Monopoly: Conception difference in law and economics
In Economics: markets are In Law: monopoly is used as “a
monopolistic or oligopolistic in standard of evaluation”,
the absence of perfect designating a situation not in
competition the public interest.
1. A large number of firms Subjective valuation
2. Homogeneous products
3. Free entry into and exit from the
4.Independence of decisions
5. Complete information
Effects of Monopolies
To the economist: the way in For a lawyer
which transactions occur and
resources are allocated monopoly means a restriction of
the freedom of business to
Efficiency loss: A firm with engage in legitimate economic
monopoly power will produce activities
at a lower output level and
charge a higher price than an
identical firm in a competitive
The Economic incentive to monopolize markets
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Why other firms do not enter monopolistic industries?
Increasing returns to scale -- if f(x)> f(x) for any >1,
then we say that IRTS prevail. In the single output case,
this implies a decreasing average cost curve.(natural
monopoly, high tech)
Economies of scale -- average cost is decreasing
Firms may have patents on certain products forbidding
other manufacturers to produce the same product during
Increasing return to scale
Setup cost X
Ways to Monopolize Markets
Horizontal Mergers and Conglomerates: FTC v. P&G, 1967. Clorox
Cartels-- secret (per se illegal)
1. Horizontal price fixing
2. Horizontal market division
Price Discrimination--predatory pricing
1. Vertical Integration
3. Tie-in arrangements
Horizontal Merger Guidelines (1992)
Theme: mergers should not be permitted to create or enhance market
power, so as to confer on a seller the ability profitably to maintain
prices above competitive levels for a sig. Period of time.
Analytical process: assessment of whether:
1.the merger will sig. increase market concentration
2.the merger will raise concern about potential adverse competitive
3.efficiency gains would result that otherwise cannot be achieved
Government-Induced Price Fixing and Foreclosure
Resale Price Maintenance (McGuire-Keough Act in 1952)
A brief outline of antitrust acts (I)
* Every contract, combination, or conspiracy in restraint of trade
among the several states is illegal. Monopolizing trade shall be deemed
guilty of a felony and punished.
*The policy goal of the common law and hence of the Sherman Act:
the maximization of consumer welfare
A brief outline of antitrust acts (II)
CLAYTON ACT(1914): limits undertakings that tend to lessen
competition substantially or create a monopoly.
*Section 2, amended by the Robinson-Patman Act(1936),
prohibits price discrimination. Section 3 makes many tie-in
*Section 7, amended by the Celler-Kefauver Act(1950),
renders corporate mergers and acquisitions illegal if they
substantially lessen competition.
A brief outline of antitrust acts (III)
THE FEDERAL TRADE COMMISSION ACT(1914): gives the FTC
jurisdiction over section 1 and 2 of the Sherman Act and over some
provisions of the Clayton Act. It also forbids “unfair methods of
* Two major economic groups exempted from the antitrust laws
1. Agricultural cooperatives
2. Labor union( Norris-la Guardia Act/Wagner Act 1935)
* Views of antitrust policy
1. Populist view: to advance competition so as to protect small businesses
2. Efficiency views: to promote economic efficiency; in the best interest of
consumers even if it leads to considerable concentration of economic power.
The Law’s conceptual apparatus: Rule of Reason
Three part rule of reason created by Edward White in 1911:
“inherent nature” – results in practices illegal per se, which means that
there is no defense and that the court need not examine either intent or
market power before pronouncing the behavior unlawful. Judging a
restraint according to its character instead by its degree.
“inherent effect” or market power: refers to the inference of bad effects
from some fact, e.g. the market share of the parties.
“evident purpose” or specific intent: proof of an actual intent to inflict
the evils of monopoly, that is an intent to gain or maintain monopoly
through means other than superior efficiency.
Assessment of market power
1. Define the relevant market(s) affected by a firm’s conduct
– narrowly defined market: camera selling between $200 and $250
– broadly defined: the market is worldwide, and includes not only all
cameras, but also portrait artists and possibly transportation media because
a painting and a visit are all substitutes for a picture.
– Depending on who convinces the judge, the concentration ratios will be
awesome or trivial, with a large influence on his verdict.
2. Calculation of market share, examination of competitive
interactions, determination of the conditions of entry, and analysis of
other pertinent structural features of the market
These are three tests to be applied to any practice or structure.
Manageable by counsel and courts in the litigation process.
the rule of reason was not composed of any particular substantive rules
but was entirely a mode of analysis, a system for directing
investigation and decision. This was in keeping with the dynamic
principle of the law, by which substantive rules would evolve and alter
as economic understanding progressed. The only constant element was
the mode of analysis (the three-part rule of reason).
Case I. Standard Oil of N.J. v. United States (1911)
Central charges against the old Standard Oil company:
– Control of 90 percent of the nation’s refining capacity largely through the
acquisition of rivals
– Local price cutting: oft-told tale of Standard’s use of predatory techniques
to gain and hold monopoly
Chief Justice White’s opinion:
– placing of all the associated corporations under the control of NJS
raised a “prima facie presumption” of wrongful intent. The nature
of wrongful intent is crucial. The intent was not to maintain market
size through “normal methods” (superior efficiency) -- which
would have been proper -- but to do it by “new means of
combination” that gave greater control and power to exclude
Weakness of White’s opinion
• The court was alleged to have claimed the power to make
subjective choices between “good trusts” and “bad trusts”. This
was a very substantial factor in the demand for more
• The court adopted uncritically the idea that it is easy for one
firm to injure another by means other than superior efficiency
(it is normal and proper), and they accepted the notion, that
vertical integration, local price cutting, bargaining for
preferences from suppliers, and the like provide the means by
which such injury is improperly inflicted.
Case II: FTC v. Procter and Gamble Co. (1967)
Case: a product-extension merger. P&G sought to expand into the
household liquid bleach market by acquiring the assets of Clorox, the
leading producer of liquid bleach.
Arguments by the Court:
– P&G was a potential entrant in the market and knowledge of this
fact kept the price competitive in the industry.
– P&G’s huge assets gave it unwarrented leverage in the market and
the potential power of predatory pricing.
Case II: FTC v. Procter and Gamble Co. (1967)
Argument by P&G co.:
– The merger will increase the efficiency of the industry and offer
consumer better products at lower cost.
Justice Douglas’s opinion for the court:
– Possible economies cannot be used as a defense to illegality: The
creation of efficiency by merger is irrelevant to the merger’s
– Efficiency is really a “competitive advantage” or a “barrier to
entry” and is therefor anticompetitive
Case III: US. V. Microsoft Co. (May 18, 1998 ~)
Plaintiff: U.S Dept. of Justice, 19 state attorneys general, and AG of
District of Columbia
– 1990: the FTC’s legal staff, but not its economics staff, recommended that
FTC bring a case focusing on MS’s licensing practices with personal
– 1995: an appellate court approved the consent decree--MS should not
enter into any license agreement conditioned upon the licensing of any
other covered product, OS or other product, but this provision should not
prohibit MS from developing integrated products.
– Disputes over the scope and interpretation of the decree soon arose. The
core dispute is that MS think the IE browser was part of the OS, not a
Disagreed opinion between M.S. And Govt.(I)
I. Assessment of Market Power:
– The government alleged: MS. Was a monopolist in the relevant
market comprising Intel-compatible personal computer operating
systems.(90% or more market share)Another operating system
would be hard pressed to displace Windows directly.
– Response of the MS’s chief economics expert: the competition in
the personal computer software market was among “platforms, ”
not operating systems. --MS faced significant competition from
existing and future software platforms, any one of which could
emerge as the new standard for desktop computing. (Mac OS,
Linux, and various middleware including Sun’s Java)
Disagreed opinion between M.S. And Govt.(II)
II. Catastrophic entry: Market with sig. network effects, technological
progress, and production economies of scale can exhibit catastrophic
entry, by which way one product dominates the market until another
product is sufficiently superior that it becomes the new network
bandwagon. -- Computer software markets may be characterized by a
succession of temporary monopolies; In such a market, rivalry can
take the form of competition to become a dominant firm-- competition
for the market, rather than competition within the market.
** Govt. asserted that MS preserved its monopoly by using
exclusionary and predatory tactics to block catastrophic entry, while
MS claimed that it was just competing in the face of huge forces of
change in the industry.
Disagreed opinion between M.S. And Govt.(III)
III. Monopoly price or not?
** MS. Argue that MS. did not behave like a firm with monopoly
power; by their calculation that the monopoly price of Windows
should have been at least 16 times that price actually charged.
**While DJ’s chief economist argue that MS.’s prices were consistent
with long-run monopoly pricing once one takes into account factors
that encourage MS to restrain its prices, such as the value of growing
its installed base, raising demand for complementary products, and
discouraging software pirating.
Central Charges again MS.(I)
MS. Used several types of contractual arrangements that tended to
I)Exclusionary Behavior -- entails denying rivals access to some
resource of set of consumers in order to raise the rivals’ costs and
weaken their ability to compete.
– With online & Internet service providers
– With personal computer manufactures
– Offered Internet content providers preferential, no-cost placement
on the IC Channel bar in return for their agreement to promote on
the as their browser of choice
Central Charges again MS.(II)
II)Predatory Conduct: is any business strategy that is profitable only
because of the long-run benefits of eliminating one or more competitors.
Typically it involves an initial stage during which a firm offers a product at an
unprofitably low price as a means of driving rivals from the market and
facilitating the later exercise of market power.
MS. Practices as predatory
– Pricing IE below cost: give it away for free and paid Apple to use its
browser. --Valid business model because it generate future revenues, e.g
by selling advertising.
– Tying and bundling: MS. Refused to offer customers the option of taking
Windows without the browser. -- No different from including a file
management program with the operating system; Lower distribution and
transaction costs; other OS vendors also bundled browsers with their OS.
Did MS. Harm Consumers?
In the short run:
– Predation can benefit consumers in the short run while harming
them in the long run because of higher prices and a reduction of
investment in R&D. But the availability of free browsers may have
allowed MS. to raise or avoid lowering the price of Windows. To
the extent that MS. internalized the benefits from free browsers
through the windows price, the short run consumer benefits from
giving away IE and bundling it with Windows were limited.
Difficulties in assessing the long-run effects of MS’s actions
1. There is the matter of predicting what will happen in the
market subject to rapid technological change.
2. The link b/t the degree of competition and the degree of
innovation is complex--The continuing development of
Apples’ OS suggests that significant innovation by firms
with much smaller sales than MS is feasible.
3. Even if one has found there would be greater
competition and more innovation absent MS’s actions, as a
matter of theory the linkage b/t innovation and welfare is
1. Conduct remedies: such as mandatory unbundling of IE from Windows,
deal directly with MS’s challenged behavior. --difficult to enforce and may not
be sufficient to deter MS from engaging in other behavior that has similar
2. Structural divestiture: into two parts: one receive the Windows OS;
the other would receive the applications programs and all other MS
lines of business.
– the proposed breakup of a huge company would certainly entail
substantial direct costs of reorganization.
– The concern w.r.t. pricing: “double marginalization problem”--the sum of
the OS and application prices set by an integrated monopolist will be
lower than the sum of those prices when set separately by two ind. firms
each with sig. market power
The economy is an artifact, very much (though not entirely) a product
of human construction. The most fundamental social process is the
definition and creation of socioeconomic reality. Two characteristics of
the socioeconomic process are selective perception of and a necessity
of choice between conflicting interests.
Although much of the organization and performance of the economy is a
matter of the unintended and unforeseen consequences of aggregated
individual and subgroup activity, a key factor nonetheless is deliberative
government decision making(choice) and action. To the extent that
government is such a participant in the social formation of the economy,
economic performance is pro tanto a result of government, in any economic
Three main issues in the antitrust policy
First was the conflict over the goals of antitrust policy; this conflict
was not only about desirable social policy but also about the proper
decision-making role of a judge in our system of government.
Second was how to judge the legality of agreed elimination of
competition. E.g. the problem of defining a market, within which the
existence of competition or some form of monopoly is to be
determined, which has remained an area calling for further economic
research at either the theoretical or empirical level.(concentration
ratio/market share--plaintiff sets the market as narrow as possible, but
the defendant does in the opposite way)
Third was the identification of practices that injured rivals, not as
vigorous competition does, but somehow improperly.
This thrust a dangerously heavy burden upon the enforcement agencies
and the federal courts. Competition is inherently a process in which
rivals seek to exclude one another. Efficiency tends to exclude firms
that are less efficient. Since congress was clearly not passing the law
with the intent of destroying competition and efficiency, the courts and
the enforcement agencies were necessarily given the task of
distinguishing between those exclusionary practices that were
competitive, that created or reflected efficiency and those that were
anticompetitive and not so related to efficiency. This task remains
beyond the law’s economic competence in our time. Inability to
make the distinction raises the danger that the courts and the
enforcement agencies will identify competition and efficiency as
processes to be stopped in the name of preserving competition.