Public Policy in Private
Markets
Monopolization (section 2, Sherman Act)
Announcements
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Case presentations: 1 case has been assigned
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Clickers:
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Case 8, K&W, 5th edition
Debate date: March 6th. Video due to me: March 2nd.
There will be a homework on that day
The number of points for iclicker on a day will be equal to
the number of questions on that day (e.g. 1 question = 1
point; 5 questions = 5 points). Your 10% of in-class work
will be computed as the fraction of total iclicker points in the
semester.
Homework 1 posted, due Feb. 14, in class, group
work is encouraged.
Overview of Antitrust Laws
What we are studying
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Sherman Act, section 2: Monopolization
1.
Substantial market power
A.
B.
2.
Define relevant market
Show market power
Intent to monopolize
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Brief history
Predatory Pricing
What we are studying
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Sherman Act, section 2: Monopolization
1.
Substantial market power
A.
B.
2.
Define relevant market
Show market power
Intent to monopolize
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Brief history
Intent: Any behavior that is used to perpetuate and
extend monopoly power with the use of abusive
practices (e.g. predatory pricing, sabotaging
competitors)
Intent: Predatory Pricing
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What is predatory pricing? “Irrationally
low prices”
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Anticompetitive vs. good healthy
competitive behavior?
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Two approaches:
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Average cost approach
Recovery approach
Question
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Which of the following best
characterizes average variable costs
(AVC) and average total costs (ATC)?
A. AVC does not include fixed costs and
ATC does
B. ATC>=AVC
C. ATC=AVC in the long run
D. ATC and AVC are always upward sloping
Average Cost Approach
MC
ATC
P
AVC
Operate
Q
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TC=Variable Cost + Fixed Cost
Cost includes a normal return to capital
If P>ATC: cover all costs (including fixed costs, and return to
capital)
Average Cost Approach
MC
P
ATC
AVC
Operate in
SR, but shut
down in LR
Shut down
Q
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If AVC<P<ATC: operate in short run (exit in long run)
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Exit losses > stay losses
If P<AVC: shut down immediately (short run)
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Exit losses < stay losses
Average Cost Approach
1. AVC Rule: if P<AVC
Must have predatory intent (economically irrational)
P>AVC: not challenged
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2. ATC Rule: if P<ATC
May have predatory intent:
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AVC<P<ATC: Are prices the result of natural variation?
Special deals, oversupply, perishables
Must have predatory intent:
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P<AVC: Irrefutable evidence of predatory behavior
Bottom line:
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AVC rule: lenient (smaller range of illegal pricing).
ATC rule: stricter (broader range of illegal pricing)
Average Cost Approach
Current interpretation:
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Supreme Court: never formally adopted AVC
rule
However, some Appeals Court cases (e.g. AA
in DFW) used AVC rule
Problems:
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Accounting cost is different from economic cost
How to interpret it with multi-product firms?
Average Cost Approach
MC
ATC
P
AVC
Q
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Example 1: Increasing MC
Average Cost Approach
P
ATC
MC=AVC
Q
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Example 2: Constant MC=AVC
Recovery Approach
A.K.A.: “recoupment”
Low prices may or may not be
“successful”
Focus on consumer well-being:
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Are consumers hurt?
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In SR consumers benefit from lower prices
In LR consumers will only be hurt if predatory
pricing is successful:
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Competitors leave
Recovery period (high price afterwards) is achieved
Recovery Approach
Worry only if recovery period is
achieved
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Illegal behavior: only if consumer is hurt
Affected firms are not factored in
Generally, approach is not as widely
accepted in court as the average cost
approach
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However, important in cases such as AA
Summary of Approaches
Average cost:
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AVC (lenient)
ATC (stricter)
Recovery:
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Sacrifice? (How long? How much?), AND
Recovery? (How soon? How much?)
Microsoft Case (1): Evidence of Intent
1970’s: personal computers are
introduced
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1985: Microsoft introduces first
commercial software for PCs
Relevant Market:
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Product: OS for PCs
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1991-1993: 50% for all OS, >70% for IBM
compatible PC’s
Geographic: National
Microsoft Case (1): Evidence of Intent
Pre-announcement of software
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DR-DOS (rival), 1990, captures 10%
MS-DOS 5.0 announced, but inexistent
Exclusionary licensing:
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Microsoft charges license fees based on all computers
shipped by manufacturer (OEM), with or without MS-DOS:
consumer paid twice for non-MS-DOS
Penalties to non-MS-DOS OEMs (higher fees, less support,
no credit)
OEMs forced to install MS-DOS
Incompatibilities:
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Denying software developers access to application
programming interface (API)
Microsoft Case (1): Details
Microsoft’s view:
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Large market share = superior product
Competitive market, large market share
is not guaranteed
Practices are good and transparent
competition
Consumers have gained
Remedies will hurt innovation rate
Microsoft Case (1): Details
Consent decree (6/95):
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OEM contracts limited to 1 year
No minimum commitment on OEM
contracts
Elimination of non-disclosure agreements
for beta testers
Next time
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Second Microsoft case (1998)
Poll: What Concept is the least clear?
A. Nolo Plea (16/36%)
B. Rule of reason v. Per se Rule
(9/20%)
C. Market Definition (9/20%)
D. AVC v. ATC rule (3/7%) ????
E. Cross-price elasticity (15/33%)
More Polling
On a scale from 1-10 what is your understanding
of: (10=awesome, 1=no idea)
Nolo Plea
AVC v. ATC rule
Cross-price elasticity