Anti Trust
Smyth v. Ames (1890)
The Court held that prices set by government had to offer "fair return on fair value," or they would violate due process.
Proposed Industrial Reorganization Act (1972)
"It is hereby declared to be unlawful for any corp or two or more corps whether by agreement or not, to possess monopoly power in any line of commerce in any section of the country or w/ foreign nations" -A prima facie case can be established by proving (1) profits over 15 percent, (2) a lack of price competition, or (3) a four-firm market share of 50% or more -Introduced by Senator Hart in 1972 but never enacted
Section 2 of the Sherman Act
"[e]very person who shall monopolize, or attempt to monopolize... trade" violates the law. Prohibits (1) exclusionary conduct by (2) a firm with monopoly power It is not illegal to be a monopoly or to charge high, monopoly prices; there must also be exclusionary conduct.
Illegal Exclusionary Conduct
(1) Conduct that causes the market to depart from the perfectly competitive ideal, either by reducing the number of competitors in the market or making it harder for competitors to offer an identical product created with an identical cost of production and (2) that reduces consumer welfare in the economic sense, meaning that the conduct results in a reduction in the margin between value of product and price of product. Conduct that is (1) but not (2) is exclusionary, but not illegally exclusionary -All product and process de-innovation also satisfy (1): they differentiate products and change relative production costs as well,
Issues argued in constitutional due process battles over economic regulation
(1) whether government could regulate prices and if so, (2) whether the prices actually chosen by government could ever be reviewed by the courts.
Sherman Act
(1890): Prohibits collusion, exclusion; provides for criminal penalties
Importance of Product Differentiation
-Started in 1930s -No two products are actually identical, and some consumers will be willing to pay more for one than another and in vice versa. -Ensures each firm has some pricing power, even in a competitive, differentiated market. -Ex. Coke and Pepsi compete but each can display some power in pricing bc some people prefer Coke to Pepsi or Pepsi to Coke (monsters) and are willing to pay more for one or the other, within limits
According to our descriptive antitrust rules, which of the following examples of conduct is most likely to violate the antitrust laws? A.) Coke reduces the number of calories in a can, without affecting taste, thereby driving Pepsi from the market. B.) Coke finds a new way of cheaply transporting cans of Coke, allowing the company to reduce the price of Coke by $1 per can, driving Coke out of the market C.) Pepsi buys up all available stocks of high fructose corn syrup and refuses to sell them to Coke, driving Coke out of the market D.) Pepsi creates an easier-to-hold can that consumers prefer over Coke cans, driving Coke out of the market E.) None of the above
A.) Product innovation, so no B.) Process innovation, so no C.) Process deinnovation, so yes D.) Product innovation, so no
Post Chicago School
Agreed that consumer welfare should be the goal of antitrust but pushed for greater enforcement In past five years, a new group of journalists and scholars advocating more vigorous enforcement have emerged ("New Brandeisians") DOJ challenge to AT&T, Time Warner merger may reflect influence of NBs
Intent and Monopolization
Antitrust law assumes that conduct violating antitrust laws requires malice of itself. You can accidentally punch someone, but you can't accidentally fix prices or exclude competitors. You can also intentionally punch someone without intending harm (hard jaw?), but you can't compete in anticompetitive conduct without intending to make money through harming consumers.
Recoupment theory of predatory pricing
Apply the cost-based test only if there are no barriers to entry that would prevent the firm from raising prices to monopoly levels after excluding competitors through low prices
Merger Enforcement
Before the 1970s any merger resulting in a market share greater than 30% was treated as illegal. Since then, only mergers that would reduce the # of firms in a market to 4 or fewer are even challenged, and only mergers that would result in 2 firms are certain to be blocked. Result: Three great merger waves of the 1980s, 1990s, 2000s
Exclusionary Conduct
Exclusive Dealing Ks Tying Predatory Pricing Refusing to Sell an Essential Input to Competitors
The maximum you are willing to pay for an iPhone is $1200. The price of an iPhone is $1000. It costs Apple $400 to produce an iPhone (including everything). What is your consumer welfare? Producer welfare? Total welfare?
CW = $200 PW = $600 TW = $800
Predatory Pricing Overview
Can be challenged as monopolization under section 2 but also sometimes as a Robinson-Patman violation (prohibiting price discrimination by suppliers) bc a predatorily priced supplier inevitably charges a low price in the markets in which the supplier is trying to exclude competition than in other markets, so the supplier is technically charging different prices to different consumers Test for predatory pricing is the same regardless of whether you bring it under section 2 or RPA The current test is recoupment, but the claim is virtually dead as no P has succeeded in winning a case since 1986. The possibility of recoupment is just too hard to establish.
Predatory Pricing
Charging a below-cost price to drive competitors into bankruptcy
Direct Proof of Monopoly Power
Comparables Price Discrimination Accounting Statements Inelasticity of Demand
Comparables
Compare prices charged in relevant market to prices in other markets thought to be competitive. If they're higher in the the relevant market, there is monopoly power. See Addyston Pipe and Staples/Office Depot
Agencies that can enforce Anti-Trust Laws
FTC and DoJ
Who can enforce Antitrust laws/how
DOJ can obtain criminal as well as civil remedies; FTC can obtain only civil remedies. DOJ in practice seeks criminal penalties, of up to ten years in jail and millions of dollars in fines, only for price fixing.
The Decline in Enforcement
DOJ, FTC mostly just stopped bringing cases after Chicago School
Price Discrimination
Defined by earning different rates of return on different units; charging different prices to different people for the same good Allows a firm to maximize profits by charging the rich higher prices than the poor A firm that must charge the same price to everyone must give the right a discount in order to avoid pricing too many poor people out of the market and thereby reducing overall profits
Hope Natural Gas (1944)
End of the due process standard for rate regulation
Two types of agreements under Section 1
Horizontal Vertical
Election of 1912
Roosevelt: Greater economic regulation; Wilson: More antitrust enforcement. Wilson won.
Pacific Bell v. Linkline (2009)
Same as Trinko; only difference is the role regulators played.
When is Price Discrimination Legal?
When consumers are the target
Under what section of FTC Act did FTC gain authority to pursue antitrust cases beyond letter of the law
§ 5
Overview of Civil Antitrust Remedies
• Dissolution of the cartel. • Breakup of the monopoly (e.g., both Standard Oil and AT&T were divided into numerous separate firms that corresponded to regional divisions of the original monopolies - Standard Oil's New Jersey division become Standard Oil of New Jersey, for example). • Trebled damages to competitors and consumers. That is, the lost profits of the competitor, or the overcharge of the consumer, times three. • Disgorgement of defendant's profits. • Behavioral remedies (e.g., an injunction requiring that the pricing department no longer communicate directly with outsiders). • Fines.
Standard Oil
(1911) Exclusionary Conduct: 1.) predatory pricing 2.) aggressive acquisitions 3.) bribery 4.) espionage Obtained 90% market share of petroleum refining Court dissolved company into 20 pieces
FTC Act
(1914) creates the Federal Trade Commission and gives it the power to enforce the antitrust laws and to prohibit other unfair methods of competition.
FTC Act
(1914): Created Federal Trade Commission and gave it power to enforce AT laws and to prohibit other unfair methods of competition
Verizon v. Trinko
(2004) Monopolization of input market is not enough; must have a monopoly in the market being harmed
Staples/Office Depot
(2016) Merger was blocked bc firm prices were 5%-13% higher in markets where it faced no competition from other firm than in markets where it did. This showed, incidentally, that non-superstore office suppliers (e.g., Amazon or your local CVS stationary section) were not close substitutes
Vertical Agreements
-Agreements between a firm and its suppliers Historically, these were often per se illegal. In particular, up until 2007, it was per se illegal for a manufacturer to impose a minimum resale price on a distributor -Today the rule of reason applies; in practice, vertical restraints are now rarely condemned
Cartel Function
-Avoid death struggle by agreeing on prices that are high enough to ensure that all cartel members cover their costs. -Economically wasteful bc they generally result in excessive spending by firms in the market -Cartelized markets ends up w/ numerous firms, each w/ own set of fixed costs rather than a single monopoly w/ one set of costs -Sometimes avoided by agreeing to shut down operation of some cartel members
Oligopoly
-Most industries only have 2 or 3 large firms. When the # of large firms is small, they don't have to enter into an agreement to fix prices. Instead, each will simply be a "good neighbor" to the other, keeping prices high bc it knows that the other firms also know that the group benefits it each firm keeps prices high. -Also called "conscious parallellism -It is legal under antitrust laws because there is no explicit agreement btwn firms
The Social Era
-Notion that the power of large orgs and big gov to improve society. -Era of relatively lax antitrust enforcement, Congress-imposed economic reg. where there were issues in two decades following
Early New Deal Antitrust Enforcement
-Roosevelt Admin. had embraced "codes of fair competition," which promoted greater size by encouraging industries to cartelize. -This was driven by the mistaken belief that the Depression had been caused by TOO MUCH competition, leading to prices too low to cover firms' fixed costs The change in thinking about size led to the appointment of Thurman Arnold as Antitrust Division chief at DOJ, and a complete reversal of course. Arnold attacked large firms engaged in exclusionary conduct, attacked vertical agreements, and for the first time attacked oligopolies
The Return of Size and Efficiency under the Chicago School
-Sometimes Chicago approach meant promoting smaller firms, competition, but sometimes meant allowing large firms to escape enforcement. Even taking higher prices associated w/ size into account, it would sometimes be true that the benefits to consumers of the large firm outweighed the losses from higher prices. -Only a large firm, for example, could invest in research/development that leads to better quality products (products that make consumers better off even after the higher prices are taken into account) In cases in which a large firm beat a small firm due to economies of scale, antitrust would never intervene to defend the small firm bc consumers were better off getting products at lower prices.
4 schools of thought re: when low prices should count as illegal exclusionary conduct
1.) Cost-based 2.) Recoupment 3.) Per se lawful 4.) Game theoretic
Horizontal Agreements
Agreements between firms that compete in the same market -Usually per se illegal -Price fixing -Market division -Group boycott Some are subject to rule of reason Research and development joint venture
FTC abilities
Can obtain only civil remedies
Interstate Commerce Commission
Established by Congress in 1877. Obtained rate power in 1907.
Brooke Group v. Brown & Williamson
The Supreme Court sets aside a jury award of $149 million in damages on the ground that the plaintiff failed to show a dangerous probability of recoupment. In particular, the court expresses skepticism that in a declining market ∆ would be able to raise prices high enough in future to recoup any losses. The case sounded the death knell for predatory pricing claims.
Monopoly Power
The ability to profitably raise prices above cost by a substantial amount
When does antitrust prohibit price discrimination?
When suppliers do it. This protects small retailers, because it prevents large retailers from obtaining bulk discounts. However, this rule is rarely enforced.
Consumer Welfare
When you consume a product you get a certain amount of pleasure. When you pay for a product, you give up money that you could have spent on other things, so your payment represents lost pleasure from not being able to consume the other things you could have bought with the money you used to pay for the product Consumer welfare in the economic sense is the difference between the pleasure you get from the product you buy and the pleasure you lose due to having to pay for the product Economists assume that consumers never buy things for which the pleasure of consumption is less than the displeasure of payment (this is ludicrous) Maximum price you WOULD pay is the dollar value of the pleasure the product gives you The price you actually pay is the dollar value of the displeasure you get from paying The difference between the two is the dollar value of consumer welfare You can add up these dollar values to get the total consumer welfare generated by the sale of some product in the market CW of 0=perfect indifference
Clayton Act
(1914): Provides for civil penalties, allows gov and private parties to obtain treble damages, prohibits mergers that threaten competition
US Steel
(1920) The Court refuses to find that company has monopoly power because the company had only a 40% share of the relevant market Court was strongly influenced by letters from competitors arguing that company had treated them well. This was almost certainly because these competitors belonged to an oligopoly with company, each charging a high price and refraining from price competition in order to enjoy greater profits. Oligopoly does not violate section 2.
Robinson-Patman Act
(1936) prohibits price discrimination in supply markets
(1914): Created Federal Trade Commission and gave it power to enforce AT laws and to prohibit other unfair methods of competition
(1936): Prohibits price discrimination in supply markets
American Tobacco v. United States
(1946) Confirmed the Alcoa Approach
Legitimate Sources of Economic Power
-Superior product -Patent or other intellectual property -Better management -Working harder -Luck
19th century regulatory approaches to company size
1.) "economic regulation" - direct government intervention in firm decisionmaking regarding price and quality 2.) state corporate laws 3.) common law rule against agreements in restraint of trade.
Government Sponsored Monopoly
Legal, so long as the government actively supervises the monopoly Noerr-Pennington doctrine allows a firm to lobby the gov to provide it with a monopoly
Two Types of Innovation
Product Innovation and Process Innovation
Lorain Journal
Slam dunk case Perfect example of process de-innovation Exclusionary Conduct (Explicit Rules): Refusing to publish the advertisements of firms that also advertised on WEOL pushed the market away from the PCI by making two products even more different than they already were Why illegal: The practice harmed consumers (here advertisers) by reducing the quality of advertising on WEOL by not being able to adv. in print.
2 successful corporate antirust prosecutions before 1914
Standard Oil and American Tobacco (1911)
Predatory Pricing 2
The practice of charging low prices that drive competitors form the market (or make them unwilling to enter), so that once competition has been excluded the firm can raise prices to monopoly levels
1907
Year that nearly all states had created "public utilities commissions" empowered to regulate rates for water, gas, and electricity.
United States v. Griffith
(1948) the Court suggested that monopoly power alone should be enough to violate Section 2, and United States v. United Shoe (1953) took a similar position
Cellar Kefauver Act
(1950) extends merger prohibitions to asset acquisitions.
Celler Kefauver Act
(1950): Extended merger prohibitions to asset acquisitions
Utah Pie v. Continental Baking
(1967) National seller of frozen dessert pies (Continental) tries to enter the Salt Lake City market dominated by local seller by charging prices below average cost (including fixed costs). The Supreme Court held this was illegal predatory pricing.
Aspen Skiing
(1985) Established prior profitable course of dealing rule
Kodak v. Image Technical Services
(1992) Explicit analysis → —Court's acceptance of Kodak copier repair services as the relevant market established that —Kodak had monopoly power once iSOs were driven from the market due to lack of parts —Raised prices after locking out ISOs —Kodak's termination of a prior profitable course of dealing with the ISOs constituted exclusionary conduct, just as Ski Co.'s termination had —The conduct was illegally exclusionary bc consumers ended up paying higher prices for repair services that were not of a higher quality Descriptive analysis → —Kodak engaged in product de-innovation by denying ISOs access to parts, thus reducing the quality of repair services ISOs could offer to copier owners —The refusal to sell to ISOs did not in itself improve the quality of Kodak's repair services Why limit the relevant market to Kodak? → —Only large corps take repair costs into acct when making copier purchase decisions. Most consumers consider only up front costs. As a result, charging more for repairs is not likely to reduce demand. —Consumers who already had Kodak printers were already locked in and could not buy services from firms that repair other brands. Price discrimination? → —An alternate explanation for Kodak's behavior is price discrimination. Suppose that people who use their copiers more (big corps) are also more likely to be willing to pay a high price for copiers than other consumers —High repair costs serve as a nice way to charge more to peeps with deep wallets while keeping costs lower for folks who can't afford the higher prices
Spectrum Sports
(1993) Defendant owner of patent rights to a polymer used in a horseshoe pad manufactured and sold by plaintiff starts manufacturing and selling an identical pad at the same time that defendant terminates a prior profitable course of licensing the patent to plaintiff. Lower courts held illegal exclusionary conduct to be enough for liability→ don't have to prove specific intent. Supreme Court reversed, holding separate proof of a dangerous probability of future monopoly power to be required but that specific intent may be inferred from the existence of illegal exclusionary conduct
Pepper v. Apple
(9th Cir. 2017) iPhone app purchasers sue Apple for monopolization of the iPhone app market. They argue that Apple has engaged in exclusionary conduct by charging a commission for sales of apps on Apple's App Store, controlling which apps may be listed on the App Store, and threatening to void the warranties of consumers who buy apps from third parties. Case re: iPhone app market; charging commission for sales of apps on Apple's app store, controlling which apps may be listed on the app store, threatening to void the warranties of consumers who buy apps from third parties Q regarding standing → according to Hanover Shoe (defensive use) and Illinois Brick (offensive use), only the direct purchaser has standing to sue; creates untenable position bc generally direct purchasers have little incentive to sue bc they get to pass on addt'l costs. Some don't think this is true though. Court found Ps had standing bc app purchasers get their apps directly from Apple;
Chicago School
-Chicago School was a group of scholars that argued antitrust should be limited to efficiencies enforcement → Aka only concerned with maximizing consumer welfare thru best products at the lowest possible prices -Robert Bork, Frank Easterbrook, Richard Posner were big names
The Rise of the Consumer Welfare Standard
-Chicago succeeded at getting enforcers, particularly starting w/ the Reagan Admin. to accept this reorientation toward a "consumer welfare standard" -Resultantly, the goal of promoting competition at all costs that had prevailed in the preceding decades was replaced with a new approach of promoting competition only when competition protects consumers from harm. If competition would hurt consumers, however, enforcers and courts would not promote competition.
Civil Antitrust Remedies
-Dissolution of the cartel -Breakup of the monopoly (e.g., both Standard Oil and AT&T were divided into many separate regional firms) -Trebled damages to competitors and consumers. That is, the lost profits of the competitor or the overcharge of the consumer, times three -Disgorgement of defendant's profits -Behavioral remedies (e.g., an injunction requiring that the pricing department no longer communicates directly w/ outsiders) Fines
Monopoly Power (Steps)
1.) The court must define a "relevant market" 2.) It then checks to see whether the firm has the power to raise prices by a significant amount in that relevant market 3.) If the firm has that power, it counts as having monopoly power 4.) Usually, if a firm has a market share >90%, then a court will assume that it has monopoly power
Decade states began to establish commissions empowered to regulate railroad prices (rates).
1870s
Coase Conjecture
A durable goods monopolist will be forced to charge at-cost prices bc the monopolist will always be in competition with its future self. After charging a high price to buyers who can afford to pay more, the monopolist will always have an incentive to then cut price and sell to those who can only afford less. But, knowing this, the rich buyers will just wait for the low price, and the monopolist will simply not be able to sell anything than at the low price. Firms avoid this problem by changing the product slightly over time (versioning) or designing the product not to last (built-in obsolescence).
Smallville has three small grocery stores. Walmart opens a new store in Smallville. Because Walmart has many stores across the country, it can buy in bulk from food distributors, allowing it to negotiate bulk discounts. It passes these discounts on to consumers in Smallville by charging lower prices. The other small grocery stores in Smallville cannot match Walmart's low prices. Consumers abandon these grocery stores and they go out of business. They sue Walmart under the antitrust laws, arguing that by charging lower prices, Walmart destroyed competition in the grocery market in Smallville. Which of the following is a true statement? A.) Before the 1970s, these grocery stores might have won their case. B.) Before the 1970s, these grocery stores could never have won their case. C.) Today, these grocery stores would have a chance of winning their case. D.) All of the Above E.) None of the above
A is correct because Robinson-Patman Act would have forbid price discrimination among distributors but has not been enforced since the rise of the Chicago School
Cost-based theory on predatory pricing
A price below average variable cost, meaning the lowest price needed to cover the cost of producing individual units, but not the cost of setting up the factory (i.e., not fixed costs)
Strength of Common Law Approach
All firms are "nexuses of contracts." Firms buy and sell using contracts, and use them to restrain the behavior of employees. A large firm that charges a high price can do so only because it can fire any employee who might disobey and charge a low price. The employment contract preventing that employee from doing so might be understood to "restrain trade." Similarly, a cartel - a group of firms contracting to stop competing and raise price - uses the cartel contract to restrict the behavior of members.
Total Welfare
Also called social welfare Sum of consumer welfare and producer welfare The difference between the pleasure consumers get from the product and the displeasure the producer gets from producing the product, measured as the difference btwn maximum willingness to pay of the consumer and the dollar cost of production (Value to consumer - cost to producer) Total welfare represents the benefit of production, the extent to which production increases the pleasure in society Price divides up total welfare between consumers and producers A high price means → most pleasure captured by producer Low price → most pleasure captured by consumer As long as price >/= cost, producer will produce the product; cost includes all payments necessary to keep firm afloat, including compensations Any payment to the producer in excess of cost is producer welfare Generally: The distribution of wealth is independent of incentives for production as long as price equals or exceeds cost
Which of the following counts as exclusionary conduct? A.) Granting your competitor the right to use your trademark B.) Granting your competitor the right to use you patent C.) Sharing a new process innovation with your competitor D.) Entering a new market by charging a price below the price charged by the incumbent, but above your own costs of production where your costs are the same as the incumbent's. E.) None of the above
Answer is E because D shows how competition should work in the perfectly competitive market; charging a lower price is OK as long as it's above your own costs.
Mergers
Antitrust law prohibits mergers that are likely to lead to monopoly or oligopoly -Firms engaged in large mergers are required to report them to DOJ and FTC, giving time for them to decide whether to sue to prevent the merger. -This is the Hart-Scott-Rodino requirement.
Common Law Regime
Antitrust laws are federal statutory law, but the language of the statutes is vague and the courts have to interpret the law (which shapes it). So antitrust is really a sort of federal common law. Yes, common law. Might even be pseudo-constitutional. They're broadly phrased and provide virtually no guidance on how to interpret.
Cartels
Avoid the death struggle by agreeing on prices that are high enough to ensure that all cartel members cover their costs. Economically wasteful because they generally result in excessive spending by firms in the market. Instead of ending up with a single monopoly with one set of fixed costs, the market ends up with numerous firms, each with its own set of fixed costs. This is avoided by agreeing to shut down the operations of some members.
The CEOs of Coke and Pepsi agree to charge the same price per can. The price is higher than the prices either currently charges but they plan on using the extra money to invest in research to lower the number of calories in their colas w/o harming flavor. Does this violate section 1? A.)Yes, bc a rule of reason means that all agreements btwn competitors are illegal B.) Yes, bc a per se rule means all agreements btwn competitors are illegal C.) Yes, bc this particular agreement is clearly harms consumers by leading to higher prices D.) No, because this particular agreement is good for consumers bc it leads to lower calories w/o harming flavor E.) None of the above
B because horizontal agreements are subject to a per se assumption of illegality. The intent to lower calories doesn't matter. It wouldn't matter if they weren't raising prices. It's per se illegal.
In 2007, Apple was able to charge a higher price for its iPhone than competing phone manufacturers were able to charge for their phones. Was this due to exclusionary conduct as defined by the antitrust laws? A.) Probably yes. The only way to have monopoly power is to exclude competitors B.) Probably yes. The only way to charge a higher price is to enter into a price fixing agreement. C.) Probably no. In 2007, the iPhone was the only smartphone, making it a superior product. D.) Probably no. People were confused by Apple's marketing into thinking the iPhone is better than a flip phone. But marketing is not exclusionary conduct under antitrust law. E.) None of the above
C because it was the first real smartphone on the market and the difference in price was justified through the difference in quality.
DoJ abilities
Can obtain criminal as well as civil remedies. In practice, seeks criminal penalties of up to ten years in jail and millions of dollars in fines, only for price fixing.
Process Innovation
Cost-reducing innovation. The quality and character of the product doesn't change, but the cost of producing the product comes down.
Tying
Forcing consumers to buy a product also sold by a competitor in order to buy another product that consumers can only get from the monopoly
Chicago School v. Harvard School
Happened at the Airlie House conference in 1974 and the Chicago School won. I like to imagine they did this over a game of squash or something.
Strategic entry deterrence in Alcoa
If Alcoa had built up extra production capacity that was not needed to satisfy new demand, then there might have been a better case under current law that Alcoa's conduct was exclusionary. The extra capacity would serve as a deterrent to potential competitors, showing them that if they enter the market to try to take advantage of the incumbent's high prices to steal business away, the incumbent will be able to quickly expand output and reduce price, limiting the ability of the competitor to take that business.
Game Theoretic
If a competitor expects an incumbent to lower prices in response to entry into the market, the competitor will not enter, and so the mere threat of charging a low price is enough to create a barrier to entry and allow the incumbent to charge high prices instead. Therefore, courts should not only condemn predatory pricing under the cost-based test or the recoupment test, but also consider whether the firm is using threats, implicit or explicit, of predatory pricing to deter entry.
Concerted Refusals to deal
If a group of firms fix the prices that they charge to buyers, there is a violation of the rule against price fixing under §1 of the Sherman Act. Same test as § 2 case
Product Innovation
Improves the quality of a product, broadly defined, at least for some consumers. The iPhone is a product innovation relative to flip phones. For those who preferred the taste of New Coke, New COke was a product innovation relative to Coke Classic
Price Discrimination as proof of monopoly power
In a competitive market, a firm's attempt to charge higher prices to "rich" consumers would induce those consumers to buy from competitors. A firm with monopoly power can do so, however, without being disciplined by competitors.
Most Common Way of Establishing Monopoly Power
Indirect Method: 1.) Start with D's product. Ask whether a 5% increase in price above cost would be profitable, or would lead to such a large reduction in demand as to offset any gains from above-cost sales. 2.) If no, then consider the D's product along with the next closest substitute (Coke-->Pepsi). Ask whether a 5% increase in both prices would be profitable. If no, add next sub and repeat until the answer is yes. 3.) Once you get a yes, you have your relevant market! This is the SSNIP method: "small but significant and nontransitory increase in price" 4.)If you get a relevant market including multiple actors, calculate the market share the D has in that relevant market, and if the D's market share is 70-90%, courts are likely to rule the D has monopoly power. 90% is nearly certain; if between 50 and 70, some might but most probably would not.
Pioneers of Product Differentiation Theory
Joan Robinson, England; Edward Chamberlin, U.S. There was no competition, only monopolistic competition w/ numerous firms selling differentiated products, each w/ power over price w/ respect to the firm's own product, but the powers of each limited by the fact that charging too high a price would cause even those consumers who preferred the firm's product to abandon the product and buy a substitute from another firm.
Gale of Creative Destruction Pioneer and Theory
Joseph Schumpeter The kind of competition that gives rise to economic growth is technological competition, with new firms and new technologies frequently obliterating older markets or older technologies (lightbulb to gas lamp). -So long as market entry not encumbered, size of a firm was of no importance because innovation will always lead to replacing/undermining the large firm. No monopolies are ever immune (Think about Apple to Microsoft's desktop dominance, Uber to a taxi monopoly)
Who were the majority of antitrust cases brought against immediately after Sherman Act was passed?
Labor Unions (until 1914)
How the FTC Brings Cases
Lawyer's in the FTC's Bureau of Competition, aided by economists in its Bureau of Economics, develop a case, which the FTC then files against a defendant. The case is then adjudicated by an FTC administrative law judge. If the defendant loses, the defendant may then appeal to the commissioners of the FTC, who then vote. If the defendant loses again, the defendant may then appeal to the federal courts. The idea behind this process is that antitrust cases require special expertise, and should therefore be decided by a specialized administrative agency. However, because the courts have rarely been shy about overturning FTC determinations, creation of the FTC has generally failed to shift ultimate antitrust decisionmaking authority to this expert agency.
ALCOA
Learned Hand was a Teddy Roosevelt progressive who had worked Roosevelt's 1912 Presidential campaign. Roosevelt preferred rate regulation to antitrust as a check on big business. Hand, like many progressives, disliked the antitrust laws. Heard this case on 2nd Circuit sitting in place of Supreme Court
Essential Facilities Doctrine
Lower court doctrine providing for liability under section 2 where the following conditions are met: 1.) Control of an essential facility by a monopolist 2.) The inability of a competitor reasonably to duplicate the essential facility 3.) Denial of use of the facility to the competitor 4.) Providing access to the facility is feasible
United States v. Microsoft Market Power Arguments
Mac OS (doesn't count because too expensive, too outside of what Windows was all about). Handhelds (don't count because they don't do the same things) Middleware (does not run enough applications) Web Portals (not enough apps)
Exclusive dealing Ks
Making downstream buyers (e.g., retailers) promise not to buy from upstream competitors (e.g., manufacturer competitors)
Product Differentiation and the Concept of Exclusion
No one firm would ever produce all of the country's bread, for ex, because there will always be another firm that produces a special kind of bread and there will always be consumers who prefer that bread, even at a higher price. This means the problem of size could be resolved by protecting the freedom to enter the market
Sherman Act
Passed in 1890. Prohibits collusion and exclusion, and provides for criminal penalties.
Clayton Act
Passed in 1914. Provides for civil penalties, allows the government and private parties to obtain three times (treble) actual damages, and prohibits mergers that threaten to harm competition
D.C. Cir. balancing test for identifying illegal exclusionary conduct
Plaintiff makes a prima facie case of harm to competition (not just competitors) and consumers D must show a procompetitive justification for the conduct Plaintiff can either rebut the procompetitive justification or show that consumers suffer a net reduction in their welfare
Addyston Pipe
Prices were higher in cities in which D firms had conspired to fix prices. (Note: was decided before the per se rule against price fixing was well established, so the "rule of reason" was applied and that required some showing of consumer harm)
The Enforcement Golden Age
Renewed emphasis on enforcement persisted for three decades after WWII, right up until the mid 1970s -1950: Cellar-Kefauver Act -- closed loophole in Clayton Act allowing asset acquisitions instead of mergers and strengthened the power of enforcers to challenge vertical, conglomerate mergers -Era characterized by merger enforcement, vertical agreement enforcement, challenges to individual large firms, repeated attempts to challenge oligopolies (not just cartels) -Starting in 1950s, there was a push among lawmakers to create a "no fault" monopolization regime allowing enforcers to break up large firms w/o a showing of exclusionary conduct. Crested in 1970s when legislation was introduced but never passed.
The Decline of Efficiency Thinking
Robinson-Patman Act in 1936 prevented suppliers from giving larger retailers bulk discounts that would allow large retailers to charge lower prices to consumers than the small retailers could afford. Suppliers could extend the bulk discounts because of economies of scale -- the per-unit cost of selling in bulk. By making it harder to do that, R-P did away with those efficiencies.
Economic Issues
Secondary Markets Coase Conjecture Strategic entry deterrance
Collusion
Section 1 of the Sherman Act prohibits "every K, combination..., or conspiracy in restraint of trade" Applies to all agreements between firms.
Using accounting statements to determine monopoly power
See whether the defendant is charging a price above D's cost of production. Less popular than it used to be because of the difficulty of translating accounting concepts into economic concepts (for example, "accounting profit" is based on a concept of cost that does not include the $$ for compensating investors, so accounting profits tend to be larger than true economic profits, among other problems).
Attempted Monopolization
Test: 1.) Illegal exclusionary conduct 2.) A dangerous probability of achieving monopoly power in the future (market share >50% or using direct methods of proof) A dangerous probability of achieving monopoly power in the future may be established by indirect proof of the following kind: market share of more than 50%. Direct methods of proof may also be used to establish a dangerous probability. 3.)Specific intent to monopolize, meaning evidence of intent to achieve monopoly power in the future. Proof of illegally exclusionary conduct normally automatically establishes the existence of specific intent
Cellophane Fallacy
The Court appeared to rely on a finding that a current price increase would result in a severe drop in demand to conclude that cellophane is a close substitute for other flexible packaging materials. The standard for defining a relevant market is that the market be one in which a price increase above cost would be profitable. If the price is already far above cost, a further price increase may not be profitable (prices cannot increase forever; at some point, even people needing lifesaving drugs will not be able to pay for them). But that does not mean that the initial price above cost was not itself profitable. If product was already being sold at monopoly price, a further increase would not be profitable. The real question was whether cellophane was being profitably sold at a price above its cost of production and the court ignored that possibility.
Munn v. Illinois (1877)
The Supreme Court held that government could regulate prices "affected with a public interest."
Per se lawful theory of predatory pricing
The charging of low prices should never violate the antitrust laws, because low prices are rarely harmful and courts will inevitably mistakenly condemn genuinely competitive, consumer-beneficial conduct with the result that recognizing a predatory pricing claim will cause firms to charge higher prices for fear of being mistakenly condemned and prices will rise across the country. Consumers harmed by mere existence of the rule
Elasticity of Demand
The extent to which demand changes in response to price. A high elasticity means that demand changes greatly in response to a small change in price. A low elasticity of demand means that demand changes little in response to a change in price. Think grocery bags versus insulin.
Cross-elasticity of demand
The extent to which the demand for one product changes in response to a change in the price of another product. High cross-elasticity of demand means that when the price of the other product rises, consumers abandon that product and buy the high cross-elasticity product instead, driving up demand for it. A low cross-elasticity means that price increases in the other product do not have much effect on the other product.
State Corporate Laws
This approach generally sought to prevent corporations from operating in multiple states, ensuring that they would not grow beyond "state size." State corporate laws limited the purposes for which a corporation could be formed, prevented corporations from owning factories in other states, and prevented corporations from owning other corporations.
Common Law rule against agreements in restraint of trade.
This rule had generally been used to prevent non- compete agreements that were not reasonable as to time and place, and tended to lead to monopoly. Thus they would prevent a contract between business partners that would prevent a partner from leaving the partnership to pursue any other business anywhere forever.
Limitation to Common Law Approach
Traditionally only parties to the contract could sue to enforce the contract. But large firms benefit from restraints on trade; it was unlikely that members of those firms would sue to invalidate the contracts allowing them to profit. Similarly, a member of a cartel would not want to sue to break up the cartel. Those who were actually harmed - consumers, for example - could not sue.
Secondary Markets in Alcoa
Valerie Suslow found Alcoa's prices were not actually constrained by secondary aluminum only bc secondary was not actually a good substitute for virgin
What determines whether exclusionary conduct is actually illegal?
Whether consumer welfare is actually reduced as a result. In general, product and process innovation make consumers better off by increasing willingness to pay or reducing prices. By contrast, de-innovation tends to make consumers worse off, by reducing consumer willingness to pay or increasing prices. Note: The mere charging of an above-cost price does not itself count as exclusion. This is known as the "conduct requirement."
Economic Regulation
direct government intervention in firm decisionmaking regarding price and quality. • Electricity, gas, water, and telecommunications remain subject to varying levels of regulation of this kind today. • The regulator - often an independent administrative agency at the local (e.g., water), state (e.g., electricity, gas, insurance), or federal levels (e.g., telecommunications, energy distribution) - sets prices ("rate regulation") and quality standards.
Large firms' solution to state corporate laws
large firms created trusts. Shares from corporations in multiple states were placed in the trusts, and the shareholders were issued trust certificates. The boards of the corporations were obligated to follow the orders of the trustees. The trustees were in turn required to follow the desires of the trust certificate holders. The result was a kind of stealth multistate corporation.
Producer Welfare
the producer buys using payment received for the thing the producer has produced and sold. The value of production to the producer is measured by the price of the product the producer sells. The cost of production to the producer is the pleasure associated with consuming the goods the producer would have purchased with the money the producer instead used to buy the things required for production (inputs from suppliers, labor time, payments to investors, so on). The cost of production to the produced is measured by the dollar amt of the producer's payments to all those, including suppliers, workers, and investors, needed to make production take place. Pleasure - displeasure of cost
