Kensington Antitrust Advisors Group

Congress and the courts have recognized a number of exemptions and immunities from the antitrust laws.  These include:

the Noerr-Pennington Doctrine, which exempts lobbying and other forms of petitioning the government from antitrust scrutiny;

the Antitrust-State-Action Doctrine, which exempts conduct that is authorized and supervised by governmental officials from antitrust scrutiny;

the Labor Exemption, which exempts labor unions and certain aspects of labor/management agreements from antitrust scrutiny;

The federal antitrust laws prohibit merchants, including a acquisition of assets, that would tend to unreasonably restrain trade. Except in rare cases, a merger will unreasonable restrain trade only when the merging firms compete in the same relevant product and geographic markets and the post-merger firm would have market power, that is the ability to raise price or exclude competition.

Small companies generally do not have market power. To determine whether a merger may produce market power, the federal enforcement agencies and the courts must determine the relevant market.

Defining the relevant product and geographic markets is a factually and legally complex exercise. In a nutshell, however, two competitors are in the same relevant market if a significant number of consumers would switch from one firm’s products to the other in response to a 5% price increase. For example, gasoline retailers A and B would be in the same geographic market if a significant number of customers would switch from A to B if both began charging $4 per gallon, and A raised its price to $4.20 per gallon. Similarly, two types of material for wrapping and storing food would be in the same produce market if consumers would switch from one to the other if the price of one increased by 5%.

Once the relevant market is determined, the enforcement agencies use a measure of concentration known as the Herfendale-Hirshman Index (“HHI”) to decide whether a merger is likely to create market power. This index is determined by summing the squares of the market shares of each firm in the relevant market. So, in a market with a single firm with a 100% market share, the HHI would be 10,000. A market with 10 firms with a 10% market share would have an HHI of 1000.

In general, the enforcement agencies will not investigate a merger if the post-merger HHI is less than 1000. If the merger increases the HHI by at least 50 and the post-merger HHI exceeds 1800, an investigation is likely. If the post-merger HHI falls between 1000 and 1800, and the merger produces an increase of at least 100, then an investigation is likely.

Courts are not bound to follow the enforcement agency guidelines with respect to the HHI. In general, however, courts, like the agencies, will find that the HHI is a useful device for identifying cases where competitive harm is possible.

It is important to recognize that HHI provides only an indication of potential concern with the the merger. Determining whether the merger would actually tend to result in an unreasonable restraint of trade requires considerable analysis to determine whether the post-merger firm would have the ability to raise price, reduce quality, or hinder innovation. A court will make this determination based on a number of factors, including whether the merger would make coordinated behavior with other competitors easier or whether it would create market power in the merged firm itself. An important aspect of the courts analysis would be the likelihood of new entry into the market if the post-merger firm raised prices.

Because merger analysis involves a hypothetical market, the enforcemen agencies and courts cannot look to actual harm to consumers in evaluating markets. They will therefore place considerable stock on the predictions of market participants and economic analysis of competitive practices in the market. This analysis is highly case specific.

The prohibition of agreements in “restraint of trade” form the core of both federal and state antitrust laws.  Understanding the concept of restraint of trade is critical to understanding the antitrust laws.  In a sense, any contract between companies restrains trade in the sense that by agreeing to purchase a good or service from one firm, the parties necessary agree not to purchase from another.  The antitrust statutes have thus been interpreted to prohibit only unreasonable restraints of trade. 

Most agreements are assessed for reasonableness under what is known as the antitrust Rule of Reason.  This rule is intended to determine whether the contract is unreasonable because it works to the disadvantage of those who purchase the product or service in question by raising the price, lowering the quality, or retarding innovation.  In general, the courts have held that an agreement is unreasonable only if the defendant(s) have market power, that is the ability to raise price or exclude competition.  Small companies generally do not have market power, and with the exceptions discussed below, their agreements are unlikely to violate the antitrust laws.  A firm becomes more likely to have market power depending on its share of the relevant product and geographic market.  A share of more than 20% is generally required before a firm will be found to have market power, and often a much larger share is necessary, depending on the nature of competition in the market. 

Defining the relevant product and geographic markets is a factually and legally complex exercise.  In a nutshell, however, two competitors are in the same relevant market if a significant number of consumers would switch from one firm’s products to the other in response to a 5% price increase.  For example, gasoline retailers A and B would be in the same geographic market if a significant number of customers would switch from A to B if both began charging $4 per gallon, and A raised its price to $4.20 per gallon.  Similarly, two types of material for wrapping and storing food would be in the same produce market if consumers would switch from one to the other if the price of one increased by 5%.

Once a court determines that a firm has market power, it must then examine the effect of the agreement in question to determine whether it raises price, reduces quality, or retards innovation.  This determination is highly dependent on economic analysis of the specifics of particular markets and the nature of competition in them.

A limited group of agreements have been deemed per se illegal, meaning that such an agreement is always unreasonable and therefore unlawful.  This group includes price fixing and bid rigging as well as agreements to divide markets, territory, or customers. 

Importantly, however, this sort of agreement is per se illegal only when the parties to the agreement are horizontal competitors.  Horizontal competitors are companies that sell the same product or service within the same geographic area.  Vertical agreements between a supplier and a dealer are never per se illegal, even if they fix prices or allocate markets, territory, or customers. 

Antitrust Challenge to Credit Card Interchange Fees,@ 7^th Annual Loyola Antitrust Colluquium, Loyola University of Chicago School of Law, Institute for Consumer Antitrust Studies (April 13, 2007)

Indirect Purchaser Antitrust Suits Under State Law,@ Legal Research Network on-line presentation (July 2006)

Who Owns the Milestone Home Run Baseball,@ presented at the Thomas Jefferson School of Law (October 2003)

Big Media Mergers and Consumer Welfare,@ presented at The Faculty of Law at Queen=s University (November 2002)

Regulating Information Platforms: The Convergence to Antitrust,@ presented at the University of Colorado School of Law (January 27, 2002)

The Case for Re-voting in Close Elections,@ presented at Thomas Jefferson School of Law (November 2000)

The Antitrust Enforcement Agencies,@ 47^th Annual American Bar Association Spring Meeting, Antitrust Section, April 15, 1999, Washington, D.C.

Kensington Antitrust Advisors Group
4107 Bedford Drive
San Diego, CA 92116

619-446-9257

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