Practical application of industrial economics:Antitrust Law
November 24, 2008
By Kinga Guzdek
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United States
The Sherman Antitrust Act (1890)
Section 1. applies to agreements among competitors
Section 2.applies to firms with monopoly power
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United States
Section 1:
Prohibition of all restraints of trade
Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among
the several States, or with foreign nations, is declared to be illegal.
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United States
Section 2.
Prohibition of monopolization
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 deemed guilty of a felony (…).
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European Union
Treaty establishing the European Community
Article 81:Prohibition of restrictions of competition
Article 82:Prohibition of abuse of a monopoly power
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European Union
Article 81 Prohibition of restrictions of competition
All agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which
have as their object or effect the prevention, restriction or distortion of
competition within the common market shall be prohibited (…).
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European Union
Article 82
Prohibition of an abuse of a dominant market position
Any abuse by one or more undertakings of a dominant position within the common
market or in a substantial part of it shall be prohibited as incompatible with the common
market in so far as it may affect trade between Member States.
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Comparizon
The U.S. and European provisions are similar They aim at protecting competition held to be a
market structure resulting in the most efficient allocation of resources.
Law wants to preserve market freedom of companies. It doesn‘t define what desired business behavior is. It allows for an intervention only when companies engage in practices leading to inefficiency from the viewpoint of whole society (not individual market participants)
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Practical example: MS case
Let‘s look at the practical application of antitrust in MS case.
We‘ll focus on the question of monopoly power of MS.
The relevant provisions are: § 2 Sherman Act Art. 82 EC
Both dealing with conduct of a company having significant market power
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§ 2 Sherman Act
Application of § 2 consists of three steps:
1) Define the relevant market2) Define the market power of the
company in the relevant market3) Decide if the company engaged in a
wrongful act
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European Union – Art. 82 EC
Art. 82 EC also requires three steps:
1) Define the relevant market2) Define the market power of the
company – does it have a dominant position?
3) Does it abuse its dominant position?
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Step one: definition of a relevant market Why do we need it?
Allows us to determine the market power of a company by analyzing competitive constraints faced by it
Allows us to determine the effects of its behaviour on competition by clarifying who the competitors are
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Traditional ways of defining a product market
To what extent can a company raise prices without losing market demand?
Small but Significant Non-transitory Increase in Price (SSNIP) test
Additional market data
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SSNIP test
= can a company raise prices 5-10% without consumers switching to other products?
If yes: the other products don‘t belong to the same market (no competitve constraints)
If no: the other products belong to the same market (the company faces competition)
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Application of the test
If there are two products - car A and car B and the manufacturer of A raises prices by 5-10% and
Consumers switch to car B => A faces competition from B, B belongs to the same market as A
Consumers still buy A => B doesn‘t compete with A and thus doesn‘t belong to the same market
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Other market factors (1)
Reasonable interchangeability for the demand and supply side
similarity of performed function(s) product and price differentiation quality restraints
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Other market factors (2)
Practical indicia: industry or public recognition of the product market
as a separate entity product’s peculiar characteristics and uses unique production facilities distinct customers distinct prices sensitivity to price changes specialized vendors
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Microsoft case
U.S.A.:
Did Microsoft want to exclude the competing internet browser Netscape from the market? Did it violate Sec. 2 of the Sherman Act?
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Microsoft case
EU:
Did Microsoft want to exclude competition with Windows Media Player from the market? Did it violate Article 82 EC?
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What is the relevant market?
PC operating system – internet browser
Should they be viewed as one product or two products?
Do they belong to one or two markets?
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What is the relevant market?
What do you think: did Microsoft try to push Netscape out of the market
to maintain its monopoly on the market for operating systems (restriction of competition on the same market)?
or MS wanted to leverage its monopoly power on the market for internet browsers (restriction of competition on a secondary market using the market strength from the primary market)?
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What is the relevant market?
How does the SSNIP test apply in MS?
Note: Internet browser and operating system are in a vertical relationship (they don‘t compete with each other)
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Microsoft case – U.S.A.
By raising the price of IE, was MS at risk of Losing some buyers of the PC operating
system? or would only lose users of IE?
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Microsoft case – U.S.A.
Would a loss in demand for IE threaten MS’s market position on the market for PC operating systems? If yes – the monopolization claim was rightly decided, MS
violated § 2 of the Sherman Act. If no – the momopolization claim was unfounded, no violation of
§ 2 of the Sherman Act.
How important was/is an internet browser for a buyer of a PC?
Does it account for a substantial share of the price of the PC?
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Microsoft case – U.S.A.
The ruling: It was assumed that Internet Explorer and
PC operating system constitute one product/belong to the same market
Because Netscape‘s Internet browser was capable of supporting applications that were independent of the operating system.
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Microsoft case – U.S.A.
Assuming the court was right in finding that browsers and operating systems are one product
can you think of any circumstances under which it is profitable for a firm with a mopoly power on the market for operating systems to exclude competition among internet browsers?
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Microsoft case – U.S.A.
In other words: Would it be profitable for MS to exclude any competition on the market for browsers?
Would MS be able to reap monopoly profits there?
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Microsoft case – U.S.A.
§ 2 Sherman Act test in MS: IE and PC operating system constitute one
product market (PC operating systems); MS has a monopoly power on market for
PC operating systems; It engaged in wrongful exclusionary
conduct. Violating § 2 Sherman Act.
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Microsoft case – U.S.A.
What would happen if the court found that IE is a separate (independent) market form the market for PC operating systems market?
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Microsoft case – U.S.A.
Probably no monopoly power on the side of MS!
No charge with violation of § 2 Sherman Act
Possible liability for tying.
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Wrongful conduct
Microsoft’s business practices that gave rise to antitrust concerns:
the way in which it integrated IE into Windows; its various dealings with Original Equipment
Manufacturers (“OEMs”), Internet Access Providers (“IAPs”), Internet Content Providers (“ICPs”), Independent Software Vendors (“ISVs”), and Apple Computer;
its efforts to contain and to subvert Java technologies; and
its course of conduct as a whole.
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Wrongful conduct
Integration of IE and WindowsMicrosoft made the IE software code an irremovable part of Windows.
Issued to Original Equipment ManufacturersMS prohibited the OEMs to:
(1) removing any desktop icons, folders, or “Start” menu entries;
(2) altering the initial boot sequence; and (3) otherwise altering the appearance of the
Windows desktop.
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Wrongful conduct
Agreements with Internet Access ProvidersMS licensed IE to hundreds of IAPs for no charge. Then, Microsoft extended valuable promotional treatment to the ten most important IAPs in exchange for their commitment to promote and distribute IE and to exile Navigator from the desktop. Finally, in exchange for efforts to upgrade existing subscribers to client software that came bundled with IE instead of Navigator, Microsoft granted rebates-and in some cases made outright payments-to those same IAPs.
Dealings with Internet Content Providers, Independent Software Vendors, and Apple ComputerMS granted ICPs and ISVs free licenses to bundle IE with their offerings, and by exchanging other valuable inducements for their agreement to distribute, promote and rely on IE rather than Navigator.
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Microsoft case – EU
Abuse of the dominant position consisted i.e. in the EU in exclusionary conduct
towards competitors of Windows Media Player by offering it for free together with
the PC operating system.
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Microsoft case – EU
Do operating systems and media players belong to the same or different product
markets?
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Microsoft case – EU
It was assumed that there are 2 markets – one for operating systems and one for media players
And Microsoft was trying to leverage its market power from the market where it had a monopoly (operating systems) to the market where it didn‘t have a monopoly (media players).
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Thank you for your attention.