Regulation of Monopoly Under The Sherman Act

Regulation of Monopoly
under the Sherman Act

Prof. S. P. Srivastava
Background
 Large companies, or any company that occupies a
large portion of any market segment, can thwart
competition through the exercise of monopoly
power. Indeed, monopoly means the lack of
competition, or at least of effective competition
 Monopoly power can harm society by making
output lower, prices higher, and innovation less
than would be the case in a competitive market.
 The possession of monopoly power is an element of
the monopolization offense and the dangerous
probability of obtaining monopoly power is an
element of the attempted monopolization offense.
 Mere possession of monopoly power does not
violate section 2.
Structure and Scope of Section 2
 Section 2 of the Sherman Act makes it unlawful
for any person to "monopolize, or attempt to
monopolize, or combine or conspire with any
other person or persons, to monopolize any
part of the trade or commerce among the
several States, or with foreign nations.
 Section 2 establishes three offenses, commonly
termed "monopolization," "attempted
monopolization," and "conspiracy to
monopolize.
Definition of Monopoly
 Monopoly is “the power to control market prices or exclude
competition.”[United States v. Grinnell Corp., 384 U.S. 563,
571 (1966)].
 Anti-trust regulators define it as the ability to raise price
by 5% and keep it at that level without losing sales.
 An additional test is market share in the relevant market.
If a company has over 70% market share, it is likely
considered a monopolist. If the company has less than
50% market share, it probably is not a monopolist. If the
company has between 50% and 70% it falls in a grey zone
(and where you need to start being vigilant). Market share
alone is not definitive, but it is indicative of monopoly
power, especially when there are significant barriers to
entry into the market (capital costs, regulatory, etc.).
Evolution
 Public concern about the economic and political
power of the large trusts, which tended to become
monopolies in the late nineteenth century, led to
Section 2 of the Sherman Act in 1890 and to Section
7 of the Clayton Act in 1914.
 These statutes are not limited to the giants of
American industry.
 A far smaller company that dominates a relatively
small geographic area or that merges with another

company in an area where few others compete can
be in for trouble under Sections 2 or 7.
 Section 2 focuses on single-firm conduct, i.e., the
unilateral actions of just one company.

Monopolization
 Requirement for monopolization is both "(1)

the possession of monopoly power in the
relevant market and (2) the willful acquisition
or maintenance of that power as
distinguished from growth or development as
a consequence of a superior product,
business acumen, or historic accident.
Attempted Monopolization
 Attempted monop-olization requires proof:

"(1) that the defendant has engaged in
predatory or anticompetitive conduct with
(2) a specific intent to monopolize and
(3) a dangerous probability of achieving
monopoly power.“
 The "dangerous probability" inquiry requires
consideration of "the relevant market and the

defendant's ability to lessen or destroy
competition in that market.
Ingredients of S. 2
 The Monopoly-Power Requirement
 The Anticompetitive-Conduct Requirement
 Assaults on the Competitive Process
 Protection of Competition, Not Competitors
 Distinguishing Competitive and Exclusionary
Conduct
Monopoly good
 There is a common misperception that having a
monopoly is bad or illegal.
 The courts are quite clear that if a company
achieves a monopoly because of superior products
or business acumen, or by historical accident, it is
absolutely 100% fine.
 If Company X has obtained a patent, then it has a
government-issued monopoly and exclusive right to
sell that patented product and it may exclude all
others from doing so.
 If Company Y sells a service that is so superior to its
competitors’ products that consumers are lining up
around the block to get it, it may charge whatever it
wants for that product.
Exclusionary conduct
 the willful acquisition or maintenance of that monopoly
through the use of anti-competitive or predatory means.
 Refusals to deal (e.g., refusing to do business with a
competitor or a “disloyal” customer, especially when
there was a prior contractual relationship).
 Tying (requiring that a customer by a company product
as a condition of being able to purchase a product in
which the company has a monopoly).
 Use of Most Favored Nations(“MFN”) clauses
 Exclusive dealing contracts
 Loyalty discounts
 Denial of access to competitors
 Abuse of standard setting (especially if you have a
patent)
Continued:
 Bundled pricing
 Predatory pricing (pricing below costs)
 Product disparagement
 Abuse of government process (e.g., filing bogus
lawsuits or regulatory actions)

 General “bad” behavior (also known as “cumulate
acts” – where any one act alone would not be a

violation but taken all together they create a
Section 2 “monopoly stew” which gives the
plaintiff the ability to toss stuff on the wall and
see what sticks).
Market Power
 . "the ability to raise prices above those that would
be charged in a competitive market.
 Before subjecting a firm to possible challenge under
antitrust law for monopolization or attempted
monopolization, the power in question is generally
required to be much more than merely fleeting; that
is, it must also be durable.
 Section 2's requirement that single-firm conduct
create or maintain, or present a dangerous
probability of creating, monopoly power serves as
an important screen for evaluating single-firm
liability.
Identifying Monopoly Power
1. The firm has (or in the case of attempted

monopolization, has a dangerous probability of
attaining) a high share of a relevant market and
2. There are entry barriers--perhaps ones created
by the firm's conduct itself--that permit the
firm to exercise substantial market power for an
appreciable period.
 Mmonopoly power as "the ability '(1) to price
substantially above the competitive level and (2)
to persist in doing so for a significant period
without erosion by new entry or expansion.
Market Shares
 A market share of ninety percent "is enough to constitute
a monopoly; it is doubtful whether sixty or sixty-four
percent would be enough; and certainly thirty-three per
cent is not.[United States v. Aluminum Co. of America]
Endorsed in American Tobacco Co. v. United States.
 The Fifth Circuit observed that "monopolization is rarely
found when the defendant's share of the relevant market is

below 70%.[Exxon Corp. v. Berwick Bay Real Estates
Partners, 748 F.2d 937, 940 (5th Cir. 1984) ]
 Third Circuit stated that "a share significantly larger than
55% has been required to establish prima facie market

power” and held that a market share between seventy-five
percent and eighty percent of sales is "more than adequate
to establish a prima facie case of power.“ [United States v.
Dentsply Int'l, Inc., 399 F.3d 181, 187 (3d Cir. 2005)]
Significance of a Dominant Market Share
 Market share is only a starting point for

determining whether monopoly power exists,
and the inference of monopoly power does not
automatically follow from the possession of a
commanding market share.
 Court will draw an inference of monopoly power
only after full consideration of the relationship
between market share and other relevant
characteristics.
 Market shares "can be used to eliminate
frivolous antitrust cases.
Durability of Market Power
 Firms with dominant market shares lacked
monopoly power when their market power
was insufficiently durable.
 The sustained charging of a price above
marginal cost, maintaining . . . a price

substantially above marginal cost.
 "[A] firm cannot possess monopoly power in a
market unless that market is also protected

by significant barriers to entry.
Relevant Market
 The broader the market is in terms of available products and
geographic scope, the less likely that any company has a
monopoly in that market.
 The market is defined with regard to demand substitution, which
focuses on buyers' views of which products are acceptable

substitutes or alternatives.
 The relevant product market in a section 2 case, as elsewhere in
antitrust, "is composed of products that have reasonable

interchangeability for the purposes for which they are produced--
price, use and qualities considered.
 In merger cases, the antitrust enforcement agencies define
markets by applying the hypothetical monopolist paradigm.

 The problem with using prevailing prices to define the market in a
monopoly-maintenance case is known as the "Cellophane Fallacy"

Other factors with respect to that
market
 Direct Evidence of High Profits, Price-Cost
Margins, and Demand Elasticity.
 Direct Evidence of Anticompetitive Effects

Regulation of Monopoly Under The Sherman Act

Uploaded by

Copyright:

Available Formats

Regulation of Monopoly Under The Sherman Act

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Regulation of Monopoly Under The Sherman Act

Uploaded by

Copyright:

Available Formats

Regulation of Monopoly

under the Sherman Act

small geographic area or that merges with another

unilateral actions of just one company.

 Requirement for monopolization is both "(1)

 Attempted monop-olization requires proof:

consideration of "the relevant market and the

lawsuits or regulatory actions)

acts” – where any one act alone would not be a

1. The firm has (or in the case of attempted

found when the defendant's share of the relevant market is

55% has been required to establish prima facie market

 Market share is only a starting point for

marginal cost, maintaining . . . a price

market unless that market is also protected

focuses on buyers' views of which products are acceptable

antitrust, "is composed of products that have reasonable

markets by applying the hypothetical monopolist paradigm.

monopoly-maintenance case is known as the "Cellophane Fallacy"

You might also like