This lesson is the first in a series of lessons dealing with antitrust laws. To start in this lesson, we'll talk about what is the concept of antitrust, and what are antitrust laws, and we'll also look at some of the ways in which a company can violate these antitrust laws. In this lesson we're going to discuss antitrust laws, and specifically unilateral restraints of trade. But before we get to unilateral restraints of trade, let's talk about what antitrust laws are. Now in this country there's a strong policy in favor of increased competition. The theory is that the more competition in the marketplace, the better for consumers. So instead of having one company that dominates a marketplace you want to have lots of companies that compete with each other because that's good for the consumers. So the United States Congress has adopted a series of laws called antitrust laws that try to promote competition and prohibit companies from dominating markets too much or harming competition. Now two really important antitrust acts are the Sherman Act of 1890 and the Clayton Act of 1914. Now these are really old, right? They're both over 100 years old but they're still very, very important today. There's been a series of acts since the Sherman Act and the Clayton Act, but these still do most of the heavy lifting in terms of antitrust laws in the United States. So one key prohibition in US antitrust laws have to do with restraining trade. There's two ways that trade can be restrained, by one company acting alone, which is what this lesson is about or by multiple companies acting in concert with one another, which is actually what the next lesson is about. So let's talk about unilateral restraints of trade. How can one company harm competition in the marketplace? Well, there's really three primary ways that a unilateral restraint of trade can be undertaken by a company. First by engaging in a monopoly, second by price discrimination, and third through tying arrangements. So let's look at each of these three in turn. First let's talk about monopolies. A monopoly, If you have ever played the game or just know generally, a monopoly is when one company dominates an industry. There are different forms of monopolies, some are actually okay and some are prohibited by antitrust laws. There's something called an innocent monopoly. An innocent monopoly, its perfectly legal and it just happens because you're the best at what you do and nobody can compete with you and that's fine. So for instance Google dominates the search industry, right? Google is for the most part an innocent monopoly as you could make some arguments that they may have taken some anti-competitive steps to dominate that market. But for the most part, especially in its early days, Google dominated the market because it was just better than everybody else. When you type something into Google, you get what you're looking for. And so Google's search for monopoly is probably an innocent monopoly. A second form of monopoly that's ok is what's called a natural monopoly. A natural monopoly is when something about the market just means that it can only support one player. So for instance, before the days of satellite TV your choices were really get the over the air stations or have cable. But to have cable it meant that a company had to actually run some wires to your house and that was expensive. And most markets could only really support one cable company because the investment required to run all those wires would only be undertaken by a company if they knew that they would have a captive audience. So the cable market prior to satellite TV was pretty much a natural monopoly and that was all right. But there are also illegal monopolies. In order for a monopoly to be considered illegal there have to be three elements that are met. Now the first is that a company has monopoly power. Monopoly power just means you have the power to dominate an industry or dominate a market. Now how much of a market share do you have to have in order to dominate? That depends on the industry. You know it could be small and it could be very large. When courts look at monopolies, they generally use the rule that if you own 70 percent of the market share in a market, that's sort of prima facie evidence that you dominate that market. But it could be less, It could be more, it depends on your market. Second element that must be present is what's called a defined market. So do you dominate the market in the entire country for your product or just in a small geographic region. You can have an illegal monopoly that's confined to a smaller geographic region. Then the third, the big big element required to show an illegal monopoly is what's called a willful act of monopolization. This means you take some affirmative action to try and drive out your competitors. Often it comes in the form of predatory pricing which means pricing your products below what it even costs you to manufacture them or to purchase them just for the purpose of driving out your competition. Okay, the next form of unilateral restraint of trade that is prohibited by antitrust laws is called price discrimination. Price discrimination is when one company charges different prices for the same products to different customers who are similarly situated. So for example, if I go into a coffee shop and order a cup of coffee and they charge me two dollars for it and then the person behind me in line orders the exact same thing and they charge them four dollars for it, that's price discrimination. We are similarly situated. We're both customers coming in to buy the exact same thing at the exact same location of the exact same business. That's illegal price discrimination. Now the customers have to be similarly situated. So for example, a coffee shop can charge a different price to me here in Champaign, Illinois than it does to a customer in New York City because their operating expenses are different. They can charge me two bucks here and four bucks in New York City and that's fine because we're not similarly situated customers in different locations. Now when a company is accused of engaging in price discrimination, they actually have some defenses much of the time. One defense to price discrimination claims is when a company changes its price to meet the competition. So for instance I buy a cup of coffee for two dollars and then later that same day they change their price to a dollar fifty because they heard that the coffee shop across the street changed its price to a dollar fifty. That's fine. You can always change your price to meet the competition, even if it results in different prices being charged to consumers. Next defense to price discrimination is what's called cost justification. If I buy one widget for $10 and a company sells the exact same widgets to somebody else, but they buy 10,000 widgets for five dollars each, well, we're similar customers, we're both buying the same product, maybe in the same location from the same manufacturer, but they have a cost justification. They can achieve savings because of the huge scale of a 10,000 widget purchase versus my one widget purchase, so it's okay for them to charge different prices in that case. Then the final defense to price discrimination claims is what's called changing conditions. If a product is perishable or loses value, it's okay for the seller to change the price in response to that. So for instance if I buy a car in December of a year for a certain price, and they sell that same model and make and color and all the options the same to another customer in March of the next year, well, you know what? That's now in a model year older car, It's gone down in value its depreciated, so it's okay for them to charge a different price in that situation. Now the final type of unilateral restraint of trade is what's called a tying arrangement. Tying arrangements aren't super common but you will occasionally see them. And as a general rule a tying arrangement is not allowed unless you can make some sort of argument that it's reasonably required. So what is a tying arrangement? It's when you buy a product and the seller makes you buy some other products in order to buy the product that you really want. Now sometimes this is not allowed. So for instance if you wanted to buy a new mobile phone and the manufacturer of the mobile phone said, we'll only sell you this phone if you also buy this set of headphones to go along with it. That's an unlawful tying arrangement. You don't have to have the headphones in order for the phone to work right, they just want to sell you the headphones. But an example of a legal tying arrangement might be, if you go to purchase a home, your lender, when you take out a loan to buy that home will make you buy homeowners insurance to protect that home. Now that's reasonably related and reasonably required because your lender wants to make sure that if your house burns down, it will be protected in its loan. So a home lender forcing you to also buy homeowners insurance in order to get the loan that you want, is a reasonable tying arrangement. So those are the three main types of unilateral restraints of trade. In the next lesson we'll look at restraints of trade where more than one company come together to harm competition.
