By: Fredner Prevalus
If one were to ask which areas of law are relevant to an entrepreneur or small business owner, typical responses would likely begin with contract law, agency law, or torts. Then responses would likely move on to employment law, tax law, or property law-including IP/Patents. There’s a strong likelihood that anti-trust law would be near the bottom of that list if it’s even mentioned at all. Unfortunately, outside of large corporate mergers, this area of law is often neglected and overlooked, especially in small business legal discussions. It’s the Cinderella of legal academia. In our brief discussion, we’ll help dispel some common misconceptions and discuss why anti-trust law matters and how anti-trust law can potentially have an impact on small business owners and entrepreneurs.
playing monopoly
One of the principal inter-related aims of antitrust law is the prevention of the collectivization and concentration of market power and the protection of consumer welfare. A brief and highly simplified review of basic economic theory may be helpful here. Market structures exist along a continuum. A monopoly structure-single seller-occupies one extreme pole while perfectly competitive market-many sellers- occupies the other. Ideally, with limited exceptions, the perfectly competitive market structure is preferred because prices are at equilibrium; the price that buyers and sellers are willing and able to trade absent any market impediments. The equilibrium price implies that if a seller attempted to set a price above this level, they would lose sales and revenue, thus becoming unprofitable. A seller in this market is a price taker. In contrast, the monopolist has market power or the ability to influence prices and set a price significantly above the competitive equilibrium thus increasing their profits. This has the deleterious effect of reducing output and creating a deadweight loss. A deadweight loss is a loss in potential economic activity as a segment of buyers can no longer participate in the market.
per-se problems
Naturally, with the prospect of capturing significant profits, there’s a strong incentive for a business to emulate some of the features of a monopoly through contract, collusion, or cooperation with competitors, suppliers, and/or others. Some of these practices, by their very nature, have predominantly anticompetitive effects and are condemned outright regardless of their actual effects or the size of the participants. These are called “per se” violations and include but are not necessarily limited to price fixing, bid rigging, customer segmentation, and market allocation. In addition, the first sections of the 1890 Sherman Act, the principal statutory authority on anti-trust law, suggests that even the act of making an agreement to engage in these practices is a criminal violation.
let’s be reasonable
Even for practices where the circumstances and effects are taken into consideration-known as a rule of reason analysis-the disruptive and damaging toll defending a suit can have on a business may be disastrous. To facilitate the transmission of information for the betterment of their business, many owners and decision-makers actively engage with other market participants formally or informally through meetings, correspondence, and membership in trade associations. These practices are often a natural part of doing business, however, a small business owner needs to be mindful that the substance of some of these communications may be a potential violation. There have been several seminal cases where a simple email correspondence discussing prices to set between competitors was sufficient to establish an antitrust violation.
big fish in a little pond
A prevailing misconception is that anti-trust law applies only to “big” businesses. However, what constitutes big business can be relative and is highly contingent on how the market is defined. In anti-trust law, a relevant market is distinguishable in two principal ways, a product market and a geographic market. A product market is determined by applying the hypothetical monopolist test. This test analyzes the consumer substitution effects of a Small but Significant Non-Transitory Increase in Price (” SSNIP”). If a hypothetical monopolist is unable to apply an SSNIP, then the relevant market definition must be expanded to include substitute goods/services. Moreover, the geographic market refers to a market’s physical or virtual boundaries. A similar hypothetical monopolist test is used to determine the geographic market which is typically limited by transaction costs. This means that the relevant market is not necessarily national in scope but can be defined regionally or locally and the relevant product/service market can be defined so narrowly as to include a few providers. Therefore, a small business may have more market power and influence than they realize. As an illustration, suppose only three restaurants in a town provide Caribbean/African cuisine. Suppose the restaurants were part of the same entity and decided to noticeably increase their menu prices. If a significant number of their customer base did not switch to alternate cuisines, then other cuisines would not be part of the same product/service market as the Caribbean/African cuisine. Also, suppose that the next nearest restaurant offering Caribbean/African cuisine was an hour’s drive away. If most customers would not be willing to travel to that restaurant, then that restaurant is not part of the town’s relevant geographic market for Caribbean/African cuisine.
some useful tips
Although market power alone does not constitute a violation, it’s a significant factor in conjunction with other actions. Other potentially illegal actions include but are not limited to predatory pricing/bidding, boycotts/refusals to deal, vertical integration-price squeezing, vertical restraints-price ceiling/floor, tying-exclusive dealing-bundled discounts. The scope of anti-trust law in regulating business conduct is broad. Anti-trust law is not exclusively limited to the mergers & acquisitions of fortune 500 companies trading shares on wall street. It can have important implications for a small business operating on main street. In fact, several significant landmark cases involved businesses operating at a regional or local level (Aspen Skiing Co. v. Aspen Highlands Skiing Corp (1985)). It’s important to remember that operating one’s establishment in a way that’s unfair to competitors or consumers is a potentially losing strategy. It’s recommended that business owners have some familiarity with anti-trust legal principles especially as their business continues to grow. A good first step is to review the FTC’s Guide to Anti-trust Laws which can be accessed through the link below.
This post has been reproduced with the author’s permission. It was originally authored on February 11th, 2022, and can be found here.
