U.S. Antitrust Law and Economics - Essay Example

U.S Antitrust Law and Economics Order No. 360266 No. of pages: 16 Introduction The top priority for any economy is to ensure the quality of the products supplied, the volume of goods supplied, the sources and materials available for production and how these products are to be distributed across the society. Markets being competitive tend to fluctuate according to the growing demand, therefore both the consumers as well as the producers play a very important part in the chain of demand and supply as far as the markets are concerned. In such a scenario, there are bound to be problems among the producers, contractors and distributors giving rise to heavy fluctuation in the different markets. A. For example, there could be fluctuation in the cost of production or in the price of articles which is proportionate to the degree of demand and supply. In the first case involving the producers of roller bits, Howard seems to be the leading production company since they are the ones who initiate the changing in price, which the other four producers follow. Over the past seven years however, the prices have remained consistent without any changes, but now suddenly the prices have changed. The reasons for this could be many. The key factor that plays a decisive role in market fluctuation could be new competitors in the market. The tactic used by Howard is to scrutinize the market for new competitors and if they find any, they immediately lower their prices and the other companies do the same. The new company is forced to price their products at a very low level and hence don’t find a profit. Gradually, the company shuts down production and once again Howard and the rest of the other companies hike up their prices once again. To solve such a problem there are three alternative methods that could be used. Firstly, a joint consensus based on tradition could be arrived at and followed by all parties involved. Secondly, central planning (output and input) could be done so that everyone follows the same rules and problems become negligible. Thirdly, there is the market system approach which exercises a control over consumers as well as producers who react to the demand and supply signals generated in the market place. B. Monopoly is not healthy for competition, but even so it is practiced everywhere. Well established companies try to widen their prospects by entering into the marketplace unaware of the monopoly that is rampant. In many cases, a competitive market approach is dispensed with because many sellers and distributors resort to a monopoly type of market. This is what had taken place in the case involving Howard and other companies. On two different occasions when well established companies made great effort to produce the cross roller bits, Howard and the other companies reduced their prices drastically for a number of months, whereupon the newcomer automatically stopped production and withdrew from the field. When Howard came to hear of it, automatically once again the prices were hiked again. According to economists who have tried their best to tip the balance in favor of a competitive market feel that competition ‘decentralizes as well as disperses power’ (F.M. Scherer & David Ross, 1990) between the different stakeholders. C. Howard does not seem to be sufficiently transparent in all its dealings and has moreover created a kind of business nexus with just a few of the established companies. Monopolizing the marketplace seems to be a top priority of Howard and therefore it creates problems for those new to the marketplace. In this case, when independent companies ventured into a limited production of its cone shaped bits on an experimental basis, immediately Howard had instituted infringement suits against the new company that involved its original patent. It is clear that Howard is not keen on having a competitive market because it’s intent is to create a sort of monopoly. The above example clearly shows that Howard does not encourage any competition from other companies because it poses a challenge where business is concerned by reducing its prices considerably or issue law suits forcing new companies to shut down. We also come to understand that Howard is not a fair or transparent player because on two occasions, the respective officials at Howard had no prior opportunity to make an examination of the mentioned drill bits, but yet had passed lawsuits against the new company which led to the selling of all its models and the supporting patents to Howard. What Howard did not encourage was a competitive market because the centralized power would no longer remain in their hands but would be distributed and divided among others. According to the people who wrote the U.S Constitution, one of their fundamental goals was to ‘limit the power of both government bodies and private individuals to make decisions that shape people’s lives and fortunes’ (Chap.1, pg. 2) As James Madison wrote in Federalist Paper No. 10, ‘nothing was more important to a well-constructed union than avoiding the imposition on all citizens of measures favored by narrow factions.’ (Federalist Papers, pgs. 77 – 84) C. According to F.M. Scherer & David Ross (1990) The best way to avoid faction-dominated outcomes, said Madison, was to keep the individual factions so small and diverse that they would be ‘‘unable to concert and carry into effect schemes of oppression.’’ This point is clearly seen in the case of Howard who sells its different cutting instruments to many of the oil and drilling companies. The sale contract provided by Howard states that in case the vendee desires to sell any of the equipment bought from Howard, Howard has the option to repurchase the instruments sold. In addition to this, the vendees are required to give back be used to bits for re-tipping or disposal. These bits are then sent to the Howard Laboratory where they are examined for defects which are rectified and sold once again. Since Howard seems to be monopolizing the marketplace, they have the freedom to act as they wish. In a competent to market all parties, both buyers and sellers have the freedom to do as they wish because they are not controlled by other entrepreneurs or bureaucrats. The action exercised by Howard is not ethically right as it is an outrage on the other companies. Only when there are no barriers that come in the way of trade can it be termed as perfect competition. II. One of the antitrust goals that have been universally agreed upon is the striving for the efficient allocation of society’s available goods and services. (Lawrence A. Sullivan & Warren S. Grimes, 2000) the chief goal of the antitrust is to encourage and maintain an economic allocation system that decentralizes power, giving individual companies the freedom to make their own decisions that help to promote progress and efficiency by taking into account the risks involved the same time reducing the opportunities of corruption between government officials and increasing public confidence through fairness applied. The twentieth century, American antitrust policy in maintaining public confidence comprises of precise goals which are the following – Goals for consumer welfare, which include the efficient allocation of existing resources and avoiding wealth transfers to parties possessing market power. Encouraging innovation and technological progress; Supporting and protecting individual firms through fairness and equity goals; Supporting decentralized economic power. In this scenario Dyco seems to be in a tight spot because its production and distribution costs are almost at par with the companies X, Y and Z. In the case of Orange 100 dye product; it has two uses. While one of its dyes is used for the processing of color photographic film, another dye is a bit inferior and is inexpensive. Orange 100 also has the ability to be used for the coloring the skins of oranges that have not been ripened earlier by diluting it with distilled water. Dyco’s pricing fluctuates in relation to the pricing of Orange 100 because its agricultural distribution channel is highly sensitive since its supply to Orange growers accounts for about 80% of its sales. The other problem it faces in the marketplace is that there’s no way it could make its product cheaper to be used in the photographic film industry without putting an end to its usefulness in the agricultural industry. (A) The relevance of a market analysis in a Sherman 2 case? According to the goals that were laid down in the Sherman Act is that the antitrust laws aim at preventing both ‘both deadweight and wealth transfer losses…”. Economists are of the opinion that production and distribution should reach optimum levels by making use of current innovative ideas in combination with the latest technology. According to them, the society benefits much more through “dynamic efficiency than through an allocative efficiency…” (pg.3) Dynamic efficiency means to make improvements by using technology more efficiently and bringing in innovative or new products if the old ones get out performed. Allocative efficiency means using technology to produce and distribute products efficiently. (B) Difference between Dyco’s production and other companies X, Y, and Z? Presently the prices of Dyco’s production cost for each unit as well as its selling price is almost the same as that of X, Y, and Z, but if it lowered its prices substantially, the margin of profit gained would be invariably much less. In fact, it is quite possible that it could suffer heavy losses. On the other hand, if they are able to sustain themselves for a period of time, then there is every possibility that Dyco could emerge as a winner in the market place because does not compromise in any way on the quality of its products. (C) Dyco’s power of monopoly? (20 points) Dyco is just one among the other companies such as X, Y and Z. Moreover, It’s cost of production and sales depend upon the other stakeholders in the field. It makes its decisions according to the other players in the market and hence cannot be said to be monopolistic. One of the key goals of the antitrust policy was ensuring that neither sellers nor buyers make use of their market power to create a shift in wealth to levels that go beyond healthy competitive conditions. The law framers of the antitrust policy are responsible to protect the consumer against any kind of exploitation that involves market power. In the case of Dyco, it depends on the pricing and selling of its products based on the other companies in the marketplace and does not possess its own power to take decisions or the power to make the other companies follow what they do, hence cannot be said to be monopolistic in nature. III. Sweet Co. is an artificial sweetener company and is one of the four manufacturers of sweetening products in the world. The chief product manufactured by Sweet Co. is ‘SweetStuff’ which is an additive that is made use of in different foods such as juices, cookies, soda pop, cereals and other bakery items like cake and biscuits. 75% of its sales depend chiefly upon food manufactures who are its regular customers. ‘SweetStuff,’ is an artificial sweetener that is used instead of sugar for cooking purposes and is therefore sold to customers at supermarkets and its sales has escalated over the past decades with an annual sale of approximately three billion out of the annual 10 billion procured worldwide. Even with such a good record, Sweet Co. is facing charges based on ‘price fixing’. Sweet Co. has been accused on criminal charges by the Antitrust division of the department of justice, stating that it had conspired with its two biggest rivals in a worldwide conspiracy in an attempt to ‘fix’ the prices of different in artificial sweeteners. Sweet Co. denied the charges levied against them and decided to refute and contest the government’s charges. The case drew to a close and Sweet Co. had to pay a fine of $250 million. Thereafter, about three dozen parties filed criminal suits against Sweet Co. and 3 of them are summarized below. Suit No. 1: Sweet Co. was allegedly charged by the Federal court for conspiracy in price fixing and in lieu of this Drink Manufacturers have also levied charges stating that Sweet Co. had allegedly violated Section 1 of the Sherman Act and Section 4 of the Clayton Act. Drink Manufacturers, who are the plaintiff demand 3 times the amount due to the alleged overcharge. The Sherman Act as well as the Clayton Act are referred to by the Antitrust Division in case of an alleged violation of the leniency agreement laid down in the antitrust policy. In Suit No. 1 levied by Drink Manufacturers who are the claimants who wish to claim 3 times the amount from Sweet Co. The recovery of damages however, has its limitations which specify the following - ‘together with the amounts so recovered from cooperating individuals … shall not exceed that portion of the actual damages sustained by such claimant … if the goods or services are in any way affected or violated.’ (Public Law, 108 – 237, 2004) The Antitrust Division has the responsibility to make a thorough investigation of all the allegations and documents pertaining to the alleged price fixing and ascertain if there has been a violation of section 1 or 3 of the Sherman Act or sections 4, 4A and 4C of the Clayton Act which is directly related to the recovery of damages pertaining to the suit and only when this claim is verified will the damages be paid to the claimant. Suit No. 2: In suit 2, an alleged claim has been levied in the Federal Court by consumers of Sweetstuff on the basis of violation of section 1 of the Sherman Act. These consumers too claim 3 times the alleged overcharge from the manufacturers of Sweetstuff. The Antitrust Division is responsible for giving all support and protection to consumers during a civil action based on the antitrust leniency agreement. If the claimant is unable to attend the Federal Court in the United States, the same claim could be cleared in a District Court where the case is filed. An evidentiary hearing is conducted among the individuals involved and specific injury or loss is taken into consideration before the claim can be realized. Suit No. 3: This suit is also a consumer suit that s taken to the State Court, where a suit was filed against Sweet Co. Manufacturer for allegedly violating the antitrust provisions of the state based on section 1 of the Sherman Act. The claimants are consumers who made purchases of cookies, soda pop, juices and other cereals and who now claim 3 times the amount as damages. In response to the above described suits and being the General Counsel for litigation and antitrust at Sweet Co., first of all I would make a thorough investigation of both parties -1) Consumers of sweet products and 2) Sweet Co. my investigation would include the general public buying sweetening agents from various supermarkets and malls, confectioners who use sweeteners in the preparation of their sweets and other bakery products, and people at different levels in the Sweet Co. manufacturing company, especially those involved in the preparation of the sweeteners. On the basis of my research, I find that the company Sweet Co. has not infringed the law based on the Sherman and Clayton Act and this was the reason they refuted the charges put up against them. Sweet Co. does not seem to have violated any of the antitrust laws which was why they wanted to fight back. The decisions taken by the Federal Court are final and binding but do not easily pass judgment unless the claimant is found to be right. In the above cases, the claimant is demanding 3 times the amount as damages which I think are quite unwarranted and unfair to Sweet Co. The use of consumer groups could have been a ploy that was set in place by the Drink Manufacturers with the idea of bringing down the price of sweetening agents once and for all. According to me, the Federal Court’s decision would be neutral considering there was no major anticipated loss or damage done. Sweet Co. may be asked to pay some damages to the claimants if any loss was incurred by them. IV. The farmers in northern California who produce beet from the land and equipment that they own, are largely dependent on the three local refiners who serve as practical outlets for their produce. In turn the refiners convert the beet into sugar and sell it in competition with the other refiners across the United States. The refiners are fully aware that the farmers have no other outlets to sell their beet, except through them which puts them at the great disadvantage. Taking advantage of this situation the three California refiners decided to ‘price fix’ among themselves, the rate for the beet, from the farmers. In addition to this the refiners also came to an agreement to ‘price fix’ the rate at which they would sell the refined sugar. According to the Sherman Act, ‘price fixing’ of any kind is a criminal offense and people found engaging in price fixing are to be taken to task. In this case the refiners should be taken to task since they have engaged in a dual ‘price fixing’ strategy – against the farmers and against the other refiners in the market. In addition to this they have taken undue advantage of the farmer’s plight and have exploited them a great deal and therefore face charges of exploitation too. On the other hand, after the farmers came to know of this, they did not resort to violence but used negotiation tactics to come to a reasonable consensus. Therefore the Government suit will not affect the farmers because they have not resorted to anything unlawful. Chapter 1 of the Sherman Act also includes monopolizing trade as a felony which carries a heavy penalty. It states that any individual who monopolizes or attempts to monopolize trade or conspires with other persons to monopolize the market of trade and commerce either globally or locally are considered to be guilty of felony and this act is punishable by law by having to pay a huge fine that does not exceed $ 100, 000,000. The parties guilty of such a crime could also face imprisonment or both the above considering the gravity of the situation. (Chap. 1, ‘The Sherman Act’) The farmers on the other hand tried to negotiate the case by choosing three representatives to speak their cause on their behalf and did not resort to harsh or violent means with the refiners; hence in no way can they be penalized for their act. According to Chapter 1 of the Sherman Act, there is a certain ethical conduct that has to be followed when negotiating business in the field of trade and commerce. Such ethical conduct was not reflected in the action of the refiners either towards the farmers not towards their fellow refiners globally. Therefore such activities of the refiners are held unlawful and punishable by a Court of Justice. V. All antitrust laws are based on effective legislative facts that have been framed over time. As Pitofsky states in, ‘The Political Content of Antitrust CB7’ - “It is bad history, bad policy, and bad law to exclude certain political values in interpreting the antitrust laws.” One of the chief aims of the antitrust laws is to see that economic power does not get concentrated in certain areas because it will cause a sort of antidemocratic pressure and also threatens the design of individual autonomy. In the case of the Lever’s morning publication newspaper circulated among the people of Amesville, two other papers titled ‘Tide’ and ‘Time’ also shares a reading audience having approximately equal circulation. ‘Tide’ is owned by the Lever enterprise and is published from the Lever plant, whereas ‘Time’ does not belong to them. The revenue for advertising is approximately proportional its entire share of circulation which amounts to Lever = 50% while Tide and Time get 25% each. According to Lever, since it also owns Tide feels that it could monopolize the situation by forcing certain actions on its advertisers. For example, those advertisers who purchase advertising space in the Lever paper are obligated to also purchase the same amount of space in the Tide. This is not correct because each paper rakes in its own share of money and therefore even if it belongs to the same owner has to be treated like two separate papers. Lever is exploiting the others due to its high position in the market by forcing their ideas and opinions on the other advertisers who are forced by Lever to buy 2 spaces instead of one even if they do not want to. Such a poor tradeoff may double Lever’s money but would harm healthy competition from the rest of the advertisers. The freedom of independent businessmen is not what concerns the antitrust department, but it the illegal way of dealing is what triggers its interference. Most other businessmen deal with a single business or enterprise and do not face similar problems; but in the case of Lever, it feels as though other businessmen or advertisers are automatically forced to oblige in paying for two spaces instead of one. This action by Lever is unlawful and illegal because t amounts to the exploitation of other businessmen which could in turn have adverse effects on their businesses as they are forced to pay twice the money than what they had bargained for. A fair and transparent dealing by Lever would be to allow the advertisers to choose only what they need and not force or compel them to pay for two spaces for advertising when all they need is just one. Monopoly of such kind would only hinder progress and only pave the way for an unhealthy market because it would create problems in distribution and stability within the market place. Therefore, it can be said that the Lever establishment has not given freedom of rights to its customers and advertisers for purchasing only what they need and are therefore guilty of violating the Antitrust laws. References F.M. Scherer & David Ross, (1990) The Goals of Antitrust Policy, Industrial Market Structure and Economic Performance, 1, 18 – 19 (3d ed.) Houghton Mifflin Company. Lawrence A. Sullivan & Warren S. Grimes, (2000) The Law of Antitrust, An Integrated Handbook, 11 – 15. By permission of West Group. Pitofsky, Goldschmid and Wood, Trade Regulation, 5th edition, 2003 (University Casebook Series, Foundation Press) Sherman Act I, PUBLIC LAW 108–237—JUNE 22, (2004), 108th Congress, Antitrust Criminal Penalty Enhancement and Reform Act, 2004. www.justice.gov/atr/public/divisionmanual/chapter2.pdf The Federalist Papers, Mentor Book edition (New York: New American Library, 1961), pp. 77–84 Trade regulation (5th Ed., Pitofsky, Goldshmid Wood. www.ilrg.com/students/outlines/.../Antitrust-Duke-Richman-Fall2005.doc U.S Code: Title 15, Chap. 1, Monopolies and Combinations www.law.cornell.edu/uscode/15/usc_sup_01_15_10_1.html Read More