Transcript United States v. EI Du Pont De Nemours & Co (1956)

United States v. E.I. Du Pont De Nemours & Co (1956)
Basic Facts: During period 1923-47, Dupont controlled 75% of cellophane sold
in U.S., which accounted for 20% of all flexible packaging products.
Government contended Dupont had illegal monopoly.
What was issue regarding relevant market?
What factors did majority consider?
What factors did dissent rely upon?
Who would the post-Chicago analysts likely side with?
Law 552 - Antitrust - Instructor:
Dwight Drake
The Cellophane Fallacy
Theory: Firm with monopoly power will keep price just below mark that will
require mass to shift to substitute products. So cross-elasticity of demand
for a product calculated on current price only defines the outer-limit of the
monopolist’s punitive power.
SSNIP of 1992 merger guidelines requires that cross-elasticity for substitute
products be measured after “small, significant, non-transitory increase in
price”. If it results in critical mass move to substitutes, then all alternatives
are included in relevant market.
Law 552 - Antitrust - Instructor:
Dwight Drake
Eastman Kodak Co v. Image Technical Services (1992)
Basic Facts: Kodak encouraged independent ISOs to provide after-market
service and repair for its photocopying and micrographic equipment. Kodak
then decided to reclaim service business and refused to sell parts to ISOs.
ISOs sued under Sherman 1 and 2.
What was market issue before court?
Isn’t a single brand always a market unto itself?
Is there a tort or a breach of contract remedy available to ISOs? Is this relevant
to antitrust policy?
Law 552 - Antitrust - Instructor:
Dwight Drake
Microsoft: Warren-Boulton Testimony
1. Operating system compatible with x/86 Pentium PCs relevant market.
- Horizontal Merger Guidelines: price power of hypothetical monopolist.
- Fact that OS is separate product and OEMs say they would not switch if
price raised show power over this market segment.
- High cost to switch to other system.
- OS cost small share of PC cost (2.5%). Gives price power.
2. Microsoft possess monopoly power.
- Issue: Power to raise market price above competitive level or exclude
competition.
- Market share very high – over 95% OS installations.
- High barriers to entry: High scale economies and sunk costs; customers
“locked-in”, high switching costs; applications “positive feedback” barrier;
high installed applications is barrier; IBM failure.
- Exclusionary conduct: Willingness to refuse business; no regard for cost.
- High profitability, P/E ratio (twice average) and ability to raise prices
above competitive level.
Law 552 - Antitrust - Instructor:
Dwight Drake
Microsoft: Schmalensee Testimony
1.
2.
3.
4.
Monopoly claim is red herring.
Microsoft has no power over software distribution.
Two approaches to monopoly power: Structural & Behavioral.
Behavioral approach better when markets blurred – best in software
industry.
5. Microsoft constrained by past, present, future.
6. Wrong to define relevant market to exclude potential new entrants and then
to measure power by how same new entrants are excluded.
7. Merger Guidelines bad approach here. Focus only on short-run. For
software, long-term competition is of most relevance.
8. Long-term, Microsoft faces stiff competition.
9. Microsoft only 9% of U.S. software revenues. This is most relevant.
10. Monopoly power: All successful software has high market share; superior
foresight, ingenuity is reason for success; OS prices relative to PC prices
irrelevant; high net margin and PC ratios just mean profitable in short-run;
Microsoft does not raise prices higher because competition exists.
Law 552 - Antitrust - Instructor:
Dwight Drake
U.S. v Microsoft (D.C. Cir. 2001) – Market Power
1. What was relevant market? Did it include MAC OS?
2. What was Microsoft’s “contradictory” argument regarding potential market
threats?
3. How did the court treat the “uniquely dynamic” software argument?
4. What was Court’s view of short-term vs. long-term in defining the relevant
market?
Law 552 - Antitrust - Instructor:
Dwight Drake