Market Power/Market Share
Market Power. Market power is the power to reduce output and raise prices above marginal cost. One could measure a firm’s market power by computing the difference between its profit-maximizing price and its marginal cost at the profit-maximizing output rate, but only in theory as those numbers aren’t available in practice.
Market Share. An alternative to complicated economic models is determining market share. The court must identify (1) a relevant product market and (2) a relevant geographic market. The court then (3) computes the defendant’s share of the market.
Relevant Product Market
Generally. A relevant product market is the smallest product market for which the elasticity of demand and supply are sufficiently low that a firm with 100% of that market could profitably reduce output and increase price substantially above the competitive level.
Cross-Elasticity of Demand. Cross-elasticity of demand is the measure of how demand for one product changes when the price for some other product goes up.
Du Pont test. (1) The extent to which the product can be used interchangeably with alleged alternatives
There are three different types of products:
Fungible (ex. Soda)
Differentiated products (ex. Cars)
Different but performs similar thing.
Completely differentiated and very little substation
and (2) the degree of cross-elasticity of demand between the defendant’s product and alleged substitutes for it.
Does the change in their price or the competitor cause the other one to change its prices?
Cellophane Fallacy. When it starts off at a monopoly price, it may go lower in price. The concept of demand cross-elasticity helps establish whether two products are close substitutes only when both are sold at competitive prices. When one product is at monopoly prices, it may show some cross-elasticity with any product.
U.S. v. E.I. du Ponte de Nemours & Co (U.S. 1956). Government charged du Pont with monopolizing an alleged cellophane market. Held, cellophane was not a separate product. Many other products had similar qualities, and it faced competition in each of its uses. Court also looked to cross-elasticity of demand between productions and customers switched to other products. (But this was probably because du Pont was already enjoying monopoly prices for cellophane.)
Diss: their competitors did not change their price as a result, clearly no price elasticity.
V 2: Is it really interchangeable?
In the national geographic area do they have a monopoly?
U.S. v. Grinnell (U.S. 1966). United States charged Grinnell with monopolizing the supply of accredited central station protective services. Held, such protective services constitute their own market. Court performs “interchangeability test” from du Pont and runs through substitute services. Watchman service is costlier and less reliable. Alarm systems are cheaper and less reliable. Proprietary systems are cost effective only for large businesses. All differ in utility, efficiency, reliability, responsiveness, and continuity. Accreditation also relevant for insurance purposes. Notably, court does not look at cross-elasticities.
U.S. v. Microsoft (CADC 2001). Held, the District Court properly excluded java and other “middleware” software that make cross-operating system programming possible from the operating system market because middleware cannot enter into the operating system market in the foreseeable future. Interchangeability test requires consideration only of “substitutes that constrain pricing in the reasonably foreseeable future, and only products that can enter the market in a relatively short time can perform this function.”
Submarkets and Brown Shoe Factors. Within a broad market, well-defined submarkets may exist. They can be determined by looking at industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.
Different lines of same item can be considered submarket market (brown shoe).
Brown Shoe v U.S. (U.S. 1962). Kinney was a shoe retailer being acquired by Brown Shoe, a shoe maker with its own line of stores. Held, court defines relevant markets as men’s, women’s, and children’s shoes. Lines are recognized by public, each line is manufactured in separate plants, each has peculiar characteristics rendering it noncompetitive with the others, and each is directed at a distinct class of customers. Price/quality differences, however, are not relevant here because companies compete across price/quality divisions.
§7 of Clayton Act:
Prohibits mergers and acquisitions where the effect “may be substantially to lessen competition, or to tend to create a monopoly.”
Defining market in merger context:
§ 7 of Clayton act:
Three types of mergers:
Horizontal mergers- two competitors merge.
Vertical mergers- a manufacturer merges with distributers. Not as bad.
But there could be foreclosures of outlets for other manufactures. Other companies wouldn’t be able to sell because don’t have distributers
Conglomerate merger- companies not in the same area that merge. Don’t really care so much.
Product extension merger- manufacture certain project and merge with company with related product.
Herfindahl- Hirschman index:
An index that allows the government to quantify the concentration in a market. You use this after you have defined a market.
Ex: market with 10 sellers and each one has 10% market share. So you take the seller’s market share and square it. So 10^2 + 10^2 etc.= 1,000
If two merge it is 10^2 + 10^2 +20^2= 1,200. So it is an increase of 200 in the herfindahl index.
If merger is more than 725 million, you need to report it to the government.
Cant merge for 60 days from when they informed govt.
Govt can make a second request for more information. Govt has 30 days from time it got info to decide if will oppose or allow the merger.
Horizontal Merger -A core group of customers can be considered a submarket (Whole Foods)
Use SSNIP i.e can a monopolist in the market raise prices a little bit (5%) how many marginal customers will I lose that the move was not beneficial, to see if those core customers would leave.
FTC v. Whole Foods Market (CADC 2008). Merger between Whole Foods and Wild Oats was challenged by FTC, which claimed there was a threat to competition in the premium natural and organic food (PNOS) supermarket market.
Hold: Court examined expert evidence analyzing a “small but significant nontransitory increase in price” (SSNIP). If you don’t lose a lot of customers, then you are in your own market. If do lose, there is cross elasticity of demand.
District court relied on testimony that a SSNIP would drive customers to regular grocers because most shop at both and cause WF a loss. But there was evidence that a core group of customers would continue to shop at PNOS stores despite a SSNIP. DC Circuit thought that Brown Shoe meant that focusing on core customers was appropriate. Evidence was bolstered by the fact that WF only really competed with regular grocers on dry foods, which was only 30% of their business.
The court focused on the fact that they sell natural food, that a core group would not leave to another grocery store, so there is a market for those organic stuff.
FTC v. Staples (DDC 1997). Staples and Office Depot attempted to merge, and the FTC sought an injunction in the district court. Held, injunction issued. The most interesting part of the opinion seemed to be product market. The FTC argued that a SSNIP in Staples-Office Depot’s prices would not cause a considerable number of Staples-Office Depot’s customers to purchase consumable office supplies from other non-superstore alternatives (e.g., Wal-Mart, Best Buy), but, on the other hand, the FTC argued that an increase in price by Staples would result in consumers turning to another office superstore, especially Office Depot, if the consumers had that option. In support of its argument, the FTC showed that where there was onl
s (typically, a “quick look” review, but possibly even per se) is appropriate. This question is adjudicated at some point before a trial on the substantive merits. For example—
Texaco v. Dagher (U.S. 2006). Courts “presumptively appl[y] rule of reason analysis, under which antitrust plaintiffs must demonstrate that a particular contract or combination is in fact unreasonable and anticompetitive before it will be found illegal.”
Cal. Dental Ass’n v. FTC (U.S. 1999). Held, quick look analysis is inappropriate. “The restraints [at issue] might plausibly be thought to have a net precompetitive effect, or possibly no effect at all on competition.” The plausibility of competing claims about the restraint ruled out use of abbreviated review, i.e. per se or quick look.
NYNEX Corp. v. Discon, Inc. (U.S. 1998). Held, per se treatment not appropriate because (1) precedent doesn’t support it, (2) complaint did not allege behavior offensive to the antitrust laws, and (3) it would discourage firms from changing suppliers, which is very procompetitive.
Professional groups get ROR
Indiana Fed. of Dentists (U.S. 1986) (wouldn’t give xrays). Held, per se treatment not appropriate because (1) per se precedent is distinguishable, (2) restraint is a professional rule, and (3) economic impact is not immediately apparent.
Northwest Wholesale Stationers v. Pacific Stationery (U.S. 1985). Held, per se treatment is not appropriate. “The mere allegation of a concerted refusal to deal does not suffice [to get per se treatment] because not all concerted refusals to deal are predominantly anticompetitive.” Purchasing coops need to sometimes expel members, like when they are uncreditworthy.
Sports competitions are usually Rule of Reason:
NCAA v. Bd. of Regents (U.S. 1984). Held, per se analysis is not appropriate because horizontal restraints on competition are essential if the product is to be available at all.
Vertical price fixing (failure to deal) is ROR
Continental T.V. v. GTE Sylvania
Horizontal price fixing- Per Se.
This list isn’t exhaustive. Generally speaking, determination of whether per se, quick look, or rule of reason review is appropriate will require examining the cases below in Section II.B and then going from there.
Ancillary versus Naked Restraints. One early distinction is between ancillary and naked restraints. “Unadorned” efforts to fix prices or allocate markets get per se treatment. On the other hand, behavior with plausible efficiency rationales gets fuller reasonableness treatment.
U.S. v. Addyston Pipe (CA6 1898) (Taft, J.). Cast iron pipe producers agreed to divide the southern and western U.S. markets among themselves into regional monopolies and instituted a system of fixed prices for each territory. They argued (1) that the agreement was meant to avoid “ruinous competition” that would bankrupt the firms and (2) prices were reasonable and therefore no one suffered an injury. Held, agreement was invalid. Where a restraint is “ancillary” to a legitimate end (e.g., the sale of a business), a subordinate restraint (e.g., covenant not to compete), the restraint is likely proper. But where the sole object of both parties is merely to restraint competition, the restraint is improper.
Professional Associations. The Court has been loathe to apply aggressive analyses (per se, quick look) to rules adopted by professional associations.