Transcript Folie 1
Georgetown University
Potato Cartel
Why
did Merrill Hanny bury $100,000
worth of Potatoes?
Potato Farmers Mash Supply
Source: United Potato Growers of America, August 2009
“The offense of monopoly under Section 2 of
the Sherman Act has two elements: (1) the
possession of monopoly power in the relevant
market and (2) the willful acquisition or
maintenance of that power as distinct from
growth or development as a consequence of a
superior product, business acumen or
historical accident”
United States v. Grinell Corp. 384 U.S. 563,
570-571 (1966)
Definition of monopoly power
1. The ability to control prices and exclude competitors
2. The ability to raise prices above marginal
cost (competitive levels) without losing so
many sales so rapidly that the price increase
must be rescinded
Monopoly power is “analog” not digital
Significant and insignificant monopoly power
Lerner Index
L = (p-mc)/p
L= 1/η , where η is the (absolute value of
the) firm-level price elasticity of demand.
0≤L<1
Measuring Market Power
The Dominant Firm Model:
a. Assumes a single “dominant” firm facing a
competitive “fringe”
b. The dominant firm calls out a price
c. The competitive fringe responds
as a price taker setting its output
The Dominant Firm-Competitive Fringe Model
P
S=Σmc
d=D-S
d
P1
mc
D
mr
Qd
Q
Market Power Determinants
L = S/[ηm + (1-S)ef]
1. Market share (S)
2. Elasticity of Market demand (ηm)
3. Elasticity of Supply of the fringe
firms (ef)
Suppose S=.4, ηm = 2, and ef = 1, What is the value of the Lerner Index?
Market definition
Market -A geographic area and a set of products
within which price is determined
IF a relevant market then set of firms and
geographic area that DOES determine price
Firms/areas that do affect price are
included
Importance of market definition
a. Microsoft (operating systems, software)
b. Coca-Cola – Dr. Pepper, Pepsi -7-up mergers
Market Definition Exercise – Begin with a small geographic
and product market and ask:
Could a hypothetical monopolist within the proposed relevant
market raise price by a small but significant and nontransitory
amount?
If “yes” then found relevant market. If “no” then broaden
proposed market and re-run exercise
a. demand side product substitutability
b. demand-side geographic substitutability
c. supply-side product substitutability
d. supply-side geographic substitutability
Willful maintenance or acquisition
US v. AT&T (1978)
Aspen Skiing (1985)
Long Lines
Bell
MCI
1. Refusal to deal
2. Price discrimination
3. Sabotage
customer
Aspen Skiing Co. v. Aspen Highlands
Colorado
1962 – ASC and Highlands begin
joint lift tickets
1978 – ASC announces it would not
Participate unless revenues split was
Adjusted to 87.5 for ASC (had
Previously divided based on usage.
ASC had 85 % of traffic)
Issues:
1. Duty to Deal
2. Market definition
No joint ticket in 78-79 but Highlands
offers Adventure Pack (3 days at
Highlands and coupòns for 3 days
at ASC facilities
ASC refused coupons
Predatory pricing
Simple story: Large firm cuts prices drives smaller firms from
market then raises prices to monopoly levels
McGee (Journal of Law and Economics) -re-examines
Standard Oil case. Predatory pricing is not rational. Why
engage in predation when merger is cheaper.
More recent literature suggests that:
1. predatory pricing may reduce sales price if ultimately merge
2. Predation may be for demonstration effect
3. McGee assumes merger to monopoly is legal
Predation requires (necessary conditions):
1. Initial Market power
2. Low Barriers to Exit
3. High barriers to entry
Predatory pricing:
1. Areeda-Turner (Harvard Law Review, 1975)
a. p<mc
b. p<mc up to minAC then p<ATC
c. p<avc
Price
MC
ATC
AVC
D
Quantity
Baumol analysis of predation
A sound predation concept is built on 3
principles:
The price-practice must have no legitimate business
purpose
It must threaten the existence of equally efficient firms
Recoupment of foregone profits is feasible
Threats to equally efficient rivals turn on AVC, so
P < AVC test is appropriate
Predation – the demonstration effect or “I’ll
Teach that SOB a lesson”
Price
FOB
Pricing of Concrete construction Blocks
Distance from plant
The importance of corporate and
management statements
Microsoft
Whole Foods Wild Oats merger
Choke of air supply
John MacKay (CEO of Whole Foods)
merger will “eliminate forever” the possibility that anyone else
could create a nationwide competitor in the natural and organic
grocery business
buying Wild Oats Markets Inc. would let Whole Foods “avoid
nasty price wars” in several cities where the two compete
KCI v. Hill-ROM
Hill-Rom makes standard and specialty beds
Hill-Rom Intends To Destroy Competition
Nelson
Baughman,
HR Vice
President:
Cut ‘em off at the knees and watch them bleed …
Competitively, idle words or a real threat? I promise
you I consider these words a threat to all who propose
to compete against Hill-Rom. Do you?
How sharp is your machete?
P-288
19
Hill-Rom Intends To Destroy Competition
Hill-Rom executive speech
We have to work together to win in our markets and do
away with KCI.
This is a job we are going to get done, and we’re going
to get it done together. If anyone doesn’t want to do it
that way, there’s a bus waiting outside, and you can get
the hell out now.
P-001
20
Hill-Rom’s Gus Hillenbrand
9/19/2002
Hillenbrand Cross Examination
Q. Did you use the market power of Hill-Rom to attempt to
obtain a hundred percent market share?
A. Yes.
Q. And you saw documents from your sales staff that talked
about eliminating KCI, torturing KCI, killing KCI, doing away
with KCI. You saw those things, didn't you?
A. I saw those.
Q. And you never sent out a directive saying, hey, we want to
treat them fair, we want to play fair, did you?
A. Never did.
P-288
21
Trial Transcript: Page 3950:12-21