Antitrust 1 Prof. E. Fox Fall 2004 1 I. Introduction to Antitrust Law 4 a. General Background 4

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Market Definition – Modern View

  1. Cellophane Test

  • First – reasonably interchangeable products (substitutability at current prices) should be included in the first-cut market hypothesis (outer limit of a market)

  • Second – cross-elasticity at current prices is similarly helpful; reveals dynamics of market competition given Δ’s price

  • Third – is Δ’s price a monopoly price?

  • Direct evidence of supra-competitive profits from a distinctive product

  • Evidence of an elevated return on investment compared to an industry benchmark w/similar characteristics including capital investment and risk

  • Evidence that Δ’s prices rose after a competition force was removed

  • Fourth – possible consideration today may be the pace of technological change (Microsoft)
      1. Eastman Kodak v. Image Technical Services (1992)

  • Is it possible to have a single-brand market?

  • Relevant market is determined by looking at the choices available to consumers; single-brand market is possible b/c evidence showed that Δ could exploit buyers in the aftermarket

  • Sophisticated vs. unsophisticated buyers – preoccupation w/the latter in Kodak

  • Single-brand markets are uncommon in antitrust; inferred in Kodak

  • Use of monopoly power in one market to gain competitive advantage in another is a violation of §2 even if there has been no attempt to monopolize the second market

  • Note: firms that reap competitive rewards attributable to efficiencies d/n violate Sherman Act §2

  • Scalia dissent – holder of a single-brand may not have power in the inter-brand market, every brand-holder for durable goods w/distinctive parts arguably has intra-brand market power in the aftermarket

  • Note: this case came on a Motion for Summary Judgment; Scalia posits that Kodak d/n have power to exploit the market in theory; however, there was evidence of actual exploitation, which is often considered as an indication of a market!

  • Fall of the Kodak Aftermarket Doctrine  see article

  • π has burden of proof that primary market competition d/n check aftermarket monopolization
      1. U.S. v. Microsoft (D.C.Cir. 2001)

  • Product Market – Intel-based PC operating systems

  • Excluded Apple (MacOS), and non-PC based competitors (handheld devices, etc.) b/c evidence suggested that there was very little price elasticity b/t them

  • Excluded middleware (Java) as a potential competitor b/c its effects on the market would not be reasonably foreseeable in a short period of time (2 years according to Merger Guidelines)

  • Finds no contradiction is excluding middleware even though it forms the basis of π’s §2 charge (suppress middleware as a threat to OS monopoly) b/c market definition and anticompetitive conduct are separate analyses

  • High and stable market share is evidence of monopoly power – over 90% for long period or time; concedes that market share can be misleading; also look at structural barriers

  • Barriers to entry – applications programming – 1) most consumers want OS w/large number of applications; 2) most programmers write for OS that has substantial consumer base

  • High hurdle to overcome

  • Who bears costs of barriers? – MS argued that such costs are borne by all participants, not just new entrants (cost of convincing software writers and evangelizing) – irrelevant

  • High market share—low profitability might suggest lack of monopoly power

  • Alternative definition offered by MS – that monopoly power should be proven by direct evidence (conduct)  rejected b/c structural approach is capable of fulfilling its purpose in new economy

  • Investment into sunk costs, i.e., R&D, and sub-monopolist pricing is equivocal!

  • Exclusionary conduct could only be rational w/knowledge of monopoly power

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