Reciprocity, Monopsony Power, and Section 7

• Author: Jerome L. Withered
• DOI: 10.1177/0003603X8002500107
• Published date: 01 March 1980
• Date: 01 March 1980
• Subject Matter: Article

The Antitrust Bulletin/Spring 1980

Reciprocity, monopsony

power, and section 7

BY

JEROME

L. WITHERED*

217

Since the passage of the Celler-Kefauver Act in 1950amending the

Clayton Act, mergers and acquisitions have been challenged by the

government on a wide variety

of

theories. One

of

the most con-

troversial is that a merger creates the probability

of

asubstantial

lessening

of

competition through the use of reciprocal buying ar-

rangements. This article will examine the economic impact

of

reci-

procity on the market and the tests applied by the federal courts in

construing section 7.I

*Associate; Dickson, Reiling &Teder, Lafayette, Indiana.

AUTHOR'S

NOTE:

This article is derived

from

my

M.A.

thesis in

economics at the University

of

Virginia.

ISection 7 of the amended Clayton Act, 15

U.S.c.

§18 (1970),

reads in part:

"That

no corporation engaged in commerce shall acquire, directly or

indirectly, the whole or any part of the stock or other share capital

and

no corporation subject to the jurisdiction of the Federal Trade

Commission shall acquire the whole or any

part

of the assets of

another

corporation engaged also in commerce, where in any line of

commerce in any section of the country, the effect of such acquisition

may be substantially to lessen competition, or to tend to create a

monopoly."

,c..,

1980by Federal Legal Publications, Inc.

218 : The antitrust bulletin

Economic

impact

Perhaps the simplest and most explicit definition

of

reciproc-

ity is that it is the practice

of

taking your business to whomever

brings business to you. In the context

of

most cases involving

section 7

of

the Clayton Act, the acquiring firm (or seller)

initially is buying products from another firm (supplier). The

seller then merges with or acquires asubsidiary that happens to

sell input products that the supplier must purchase to produce

its goods for sale. The reciprocal relationship develops as the

supplier begins to purchase inputs from the seller. 2

It

has been argued that there are three separate types of

reciprocity buying in the business world. The first is coercive

reciprocity where a seller, by threatening to withdraw orders

from asupplier firm, coerces that supplier into purchasing input

products from the seller or its subsidiary. The supplier, in order

to remain in business, relents to the threat and a reciprocal

arrangement develops. The other two forms

of

reciprocity are

voluntary commitments. Mutual patronage reciprocity is what is

commonly known as commercial back-scratching. The seller un-

dertakes an agreement to purchase the products

of

its supplier

in return for that supplier buying the products

of

the seller or

its subsidiary. Finally, in the case

of

defensive reciprocity.' the

supplier voluntarily purchases from the seller with the hope that

the seller will reciprocate by purchasing from the supplier.

2In that the major emphasis of the government's attack on the

practice

of

reciprocity has been in the merger field, this article will

consider only the reciprocity problem with regard to mergers under

section 7. Actions under the Sherman Act will not be considered.

However, the same technique can be used in a Sherman Act context

and the effects

of

the practice can be analyzed thereby. Compare

DeVoto v. Pacific Fidelity Life Ins.

Co.,

516 F.2d I (9th Cir. 1975),

cert, denied, 423 U.S. 894 (1976); U.S. v. Airco, Inc., 386 F.Supp.

915 (S.D. N.Y. 1974); and W.L. Gore &Associates, Inc. v. Carlisle

Corp., 381 F.Supp. 680 (D.Del. 1974), mod'd, 529 F.2d 614 (3d Cir.

1975) where the courts applied sections 1 &2 of the Sherman Act to

reciprocal buying situations.

JSometimes called reciprocity effect.