Anti-Trust Laws and the Consumer
Anti-trust laws protect the consumer from unfair and deceptive trade practices. These laws were created to protect business owners, consumers and economic efficiency. In an open and free market, businesses must provide quality products and services to consumers as well as truthful representation of their goods and services. Misrepresentation results in inferior products and artificially inflated prices for the consumer and is at times accomplished through unlawful collusion between competitors. A fair and open market where businesses compete in a non-monopolistic environment brings economic efficiency as businesses are encouraged to find more efficient methods of production stay in the market. Inefficient firms that fail to understand consumer needs, eventually lose in the market. If open market competition was nonexistent, cartels and monopolies would be free to distort the allocation of society’s resources for economic profit in the long run. This would result in economic loss to consumers as well as competitive harm to the economy.
In the United States, the basic federal antitrust laws are: The Sherman Act of 1890, the Clayton Act (1914) and the Federal Trade Commission Act of 1914. The Sherman Act prohibits the restraint of trade and the creation of monopolies and is an important part of economic legislation in the United States. The Sherman Act prohibits any agreement among competitors to fix prices, rig bids or engage in other competitive activity. Corporations or individuals in violation of the Sherman Act face large fines and/or imprisonment and must make restitution to the consumers for overcharges. The Clayton Act of 1914 is a supplement to the Sherman Anti-trust act. It deals with specific types of restraints including exclusive arrangements, tie-in sales, price discrimination and mergers and acquisitions. These restraints protect against monopolistic takeovers. The Federal Trade Commission Act of 1914 was created to support loopholes in the Clayton Act and is a “catch all” for all antitrust laws. The Federal Trade Commission Act has national and international jurisdiction in prohibiting unfair trade and competition practices.
Antitrust laws protect the consumer at both the state and federal level. These laws do not restrict or prosecute all joint agreements between companies, such as joint research and development. They govern companies that raise consumer prices through forms of collusive pricing and low output of supply. Horizontal price fixing, bid rigging and allocation schemes are considered the most common forms of antitrust collustions. Firms that agree to sell at a fixed price or agree to not bid against each other defraud their customers into thinking they are competitive. These types of non-compete agreements are usually covert and illegal.
Horizontal price fixing is agreed upon between competitors through a policy that is committal between players. When prices are artificially set, the free market is unable to fundamentally drive price levels, creating economic inefficiency. If output is reduced and prices are raised, the intent to create a monopoly is in question. It brings harm to the consumer and to economic efficiency through affected prices, profit margins, discounts and wages. In bid rigging, competitors agree on who will submit the winning bid before the bid process begins. Common forms of bid rigging are bid suppression, complementary bidding and bid rotation. Bid rigging usually happens among government agencies soliciting competitive bids. The dairy industry has faced prosecution in conspiracy to rig bids on milk products sold to public schools and other public institutions. Students and taxpayers who subsidized public school meals overpaid for milk while the dairy industry made excessive profits on artificially inflated milk products. Allocation schemes are when competitors agree to divide markets among themselves. Competitors will agree to allocate customers or geographic areas amongst themselves and will purposely quote high prices to customers outside their allocated area to forfeit business.
While price fixing, bid rigging and market allocation are the obvious violations of antitrust, there are more complex forms of antitrust violations. As antitrust violations become more complex, illegal per se is no longer a common ruling of the court in antitrust violations. Illegal per se is solely an interpretation of the Sherman Antitrust Act and it is no longer believed to bring accurate judgment in modern day cases and rulings. To combat the need for new interpretation, the US Supreme Court developed a doctrine called the rule of reason. The rule of reason gives lead way in the interpretation of the Sherman Antitrust Act. This flexible approach is meant to bring economic efficiency and preserve the business opportunities of individuals. Examples of modern day antitrust behaviors in question are resale price maintenance, bundled discounts, predatory pricing in the consumer oil market and online behavioral advertising.
Resale price maintenance (RPM) is when a manufacturer influences its retailers to resell a product at the same price and thereby prevents competition. RPM can be in the form of maximum or minimum resale price maintenance. Maximum resale price maintenance is when the manufacturer sets a cap on its distributors markup price. If maximum RPM is set too high, consumers are disadvantaged by high prices allowed by the manufacturer. If maximum RPM is set too low, distributors are disadvantaged because they cannot raise their prices high enough to make a profit. Minimum resale price maintenance is also known as vertical price fixing. Vertical price fixing agreements are between buyers and sellers who operate at different levels of a manufacturer’s retail distribution chain. This is different from horizontal price fixing which is agreements between competitors at the same level of distribution.
With minimum RPM, the manufacturer sets the minimum price of its downstream distributors or retailers. The manufacturer monitors their price setting requirements and can terminate downstream distributors for breach of pricing agreement if their good(s) are sold below the minimum price set. Before 1997, the courts ruled minimum RPM antitrust cases as illegal per se under the case ruling of Dr. Miles Medical Co. v. John D. Parke & Sons Co, 1911. In 1997, this case was overruled in Leegin Creative Products, Inc. v. PSKS, Inc.
Leegin manufactures and distributes leather goods and accessories under the name of Brighton. The manufacturer implemented an RPM and terminated retailers who sold their goods below their minimum RPM. Leegin also sold only to specialty stores that could offer better service and support of their product. PSKS was caught discounting the Brighton line below the minimum RPM. When asked to stop, PSKS sued Leegin in violation of the Sherman Act with interpretation of the Dr. Miles case. Leegin won when the Supreme Court overruled Dr. Miles and stated that minimum RPM does not fall under horizontal price fixing and market division since it does not restrict competition and/or output. This became a turning point in the interpretation of minimum RPM.
One of the benefits of minimum RPM is the inability to free ride. Free riding is when consumers purchase quality products at a lesser price minus product service and support. An example of free riding is a consumer views a product at a trade show or specialty shop from a distributor that offers full service and support of downstream product(s). The consumer then purchases the product over the internet without service or support at a price below the full service distributor’s retail price. This kind of competition discourages full-service retailers because of the inability to recoup the additional expense of showcasing and professional support of product lines. In addition, the manufacturer also loses sales due to the competitive disadvantage of their downstream distributors.
A harmful effect of minimum RPMs is when price fixing and exclusion of competitors is combined. Collusion is agreed upon by either competing manufacturers or between retailers who together place pressure on the manufacturer to change the RPM. One harmful example is when a retailer can raise prices due to an increase in minimum RPM and the retailer does not provide retail space for a competing manufacturer. The retailer sells the product with the higher profit margin through exclusionary practices. This also places the consumer at a disadvantage since substitute products are limited or unavailable. While there are benefits and harms to RPM, the economic incentive of RPM is to prevent intra-brand competition between distributors.
The next modern day antitrust behavior in question is discount bundling and bundle tying. This is when a seller offers two or more products at a discount when purchased together. One product is the “tying good” and the conditional purchase product(s) are the “tied good.” This could be a 20% discount on product A when purchasing product B. A discounted bundle could stipulate a market share (quantity) purchase or a required multiple product purchase. Bundled discounts and tying are omnipresent in the marketplace and basically considered efficient. Bundling can be simple or complex as well as, contractual or non-contractual. One common form of complex bundling allows the customer to determine the portions of various goods to purchase at a bundled discount. This is generally offered to Group Purchasing Organizations and large commercial contracts such as medical brokers. For the most part, discount bundling is competitively harmless and non-monopolistic. There are theories however, that question particular its characteristics and antitrust violation.
The positive economic reasons for bundled discounts are considered efficient, profitable and beneficial to buyers and sellers. Some items are manufactured as a bundle to lower transactions costs or protect product quality. A complete package such as a car, eliminates the need for the consumer to purchase the shell of a car and add their own seats, tires, etc. to finish the product. Lowering the transaction costs of doing business is savings passed down to the consumer.
Product quality protection is when bundled product A and B are complementary. Product quality may diminish in product A if the consumer purchases an inferior product B, when product B is needed to operate product A. Giving the consumer monetary incentive to purchase a tied bundle of complement products mitigates customer dissatisfaction and preserves brand quality. An example is printers and ink cartridges and a business example is when a franchise restricts its franchisees to their suppliers in order to preserve consumer quality. For the two reasons explained, tying maintains competition and is non-monopolistic.
The most common issues for antitrust violations in tie bundling is leveraging, predatory pricing and exclusionary conduct. Leveraging is when a manufacturer outputs a Product A with high market demand and ties with a product B that pushes out competitors. This happened in 1987 when Kodak tied the sale of their copiers with service contracts restricting part replacements to buyers who only serviced their copiers internally or through Kodak. It formed a service monopoly for Kodak and pushed out independent service companies.
An exclusionary example of bundling is when competitors who manufacturer a subset of another competitor’s bundled products are subject to being pushed out of the market because of profit margins. For example, if manufacturer 1 creates a bundled discount that consists of product A and B and manufacturer 2 only produces product A at the same price, manufacturer 2 must sell below the competitor’s amortized bundled discount price of product A to stay competitive. Manufacturer 2 lowers prices to compete and forfeits profit margin. Manufacturer 1’s ability to sell at the lowest price and profit, pushes out the competitor with the limited product line. Eliminating rivals in the market allows bundled discount competitors to gain market share and predatory pricing works against efficient competitors and can lead to monopolies. Predatory bundles are always exclusionary but exclusionary bundles are rarely predatory. While bundled pricing offers a savings to the consumer in the short run, it could lead to higher prices in the long run if product competition is eliminated.
Consumer oil prices are a third modern antitrust behavior in which interpretation is evolving with government and consumer protection agencies. There is much debate and speculation over volatility in gas prices. Oil companies argue that gas prices are reflective of crude oil prices and the adjustment of supply and demand; however, consumers and politicians contribute high gas prices to oil companies exploiting their market power.
The oil industry is considered an oligopoly to some because of minimal competitors and the speculated existence of cartels. It was deregulated in 1981 and at times come under scrutiny for showing large economic profits that coincide with high consumer prices and restricted output. Some speculations of exploitation are market manipulation of data and price projection; oil companies falsifying information on prices and inventory and price fixing conspiracies between oil companies. In Texaco v. Dagher, 2006 Texaco and Shell gas stations owners filed a class action suit against Equilon for setting a set single price for both brands. Plaintiffs also charged Equilon with collusion and horizontal price fixing. Equilon was found not guilty on all charges of antitrust violations of the Sherman Act.
In 2008, oil prices surged as heavy speculators purchased crude oil in the futures market. This is thought to be a contributing factors to the price increase for consumer oil. As more oil investors entered the futures market, the value of the dollar dropped and oil prices rose creating an inconsistency with market demand and price. Moreover, the CFTC is currently investigating alleged short-term manipulation of crude-oil prices that were allegedly read by an industry-used price-reporting system...There is also concern of the timing of energy companies and traders entering the market. While there is no absolute proof of market manipulation at this time, lawmakers and regulators are currently working to enforce regulations to ensure that speculative investors do not create oil market volatility at the expense of the consumer.
The final antitrust behavior to be discussed in this paper is online behavioral advertising. Online behavioral advertising is the practice of tracking an individual’s internet activity in order to deliver advertising tailored to his/her interests. While there are benefits to tailored free online advertising, consumer privacy is a concern that includes the hidden method of data collection and the risk of collecting sensitive data from an individual’s computers. Data is collected invisibly through “cookies” or small text files placed on a computer’s web browser. The cookie transmits data back to the website’s server on the browsing activity of the individual’s computer. This brings concern that the security of the data collected could be fraudulently compromised, especially information regarding finances, health and children. While there are laws in place related to data protection, the FTC also has 4 governing principles. They are (1) transparency and control; (2) reasonable security and limited data retention; (3) material changes to privacy policies (consent of the consumer if material changes) and (4) companies must obtain a consumer’s consent before using sensitive data. Companies that have recently addressed these principles are Google and Yahoo. They offer opt-outs on their toolbar for online tracking and privacy controls. Microsoft has released a new web browser version that will allow the user to clear the browser’s cache at the end of each internet session. Educational programs are also being developed to inform the consumer of online data collection. While online behavioral advertising has the right to operate freely in a competitive market, FTC practices will continue to evolve as they examine the marketplace and work towards protecting the consumer .
In conclusion, the United States’ founding antitrust laws were written to protect both the consumer and the individual business owner. As times have changed, so have the complexities of how businesses operate in today’s free and open marketplace. The courts no longer rule solely on illegal pre se for antitrust violations as they have learned to interpret the law bearing rules of reason on a case by case basis. When the competitive system is operating effectively it brings economic efficiency and is Pareto-efficient. Bibilography

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