Types of CasesGovernment Criminal Case

Government Civil Case

Private Civil Case

W/jury Punishment

(jail)

Damages

(money)

Damages (money)

W/judge only

------------ Structural remedies (injunctions)

Structural remedies (injunctions)

Appeal Govt. does not appeal

FTC hearing,

Appeals Ct.

Supreme Ct.

District Court

Appeals Ct.

Supreme Ct.

Facts & findings

In trial From govt. trial From private trial

No facts & findings

No lo contendere Consent Decree Consent Decree, out-of-court-settlement

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

X

X

XX

O

O

O

X represents buyers

O represents sellers

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

U represents your firm

UN

N represents a new firm

Cross Price Elasticity w.r.t. New Firm?

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

U represents your firm

U

N represents a new firm

Cross Price Elasticity w.r.t. New Firm?

N

Positive , Negative, or Zero

CROSS-PRICE ELASTICITY

EX,Y=

PERCENTAGECHANGE IN QUANTITY (X)PERCENTAGE CHANGE IN PRICEOF ANOTHER GOOD (Y)

Qx-QxQx+QxPy-PyPy+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 elasticityTo be if they believe that it is not a substitute for other packagingmaterials?

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 elasticityTo be if they believe that it is not a substitute for other packagingmaterials? 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.

POTENTIAL ENTRY

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

U represents your firm

UN

N represents a new firm

Cross Price Elasticity w.r.t. New PotentialEntrant?

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

U represents your firm

U

N represents a new firm

Cross Price Elasticity w.r.t. Potential New Firm?

N

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 CHARACTERISTICSOF THE MARKET•Count firms•Measure their sales

Market Share Calculation

Sales Market ShareFirm I 60 60/100= 60%Firm II 30 30/100=30%Firm III 10 10/100=10%

Total 100

EXAMPLE: Entry of two new firms

Market share?Firm I 60 ________Firm II 30 ________Firm III 10 ________Firm IV 30 ________Firm V 20 ________

TOTAL _____

EXAMPLE: Entry of two new firms

Market ShareFirm I 60 60/150=40%Firm II 30 30/150=20%Firm III 10 10/150=10%Firm IV 30 30/150= 6.67%Firm V 20 20/150=13.33%

TOTAL 150

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 60 60/150=40%Firm II 30 30/150=20%Firm III 10 10/150=10%Firm IV 30 30/150= 6.67%Firm V 20 20/150=13.33%

TOTAL 150

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 60 60/150=40%Firm II 30 30/150=20%Firm III 10 10/150=10%Firm IV 30 30/150= 6.67%Firm V 20 20/150=13.33%

TOTAL 150 Herfindahl Index= 402+202+ 102 +6.72 +13.32 =1600+400+100+ 45 + 177 = 2322

Two kinds of antitrust cases in whichMarket power must be proved and In which the government is takingOpposite points of view:

1 Monopolizing cases: (The government wants to prove very narrowMarket 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 providedFurther burdens of proof on the government

A firm may be able to avoid prosecution forIts 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).