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In this lesson, we continue our discussion of antitrust laws
by looking at cases where more than one company come together to harm trade.
Specifically, we'll be looking at horizontal and
vertical restraints of trade.
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In the last lesson,
we looked at ways that one company can act alone to violate antitrust laws.
In this lesson, we're going to take a look at the ways at which multiple
companies can come together to violate antitrust laws.
Specifically, we're going to look at horizontal and
vertical restraints of trade.
So what does that mean?
A horizontal restraint of trade is when two competitors
in the same industry act together to somehow harm consumers.
And there's four main ways that companies do this.
The first is what's called price fixing.
Price fixing is when two competitors get together and
agree to sell their products at a certain price.
And this is illegal.
So an example of this happening, Apple, the iPhone manufacturer,
was actually found liable for price fixing when it released its iBooks app.
Because when it created iBooks, it went to all the major publishing companies in
the United States and said, we want to publish your books on iBooks, but
you have to sell it for the price that we tell you to sell it for.
And that was actually illegal price fixing.
The publishers, under the law, needed to be free to sell their books on iBooks or
whatever they chose to sell them for.
The second form of horizontal restraint of trade is called division of markets.
So, if Coke and Pepsi decided, we're tired of fighting each other,
all this advertising money, it's making us poor.
Let's just split up the United States and then we can all get rich.
So Coke says we'll take all the markets east of the Mississippi River.
Pepsi, you can have all the markets west of the Mississippi River.
That's division of markets, and that's an unlawful horizontal restraint of trade.
Next, is what's called bid rigging.
Bid rigging is when a group of companies that are involved
in making bids as a result of a request for proposal,
get together to decide who gets the bid each time.
So, for instance, say the government puts out a request for
proposals for a company to build our next generation fighter jet for the military.
Well, if multiple military contractors are thinking of submitting bids,
it takes a lot of time and money to submit a bid.
So maybe they all get together and they say, okay, for
this round, Lockheed Martin, you guys can win, so
the rest of us will all submit unrealistic bids so that Lockheed Martin could win.
And the next round they all say, okay, Lockheed, you won this time, so
this time Raytheon gets to win this government contract.
That's an unlawful horizontal restrain of trade.
The final form of Horizontal Restraints of Trade is a group boycott.
This is when all the competitors or multiple competitors in one level
of the market place get together to boycott usually a supplier.
So say, for instance,
that I own a ice cream company and I think milk is too expensive.
So I get together with other ice cream manufacturers, and
we all agree to boycott certain milk producers until they lower their prices.
That's a group boycott and that is an unlawful horizontal restraint of trade.
So let's talk about Vertical Restraints of Trade.
Whereas a Horizontal Restraint of Trade is an agreement between competitors on
the same level in the marketplace, a Vertical Restraint of Trade is
an agreement between parties on different levels in the chain of production.
So, for instance, the first type of Vertical Restraint of Trade is what's
called resale price maintenance.
If I'm a manufacturer of goods, and I sell those goods to a retail store,
I can't tell the retailer how much they have to sell those goods for.
So for example, if I'm General Motors and
I sell cars to a local Chevrolet dealership, which General Motors does,
I can't tell them how much they have to sell those cars to the public for.
Now, I can suggest it.
And, in fact, car companies do.
If you go to the car dealership you see on a car the MSRP.
Stands for manufacturer's suggested retail price.
That's how much I say the car should sell for, but
the dealership is free to sell it for whatever it wants.
And, in fact, if you pay MSRP on your car, you're probably getting a bad deal.
Most people know that.
So the manufacturer cannot control how much a retailer sells the product for.
That is called resale price maintenance.
Next form of Vertical Restraint of Trade is called exclusive dealing agreement.
Now, an exclusive dealing agreement is when I say, you can do business with me,
but only if you don't do business with somebody else.
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And those are generally illegal if they harm competition.
So as an example, Intel is a well known manufacturer of computer chips.
In the 1990s, they were actually found to have violated antitrust
laws by offering big rebates to computer manufacturers
who agreed to use only Intel's chips and
not buy chips from their competitor, Advanced Micro Devices, or AMD.
This is an unlawful exclusive dealing agreement.
And then, the final form of Vertical Restraints of Trade are called territory
restrictions.
Now, territory restrictions are okay if they're reasonable, but
if they unreasonable, they violate antitrust laws.
So, for example, if I'm a franchisor, and
I'm selling a franchise to a local business to operate a franchise.
So, I'm McDonald's, headquartered up in the Chicago area, in Illinois.
And I'm selling a franchise to somebody to open a McDonald's store, it's reasonable
for me to grant them a territory restriction of some small radius
around their store so that they don't have to fight with other McDonald's stores.
But it would be unreasonable if they demanded a territory restriction of all of
the United States, or something outside their reasonable scope of doing business.
So those are the forms of Vertical Restraints of Trade.
In our next lesson, we'll look at how mergers
can sometimes have antitrust implications.
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Professor Michael R FrickeTeaching Assistant Professor
