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					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.
Competitive market:
1. A large number of firms             Subjective valuation
2. Homogeneous products
3. Free entry into and exit from the
    market
4.Independence of decisions
    among firms
5. Complete information
                                                                           1
                     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
   market




                                                                     2
The Economic incentive to monopolize markets


 P



Pm
Pc          MR              MC




           Qm      Qc               Q
                                               3
     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
    certain period.
                                                                4
    Increasing return to scale

                              Y








                 Setup cost       X



                                       5
                 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

 Foreclosing Entry
   1. Vertical Integration
   2. Advertising
   3. Tie-in arrangements
                                                                   6
           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
  effects
 3.efficiency gains would result that otherwise cannot be achieved




                                                                           7
 Government-Induced Price Fixing and Foreclosure

 Resale Price Maintenance (McGuire-Keough Act in 1952)


 Occupational Licensing




                                                          8
            A brief outline of antitrust acts (I)

 SHERMAN ACT(1890)


 * 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




                                                                        9
            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
   arrangements illegal.

   *Section 7, amended by the Celler-Kefauver Act(1950),
   renders corporate mergers and acquisitions illegal if they
   substantially lessen competition.

                                                                10
             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
   competition.”

* 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.

                                                                                  11
   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.


                                                                          12
                  Assessment of market power

 1. Define the relevant market(s) affected by a firm’s conduct
 ***Camera:
   – 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

                                                                                13
 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).



                                                                        14
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
        others.
                                                                               15
       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
  legislation.

• 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.

                                                                    16
   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.




                                                                       17
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
      legality.
    – Efficiency is really a “competitive advantage” or a “barrier to
      entry” and is therefor anticompetitive



                                                                          18
   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
  Defendant: MS.co.
 Background:
   – 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
      manufacturers
   – 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
      separate product
                                                                             19
    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)



                                                                        20
    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.
                                                                           21
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.


                                                                            22
                Central Charges again MS.(I)

 MS. Used several types of contractual arrangements that tended to
  exclude competitors
 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



                                                                      23
                  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.


                                                                                 24
               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.




                                                                    25
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
  ambiguous.

                                                                 26
                                 Remedies

 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
  effects.
 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

                                                                               27
 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
   system.


                                                                           28
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.

                                                                        29
 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.
                                                                         30

				
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