The first principles approach to antitrust, Kodak, and antitrust at the millennium

Antitrust Law Journal

Volumn 68, Issue 1, 2000, Pages 187-201

  Salop, Steven C ^a  

^a NONE

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EID: 0034418484     PISSN: 00036056     EISSN: None     Source Type: Journal    
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References (43)

1. Eastman Kodak Co. v. Image Technical Serv. Inc., 504 U.S. 451 (1992).
2. For example, we have now learned from the prequel to the trilogy, that the Star Wars depicted in the George Lucas films apparently started with a dispute over monopolized trade routes. Perhaps if the Jedi warriors of the Galactic Republic had developed a stronger and more credible antitrust policy, the resulting violence, high prices, and deadweight losses could have been avoided.
3. Kodak, 504 U.S. at 499 n.3.
4. Id. at 496.
5. Id. at 479 n.29.
6. Frank E. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 14-16 (1984).
7. A number of these points have been made in recent articles, including Lawrence J. White, Wanted: A Market Definition Paradigm for Monopolization Cases, 4 COMPUTER INDUS. 1 (1999); Gregory J. Werden, Market Delineation Under the Merger Guidelines: Monopoly Cases and Alternative Approaches, 16 REV. INDUS. ORG. 211 (2000).
8. A number of these points have been made in recent articles, including Lawrence J. White, Wanted: A Market Definition Paradigm for Monopolization Cases, 4 COMPUTER INDUS. 1 (1999); Gregory J. Werden, Market Delineation Under the Merger Guidelines: Monopoly Cases and Alternative Approaches, 16 REV. INDUS. ORG. 211 (2000).
9. To keep the exposition simpler in this essay, I generally will use the term market power, even in discussing Section 2 allegations. 9 504 U.S. at 480.
10. For an earlier treatment of a number of the ideas in this section, see Thomas G. Krattenmaker, Robert H. Lande & Steven C. Salop, Market Power and Monopoly Power in Antitrust Law, 76 GEO. L.J. 241 (1987). The market definition discussion of price-down cases there, however, is superceded to some extent by the analysis in this essay. For a general approach that is similar to the first principles approach described here, see also A. Douglas Melamed, Exclusionary Vertical Agreements, Speech Before the ABA Antitrust Section (Apr. 2, 1998), available at 〈http://www.usdoj.gov/atr/public/speeches/1623 .htm〉.
11. In a tying claim, proof of distinct products and market power in the tying product market are required. In his dissent, Justice Scalia argued that replacement parts (the alleged tying product) and service (the alleged tied product) are not distinct products because all service may involve the installation of parts. Kodak, 504 U.S. at 495 n.2. Kodak itself argued that there is no demand for parts separate from service. Id. at 463.
12. As discussed below, analyses of merger cases can be problematic when the relevant anticompetitive allegation is that the merger will prevent prices from falling in the future.
13. 504 U.S. at 456-59, 480-85.
14. Id. at 482.
15. For a more detailed analysis of this two-step approach, see Thomas G. Krattenmaker & Steven C. Salop, Anticompetitive Exclusion: Raising Rivals' Costs to Gain Power Over Price, 96 YALE L.J. 209 (1986).
16. The Court also pointed out that the inquiry could be framed in terms of either market power or market definition. Kodak, 504 U.S. at 469 n.15.
17. Id. at 477-78.
18. All of these traps also could be applied to analyses of the collective market power of a group of firms.
19. The Unilateral SSNIP Trap is closely related to the Threshold Test Trap. The two traps are distinguished because the errors to which they refer occur in different contexts. For example, the Unilateral SSNIP Trap could arise in a horizontal agreement case as well as in an exclusion case. In addition, the Unilateral SSNIP Trap focuses on the market definition methodology whereas the Threshold Test Trap focuses on an erroneous finding of market power.
20. The greater the difference between price and marginal cost, the larger is the effect on the deadweight loss in economic surplus (consumer plus producer surplus) that results from changing output, when other factors are held constant. This suggests the need for greater antitrust concerns in those markets where the difference between price and marginal cost is greater. See Raymond Jackson, The Consideration of Economics in Merger Cases, 43 U. CHI. J. BUS. 439 (1970).
21. This benchmark is similar to the standard set forth in the draft of the Competitor Collaboration Guidelines. U.S. Federal Trade Commission, Draft Antitrust Guidelines for Collaborations Among Competitors (Oct. 1, 1999) § 1.2, reprinted in 64 Fed. Reg. 54,484 (Oct. 6, 1999).
22. Benjamin Klein prefers a market power test based on whether a firm's prices have any significant effect on market quantities. Klein, supra note 1, at 76. If one broadens the test, going beyond price to include the alleged anticompetitive conduct and to take into account the effect of the conduct on rivals' prices and outputs, then Klein's test moves closer to the first principles approach set out here. The analysis in this article may indeed be what Klein means when he discusses changes in market power. However, Klein's focus on market quantities raises the question of whether the two approaches are consistent; the question is complicated because Klein does not set out a market definition methodology. Id. at 85.
23. This article's analysis focuses on the market in which the alleged anticompetitive effects occur. Tying and other leverage theories also involve the evaluation of market power in a second market, the tying/leveraging product market. The resulting analysis may still involve a comparison to the perfectly competitive price, particularly in the case of per se offenses. However, it also may involve the power to exclude competitors profitably. This is because the fundamental issue is whether a firm has the power to profitably carry out the alleged anticompetitive leveraging conduct that causes harm in the tied product market. In contrast, in the case of leveraging used to maintain (i.e., defend) market power in the tying/leveraging market, the issue does not arise in the same way. See Robin C. Feldman, Defensive Leveraging in Antitrust, 87 GEO. L.J. 2079 (1999).
24. U.S. Department of Justice & Federal Trade Commission, Horizontal Merger Guidelines (1992, as amended 1997), reprinted in 4 Trade Reg. Rep. (CCH) ¶ 13,104.
25. United States v. E.I. du Pont de Nemours & Co., 351 U.S 377 (1956). For the classic statement of the Supreme Court's error, see Donald Turner, Antitrust Policy and the Cellophane Case, 70 HARV. L. REV. 281 (1956). See also Krattenmaker et al., supra note 11.
26. See 504 U.S. at 471.
27. Lorain Journal Co. v. United States, 342 U.S. 143 (1951).
28. Radiant Burners, Inc. v. Peoples Gas Light & Coke Co., 364 U.S. 656 (1961).
29. FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997). The 1992 Horizontal Merger Guidelines contain a sentence that could cover this scenario. 1992 Merger Guidelines, supra note 24, § 1.11; see also Draft Competitor Collaboration Guidelines, supra note 21, at § 3.32.
30. That is, even a monopolist faces competitive constraints from substitute products, which place a ceiling on its price. For example, see Judge Hand's discussion of foreign imports in United States v. Aluminum Co. of America, 148 F.2d 416, 426-27 (2d Cir. 1945).
31. For one example applied to distribution inputs, see ROBERT BORK, THE ANTITRUST PARADOX 156 (1979).
32. Klor's, Inc. v. Broadway-Hale Stores, Inc., 359 U.S. 207 (1959).
33. Id. at 209-10.
34. Id. at 213.
35. A SSNIP is a "small but significant and non-transitory increase in price." 1992 Merger Guidelines, supra note 24, § 1.0. A unilateral price increase is one that is not followed by rivals.
36. Another aspect of this error arises out of a focus on unilateral price increases. The unilateral SSNIP test assumes that rivals would respond to the firm's price increase by expanding their output to meet additional demand as consumers substitute. However, it may be more profitable for competitors instead to raise their own prices in response to the firm's price increase, and it would be erroneous to ignore this potential price response. Market power is the ability to profitably raise price, taking rivals' expected responses into account. Thus, the expected response must be examined; one cannot simply assume that rivals will maintain their prices at the initial level.
37. For an example of a test of market power based on collective market share in the context of exclusionary conduct in joint ventures, see Dennis W. Carlton & Steven C. Salop, You Keep on Knocking But You Can't Come In: Evaluating Restrictions on Access to Input Joint Ventures, 9 HARV. J.L. & TECH. 319 (1996).
38. As evidence that this point is indeed a matter of first principles, Fred Kahn pointed out to me that it was recognized as far back as United States v. Addyston Pipe & Steel, 85 F. 271, 292 (6th Cir. 1898), by Judge Taft: "Much evidence is adduced upon affidavit to prove that defendants had no power arbitrarily to fix price, and that they were always obliged to meet competition. . . . The most cogent evidence that they had this power is the fact, everywhere apparent in this record, that they exercised it."
39. 504 U.S. at 477.
40. This approach also has been followed by a number of lower courts. Re/Max Int'l, Inc. v. Realty One, Inc., 173 F.3d 995, 1016-19 (6th Cir. 1999); see Coastal Fuels of Puerto Rico, Inc. v. Caribbean Petroleum Corp., 79 F.3d 182, 196-97 (1st Cir. 1996); Rebel Oil Co. v. Atlantic Richfield Co., 51 F.3d 1421, 1434 (9th Cir. 1995); Flegel v. Christian Hosp., 4 F.3d 682, 688 (8th Cir. 1993); Reazin v. Blue Cross & Blue Shield of Kan., Inc., 899 F.2d 951, 966-67 (10th Cir. 1990); Byars v. Bluff City News Co., 609 F. 2d. 843, 850 (6th Cir. 1979).
41. FTC v. Indiana Fed'n of Dentists, 476 U.S. 447, 460-61 (1986) (quoting 7 PHILLIP AREEDA, ANTITRUST LAW ¶ 1511, at 429 (1986)); see also NCAA v. Board of Regents, 468 U.S. 85, 109-11 n.42 (1984).
42. For a similar commentary in the context of merger analysis, see Franklin M. Fisher, Horizontal Mergers: Triage and Treatment, 1 J. ECON. PERSP. 23, 30 (1987); Jonathan Baker, Product Differentiation Issues Through Space and Time: Some Antitrust Policy Issues, 42 ANTITRUST BULL. 177, 185 (1997).
43. For a similar commentary in the context of merger analysis, see Franklin M. Fisher, Horizontal Mergers: Triage and Treatment, 1 J. ECON. PERSP. 23, 30 (1987); Jonathan Baker, Product Differentiation Issues Through Space and Time: Some Antitrust Policy Issues, 42 ANTITRUST BULL. 177, 185 (1997).