Antitrust

1. Antitrust • Why important to telecommunications? • Suits regarding abuses of monopoly power • Led to break up of Bell System and restructuring of the industry • Mergers and their implications • Horizontal mergers (Seven RBOCs now four) • Vertical mergers (AOL/Time Warner)

2. Antitrust Laws • Enforcement • Antitrust Division of Department of Justice can bring a civil or criminal case • Federal Trade Commission can bring civil cases • State attorneys general can bring civil lawsuits under federal antitrust laws • Private party can sue—for triple damages (MCI case)

3. First anti-trust Law • Sherman Act of 1890 • Section 1 • “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal.” • Section 2 • “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilt of a felony . . .”

4. Additional anti-trust legislation • Clayton Act of 1914 • Unlike the Sherman Act, looks to the future and to prevent anticompetitive behaviors before they occur • Unlawful to discriminate in price between different purchasers of same type of commodity if effect would be to lessen competition or create a monopoly • Prohibits tying • Prohibits acquisitions that would lessen competition or create monopoly

5. An important point: • Monopoly in and of itself is not illegal—lawfully attained monopoly is not a matter of antitrust • Monopoly that results only from growth or development because of a superior product, good business sense, or historic accident is not objectionable • The problem is attempted monopolization and monopolization • Must prove intent to destroy competition or build a monopoly—through documents or through improper conduct

6. Antitrust principles • Certain ways firms should not behave • No restraint of trade or unfair business practices to get a monopoly • No use of monopoly in one market as leverage to increase its share in some other market • No use of predation or of cross-subsidies • No efforts to raise barriers to entry or to raise costs of rivals trying to stay in business, or deprive rivals of access to customers

7. Essential facilities doctrine • Firm with monopoly power in one market has to deal fairly with competing firms in adjacent markets who need essential facilities. To show antitrust activity have to show: • Control of facilities by a monopolist • Competitor’s inability to duplicate the essential facility • Denial of use • Feasibility of providing the facility

8. Tying • Seller insists on selling two distinct products or services as a package • Seller must have power in the tying product market • Substantial threat that the seller will acquire market power in the tied product market • Must be a coherent economic basis for treating the tying and tied products as distinct • Not a problem to bundle the components of what can be viewed as a single product or service

9. Other problems • Boycotts—several firms • Refusals to deal—one firm • Market foreclosure—control of secondary market that deprives competitor of necessary supplies

10. Pricing problems • Predatory pricing • Cross-subsidization • Distorted transfer pricing • Price fixing

11. Regulatory immunity? • Willis Graham Act of 1921—immunity regarding consolidation • 1930-1960—there were few antitrust cases • 1960 and thereafter—many suits developed • Immunity upheld if • Conflict between FCC rules and antitrust laws • Actions complained of are required or approved by FCC • Regulatory controls on entry and price preclude defendant’s exercise of monopoly power as a matter of fact. • Filed rate doctrine

12. Doctrine of Primary Jurisdiction • If there is direct conflict between antitrust and regulation, the courts will suspend antitrust proceedings and allow regulatory agency first chance to resolve conflict • Regulators not given the authority to moot antitrust claims or to provide final interpretation of antitrust decrees

13. Mergers and Acquisitions • Horizontal • Un-concentrated--no merger will be disallowed • moderately concentrated--only large mergers that lead to greater market concentration will be disallowed • highly concentrated--almost any merger will be disallowed • Vertical • Between suppliers and customers; have received little attention in recent years • Conglomerate • Between unrelated firms; only if risk of elimination of potential competitor

14. Pre-merger Notification • Notification of both FTC and of the antitrust division of the DOJ; one will take on the case • Second Request (if questions outstanding) • Efforts at settlement to avoid court action • Suits brought in about 4% of cases (about 2,000 a year are investigated)

15. Steps taken to decide if action is necessary • First, define relevant market • All buyers and sellers of all products that compete with one another • Determine what group of competitors could jointly effect a substantial and durable price increase

16. Defining the market • Product market • Including all goods that consumers view as realistic substitutes—at what point will consumers react to price rises by switching to another product • Geographic market • Focus on realistic alternatives for consumers • Competitors • All firms with ability to offer product in long or short term

17. Determine if there is market power • Power to control prices or exclude competition • Ability to do competitive injury by artificial increase in price, restriction of output, exclusion of competition • In the absence of market power, business practices cannot hurt competition and so aren’t concern of antitrust authorities, no matter how objectionable on other legal grounds

18. Points of consideration regarding market power • Market share • Persistence of high market share over time or if eroding • Whether group dominating the market has consistent membership • Whether significant number of potential entrants are ready to enter the market if prices rise • If producers with large market share face powerful or dispersed sellers

19. Two method for determining market power • Herfindahl-Hirschman Index (HHI) • Concentration ratios

20. HHI • Market shares (based on dollar sales, unit sales, or physical capacity) • Sum the squares of the market shares • The higher the HHI, the greater the market concentration

21. HHI Examples • Eight firms, 4 with 15% and 4 with 10%: • 152 + 152 + 152 + 152 + 102 + 102 + 102 + 102 = 1300 • Four firms, 2 with 40% and 2 with 10%: • 402 + 402 + 102 + 102 = 3,400 • Guidelines of DOJ and FTC classify anything over 1,800 as highly concentrated; 1,000 – 1,800 as moderate; below 1,000 as un-concentrated

22. Concentration Ratios • This method usually looks at the market share of the four largest firms to determine concentration; over 40% suggests possibility to collude • For a single firm, market power usually appears at 15%; market power is significant at 25%; market dominance at or above 40% • Dominant firm’s market share declines slowly—could take decades

23. The devil’s in the details • Need to look at the size of the relative market shares • There’s a big difference between: • 15% + 15% + 15% + 15% = 60% and • 48% + 6% + 3% + 3% = 60% • Have to look at the characteristics of the industries themselves

24. Role of FCC in Merger Review, pre-Telecom Act of 1996 • FCC had been final authority regarding approval of mergers between telephone companies; had held public hearings and solicited comments from state commissions • FCC had been able to prevent antitrust consideration of mergers the FCC deemed to be in the public interest • This authority removed by the Telecom Act

25. FCC role post-Telecom Act • FCC still has role • Has to approve transfers of radio licenses and telephone lines • Has to assure that mergers meet communication policies (media diversity, universal service, etc.) • Has used this ability to extract concessions from companies seeking mergers and acquisitions • Telecom mergers now primarily under competitive scrutiny rather than public interest scrutiny