ANTITRUSTSPRING 2007: INFORMATION MEMO #3
Contents:
(A) §2 Conduct Requirement: Predation
(B) Tying
(A) §2 Conduct Requirement: Predation
I.Overview of Predation & Predatory Pricing
A. Predation is conduct by a monopolist that involves incurring short term losses intending to
1.drive out or deter a potential competitor AND
2.subsequently recoup the losses by earning monopoly profits
B. Thus, predatory pricing is keeping prices artificially low to drive competitors out of market, intending to reap high profits with monopoly prices afterward
C.Unclear empirically how often happens; most plausible for multi-market players
D. Concerns with aggressive attacks on monopolist prices that appear predatory:
1.We don't want to discourage low prices
2. Theoretical argument: Unlikely b/c very risky strategy
a. High Entry Barriers: rival will stay long time
b. Low barriers: rivals come back as soon as raise prices to monopoly level
3. Failed predatory pricing strategy helps consumers (cf. failed cartel)
II.Supreme Court on Predatory Pricing
A. No §2 cases, so info from horizontal conspiracy cases:
1.Matsushita: Alleged agreement by Japanese electronics firms to drive out American firms
2. Brown & Williamson: Alleged use of predatory pricing as cartel enforcement mechanism
B.Generally
1. Language in these cases suggests gen’l applicability to all predatory pricing claims
2. Court displays skepticism about likelihood, but willing to allow claim if enough evidence
3.Two Necessary Elements
a.Price below appropriate measure of cost
b.Dangerous probability of recoupment
C.Price below appropriate measure of cost
1. SCt hasn’t specified
2. E.g., “Areeda/Turner Test”: below AVC pricing only
3. Leaves open what to do about “limit pricing”
a. above marginal cost, but below monopoly profit-max
b. low enough to scare off most likely entrant
D. Dangerous probability of recoupment (from Brown & Williamson)
1.w/o recoupment, aggregate benefit to consumers.
2. must show capable of having effect on intended target
3. then show objective evidence of likely rise in prices sufficient to recoup
a. evidence of actual supra-competitive prices in market –OR-
b. market evidence that conduct likely to have led to monopoly/oligopoly pricing
4.subjective belief insufficient b/c without recoupment, consumers not harmed.
III. Predation Beside Predatory Pricing
A. Alcoa: Predatory Expansion
B. Exclusion Cases Sometimes Seem to Require Predation for Liability
1. Aspen/Trinko
2. Predatory Hiring
C. Photovest v. Fotomat (7th Cir. 1979)
1. Fotomat directly owned & franchised kiosk photofinishing services
2. Photovest Corp. set up to run Fotomat franchises; gets contract for 15.
3. Fotomat decided to eliminate own franchises b/c discovered co. kiosks more profitable than franchises
4. Among conduct held to violate §2: predatory placement of new kiosks, which meant
a. F flooded market w co. kiosks to reduce value of franchises so F could buy back.
b. F placed 14 kiosks in P’s city; more than 1/2 on overlapping sites
c. Evidence that new kiosks operating at below break-even point
D.Last word: Weyerhaeuser (U.S. 2007): Predatory Bidding claim
1.D runs sawmills & has dominant market position in region
2.Claim: predatory bidding
a. using monopsony power to drive up prices of logs above what competitors could afford
b. predatory b/c losing money in short run by paying too much with intent to recoup when competitors gone
3.Court says analytically like predatory pricing, so Brown & Williamson standards apply
(B) TYING
I. OVERVIEW
A.DEFINITIONS
1.Producer sells product only to those who agree to buy 2d product. (E.g. can only buy can-closing machines if also buy cans from same mfr.
2.Desired product (can-closing machine) is "tying" product
3.Forced products (cans) are "tied" product
B.RELEVANT STATUTES
1. Clayton Act §3:
a.Limited to goods (not services)
b.Conduct only violates act if “the effect … may be to substantially lessen competition or tend to create a monopoly in any line of commerce.”
2.Sherman Act §1:
a.Only thing available for ties between services or goods/services
b.SCt has read ShAct§1 to have same standards as ClAct§3
c.issue whether coerced tying agreement = §1 concerted action
i) Circuits say yes
ii) E.g., Systemcare (10th 1997)
C.BUSINESS JUSTIFICATIONS FOR TYING
1.attain monopoly/increase market share in tied product
2.more favorable joint pricing of products
3.price discrimination (charge more to those who use more)
a.counting device (hard to do without tie)
b.Note debate re whether price discrimination is bad
c.If in context where horizontal producer cartel seems possible, industry wide-use could indicate horizontal agreement
4.Achieve efficiencies
a.packaging in bundles
b.force dealers to put full line before public
5.quality control: tying service/parts/complementary prods
a.insures successful operation of product
b.creates consumer goodwill
II.ECONOMIC ANALYSIS OF TYING
A.Traditional Arguments Against
1.Attempt to spread monopoly from 1 market to another
a.harms competition in market for tied product
b. competitors lose opportunities for customers
c.“leverage”
2.limits buyers’ freedom of choice
B.Chicago Critique
1.fixed sum: can get only so much leverage out of monopoly
a.doesn't matter where you take it.
b.no possible harm if 2 products used in fixed proportions
2.most ties benign/pro-competitive
3.if there is monopoly, should attack it directly
C.Responses to Chicago
1.fixed sum is static analysis; over time may lead to loss in comp:
a.discourage innovation
bdiscourage entry (have to come in at 2 levels)
2.Concerns with counting justification
a.can use less restrictive alternatives (metering)
b.must have market power to do price discrimination.
3.Concerns with “just attack the monopoly directly”
a.breaking up monopoly complex and expensive
b.maybe better to permit monopoly; control behavior
4.Alternative Managerial motivations
a.people believe they can “leverage” even if they can't
b.sales & growth maximization (cf. mergers)
III. EARLY TYING CASES:
A. International Salt (1947): patented salting machines tied to sale of salt
1.Gov’t suit under ShAct1 & ClAct3
a.DCt: Summary Judgment for Govt.
b.D claim: need trial on either:
i) “unreasonable” (ShAct1) OR
ii) “tends to create monopoly/lessen competition” (ClAct3)
2.SCt says NO.
a.Unreasonable per se to foreclose competitors from a substantial market
b.tendency to monopoly "obvious"
c.immaterial that tendency "is a creeping one rather than one that proceeds at full gallop; nor does the law await the arrival of the goal before condemning the direction of the movement."
3.Court rejects proposed defenses
a.D will meet price, so consumers not harmed?
i) competitors have to beat IS salt prices to sell = restraint of trade
b. quality control defense: keeps impurities out
i) Can require specs instead:
ii) “It is not pleaded, nor is it argued, that the machine is allergic to salt of equal quality produced by anyone except International."
B.Northern Pacific Ry. (1958)
1.RR owned lots of land. In lease/sale provisions:
a.require grantee/lessee to ship over its lines all commodities produced or manufactured on lands
b.guaranteed rates as low as competing carriers.
2.SCt: tying arrangements per se illegal
a.pernicious effect on comp; lack of any redeeming value
b.Denies competitors free access to customers
c.Buyers forced to forego free choice among competing products.
3.Two Requirements for Per Se
a. sufficient economic power in tying product to appreciably restrain free competition for tied product; no monopoly/market dominance necessary
b.not insubstantial amount of interstate commerce affected.
4.Northern Pacific contains famous stmt of per se illegality:
a.price fixing, boycotts, tying are per se
b.because little redeeming value, avoid costly Rule of Reason inquiry
C.Leaves 3 issues as basic structure of tying law
1.2 products: (i.e., not left and right shoes)
2.Economic power in tying product
3.Substantial commerce in tied product affected
a.Fortner (1969) makes this insignificant
b.look at $ value, not % of market
c.$190,000 = substantial, so effectively no bottom limit
IV. POST-KODAK CASELAW
A.Many claims re franchises (Dairy Queen; Jiffy-Lube, etc.)
1.Nature of claims:
a.franchisee must use specific product brands to get franchise
b.big investment in franchise arguably locks in franchisee as in Kodak
2.Cases split
a.some cts: Kodak doesn’t apply once franchise agreement signed. E.g., QueenCity (3d Cir 1997): Franchisees purchase tied products because bound by contract, not forced by market power
b.other cts: more expensive than switching costs at issue in Kodak, so can force franchisee to buy fungible stuff from manufacturer at market or above-market price
c. distinctions from Kodak:
i) franchisee effectively acting as dealers of common product
ii) franchisee not consumer; market can discipline bad ties
B.Kodak distinguished where purchasers know of policy in advance
1.Several Circuits & S.D. Fla (E.g., Honeywell (6th Cir. 1997))
2. Facts similar to Kodak except policy in place before all sales
3.Can’t succeed on Kodak claim w/o market power in product market unless tie is change in policy or policy hidden
C.Kodak on remand
1.9/95 jury verdict for Ps: $23.9million (trebled)
2.9th Cir largely affirms in 1997
a.about ½ of verdict affirmed; most of rest remanded
b.affirms market definition put forward by ISO’s
c.affirms jury finding of monopoly power
d.§2 violation for refusal to deal
i) rejects claim that monopolist only liable for refusal to deal if it denies access to essential input
ii) violation if w/o business justification
A) here: Kodak claimed protecting patents in parts
B) possible defense but here only 65 of 1000s of parts patented
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