“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. Grinnell Corp. 384 U.S. 563, 570-571 (1966)

Predatory pricingPredatory pricing

Simple storySimple story: : Large firm cuts prices drives smaller firms Large firm cuts prices drives smaller firms

from market then raises prices to monopoly from market then raises prices to monopoly levels levels

McGee (McGee (Journal of Law and EconomicsJournal of Law and Economics) -) -re-examines Standard Oil case. Predatory re-examines Standard Oil case. Predatory pricing is not rational. Why engage in pricing is not rational. Why engage in predation when merger is cheaper. predation when merger is cheaper.

More recent literature suggests thatMore recent literature suggests that::

McGee assumes merger to monopoly is legalMcGee assumes merger to monopoly is legal

predatory pricing may reduce sales price if predatory pricing may reduce sales price if ultimately mergeultimately merge

Predation may be for demonstration effectPredation may be for demonstration effect

Predation requires Predation requires (necessary conditions):(necessary conditions):

Initial Market powerInitial Market power

Low Barriers to ExitLow Barriers to Exit

High barriers to entryHigh barriers to entry

Predation – the demonstration effect or “I’ll Predation – the demonstration effect or “I’ll Teach that SOB a lessonTeach that SOB a lesson

FOB

Price

Pricing of Concrete construction Blocks

Distance from plant

Predatory pricing:

1. Areeda-Turner (Harvard Law Review, 1975) a. p<mc b. p<mc up to minAC then p<ATC c. p<avc

ATCMC

D

AVC

Price

Quantity

Exclusionary practicesExclusionary practices

Willful acquisition or maintenance of that power as Willful acquisition or maintenance of that power as distinct from …distinct from …

Acts that are capable of creating, enlarging or Acts that are capable of creating, enlarging or prolonging monopoly power by impairing the prolonging monopoly power by impairing the opportunities of rivals and,opportunities of rivals and, Do not benefit customers at all (Do not benefit customers at all (Naked ExclusionNaked Exclusion), ),

or are unnecessary to achieve specific customer or are unnecessary to achieve specific customer benefits, or produce harms disproportionate to benefits, or produce harms disproportionate to resulting benefitsresulting benefits• H. Hovenkamp H. Hovenkamp Antitrust LawAntitrust Law

Exclusionary practices (cont.)Exclusionary practices (cont.)

Conduct , other than competition on its Conduct , other than competition on its merits (Areeda and Turner)merits (Areeda and Turner)

Conduct capable of excluding an equally Conduct capable of excluding an equally efficient rival (Posner)efficient rival (Posner)

The Boundaries of ExclusionThe Boundaries of Exclusion

“…“…to be condemned as exclusionary, a to be condemned as exclusionary, a monopolist’s act must have an monopolist’s act must have an ‘anticompetitive effect.’ That is, it must ‘anticompetitive effect.’ That is, it must harm the competitive process and thereby harm the competitive process and thereby harm consumers. In contrast, harm to one harm consumers. In contrast, harm to one or more competitors will not suffice…”or more competitors will not suffice…” MicrosoftMicrosoft, 253 F3d at 58-59 , 253 F3d at 58-59

Supplier Discrimination Supplier Discrimination and Retail Competitionand Retail Competition

Penn tennis balls

Conway Drugs Walmart

P = $1.00/can

P = $1.75/can

P= $2.00/can

P= aaargh!

Willful maintenance or acquisitionWillful maintenance or acquisition Aspen Skiing (1985)Aspen Skiing (1985)

No general duty to deal, but Duty to Deal exception No general duty to deal, but Duty to Deal exception

US v. AT&T (1978)US v. AT&T (1978)

Bell

Long Lines MCI

1. Refusal to deal2. Price discrimination3. Sabotage

customer

LePage’s Inc. v. 3M (2003)LePage’s Inc. v. 3M (2003)

Scotch tape

A B C D E

PrivateLabel

3M: Partnership Growth FundDiscounts if customer buys all product lines

Suppose $5,000 per line. If buy all, then discount is $3000. Suppose you are private label

Discounts:Walmart $1.5mKmart $926kSam’s $667kTarget $482k

Cheap ExclusionCheap Exclusion

Cheap, as in “inexpensive”Cheap, as in “inexpensive”

Cheap, as in “having no redeeming value” Cheap, as in “having no redeeming value” (no cognizable efficiency gains)(no cognizable efficiency gains)

Examples:Examples: ““helpfully” rearrange product displayshelpfully” rearrange product displays Frivolous patent infringement claimsFrivolous patent infringement claims Abuse of the standard setting processAbuse of the standard setting process

Raising Rivals’ CostsRaising Rivals’ Costs

GM Ford Chrysler

UAW

K

L

GM

Ford

Chrysler

The importance of corporate and The importance of corporate and management statementsmanagement statements

MicrosoftMicrosoft Choke of air supplyChoke of air supply

Whole FoodsWhole Foods

KCI v. Hill-ROMKCI v. Hill-ROM Hill-Rom makes standard and specialty bedsHill-Rom makes standard and specialty beds

DALLAS - The chief executive of Whole Foods Market Inc. told his board that if it bought its leading rival, the company would “eliminate forever” the possibility that anyone else could create a nationwide competitor in the natural and organic grocery business, government lawyers say.

Chairman and CEO John Mackey also said that buying Wild Oats Markets Inc. would let Whole Foods “avoid nasty price wars” in several cities where the two compete, the lawyers wrote in a court document unsealed on Tuesday.

Whole Foods

P-288P-288 1717

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?

Nelson Baughman, HR Vice President:

Hill-Rom Intends To Destroy Competition

P-001P-001 1818

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.

Hill-Rom Intends To Destroy Competition

Hill-Rom executive speech

P-288P-288 1919

Hill-Rom’s Gus Hillenbrand

9/19/2002Hillenbrand Cross Examination

Q. Did you use the market power of Hill-Rom to attempt toobtain a hundred percent market share?A. Yes.Q. And you saw documents from your sales staff that talkedabout eliminating KCI, torturing KCI, killing KCI, doing awaywith KCI. You saw those things, didn't you?A. I saw those.Q. And you never sent out a directive saying, hey, we want totreat them fair, we want to play fair, did you?A. Never did.

Trial Transcript: Page 3950:12-21