Monopsony and Backward Integration: Section 2 Violations in the Buyer's Market

Publication year1988



Monopsony and Backward Integration: Section 2 Violations in the Buyer's Market

Susan E. Foster, C.P.A.

I. Introduction

Monopsony(fn1) and backward integration(fn2) are the converse of the terms monopoly and forward integration. The former terms refer to a condition or activity(fn3) in the buyer's market, the latter terms to a condition or activity in the supplier's market.(fn4) While monopolization has received substantial judicial and scholarly attention, its counterpart in the buyer's market, monopsonization, has received little notice.(fn5) This inattention to the basic difference between antitrust violations in the buyer's and seller's markets under section 2 of the Sherman Antitrust Act(fn6) is unfortunate, and may often be legally fatal.(fn7)

The majority of antitrust claims arise from activity in the seller's market.(fn8) Suppliers may be prohibited from setting the price at which they will sell their products (price fixing), from requiring the purchase of one product in order to acquire another (tying), and, under certain conditions, from acquiring their retail outlets (vertical integration). If these activities are conducted in the buyer's market, however, they are rarely the subject of an antitrust claim under section 2 of the Sherman Antitrust Act. There is even legislative history indicating that the Act was never intended to reach into the buyer's market.(fn9)

A seller's action may arise in the following manner: Seller (S), a manufacturer of widgets, sells to Purchaser (P). P is the sole purchaser of widgets. As a result of this monopsony, P has the power to set the price it will pay for widgets. Since S has no other market for its product, it is forced to sell at the price P has set.

Courts, litigators, and the reader may believe it appropriate that P should be able to set the price at which it will purchase its widgets without incurring antitrust liability. Initially, the arguments against recognition of a seller's claim appear substantial. First, P may not have sufficient economic incentive to use its monopsony power in an anticompetitive manner. If P reduces the price it will pay for widgets below S's cost, S would be required to continue selling at a loss. Yet, prolonged loss-selling behavior does not appear either rational or feasible from the viewpoint of either S or P. Since such an action may force S out of business or into a different product market because of continued loss selling, P would be left without a supplier-leaving little incentive for P to engage in such anticompetitive conduct.(fn10) S's incentive to avoid loss-selling behavior is more obvious.

Second, it has become axiomatic that the asserted purpose of the antitrust laws is the protection of competition, not competitors.(fn11) This asserted purpose may be construed to argue against recognition of a claim in the buyer's market, since permitting P to obtain the lowest possible price for its widgets would appear to embody the concept of free competition.(fn12) Conversely, prohibiting P from engaging in such activity may only protect and safeguard S's profit margin. Reduction of a business' net profit margin, however, is not the type of antitrust injury that the antitrust laws were designed to prevent. Thus, in Cargill, Inc. v. Monfort of Colo., Inc.,(fn13) the Supreme Court rejected on standing grounds a claim alleging behavior that had the effect only of reducing the plaintiff's profit margin without adversely affecting competition.(fn14)

Despite these arguments against recognition of antitrust violations in the buyer's market, certain circumstances create a condition in which the buyer's activities are anticompetitive and of the type the antitrust laws were designed to prevent. Exclusionary conduct is particularly susceptible to such a claim. Thus, if P engages in more than mere price setting, and predatorily sets its purchase price, refuses to deal, or vertically integrates into S's market for the purpose of excluding either S or a competitor at P's own level, P will have violated the antitrust laws.

This Comment will focus on the application of section 2 of the Sherman Antitrust Act to actions in the buyer's market.(fn15) After briefly reviewing general antitrust law, this Comment will explore the status of antitrust claims in the buyer's market under both section 1 and section 2. The necessary elements of a section 2 monopsony claim will then be reviewed with particular emphasis on the types of buyer activities that might support a seller's claim under this section. As will be shown, the anticompetitive effect of these activities provides the major distinction between actions in the buyer's and seller's market. Despite these distinctions, monopsony claims are cognizable under section 2, particularly when exclusionary activities are involved. The viability of such a claim may not be immediately apparent and should be carefully considered by litigants and thoughtfully reviewed by the courts. The Supreme Court's most recent review of anticompetitive injury in Cargill,(fn16) and the Court's adoption of stricter summary judgment standards in Matsushita Elec. Ind. v. Zenith Radio,(fn17) however, make it imperative that litigants recognize, plead, and prove the proper antitrust injury and effect when pursuing a claim in the buyer's market.(fn18)

II. Antitrust Overview

Despite the plethora of antitrust statutes,(fn19) the Sherman Antitrust Act remains central to antitrust analysis. Claims brought under the Act generally allege a violation of either section 1 or section 2. Section 1 provides that "every contract, combination ... or conspiracy, in restraint of trade . . . among the several states . . . is . . . illegal."(fn20) Section 2 provides that "[e]very person who shall monopolize, or attempt to monopolize . . . any part of the trade or commerce among the several States . . . shall be deemed guilty . . . ."(fn21) The major distinction between these provisions is that while section 1 violations require an agreement between two or more people, section 2 violations reach the unilateral action of a party who possesses or attempts to gain monopoly or monopsony power.

Antitrust violations under section 1 are analyzed under either the per se rule or the rule of reason. An activity that is illegal per se will not be reviewed by the court for its anticompetitive effect; the plaintiff will only need to prove that the defendant engaged in the activity.(fn22) In contrast, the rule of reason requires an in-depth review of the activity's anticompetitive effect in the particular application confronting the court.

The per se rule is limited to "agreements or practices that, because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable and therefore illegal without elaborate inquiry about the precise harm they have caused or the business excuse for their use."(fn23) The per se rule will apply only to a particular activity after the court has had "experience with a particular kind of restraint . . . [and may reach] a conclusive presumption that the restraint is unreasonable."(fn24) Those activities falling within the per se category have been limited in recent years, and the rule will generally apply only to horizontal arrangements(fn25) under section 1 that involve activities such as price fixing,(fn26) division of markets,(fn27) group boycotts,(fn28) or tying arrangements.(fn29)

If an activity has not been declared illegal per se, the court, in reviewing a section 1 claim, will evaluate the practice under the rule of reason. The rule of reason requires the court to review the competitive effects of the business practice and weigh any potential benefits against the practice's negative effect on competition.(fn30) While the rule of reason analysis under section 1 is not identical to the anticompetitive effects analysis conducted under section 2, the competitive objectives and economic goals are similar. In recent years, the Chicago School of Economics, with proponents such as Areeda and Turner, Judge Robert Bork, and Judge Richard Posner, has dominated this analysis. While each of these proponents has his own variation on this school of thought, each has participated in the shift of focus away from the goal of free competition through decentralization.(fn31) Rather, the Chicago School focuses on consumer welfare as the goal of antitrust law.(fn32) Emphasis is placed on whether the activity decreases output and increases prices. If the activity does not have this effect, then the activity does not have an anticompetitive effect, and thus does not violate the antitrust laws.(fn33)

Often the tests of decreased output or increased price do not address the anticompetitive effect of exclusionary conduct. Thus, Krattenmaker and Salop have recently argued that claims of anticompetitive exclusion should be judged according to whether the challenged activity places competitors at a cost disadvantage sufficient to allow the defendant firm to exercise monopoly power by raising its prices.(fn34) This test requires the court to ask first "whether the challenged conduct unavoidably and significantly increases the cost of competitors," and second "whether raising rivals' costs enables the firm to exercise market power-that is, raise prices...

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