Predatory Pricing and Bidding Process
The economic issues that need to be addressed in case scenario I are predatory pricing and the bidding process (OECD 1989, p.6). Predation refers to lowering of the price of a commodity to such a low level that competitors opt to exit the market. In this case, pricing acts as a barrier to entry. In the same way, AAA has used its monopolistic power to hinder the entry of new players in the market. According to OECD (1989, p.39), predatory pricing fall under the Sherman and Clayton Acts (sections 2 and 5). Section 2 of the Sherman Act talks of possessing monopoly power in the market and how that power can be maintained for growth.
With regard to the issues of monopoly power possession, AAA has drastically lowered the bidding price before increasing it. According to the Sherman Act (section 2), this is an offense. Although it is not illegal to have a monopoly in the market, however, it can distort the competitive component of anti-trust laws (OECD 1989, p.39). The second component of the Sherman Act (section 2) encourages a monopolist to compete aggressively. Nevertheless, a monopoly may not be used “to injure competition by excluding rivals unnecessarily” (OECD 1989, p.39).
An exclusive contract is based on the agreement that one party will not trade with another party at any given time (Segal & Whinston 2000, p.603). Ideally, an exclusive contract should be a short term agreement since long term agreements are likely to raise antitrust concerns (Segal & Whinston 2000, p.603). Metropolis and AAA Franchise have entered into a long term agreement and this disqualifies their exclusive contract. However, the exclusive contract compromises the bidding or contracting process and as such, it is uncompetitive (Segal & Whinston 2000, p.604). Therefore, AAA franchise should not enter into an exclusive contract with Metropolis.
The Sherman Act
The Sherman Act (section 2) condones any act of monopoly (Cornel University Law School n.d). From the case provided, nearly 80 percent of the total sales can be attributed to Dyco. As such, Dyco could be said to be a monopoly. The change in price has not affected the photographic market a lot compared to the agricultural sector. This could be due to the fact that Orange 100 is the only dominant brand in the photographic industry. The pricing problems that arise in the distribution chains could be as a result of the many players who are involved in anticompetitive practices. Few players control the distribution and as a result, the process is marred by price controls (Cornel University Law School n.d).
Price controls affect the prices of other related commodities in the market. Although this is a highly competitive process, a change in price would alter the prices of Orange 100. The use of predatory pricing would not only control the market, but also attract consumers.
Given that the cost of producing the colouring potency was lower than that of X, Y or Z, Dyco would experience the same problem in pricing since the distributors and the jobbers in the agricultural chemical sector also happen to be the price setters. The channels are also independent, meaning that they control the prices offered to farmers as well. In addition, 100 orange is much more expensive and can be used for other purposes. With more than 80% of the total market sales, Dyco qualifies to be a monopoly. Based on the two scenarios, Dyco’s pricing strategy determines the prices of other products. The company’s products are priced lower than those of its competitors, making it the industry’s monopolist.
The Antitrust Law
The settlement reached by the court where Sweet Co is fined USD 250 million is an indication that the company was probably involved in antitrust practices. According to section 4 of the Clayton Act, any person injured as a result of a trade restraint is liable to compensation (Kintner & Wilberding 1972, p.300). Therefore, in suit No.1, although the plaintiff (Drink Manufacturers) believes that section 1 of the Sherman Antitrust Act has been violated by the defendant, Sweet Co is not liable to any payments as the settlement was done under consent of decree. In this case, the defendant does not agree to allegations made against him/her, although the defendant pays the designated fine. The Clayton Act (section 4) talks of reasonable probability as a sign that the plaintiff was injured following the defendant’s actions (Kintner & Wilberding 1972, p.300). However, this is lacking in the current case.
Suit No. 2 can be argued on grounds of reasonableness by considering the fact that the defendant agreed to pay the alleged fee in the first place as a way of maintaining his reputation. The defendant has not inflicted any injury to the business or consumers’ property and this would effectively nullify the case. The treble damage recovery can only be compensated if the defendant hails from the same district as where the case has been filed (Kintner & Wilberding 1972, p.299) which is not.
In suit no. 3, the antitrust law prohibits any anticompetitive acts that could lessen or deter competition as reflected by Sherman Act section 1. However, there is no reasonable probability that the defendant was involved in the act of price fixing that could have led to the treble recovery. Consumers of Sweetstuff products have the burden of proof that indeed Sweet Co violated antitrust laws under section 1 of the Sherman Act. Until then, the three times recovery does not apply to this case.
The Clayton Act
In accordance with the Sherman Act (section 1), the per se rule violation holds that there is no need for an inquiry if the act done affect persons involved in that kind of business in any way (Cornel University Law School n.d). Based on this statement and with reference to the case, the plaintiff has the right to sue the defendant (Bank) for charging a discriminatory fee. In this case, the discriminatory fee refers to the high interest rates charged by the out-of-state bank. The Sherman Act (section 1) also prohibits agreements that involve restraint of trade, such as the refusal to deals (Cornel University Law School n.d). Local banks in Kansas City have colluded to deny certain groups of people loans. As described in the case, the plaintiff hails from an area prone to crime and as such, he is not able to get a loan. The court could argue that the plaintiff did not choose the place of operating his business as such it would be unreasonable to deny the applicant a loan on grounds of the location of the business.
The reasonable approach could be applied to determine why the defendant decided to take a particular action and the economic costs and benefits associated with the act (Cornel University Law School n.d).The out-of-state actions were beneficial to the bank, and this is an economic constraint. The final ruling of the court would be that the plaintiff deserves treble damages as required by section 1 of the Sherman Antitrust Act. Such a decision could be based on the argument that several cities have conspired to form a constraint to trade which is an illegal practice as it discriminates certain people. It therefore qualifies as a felony under the Sherman Antitrust Act section 1.
Under section 7 of the Clayton Act, a person who is involved in any business operation is not required to indirectly or directly acquire part or whole of share to that business (Cornell University Law School n.d). This prohibition is meant to protect other companies from creating a monopoly as is the case with Blackston Inc. Therefore, according to Section 7 of the Clayton Act, Blackston Inc can be challenged in a court of law over the acquisition of O’Connor with the intention of creating a monopoly. The section adds that individuals who acquire or purchase another entity and engages in an activity that affects commerce in any way could be challenged in a court of law (Kintner & Wilberding 1972, p.300). The reason why the section prohibits such a purchase is such an action can create barriers which lessen competition.
Blackston Inc can defend itself on the case filed against it. Section 7 of the Clayton Act is not applicable to entities purchasing stock or shares of a company with the aim of investment and not for individual gains like lessening market competition (Kintner & Wilberding 1972, p.293-294). As such, Blackstone has the right to purchase part of another organization for purposes of investment. Since Blackston Inc undertook the purchase with the sole intention of expanding its legal business and rescuing a falling company, section 7 of Clayton Act does not apply to the current case. It can also be argued that the acquisition of O’Connor was for purposes of expanding the business and not for reducing competition in the market. The section protects organizations which have formed subsidiaries through acquisition from falling in the legal issues associated with it which makes Blackston free of the alleged anticompetitive acts.
From a logical point of view, lowering the price of a product has detrimental effects on the profits of other players in the market. Under section 4 of the Clayton Act, any person (Wright’s book store) has the right to sue another entity if the actions of another (Blackstone) have injured or adversely affected his property or business (Kintner & Wilberding 1972, p.293). Section 7 of the Clayton Act prohibits the formation of merger with the aim of creating a monopolistic venture (Kintner & Wilberding 1972, p.301).
Based on the Wright’s book store argument, there is proof that indeed the actions of Blackston led to a $100,000 loss. However, under section 7, Wright’s book store may not be compensated for the treble benefits as the section is based on “future monopolistic and restraining tendencies of corporate acquisition” (Kintner & Wilberding 1972, p.301). This can be referenced to Bailey’s Bakery, Ltd. v. Continental Baking Co (Kitner & Wilberding 1972, p.300) where damages for section 7 were denied.
Assuming that the action in the preceding paragraph prevailed as a result of the merger action, Wright’s book store would have benefited through monetary value compensation. According to Kintner and Wilberding (1972, p.300) section 7 is related to section 4 of the Clayton Act. What this means is that Wright’s book store would have received the treble compensation. With regard to reasonable probability, there could be property or business injury resulting from Blackston actions and on such a ground, Wright’s book store would be compensated. In the lawsuit Gottesman v. General Motors Corp the court ruled that monopolization of potential trade restraint may not cause a plaintiff to incur any damages (Kintner & Wilberding 1972, p.300). If a consent decree is obtained, Wright’s book store would be compensated out of court. This is beneficial as the power of the court supports the agreement.
The Blackston’s and O’Connor’s merger plan to offer a discount of 25% can be seen as a pricing strategy that cuts off its competitors from the market. In a way, the merger plan creates a monopoly as most of the competitors in the market end up with low customer levels (OECD 1989, p.38-39). Under section 2 of the Clayton Act, this may be categorised as price discrimination which is carried out with the intention of injuring competitors (Segal & Whitnston, 2000, p. 610). The argument by the Croton law book that Blackston’s and O’Connor’s are practicing predatory pricing is the absolute truth. This can be supported by evidence provided by the memo in which it is stated that the intention of lowering the price below normal market prices was with a view to incresing its market share for the benefit of both Blackston and O’Connor
The Sherman Act section 1 prohibits anticompetitive practices by businesses (Cornell University Law School n.d). An example of these actions includes price fixing with the sole aim of causing a monopolistic power which is an anticompetitive act. Under section 1 of the Sherman Antitrust law, actions that restrain trade like bid rigging and price fixing are prohibited. Under the per se violation approach, incidents of direct price-fixing are reported.
By Per se it implies that a certain action has been found by the court as harmful and only proof can be used to level the claims against the defendant. According to the Cornell University Law School (n.d) some actions which organizations exercise show a total commitment of practicing anticompetitive behaviour. Since the actions of the Law publishers qualify to the claim, Brenda can carry out the lawsuit against the publisher under per se.
Cornell University of Law School n.d, Antitrust: An overview. 2012. Web.
Kintner, E W & Wilberding, M F1972, ‘Enforcement of the Merger Laws by Private Party Litigation’, Indiana Law Journal, vol. 47, no.2, pp. 293-318.
OECD 1989, Predatory pricing. Web.
Segal, I R & Whitnston, M D 2000, ‘Exclusive contracts and protection of investments’, Rand Journal of Economics, vol.31, no.4, pp. 603-633.