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What is a covenant not to compete and when is it legal?
- an agreement not to compete
- it is legal in employment contracts and sale of businesses
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What does illegal per-se mean?
- automatically illegal, without investigation
- unreasonable by its very nature
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What is the rule of reason test?
- test to determine legality of a business agreement
- weighs anti-competitive effects against pro-competitive effects (how does this agreement effect competition?)
- plaintiff has to prove that agreement caused economic harm
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What is the purpose of antitrust laws?
- assure free and fair competition
- prevent harm to consumer, but encourage practices that lead to economic effieciency
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When is a monopoly legal?
- came to its position "naturally" (by being the best)
- does not use its position to harm consumers
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How many parts does the Sherman Act have and what do they regulate?
2
- Section 1: prohibits agreements that restrain trade
- Section 2: prohibits actions that restrain trade
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At least how many parties have to be involved to violate Section 1 of the Sherman Act and why?
at least 2, b/c it regulates agreements
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At least how many parties have to be involved to violate Section 2 of the Sherman Act and why?
at least 1, b/c it regulates actions
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What are the 3 standards of Section 1 of the Sherman Act to determine legality of an agreement?
- per se
- rule of reason test
- "quick look" rule of reason test
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What is the "quick look" rule of reason test?
- applied to agreements that are assumed to be illegal
- economic harm is presumed
- defendant must prove non-existance or justification of the agreement
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What are the 2 kinds of trade restraints regulated under Section 1 of the Sherman Act?
- horizontal -- involves competitors at the same level (eg. 2 computer manufacturers)
- vertical -- involves parties not in direct competition and at different levels of the chain of distribution (eg. manufacturer and seller)
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What does concerted action mean?
action that 2 or more parties have agreed upon and exercise
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What is innerbrand competition?
- competition within a specific product market with similar marketshare
- eg. Coke + Pepsi
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Which standard is applied to horizontal trade restraints to determine validity?
per se illegal
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Which standard is applied to vertical trade restraints to determine validity?
rule of reason test
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What are the 4 different concerted actions regulated under Section 1 of the Sherman Act?
- price-fixing
- market allocations
- group boycotts
- tying arrangements
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What are the 2 forms of price-fixing and what is the standard used to determine their legality?
- horizontal price-fixing -- illegal per se
- vertical price-fixing -- rule of reason test
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What are the 2 forms of market allocations and what is the standard used to determine their legality?
- horizontal market allocation -- illegal per se
- vertical market allocation -- rule of reason
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What is price-fixing?
agreement to establish a common/minimum/maximum price
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What is market allocation?
agreement to split the market (eg. by customer type, geography, products etc.)
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What are group boycotts?
agreement to refuse to deal with a third party
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What are the 2 forms of group boycotts and what is the standard used to determine their legality?
- horizontal -- illegal per se if group has market power and boycott is designed to eliminate/lock out competitor or force him to conform to group standards
- vertical -- rule of reason
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What is the Noerr-Pennington doctrine?
allows joint lobbying efforts of competitors as part of their freedom of speech
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What kind of horizontal agreements that are not illegal per se, but subject to the rule of reason test?
any agreement designed to increase economic efficiency and increase competition in the market
- eg:
- - joint venture
- - trade associations
- - combined research and development
- - lobbying
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What is a tying arrangement?
a vertical agreement in which seller requires buyer to purchase a less desirable product/service ("tied product") with the desirable ("tying product")
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What is conscious parallel action?
legal act of watching competitor and repeat what they do (=no agreement)
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What is the standard used to determine the legality of a tying arrangement?
rule of reason, unless
- - seller has considerable economic power in tying product (desirable product)
- - agreement affects more than an insubstantial amount of interstate commerce in the tied product (less desirable product)
- => illegal per se
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Briefly describe Section 1 of the Sherman Act.
prohibits restraints of trade/agreements that reduce competition in the marketplace
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Briefly describe Section 2 of the Sherman Act.
prohibits monopolization, attempts to monopolize, and conspiracies to monopolize
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What is monopoly power?
when one firm has sufficient market power to control prices and exclude competition
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What is a relevant market?
the market in which a product is sold
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What is the rule of thumb for a firm to be regarded as having monopoly power?
when a firm has a share of 75% or more of a relevant market
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What is the rule of thumb for a firm to be regarded as NOT having monopoly power?
when a firm has a share of less than 50% of a relevant market
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What are the market share limits for court scrutiny in regards to monopoly power?
- less than 30% -- no concerns
- 30% to 70% -- some scrutiny => investigation
- more than 70% -- serious antitrust concerns
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What has to happen for a company to violate Section 2 of the Sherman Act?
- has to have monopoly power
- engage in "unfair conduct" (= gain monopoly power unfairly, or abuse monopoly power)
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What is an attempt to monopolize?
- specific intent to monopolize
- "dangerous" probability of success
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Who can enforce the Sherman Act?
- FTC - civil suit
- DoJ - criminal suit
- injured parties - civil suit (up to 3x actual damage)
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What is predatory pricing?
pricing a product well below the normal cost of production
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What are the possible relieves under the Sherman Act?
- injunction
- consent decree
- divestiture
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What is a consent decree?
defendant agrees to punishment without the admission of guilt
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What is a divestiture?
giving up of a possession or right
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