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out-of-courtsettlement
Monopolization
•Defined by Sherman, Section 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 guilty of a
misdemeanor…”
•A behavior, not a structural characteristic
•Importance of “intent”
•Commerce clause reference: “commerce among the
several States”
What the government must show according to Sherman 2:
1. A firm has market power (U.S. Steel)
a. The appropriate market must be defined to include
“substantially fungible” (I.e. “interchangeable or
substitutable) goods.
b. An appropriate cutoff for market share size must be decided
upon to decide if monopoly exists.
2. A firm has used (in the case of “monopolizing”)
or has the intent to use (in case of “attempting to
monopolize”) that power to restrain commerce
a. Actual competition (Standard Oil)
b. Potential competition (Alcoa)
MARKET BOUNDARIES
• BUYER POINT OF VIEW: No potential
seller exists outside of the market
boundaries (within a reasonable price range)
• SELLER POINT OF VIEW: No potential
buyer exists outside of the market
boundaries (within a reasonable price range)
• BOTH POINTS OF VIEW MUST HOLD
• CROSS PRICE ELASTICITY measures
MARKET BOUNDARIES
X represents buyers
O represents sellers
X
X
O
O
X
X
X
O
N represents a new firm
U represents your firm
MARKET BOUNDARIES
X represents buyers
O represents sellers
X
X
O
X
N
X
X
U
O
O
Cross Price Elasticity w.r.t. New Firm?
N represents a new firm
U represents your firm
MARKET BOUNDARIES
X represents buyers
O represents sellers
X
X
N
O
X
X
X
U
O
O
Cross Price Elasticity w.r.t. New Firm?
Positive , Negative, or Zero
CROSS-PRICE ELASTICITY
E X,Y=
PERCENTAGE
CHANGE IN QUANTITY (X)
PERCENTAGE
CHANGE IN PRICE
OF ANOTHER GOOD (Y)
Qx-Qx
Qx+Qx
Py-Py
Py+Py
=
CROSS-PRICE ELASTICITY
• Exy<0===> x and y are
complements
• Exy>0 ===> x and y are
substitutes (or in same market)
• Exy =0 ==> x and y are
unrelated
The Dupont Case:
First Use of Cross Price Elasticity
Question: Is cellophane a substitute for other packaging
materials?
What would the government want the cross-price elasticity
To be if they believe that it is not a substitute for other packaging
materials?
What would the industry want the cross-price elasticity
To be if they believe that it is a substitute for other packaging
materials?
The Dupont Case:
First Use of Cross Price Elasticity
Question: Is cellophane a substitute for other packaging
materials?
What would the government want the cross-price elasticity
To be if they believe that it is not a substitute for other packaging
materials? Zero Cross-price elasticity.
What would the industry want the cross-price elasticity
To be if they believe that it is a substitute for other packaging
materials? Positive cross-price elasticity.
N represents a new firm
U represents your firm
POTENTIAL ENTRY
X represents buyers
O represents sellers
X
X
O
X
N
X
X
U
O
O
Cross Price Elasticity w.r.t. New Potential
Entrant?
N represents a new firm
U represents your firm
MARKET BOUNDARIES
X represents buyers
O represents sellers
X
X
N
O
X
X
X
U
O
O
Cross Price Elasticity w.r.t. Potential
New Firm?
Positive , Negative, or Zero
Activity to Bar
Potential Entrants
as Monopolizing?
The Alcoa Case
Now that we have the market boundaries
We can figure how much market power
there is.
How does the government make the
case that there is market power in a market?
STRUCTURAL CHARACTERISTICS
OF THE MARKET
•Count firms
•Measure their sales
Market Share Calculation
Firm I
Firm II
Firm III
Sales
60
30
10
Total
100
Market Share
60/100= 60%
30/100=30%
10/100=10%
EXAMPLE: Entry of two new firms
Firm I
Firm II
Firm III
Firm IV
Firm V
60
30
10
30
20
TOTAL
_____
Market share?
________
________
________
________
________
EXAMPLE: Entry of two new firms
Firm I
Firm II
Firm III
Firm IV
Firm V
60
30
10
30
20
TOTAL
150
Market Share
60/150=40%
30/150=20%
10/150=10%
30/150= 6.67%
20/150=13.33%
Two Measures of Market Power:
1. Four Firm Concentration Ratio:
The total market share of the
Top four firms in a market.
2. The Herfindahl Index:
The Sum of the Square of the
market shares of ALL
of the firms in a market.
EXAMPLE: Entry of two new firms
Firm I
Firm II
Firm III
Firm IV
Firm V
60
30
10
30
20
TOTAL
150
60/150=40%
30/150=20%
10/150=10%
30/150= 6.67%
20/150=13.33%
4 firm concentration ratio= 83.33%
Remember: you must rearrange market shares
To get the top four firms. (NOT 76.67%)
EXAMPLE: Entry of two new firms
Firm I
Firm II
Firm III
Firm IV
Firm V
60
30
10
30
20
TOTAL
150
60/150=40%
30/150=20%
10/150=10%
30/150= 6.67%
20/150=13.33%
Herfindahl Index= 402+202+ 102 +6.72 +13.32
=1600+400+100+ 45 + 177
= 2322
Two kinds of antitrust cases in which
Market power must be proved and
In which the government is taking
Opposite points of view:
1
Monopolizing cases:
(The government wants to prove very narrow
Market boundaries to make market share look larger)
2
Merger cases: (The government wants to prove very wide market
Boundaries to show that mergers will eliminate competing entities:
Larger market boundaries means there are more likely to be
Interfaces between two competing firms that want to merge)
3. Precedents through time have provided
Further burdens of proof on the government
A firm may be able to avoid prosecution for
Its market power if the monopoly:
•was “thrust” upon a firm.
•was due to a defendant’s normal business ability,
• economies of scale,
• research (invention, innovation) and new products
• natural advantages,
•“inevitable economic laws” (United Shoe Machinery),
•“development of business power by usual methods”
(Standard Oil),
• other accidents of its origin,
4. Remedies to abate monopoly
must exist that are not too costly
in efficiency, technological change,
etc.
ECONOMICS of MONOPOLIZING
•Welfare Loss of Monopoly, efficiency losses,
prices too high, output too low, and
economic profit.
•Double Standard: Contracts prohibited if in
restraint of trade, but monopoly itself is not
illegal (monopolizing is illegal but not
monopoly).