19.4: Unreasonable Restraints on Trade
- Page ID
- 49157
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\(\newcommand{\avec}{\mathbf a}\) \(\newcommand{\bvec}{\mathbf b}\) \(\newcommand{\cvec}{\mathbf c}\) \(\newcommand{\dvec}{\mathbf d}\) \(\newcommand{\dtil}{\widetilde{\mathbf d}}\) \(\newcommand{\evec}{\mathbf e}\) \(\newcommand{\fvec}{\mathbf f}\) \(\newcommand{\nvec}{\mathbf n}\) \(\newcommand{\pvec}{\mathbf p}\) \(\newcommand{\qvec}{\mathbf q}\) \(\newcommand{\svec}{\mathbf s}\) \(\newcommand{\tvec}{\mathbf t}\) \(\newcommand{\uvec}{\mathbf u}\) \(\newcommand{\vvec}{\mathbf v}\) \(\newcommand{\wvec}{\mathbf w}\) \(\newcommand{\xvec}{\mathbf x}\) \(\newcommand{\yvec}{\mathbf y}\) \(\newcommand{\zvec}{\mathbf z}\) \(\newcommand{\rvec}{\mathbf r}\) \(\newcommand{\mvec}{\mathbf m}\) \(\newcommand{\zerovec}{\mathbf 0}\) \(\newcommand{\onevec}{\mathbf 1}\) \(\newcommand{\real}{\mathbb R}\) \(\newcommand{\twovec}[2]{\left[\begin{array}{r}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\ctwovec}[2]{\left[\begin{array}{c}#1 \\ #2 \end{array}\right]}\) \(\newcommand{\threevec}[3]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\cthreevec}[3]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \end{array}\right]}\) \(\newcommand{\fourvec}[4]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\cfourvec}[4]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \end{array}\right]}\) \(\newcommand{\fivevec}[5]{\left[\begin{array}{r}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\cfivevec}[5]{\left[\begin{array}{c}#1 \\ #2 \\ #3 \\ #4 \\ #5 \\ \end{array}\right]}\) \(\newcommand{\mattwo}[4]{\left[\begin{array}{rr}#1 \amp #2 \\ #3 \amp #4 \\ \end{array}\right]}\) \(\newcommand{\laspan}[1]{\text{Span}\{#1\}}\) \(\newcommand{\bcal}{\cal B}\) \(\newcommand{\ccal}{\cal C}\) \(\newcommand{\scal}{\cal S}\) \(\newcommand{\wcal}{\cal W}\) \(\newcommand{\ecal}{\cal E}\) \(\newcommand{\coords}[2]{\left\{#1\right\}_{#2}}\) \(\newcommand{\gray}[1]{\color{gray}{#1}}\) \(\newcommand{\lgray}[1]{\color{lightgray}{#1}}\) \(\newcommand{\rank}{\operatorname{rank}}\) \(\newcommand{\row}{\text{Row}}\) \(\newcommand{\col}{\text{Col}}\) \(\renewcommand{\row}{\text{Row}}\) \(\newcommand{\nul}{\text{Nul}}\) \(\newcommand{\var}{\text{Var}}\) \(\newcommand{\corr}{\text{corr}}\) \(\newcommand{\len}[1]{\left|#1\right|}\) \(\newcommand{\bbar}{\overline{\bvec}}\) \(\newcommand{\bhat}{\widehat{\bvec}}\) \(\newcommand{\bperp}{\bvec^\perp}\) \(\newcommand{\xhat}{\widehat{\xvec}}\) \(\newcommand{\vhat}{\widehat{\vvec}}\) \(\newcommand{\uhat}{\widehat{\uvec}}\) \(\newcommand{\what}{\widehat{\wvec}}\) \(\newcommand{\Sighat}{\widehat{\Sigma}}\) \(\newcommand{\lt}{<}\) \(\newcommand{\gt}{>}\) \(\newcommand{\amp}{&}\) \(\definecolor{fillinmathshade}{gray}{0.9}\)Antitrust laws prohibit unreasonable restraints on trade. A restraint on trade is an agreement between two or more businesses intended to eliminate competition, create a monopoly, artificially raise prices, or adversely affect the free market. A restraint on trade that produces a significant anticompetitive effect and, therefore, violates antitrust laws is an unreasonable restraint on trade.
Concerted Action
Concerted action is an action that has been planned, arranged, and agreed on by parties acting together to further some scheme or cause. Concerted action can be either horizontal or vertical. Horizontal agreements occur between direct competitors. For example, cell phone providers decide to lock customers into two-year contracts. Customers are required to agree to terms that benefit the companies, regardless of which provider they choose.
Horizontal agreements are almost always struck down as per se violations of antitrust laws. Because competitors appear to make decisions based on their own self-interest rather than letting the market forces decide price and conditions, courts conclude that such agreements are not in the interest of consumers and the free market.
Vertical agreements occur between businesses at different places along the distribution chain of a given product. For example, a manufacturer suggests a sale price to a wholesaler of its product (i.e. “manufacturer’s suggested retail price”).
Vertical agreements are usually subject to a “rule of reason” test to determine if they are illegal. The rule of reason test is a case-by-case analysis of the agreement, industry, effects, and intent of the businesses. Although it is possible to show that a vertical agreement is legal, it usually costs businesses a lot to litigate these types of cases.
Price Fixing
Price fixing is the artificial setting or maintaining of prices at a certain level, contrary to the workings of the free market. Horizontal price fixing is price fixing among competitors at the same level, such as retailers throughout an industry. Vertical price fixing is price fixing among businesses in the same chain of distribution, such as manufacturers and retailers attempting to control a product’s resale price.
One form of price fixing is predatory pricing. Predatory pricing occurs when a company lowers its prices below cost to drive competitors out of business. Once a predator rids the market of competition, it raises prices to make up lost profits. The goal of predatory pricing is to win control of a market or to maintain it.
Predatory pricing has three elements:
- The alleged predator is selling products below cost;
- The alleged predator intends that its competition goes out of business; and
- If the competitors go out of business, the alleged predator will be able to earn sufficient profits to recover its prior losses.
Predatory pricing cases are often hard to win because it is difficult to prove the alleged predator’s intent.
Division of the Market
Division of the market occurs when businesses agree to exclusively sell products or services in specific geographic territories. A horizontal division of the market is when competitors enter into an agreement to not compete for customers by dividing a geographic area into separate sales territories. A vertical division of the market is when a manufacturer and its wholesalers agree to exclusive distributorships in a given territory.
Exclusive distributorships are usually legal unless the manufacturer has dominant power in the overall market. For example, Wendy’s grants exclusive distributorships to its franchisees to avoid oversaturation in a given geographic area. As long as Wendy’s is not the only fast food restaurant within a particular market, the exclusive distributorships will be upheld. This is because Wendy’s has a legitimate business interest in not diluting the value of its franchises, which does not restrict consumers’ choice of fast food restaurants in the overall market.
Group boycotts
A boycott is an action designed to socially or economically isolate an adversary. A group boycott is an agreement between two competitors who refuse to do business with a third party unless it refrains from doing business with an actual or potential competitor of the boycotters. Group boycotts may be either horizontal or vertical.
Exclusionary Contracts
Exclusionary contracts require businesses to buy or lease products on the condition that they do not use the goods of a competitor of the seller. The most common types of exclusionary contracts are tying arrangements and exclusive dealing arrangements.
A tying arrangement occurs when a buyer is not permitted to purchase one item without purchasing another. These are often called “bundling packages.” These arrangements benefit a seller because it allows the seller to wed a popular item with one that is less desirable and would not get as many sales independently.
Under the rule of reason test, a tying arrangement is illegal when:
- The agreement involves two distinct products not closely related to each other;
- Commerce is impacted significantly; and
- The seller has sufficient economic power in the tying product to enforce the tie-in.
An exclusive dealing arrangement exists when a buyer agrees to purchase all of its requirements from a single seller or a seller agrees to sell all of its output to a single buyer. Exclusive dealing arrangements are illegal when they substantially lessen competition or tend to create a monopoly.
Mergers and Acquisitions
Regardless of a business’s intention when merging or acquiring another business, a merger or acquisition is prohibited when it may substantially lessen competition or may create a monopoly. When analyzing a potential merger, the court considers:
- The relevant market;
- The pre-merger profile of the business; and
- The post-merger profile of the business.
As discussed above, the relevant market is determined by examining the relevant product or service market, as well as the geographic area of the business’s operations.
The pre-merger profile is determined by analyzing the type of merger, the size of the companies involved, and the concentration of the industry. Mergers may be horizontal, vertical, or conglomerate. Horizontal mergers are between competitors. Vertical mergers are between businesses within a supply chain. And conglomerate mergers are between companies in different industries. An example of a conglomerate merger is Amazon’s acquisition of Whole Foods in 2107.
The post-merger profile uses the same factors as the pre-merger profile but looks at the anticipated business after the merger.