Vertical Restraints Randal C Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright 200019 Randal C Picker All Rights Reserved ID: 757479
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Class 10Antitrust Fall 2020Monopolization under Sec. 2
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
The Law School
The University of Chicago
Copyright © 2000-20 Randal C. Picker. All Rights Reserved.Slide2
October 12, 2020
2
Sherman Act Sec. 1
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.Slide3
October 12, 2020
3
Sherman Act Sec. 2
Every person who shall 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, shall be deemed guilty of a felony,Slide4
October 12, 2020
4
Sherman Act Sec. 2
and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.Slide5
SA1 v. SA2Hypo 1Eight competitors, each with 10% of the relevant market, form a cartelThey agree on a price for the product of $7
Is this a violation of SA1?
October 12, 2020
5
TTYN (1 of 2
)Slide6
SA1 v. SA2Hypo 2A single firm has 80% of the relevant market (and has achieved that position via wholly legitimate means)
It sets a price for the product of $7
Is this a violation of SA2? Should hypo 1 and hypo 2 be treated the same?
October 12, 20206
TTYN
(2
of 2
)Slide7
What Does the Start of a Monopoly Look Like?
October 12, 2020
7
Hall Patent (2 Apr 1889
)Slide8
Or Here?
October 12, 2020
8
Bradley Patent (2 Feb 1892
)Slide9
October 12, 2020
9
Key Facts: Patents
4-2-1889: Hall receives patent for process eliminating oxygen from aluminum; assigns patent to Alcoa
2-2-1892: Bradley improves smelting of aluminum and gets patent
10-31-1903: Bradley patent assignee and Alcoa strike deal giving Alcoa an exclusive license under the patentSlide10
October 12, 2020
10
Key Facts: Patents
4-2-1906: Hall patent expires
2-2-1909: Bradley patent expiresSlide11
U.S. Suit Against Alcoa
October 12, 2020
11
New York Times (
17 May 1912)Slide12
What Has Alcoa Done? What is Legal? Illegal?
October 12, 2020
12
New York Times (
17 May 1912)Slide13
Market Position of Alcoa
October 12, 2020
13
New York Times (
17 May 1912)Slide14
Violations
October 12, 2020
14
New York Times (
17 May 1912)Slide15
Analysis of Trust Decrees
October 12, 2020
15
New York Times (
19 May 1912)Slide16
Dissolution of Standard Oil: Just Distribute Sub Shares
October 12, 2020
16
New York Times (
19 May 1912)Slide17
Tobacco Trust: Split Into 3 Firms; Distribute Shares; Allow Common Share Ownership
October 12, 2020
17
New York Times (
19 May 1912)Slide18
The Powder Trust: Replay of Tobacco Trust
October 12, 2020
18
New York Times (
19 May 1912)Slide19
And What of Alcoa?
October 12, 2020
19
New York Times (
19 May 1912)Slide20
Electric Lamp Trust (and One More Coming)
October 12, 2020
20
New York Times (
19 May 1912)Slide21
October 12, 2020
21
New York
Times (24
Apr
1937)
U.S. Brings Suit Against AlcoaSlide22
United States v Aluminum Co. of
America, 148
F.2d 416 (2d Cir. 1945)
October 12, 202022Slide23
October 12, 2020
23
Alcoa (2d Cir. 1945)
Procedural Posture
6-1-38 to 8-14-40: Trial in district court for more than 2 years
10-9-41: Oral opinion
7-14-42: Written opinion
7-23-42: Dismissed the case
6-12-44: Sup Ct referred case to special 2
nd
Cir panel (No quorum of justices possible)Slide24
October 12, 2020
24
Key Facts: Contracts and Facilities
Contracts
Exclusive contracts starting in 1895
Cartels with foreign manufacturers
Resulted in antitrust action and consent decree barring these on 6-7-1912Slide25
October 12, 2020
25
Key Facts: Contracts and Facilities
Facilities
1903: Builds large East St. Louis plant after expiration of dominant patent
1939: Builds Mobile, Alabama plantSlide26
October 12, 2020
26
Market Share and Practices
Market Definition: Virgin v. Secondary Ingot & Ingot v. Fabrication
Virgin Ingot
1912: 91%
1913: 72%
1921: 68%
1922: 72%
1934-38: > 90%Slide27
October 12, 2020
27
Market Share and Practices
Virgin and Secondary
Roughly 64%
Virgin and Secondary (excluding Ingot Used in Fabrication)
1929-1938: 33%Slide28
October 12, 2020
28
Market Share and Practices
Assessing Monopoly
90%: Yes
60 to 64%: Doubtful
33%: NoSlide29
Aluminum
Stats
, 1900-1920
October 12, 202029
U.S. Geological SurveySlide30
Aluminum
Stats
, 1920-1945
October 12, 202030
U.S. Geological SurveySlide31
October 12, 2020
31
Alcoa (2
nd
Cir. 1945)
Does Alcoa Violate SA 2
? The Gov’t Says Yes
“
It is undisputed that throughout this period “Alcoa”
continued to be the single producer of “virgin” ingot in the United States
; and the plaintiff argues that this
without more was enough to make it an unlawful monopoly
.”Slide32
October 12, 2020
32
Linking the Virgin and Secondary Markets
Key Questions
How should the monopolist take into account the secondary market?
How should purchasers take into account the secondary market?Slide33
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33
Linking the Virgin and Secondary Markets
“
Indeed,
it may be thought a paradox to say that anyone has the monopoly of a market in which at all times he must meet a competition that limits his price. We shall show that it is not
.”
Alcoa (2
nd
Cir. 1945)Slide34
October 12, 2020
34
Linking the Virgin and Secondary Markets
“In the case of a
monopoly of any commodity which does not disappear in use
and which can be salvaged, the
supply
seeking sale at any moment will be made up of
two components
: (1) the part which the putative monopolist can immediately produce and sell and (2) the part which has been, or can be, reclaimed out of what he has produced and sold in the
past.”
Alcoa (2
nd
Cir. 1945)Slide35
October 12, 2020
35
Linking the Virgin and Secondary Markets
“By hypothesis he presently controls the first of these components; the second he has controlled in the past, although he no longer does.
During the period when he did control the second, if he was aware of his interest, he was guided, not alone by its effect at that time upon the market, but by his knowledge that some part of it was likely to be reclaimed and seek the future market
.”
Alcoa (2
nd
Cir. 1945)Slide36
October 12, 2020
36
Linking the Virgin and Secondary Markets
“The
competition of “secondary” must therefore be disregarded
, as soon as we consider the position of “Alcoa” over a period of years; it was as much within “Alcoa’s” control as was the production of the “virgin” from which it had been derived.”
Alcoa (2
nd
Cir. 1945)Slide37
The Durable Monopoly ProblemQuestionIf you knew that you would be competing tomorrow with the good that you were selling today, how would that influence your choices today?
Would you sell less today knowing that, more today, or would it not matter at all?
October 12, 2020
37Slide38
Coase Conjecture
October 12, 2020
38
15 J. Law & Econ. 143 (1972)
“Assume that a supplier owns the total stock of a completely durable good. At what price will he sell it? … The demand schedule facing the original landowner would be infinitely elastic at the competitive price and this even though he was the sole supplier.
With complete durability, the price becomes independent of the number of suppliers and is thus always equal to the competitive price
.”Slide39
And the Fancy Version
October 12, 2020
39
39 Econ. Theory 155 (1986)Slide40
Monopoly and the Coase ConjectureFraming the SituationProduct monopolistConsumersEach consumer wants one unit of the product
Product lasts forever
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40
TTYN (1 of 3)Slide41
Monopoly and the Coase ConjectureTwo ConsumersHigh type values the product at $10Low type values the product at $4
The Monopolist’s Strategy: A Two-Period Strategy
Set period 1 price at $10, sell to high type
High type leaves marketOctober 12, 202041
TTYN (2 of 3)Slide42
Monopoly and the Coase ConjectureThe Monopolist’s Strategy: A Two-Period StrategySet period 2 price at $4, sell to low typeExhausts the market
Is this what we should expect to happen? Is this an equilibrium?
October 12, 2020
42
TTYN (3 of 3)Slide43
Monopoly and the Coase ConjectureReturns to MonopolistAssume marginal cost = $2
Payoff to Monopolist
+
October 12, 202043
Profits from 1
st
Period Sale to High-Value Consumer
Discounted profits via interest rate r from 2
nd
Period Sale to Low-Value ConsumerSlide44
Monopoly and the Coase ConjectureShould the High-Type Consumer Wait?If the high-type consumer knows that the price of the good will drop from 10 to 4 in the second period, should he buy in the first period or wait to buy in the second period?
October 12, 2020
44Slide45
Monopoly and the Coase ConjectureCompare the Possible Results for the High-Type Consumer
10-10 = 0
vs
October 12, 202045
If purchases in period 1, pays full price and nets nothing
Buys at lower period 2 price, nets 6, discounted by interest rate r
The equation on the right exceeds 0Slide46
Monopoly and the Coase ConjectureThe Monopolist’s Strategy is Not an EquilibriumThe monopolist set a path of prices designed to extract the full value from the two different consumersThe monopolist did that by setting a high first-period price and then dropped the price in the second period.
October 12, 2020
46Slide47
Monopoly and the Coase ConjectureBut the high-type consumer would instead wait to buy in the second period, since the monopolist’s first-period price takes all of the net value from the high-type consumerKey Point
The monopolist’s prices at time 1 compete with the prices at time 2
October 12, 2020
47Slide48
October 12, 2020
48
Monopoly and the Coase Conjecture
In the limit, M can’t exercise monop powerTirole (1988, p. 83): “In other words, a monopolist who can change his price very quickly (as would be expected) loses his monopoly power completely. In equilibrium, consumers expect him to charge prices close to the competitive price c at any future instant and, as they can wait for the next competitive offer without much delay cost, they cannot be induced to accept higher prices.Slide49
October 12, 2020
49
Monopoly and the Coase Conjecture
In the limit, M can’t exercise monop powerTirole (1988, p. 83): “Thus, the monopolist ends up charging prices close to the competitive price, vindicating the consumers’ belief.”Slide50
Limits
of the Coase Conjecture
October 12, 2020
50
Amer
Econ Rev (2014)Slide51
October 12, 2020
51
How Does the Court See This?
Says the Court (Again)
“The competition of ‘secondary’ must therefore be disregarded, as soon as we consider the position of ‘Alcoa’ over a period of years; it was as much within ‘Alcoa’s’ control as was the production of the ‘virgin’ from which it had been derived.”
This conclusion seems inconsistent with the Coase Conjecture analysis.Slide52
October 12, 2020
52
How Does the Court See This?
“We conclude therefore that
“Alcoa’s” control over the ingot market must be reckoned at over ninety per cent
; that being the proportion which its production bears to imported “virgin” ingot. If the fraction which it did not supply were the produce of domestic manufacture there
could be no doubt that this percentage gave it a monopoly—lawful or unlawful, as the case might be.
The producer of so large a proportion of the supply has complete control within certain limits.”
Alcoa (2
nd
Cir. 1945)Slide53
October 12, 2020
53
Imports
and
Potential Competition
Possible Imports Should Constrain Alcoa’s
Pricing
Market Share ≠ Market Power Necessarily
We shouldn’t necessarily infer market power from high market shares
Threatened competition can limit exercise of market power, yet we may observe incumbent has high sharesSlide54
October 12, 2020
54
Imports
and
Potential Competition
Market Share
≠ Market Power Necessarily
That threat can come from an outsider—potential competition—or for durable goods from anticipated future goods from the incumbentSlide55
October 12, 2020
55
If We Condemn Price-Fixing, Must We Condemn Monopoly?
“Starting, however, with the authoritative premise that all contracts fixing prices are unconditionally prohibited, the only possible difference between them and a
monopoly
is that while a monopoly necessarily involves
an equal, or even greater, power to fix prices
, its mere existence might be thought not to constitute an exercise of that power.”
Alcoa (2
nd
Cir. 1945)Slide56
October 12, 2020
56
If We Condemn Price-Fixing, Must We Condemn Monopoly?
“
Indeed it would be absurd to condemn such contracts unconditionally, and not to extend the condemnation to monopolies
; for the contracts are only steps toward that entire control which monopoly confers: they are really partial monopolies.”
Alcoa (2
nd
Cir. 1945)Slide57
October 12, 2020
57
Show me the Money - Measure Monopoly Power Directly: Look at Profits? Alcoa’s?
“The judge found that, over the whole half century of its existence, “
Alcoa’s” profits upon capital invested, after payment of income taxes, had been only about ten per cent
, and, although the plaintiff puts this figure a little higher, the difference is negligible.”
Alcoa (2
nd
Cir. 1945)Slide58
October 12, 2020
58
More than Profits at Stake
“But the whole issue is irrelevant anyway, for it is no excuse for “monopolizing” a market that the monopoly has not been used to extract from the consumer more than a “fair” profit.
The Act has wider purposes
. Indeed, even though we disregard all but economic considerations, it would by no means follow that such concentration of producing power is to be desired, when it has not been used extortionately.”
Alcoa (2
nd
Cir. 1945)Slide59
October 12, 2020
59
More than Profits at Stake
“Many people believe that
possession of unchallenged economic power deadens initiative, discourages thrift and depresses energy; that immunity from competition is a narcotic
, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone.”
Alcoa (2
nd
Cir. 1945)Slide60
October 12, 2020
60
More than Profits at Stake
“Such people believe that
competitors, versed in the craft as no consumer can be, will be quick to detect opportunities for saving and new shifts in production, and be eager to profit by them
.”
Alcoa (2
nd
Cir. 1945)Slide61
October 12, 2020
61
More than Profits at Stake
“In any event the mere
fact that a producer, having command of the domestic market, has not been able to make more than a “fair” profit, is no evidence that a “fair” profit could not have been made at lower prices
.”
Alcoa (2
nd
Cir. 1945)Slide62
October 12, 2020
62
Evaluating Monopolies: Is a Monopoly a Violation?
Monopoly v. Monopolization
“It may not have achieved monopoly; monopoly may have been thrust upon it.”
“Origin of monopoly may be critical in determining its legality”
“Size does not determine guilt” … “there must be some ‘exclusion’ of competitors”Slide63
October 12, 2020
63
Evaluating Monopolies: Is a Monopoly a Violation?
“The successful competitor, having been urged to compete, must not be turned upon when he wins”
Why Should We Seek to Separate These?
Why Not Just Condemn All Monopolies?Slide64
October 12, 2020
64
Is this Alcoa?
What did Alcoa do wrong?
Alcoa built plants in anticipation of demand?
Alcoa created demand?
Says Judge Hand:
“It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them.”Slide65
October 12, 2020
65
Is this Alcoa?
“Nothing compelled it to keep doubling and redoubling its capacity before others entered the
field. It
insists that it never excluded competitors; but we can think of
no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel
.”
Alcoa (2
nd
Cir. 1945)Slide66
October 12, 2020
66
Is this Alcoa?
“Only in case we interpret ‘exclusion’ as limited to maneuvers not honestly industrial, but actuated solely by a desire to prevent competition, can such a course, indefatigably pursued, be deemed not ‘exclusionary
.’
So
to limit it would in our judgment emasculate the Act; would permit just such consolidations as it was designed to prevent
.”
Alcoa (2
nd
Cir. 1945)