Antitrust

Fall 2001

Professor Hovenkamp

 

Monopoly Structure, Power and Conduct

 

Þ          Market Power:  The ability of a firm to obtain higher profits by reducing output and selling at a higher price.

Þ          Monopolization:  Illegal conduct by which a single firm seeks either to obtain or to retain market power.

 

I.                THE PROBLEM OF MONOPOLY

A.                      United States v. American Can Co.  (1916)

                                                    1.            Facts:

a.                  Proceeding brought under §4 of the Sherman Act.  Government claims American Can violated §1 and §2 of said Act.

b.                  American Can obtained its size by uniting various plants under one management, by persuading, inducing, or coercing other can makers to sell out usually at very extravagant prices above what plants were worth, as well as negotiating contracts with can-making machinists to limit manufacture to only to American Can Co.

c.                  The contracts of sale to American Can often contained non-compete clauses.   Many of the plants the D bought were shut down and never used.

 

                                                    2.            Arguments

a.                  D argued that although it may have been formed under certain criticisms in the beginning  it has on the whole served the can trade will and to divest it would do more harm than good.

i.                The court recognizes the difficulty in assigning what has come about because of D’s presence and what would have come about without it all together.

 

b.                  Next D argues that it is most efficient in can making and delivery.

i.                This is true because D has many shops and other competitors only one.   Users of cans often prefer to deal with a factory that is closer to them in preference to buying cheaper elsewhere.  This the court said “ is perhaps the most valuable service to the trade American Can has provided.”

 

                                                    3.            Reasoning by Court

a.                  Pg 604- “One who sells only one-half of the cans that are sold does not of course possess a monopoly in the same sense it would if he sold all or nearly all.” 

i.                So 50% doesn’t equal monopoly, but is does provide substantial market power which may allow it to manipulate the market by reducing output.

 

b.                  Pg 604- The court states that “size and power are themselves facts some of whose consequences do no depend upon the way in which they were created or in which they are used. “

i.                Court seems to be saying that size and power, even when not gained by anticompetitive practices, is prima facia evidence of monopoly power and the lead to monopolization.

 

c.                  Decision to dissolve:  Court seems to be hesitant to use this, but says it is the policy of Congress. “Whether its dissolution would profit any one is doubtful.”  “ I am frankly reluctant to destroy so finely adjusted an industrial machine as the record shows defendant to be.”

 

 

B.                      Notes and Questions

                                                    1.            Monopolists have often attempted to defend their monopolies by arguing that the monopoly undertook research and development that would not have occurred in an industry made up of smaller, competitive firms.

                                                    2.            Two arguments

a.                  Only a very large firm can afford to undertake research and development or exploration in certain area in which such activities are very expensive and

b.                  Only monopoly profits give a firm enough money to finance such research.

 

 

C.                     United States v. Aluminum Co. of America (1945)

                                                    1.            Alcoa is a producer of aluminum which requires a large amount of energy.  It was able to obtain energy by securing contracts, binding the power companies not to sell or let power to anyone else for the manufacture of aluminum.

                                                    2.            This action is brought under §2 of the Sherman Act.

                                                    3.            The first thing the trial court faces is the market in which Alcoa competed

a.                  The Market

i.                The district court judge included “secondary” aluminum, and excluded production which Alcoa fabricated in the market and determined that Alcoa had a 33% share.

ii.              The court clearly indicates that a market share of over 90% is enough to constitute a monopoly, but it is doubtful whether sixty or sixty-four per cent would be enough and 33% is definitely not.

iii.             The court does not feel that “secondary” scrap should be included in the market.

                                                                                                                              1.          Alcoa always knew that the future supply of ingot would be made up in part of what it produced at the time, and, if it was as far-sighted as it proclaims itself, that consideration must have had its share in determining how much to produce.

                                                                                                                              2.          Secondary was as much within Alcoa’s control as was the production of the “virgin” from which it had been derived.

                                                                                                                              3.          Therefore the court only focuses on production of “virgin” ingot which is 90%.

 

iv.            The court makes a distinction between domestic and foreign competition.  The court notes that Alcoa was worried about imports into the market so it kept its prices lower than what it could

                                                                                                                              1.          The court noted profit and stated “ a profit of ten percent so conditions, could hardly be considered extortionate.”

 

D.                     Notes and Questions

                                                    1.            The Price and Supply Squeeze

a.                  By which the vertically integrated monopolist allegedly manipulates a market in order to injure vertically related firms.

b.                  Courts have usually condemned the price and supply squeezes by the monopolist when they have found them.

 

                                                    2.            Today it is well established that a §1 violation by a firm with monopoly power is also a violation of §2.

a.                  Antitrust law’s concern with this process of monopolization rather than merely with the outcome.  The law of monopolization requires not only a monopoly position, but also the commission of one or more anticompetitive “exclusionary practices”, thus signaling that the process by which monopoly is to be created determines its legality.

b.                  Indeed, there is no law of “no fault” monopoly—the innocent monopolist does not violate the antitrust laws simply by charging its profit-maximizing price.

                                                    3.            A §2 monopolization offense requires 2 elements 1) substantial market power, or monopoly power (as referred to by the courts) and 2) one or more qualifying anticompetitive or “exclusionary” acts.  You must show both of these things to make out a claim of monopolization.

a.                  Monopoly power is not itself an exclusionary practice, in fact the exercise of such power—the sale of products at a monopoly price—generally attracts new sellers to the market.

b.                  Further, monopoly power is not a function of absolute firm size.   The offense of monopolization is not directed at absolute firm size, but rather at size in relation to some market.

c.                  Before a firm can be convicted of monopolization, it must have monopoly power in a relevant market. 

i.                “Market Power” is the power to reduce output and raise prices above marginal cost, and to make a profit by doing so.

ii.             “Monopoly Power” is simply a large amount of market power.

 

d.                  This rule rules-out 1) business torts where the actor is not a monopolist nor are they threatening to being one.—these are not §2 violations unless §2’s power requirements are met

e.                  There is no such thing in the US as no fault monopolization. A presumption that substantial long term market power indicates a presumption to maintain that power.

f.                    Exclusionary:  a subset of exclusionary actions, in the sense of a manifest intent to injure competition—injury, something that is capable of yielding lower market output and higher market prices.  (complicated by the fact that output can be computed in very different ways.)

 

E.                      Fringe Firms

                                                    1.            American Can was accused of doing all these “bad” things which raised the price of the cans which caused in influx of competitors into the market who made inferior products, but the market had become attractive.  American Can then proceeded to buy up competitors cans (which is a dumb thing to do since is spurred the competitors on.)   These hand made cans would be of a different quality and size.  Entry was easy in this case because of the very low entry barriers.

a.                  This market had many “fringe” competitors who possess a fairly horizontal aggregate supply curve, whose costs are much higher than American Can.

b.                  If the fringe is able to produce costs at below P(m)—the monopoly price set my Am. Can—then American Can will have to price below the fringe price to compete.  This is known as “limit pricing.”

c.                  Just because there are competitors in a market, a monopoly can still have great market power because they are able to outprice(by undercutting the fringe price even though it is below P(m)) if they can price below cost of the fringe. Courts often get this wrong!!!  Oftentimes these fringe companies are not as efficient as the larger more dominant firm which is why their costs tend to be higher.

 

F.                      Measuring Market Power Directly

                                                    1.            The Market Problem and Defining it 

a.                  Economists define market power as the power to raise prices above cost by a certain degree. Looking at price cost analyses.   Antitrust lawyers define power by looking for 1) a relevant market, and then making a determination of the D’s share of the relevant market.

 

                                                    2.            The Relevant Market

a.                  The Relevant market is a market capable of being monopolized.  The relevant market consists of 2 parts

i.               A relevant product market and

ii.             A relevant geographic market

 

b.                  Once such a relevant market has been determined, the court hen computes the dfendant’s share of that market. If the D’s share is big enough, then the first element of the monopolization offense has been established.

 

c.                  Another way to thing of relevant market is like this:  A relevant market is some grouping of sales such that, if those sales were made by a single firm, that firm would have the power to raise prices above the competitive level without losing so many sales that the price increase would be unprofitable.

 

d.