Guide to Antitrust Laws (Ilegal Business Practices)



Illegal Business Practices

Horizontal agreements among competitors:
Agreements among parties in a competing relationship can raise antitrust suspicions. Competitors may be agreeing to restrict competition among themselves. Antitrust authorities must investigate the effect and purpose of an agreement to determine its legality.

Agreements on price. Agreements about price or price-related matters such as credit terms potentially are the most serious. That’s because price often is the principal way that firms compete. A "naked" agreement on price -- where the agreement is not reasonably related to the firms’ business operations -- is illegal. Hard core -- clear or blatant -- price-fixing is subject to criminal prosecution.

Are similarity of prices, simultaneous price changes or high prices indications of price-fixing? Not always. These conditions can result from price-fixing, but to prove the charge, antitrust authorities would need evidence of an agreement to fix prices. Price similarities -- or the appearance of simultaneous changes in price -- also can result from normal economic conditions. For example, vigorous competition can drive prices down to a common level. A general increase in wholesale gasoline costs due to production shortages can cause gasoline stations to increase retail prices around the same time. As for the appearance of uniformly "high" prices, collusion may not be the only basis for the situation. Prices may increase if consumer demand for a product is particularly high and the supply is limited. Ask any shopper in search of a particularly popular children’s toy.

Agreements to restrict output. An agreement to restrict production or output is illegal because reducing the supply of a product or service inevitably drives up its price.

Boycotts. A group boycott -- an agreement among competitors not to deal with another person or business -- violates the law if it is used to force another party to pay higher prices.

Boycotts to prevent a firm from entering a market or to disadvantage a competitor also are illegal. Recent cases involved a group of physicians charged with using a boycott to prevent a managed care organization from establishing a competing health care facility in Virginia and retailers who used a boycott to force manufacturers to limit sales through a competing catalog vendor.

Are boycotts for other purposes illegal? It depends on their effect on competition and possible justifications. A group of California auto dealers used a boycott to prevent a newspaper from telling consumers how to use wholesale price information when shopping for cars. The FTC proved that the boycott affected price competition and had no reasonable justification.

Market division. Agreements among competitors to divide sales territories or allocate customers -- essentially, agreements not to compete -- are presumed to be illegal. At issue in one recent case was an agreement between cable television companies not to enter each other’s territory.

Agreements to restrict advertising. Restrictions on price advertising can be illegal if they deprive consumers of important information. Restrictions on non-price advertising also may be illegal if the evidence shows the restrictions have anticompetitive effects and lack reasonable business justification. The FTC recently charged a group of auto dealers with restricting comparative and discount advertising to the detriment of consumers.

Codes of ethics. A professional code of ethics may be unlawful if it unreasonably restricts the ways professionals may compete. Several years ago, for example, the FTC ruled that certain provisions of the American Medical Association’s code of ethics restricted doctors from participating in alternative forms of health care delivery, such as managed health care programs, in violation of the antitrust laws. The case opened the door for greater competition in health care.

Restraints of other business practices. Other kinds of agreements also can restrict competition. For example:

  • A large group of Detroit-area auto dealers agreed to restrict their showroom hours, including closing on Saturdays. The agreement reduced a service that dealers normally provide -- convenient hours -- and made it difficult for consumers to comparison shop. The FTC challenged the agreement successfully.
  • A group of dentists refused to make patients’ X-rays available to insurance companies. The FTC maintained that the agreement restricted a service to patients, as well as information that would be relevant to reimbursements. The Supreme Court upheld the FTC’s ruling.

Proving a violation in these kinds of cases depends largely on proving the existence of an agreement. An explicit agreement can be demonstrated through direct evidence -- a document that contains or refers to an agreement, minutes of a meeting that record an agreement among the attendees, or testimony by a person with knowledge of an agreement. But an agreement also can be demonstrated by inference -- a combination of circumstantial evidence, including the fact that competitors had a meeting before they implemented certain practices, records of telephone calls, and signaling behavior -- when one company tells another that it intends to raise prices by a certain amount. This evidence must show that a company’s conduct was more likely the result of an agreement than a unilateral action.

Vertical agreements between buyers and sellers
Certain kinds of agreements between parties in a buyer-seller relationship, such as a retailer who buys from a manufacturer, also are illegal. Price-related agreements are presumed to be violations, but antitrust authorities view most non-price agreements with less suspicion because many have valid business justifications.

Resale price maintenance agreements. Vertical price-fixing -- an agreement between a supplier and a dealer that fixes the minimum resale price of a product -- is a clear-cut antitrust violation. It also is illegal for a manufacturer and retailer to agree on a minimum resale price.

The antitrust laws, however, give a manufacturer latitude to adopt a policy regarding a desired level of resale prices and to deal only with retailers who independently agree to that policy. A manufacturer also is permitted to stop dealing with a retailer who breaches the manufacturer’s resale price maintenance policy. That is, the manufacturer can adopt the policy on a "take it or leave it" basis.

Agreements on maximum resale prices are evaluated under the "rule of reason" standard because in some situations these agreements can benefit consumers by preventing dealers from charging a non-competitive price.

Non-price agreements between a manufacturer and a dealer. Manufacturer-imposed limitations on how or where a dealer may sell a product, e.g., service obligations or territorial limitations, are generally not illegal. These agreements may result in greater sales efforts and better service in the dealer’s assigned area, and more competition with other brands. Some non-price restraints may be anticompetitive. For example, an exclusive dealing arrangement may prevent other manufacturers from obtaining enough access to sales outlets to be truly competitive. Or it might be a way for manufacturers to stop competing so hard against each other. Take the case against the two principal manufacturers of pumps for fire trucks. It involved agreements that required their customers, the fire truck manufacturers, to buy pumps only from the manufacturer that was already supplying them. That meant that neither pump manufacturer had to fear competition from the other.

Tie-in sales. The sale of one product on condition that a customer purchase a second product, which the customer may not want or can buy elsewhere at a lower price, is a tie-in. Requirements like these are illegal if they harm competition. A recent example: The FTC charged a pharmaceutical manufacturer with tying the sale of clozapine, an antipsychotic drug, to a blood testing and monitoring service.

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