dealings? Retrieved from:http://news.com.com/did+microsoft+want+to+whack+dell+over+its+linux+dealings/2100-1014_3-6153904.html 12
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