"Conduct" describes a firm's acts in the marketplace. Although conduct determines a firm's performance in the marketplace (the results the firm achieves), it is NOT defined as those results. Rather, it is defined as the firm's ACTIONS.
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Market
1
What is the "market"?
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1
The market is the arena within which the strength of competitive forces is measured.
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Market Definition
1
What is "market definition"?
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1
Market Definition is the process of determining the proper arena in which to measure competitive ability. It should include those firms and products that are most relevant to appraising a defendant's "market power."
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Parts of Market Definition
1
What are the two elements of Market Definition?
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1
1) Geographic Market.
2) Product Market.
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Geographic Market
1
What is the "Geographic Market"?
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1
It is the geographic area in which a firm competes for customers with its competitors.
This is one of the two parts of Market Definition.
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Defining Geographic Market
1
How do you go about defining the Geographic Market?
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1
On the demand side, look for the geographic area in which a typical customer could reasonably be expected to purchase products from competing firms.
On the supply side, look for that section of the country in which a firm can increase its price without attracting new sellers or losing many customers to alternative suppliers outside that area.
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Product Market
1
What is "product market"?
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1
It is the range of products with which defendant's product(s) compete. In order for a product to be part of the product market, it must be "reasonably interchangeable by consumers for the same purposes." "Du Pont" (Cellophane).
This is the second part of the two parts of Market Definition.
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Components of Market Definition
1
What are the three factors to consider in determining if a product is part of the product market (that is, if it is a product reasonably interchangable with defendant's product), as defined in the "Du Pont" (Cellophane) case?
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1
1: Price. (compare prices of products to see if consumers would be willing to substitute one for the other.) Note that in later cases courts have not considered this factor, however, but only used factors 2 and 3.
2: Use. (compare how products are used in the 'real world')
3: Qualities. (compare physical attributes of products.)
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Product Market Example
1
Ford manufactures cars. In what way could we define Ford's product market?
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5
from narrowest to widest definition...
A) Ford Cars (Ford has 100% of this market)
B) American Cars (Ford, GM, Chrysler)
C) Cars (American and Foreign)
D) Passenger Motor Vehicles (Cars, Trucks)
E) Vehicles of any type (Cars, Bikes, Big Wheels)
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Product Market Example
1
Of the following definitions of Ford's market, which is the best one to choose?
A) Ford Cars (Ford has 100% of this market)
B) American Cars (Ford, GM, Chrysler)
C) Cars (American and Foreign)
D) Passenger Motor Vehicles (Cars, Trucks)
E) Vehicles of any type (Cars, Bikes, Big Wheels)
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5
@@##$$5C If Ford uses its market power to force prices up in category A, people can move to other choices of similar products (cars) in category B, which are similar in the 3 "Cellophane" factors: price, use, and qualities. Similarly, if Ford uses its (somewhat lesser but still substantial) market share to force up prices in category B, people can move to other similar choices in category C. If, however, Ford manages to force up prices in category C, people who cannot pay will have to move to other choices in category D such as trucks, which do not have the same use and qualities. Thus, category C is the best choice.
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Market Structure
1
What is "Market Structure"?
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1
Market structure concerns the breadth and character of the market, the number and distribution of buyers and sellers, and the capacity of firms to enter or expand within the market.
Note that implicit in this definition is the necessity to create a Market Definition before one can analyze the Market Structure.
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Market Power
1
What is Market Power?
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1
Market Power is a firm's ability to act in a way that a perfectly competitive firm could not. Most discussion of Market Power concerns a firm's ability to charge a higher than competitive price. A subset of this ability is a firm's ability to exclude competitors from the market, since this ability normally will carry with it the ability to raise price above competitive levels.
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Monopoly Power
1
What is Monopoly Power?
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1
Monopoly Power is a rather nebulous concept, but it can be defined as a significant degree of market power; that is, a significant ability to control price or exclude competition from the market.
The exact degree required is not definable.
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Relationship between factors
1
How do Market Definition, Market Structure, Market Power, and Monopoly Power relate to one another?
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4
Because Market Structure concerns the character of the market, number, size and distribution of buyers and sellers, and ability of firms to enter or expand into the market, the Market Definition must be determined before the Market Structure can be analyzed. Only after the Market's geographic and product markets are determined can we see how many buyers and sellers exist in the market, and what barriers to entry or expansion exist.
Market Structure relates to Market Power because Market Power involves seeing if a firm's prices exceed competitive levels, and determining if a firm can exclude competition. These determinations involve analyzing the role of the firm in question within the Market Structure.
Finally, Monopoly Power, being defined as a significant degree of Market Power, is simply an extension of the previous paragraph.
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Monopolization
11
Sherman Act s. 2
1
What is the text of Sherman act s. 2?
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2
"Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce amoung the several States, or with foreign nations, shall be deemed guilty of a felony..."
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Possession of a Monopoly
1
True or False: The mere posession of a monopoly, without some additional specific form of conduct, is forbidden under s.2 of the Sherman Act.
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2
@@##$$TFIn "Alcoa" (pp. 478 CB) it is pointed out that sometimes "persons may unwittingly find themselves in possession of a monopoly automatically ... without having intended either to put an end to existing competition, or to prevent competition from arising when none had existed...a market may be so limited that it is impossible to produce at all ... except by a plant large enough to supply the whole demand...or...a single producer may be the survivor out of a group of active competitors. merely by virtue of his superior skill, foresight and industry."
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Specific Intent
1
Does a monopolist need a specific intent to monopolize in order for his actions to constitute a violation of s. 2 of the Sherman Act?
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2
@@##$$YN"No monopolist monopolizes unconcious of what he is doing." Alcoa (pp. 482 CB.) If "a necessary and direct result" of the actions of the firm in question was the "restraining or monopolizing of trade within the meaning of the Sherman Act", then s.2 has been violated. Griffith (pp. 485-86 CB.)
But compare: ATTEMPTED monopolization DOES require specific intent.
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Test for Monopolization
1
What is the test for monopolization given in the "Aspen Skiing" case? (pp. 514 CB)
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4
1) Possession of monopoly power in a relevant market.
2) willful acquisition, maintenance, or use of that power by anticompetitive or exclusionary means or for anticompetitive or exclusionary purposes.
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Test for Monopolization Pt. 1
1
How do you determine if a firm "posesses monopoly power in the relevant market", part one of the Aspen Skiing monopolization test?
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4
First, create the market definition by defining the geographic market and the product market.
Next, examine the firm in question's actions in the market to determine its market power - its power to charge higher than competitive prices, and its power to exclude competition. Determining the latter will require an examination of the market structure, including barriers to entry.
Finally, make a judgement call as to whether the firm's market power is great enough to constitute monopoly power.
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Test for Monopolization Pt. 2
1
How do you determine if a firm has engaged in "willful acquisition, maintenance, or use of that [monopoly] power by anticompetitive or exclusionary means or for anticompetitive or exclusionary purposes", part two of the Aspen Skiing monopolization test?
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4
In "Aspen Skiing" (pp. 514 CB) is it stated that a distinction must be drawn between "practices which tend to exclude or restrict competition on the one hand, and the success of a business which reflects only a superior product, a well-run business, or luck, on the other...for example, a firm that has lawfully acquired a monopoly position is not barred from taking advantage of scale economies by constructing a large and efficient factory ... nor is a corporation which posesses monopoly power under a duty to cooperate with its business rivals ... [or required] to enter into a joint operating agreement or otherwise [required to deal] with a competitor in some manner ... if valid business reasons exist for that refusal."
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Test for Monopolization Pt. 2
1
Is a firm which is engaging in a cooperative venture with a business rival at the time it acquires monopoly power permitted to discontinue the venture later on?
(A) Yes.
(B) No.
(C) It depends on the monopolist's reason for discontinuing the venture.
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4
@@##$$3CSince the firm posesses monopoly power, and was engaged in the venture at the time it acquired such power, the cooperative venture will be considered part of the market structure. Thus, since changes to the market structure by a monopolist are not permitted for "anticompetitive or exclusionary purposes," if the firm's action in discontinuing the cooperative arrangement is found to be based on such purposes, the firm may not discontinue the arrangement without violating s. 2. However, if the discontinuance is solely for valid business reasons, the firm may discontinue the arrangement. "Aspen Skiing." (see pp. 517 CB.)
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Predatory Pricing
1
Is a monopolist which lowers its prices to increase its market share ('predatory pricing') violating section 2, by engaging in "anticompetitive or exclusionary" tactics?
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4
Only if the lower price is not above the monopolist's costs. A lower price which does exceed total costs is not "unreasonably low" and does not violate s. 2. "Barry Wright" (pp. 531 CB.)
Note that this (newer) rule is contrary to the rule in "Alcoa" which implied that any move a monopolist makes to increase its market share results in a s.2 violation. This requirement of specific exclusionary conduct is typical of modern courts. (see pp. 556 CB.)
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Predatory Pricing - 9th Cir.
1
How does the 9th Circuit's predatory pricing analysis differ from the analysis presented in "Barry Wright"?
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4
In the 9th Circuit, in a situation where a monopolist offers a customer a price above its incremental cost, but below its average cost, the plaintiff can win by proving by a preponderance of the evidence that the monopolist's price cut was made for its exclusionary or disciplinary tendancy. Even if the lower price was above both incremental and average cost, the plaintiff can still win by proving by clear and concinving evidence that the monopolist's price cut was made for its exclusionary or disciplinary tendancy.
The "Barry Wright" court rejects the latter portion of the 9th circuit analysis, concluding that a price cut leaving prices above both incremental and average costs never violates s. 2. (see pp. 537-38 CB.)
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Monopolization Example
1
The Boston Red Sox sell scorebooks in Fenway Park for $2 each. Because the Red Sox control vending within the park, they have 100% market power within it. Although they do not control the street vendors outside the park, assume that their market power is nonetheless sufficient to constitute monopoly power in the area immediately surrounding the ballpark.
A street vendor gets a permit and sets up shop just outside the park, selling similar scorebooks for $1 each. Due to his lower price, he succeeds in taking a significant share of the scorebook market from the Red Sox. The Red Sox respond by lowering the price of their scorebooks to $1. A Red Sox vice-president is quoted in the Boston Globe as saying that the price cut "will teach that upstart a lesson about trying to take business away from us. In fact, if he goes out of business, we plan to raise the price of scorebooks to $3." Have the Red Sox violated Section 2?
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5
No under "Barry Wright", yes under the 9th circuit analysis. Regardless of the Red Sox' intentions, the $1 cost is still enough to more than cover total costs. (We can assume this because the street vendor's similar scorebooks were $1, and he was making a profit.) Thus, under the "Barry Wright" rule, the Red Sox have not engaged in exclusionary conduct. However, under the 9th circuit view, the vendor will be able to use the Vice-president's statement as clear and convincing evidence that the price cut was made for exclusionary purposes, and thus the vendor will win. (Unfortunately for the vendor, Massachusetts is not in the 9th circuit.)
Even if the Red Sox succeed in driving the vendor out of business, and then raise the price of their book to $3, they have still not violated s. 2. A monopolist is permitted to charge a monopoly price, as this encourages new entry into the market. Note that this seems an inconsistant result, but that's the way it is. (discussion with Drobak, 4/21/93.)
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Requirements Contracts
1
How do you judge a requirements contract with a monopolist under part 2 of the "Aspen Skiing" monopolization test? That is, how do you tell if a long-term requirements contract, which causes the monopolist to tie up a portion of the market for an extended period of time, causes the seller to violate s. 2 due to the exclusionary nature of the contract?
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2
Use the Rule of Reason. Examine the extent of the market forclosure (ie the size of the contract) and its anticompetitive effects, and balance the anticompetitive effects against the reasonableness of the buyer and seller's business justifications for entering into the contract. If the business justifications are sound, the contract does not result in a s.2 violation. "Barry Wright" (pp. 538-39 CB.)
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Attempted Monopolization
5
Attempted Monopolization Test
1
What is the test for Attempted Monopolization as given in the "Spectrum Sports" case?
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4
The plaintiff charging attempted monopolization must prove:
1) the defendant has engaged in predatory or anticompetitive conduct,
2) the defendant has a specific intent to monopolize, and
3) the defendant has a dangerous probability of achieving monopoly power.
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Actual v. Attempted Monopoly
1
What is the difference between monopolizing and attempting to do so with regard to intent?
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2
A plaintiff with monopoly power does not have to have specific intent to be found guilty of monopolizing.
However, a plaintiff merely attempting to monopolize, who does not have monopoly power, must have a specific intent to monopolize in order to be found guilty of attempted monopolization.
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Test - Attempted Mon. - Pt. 1
1
How do you prove that the defendant has engaged in "predatory or anticompetitive conduct", so as to meet part one of the Spectrum Sports test for attempted monopolization?
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4
Use a similar analysis to part 2 of the monopolization test. Check to see if the defendants's actions are taken for the purpose of interfering with competition on the one hand, or if the defendant's actions are justified by legitimate business reasons on the other hand.
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Test - Attempted Mon. - Pt. 2
1
In the absence of specific evidence, how can you prove that the defendant had the necessary specific intent to monopolize, in order to satisfy the second part of the Spectrum Sports attempted monopolization test?
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4
Look at the evidence presented to support part one of the test (unfair or predatory tactics.) The defendant's conduct may be sufficient to circumstantially prove the necessary intent to monopolize, if the conduct appears to indicate "something more than an intent to compete vigorously." Spectrum Sports, pp. 892.
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Test - Attempted Mon. - Pt. 3
1
How do you determine if the defendant's actions have given it a dangerous probability of achieving monopoly power, as required by part 3 of the Spectrum Sports attempted monopolization test?
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4
The mere existance of unfair and/or predatory tactics, and the requisite intent to monopolize, are not alone sufficient to make a defendant guilty of attempted monopolization. There must also be an independent demonstration that the defendant has achieved a dangerous probability of monopolization.
To make this demonstration, consider the relevant product and geographic market (ie the market definition), and the defendant's economic power in that market. In order to satisfy step three of the test, there must be "a realistic probability that the defendant[] could achieve monopoly power in that market." Spectrum Sports, pp. 892.
Remember that monopoly power is defined as a significant degree of market power, which in turn is defined as a business's ability to control price and restrict competition.
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Clayton Act s. 3
4
Tying Test
1
What is the test for tying which violates section 3 of the Clayton Act, as given in the "Kodak" case?
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2
1) The products must be distinct.
2) D. must have tied sale of the products.
3) D. must posess appreciable market power in the market for the tied product, such that he can "force a purchaser to do something that he would not do in a competitive market"; ie the ability to have a not insignificant effect in the market for the tied product.
Note that the market power required for step 3 may be presumed if D. posesses a predominant share of the market for the tying product, but could exist even if he does not.
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Exclusive Dealing
1
How do you determine if an exclusive dealing contract violates s.3 of the Clayton Act?
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2
"The qualifying clause of s.3 is satisfied by proof that competition has been foreclosed in a substantial share of the line of commerce affected." "Standard Oil" (pp. 781 CB).
Note that this is NOT the rule of reason; D. can NOT explain away his acts by using a business necessity argument.
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Exclusive Dealing
1
What is the specific analysis to be used to see if an exclusive dealing contract violates section 3 of the Clayton Act?
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4
1) Determine the line of commerce involved. (aka Product Market)
2) Determine the area of effective competition - the market area in which the seller operates, and the area in which the buyer can turn for supplies. (in other words, figure out the geographic market.)
3) Determine if the competition which the contract forecloses is a substantial share of the relevant market. That is, the opportunities for other traders to enter (entry barriers) or stay in the market must be significantly limited.
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Enabling Language of s.3
1
How does the enabling language of s.3 of the Clayton Act differ from that of s.1 of the Sherman Act?
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2
The enabling language of s.3 of the Clayton Act (Condition, Agreement, or Understanding) is broader than that of s.1 of the Sherman Act (Contract, Combination, or Conspiracy). This means that s.3 can apply in situations where s.1 does not apply. In particular, the "Colgate" doctrine does not work with s.3.
