The Clayton Act

The Clayton Act was enacted in response to the lack of clarity in the Sherman Act

  • Unlike the Sherman Act that punishes observed monopoly behavior, the Clayton Act explicitly outlaws specific behaviors (“halt monopoly in its inciency”)
    • Price discrimination
    • Exclusionary practices
    • Mergers
  • It was designed to prevent monopolies from forming rather than dissolve existing monopolies

Price Discrimination

  • Price discrimination is the act of charging different prices to different customers, where the different prices do not reflect different costs of providing the good or service
    • The Clayton Act forbids price discrimination when “the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly”
    • A seller is also not allowed to discriminate through indirect means
  • However, there are allowable ways to price discriminate
    • Discrimination based on cost savings is allowed
    • Good faith price discrimination is allowed (if a rival firm offers your current customer a lower price, you are allowed to match that price to that customer, without matching it for all other customers)

Exclusionary Practices

Exclusionary practices are any activities that have an adverse effect on competition. The act requires a likelihood that a substantial adverse effect on competition will arise before the enumerated business practices violate the law.

  • Tying Arrangements: Only allowing a buyer to purchase product A, if they also buy product B
  • Exclusive Dealing: Buyer agrees to not buy competing merchandise (prevents a distributor from selling the products of a different manufacturer)
  • Requirement Contracts: Forcing a buyer to buy all requirements for a commodity from a single seller (prevents a manufacturer from buying inputs from a different supplier)
  • Territorial Confinement: Buyer is not allowed to resell product outside of their territory

Mergers

  • The Clayton Act provides preventive measure
    • Section 7 of the Clayton Act forbids mergers that significantly lessen the competition or tendency toward monopoly in the market
    • Applied to both horizontal mergers (e.g. Starwood Marriott) and vertical mergers (e.g. AT&T Time Warner)
    • Activities that appear to lead to monopolies are forbidden
  • In practice, IO economists conduct empirical analysis to determine the market effects of mergers