class 11 whiteboard antitrust, fall, 2012 monopolization under sec. 2 randal c. picker leffmann...

Class 11 WhiteboardAntitrust, Fall, 2012

Monopolization under Sec. 2

Randal C. PickerLeffmann Professor of Commercial Law

The Law School

The University of Chicago

773.702.0864/[email protected] © 2000-12 Randal C. Picker. All Rights Reserved.

April 18, 2023 Copyright © 2000-12 Randal C. Picker 2

Strategic Entry Hypo: Capacity Competition

Starting Point Incumbent (I) owns single cement plant in

town. Transportation costs preclude shipments

from other locations. I earns profits of $25 per period.


Strategic Entry Hypo: Capacity Competition

Decisions I can leave its plant capacity alone or

expand it. A potent entrant (E) can build a cement

plant and go into competition with I or build a general manufacturing plant and not compete with I.


Incumbent Profits

I would earn: $25 profits per period from the cement plant if it

did not expand it and E entered M. $30 profits per period from the cement plant if it

expanded the plant and E entered M. $10 profits per period from the cement plant if it

did not expand and E entered C. $5 profits per period from the cement plan if it

expanded and E entered C.


Entrant Profits

E would earn $10 profits per period from manufacturing.

E would earn: $15 profits from entering C if I doesn’t

expand its plant. $5 profits from entering C if I expands its

plant.


Profits Table

We can represent this in the following table:

Incumbent

Entrant

Not Exp

Expand

Enter M Instead

(25,10)(10,15)

(5,5) (30,10)

1. Suppose that E were going to …, what would I do?

2. Suppose that I were going to …, what would E do?


Simultaneous Moves Suppose that E and I make their decisions at

the same time: what would happen? Two (Pure-Strategy) Nash Equilibria Exist

If E were going to enter, I would not expand; if I were going to not expand, E would enter. These are strategically consistent decisions, or they form a Nash equilibrium.

If E were going to Man, I would expand, and if I were going to expand, E would Man. This is a 2nd Nash equilibrium.


Substantial Uncertainty

With two Nash equilibria, we can have little confidence in how this game will be resolved.


E Moves First

Suppose E moves first:

I expands I not I expands I not exp

E opens man E enters cement

1

2 3

(10,30) (10,25) (5,5) (15,10)Payoffs: (E, I)


Results

Use backwards induction to solve this game. At node 3, I will not expand. At node 2, I will expand. At node 1, if E enters, putting I at node 3, I

will not expand, and E will get 15; if E manufactures instead, putting I at node 2, I will expand, and E will get 10.

E will enter the cement business.


I Moves First

Suppose I moves first:

E opens M E enters C E opens M E enters C

I expands I doesn’t expand

1

2 3

(30,10) (5,5) (25,10) (10,15)Payoffs: (I, E)


Results

Use backwards induction to solve this game. At node 3, E will enter C. At node 2, E will manufacture instead. At node 1, if I doesn’t expand, putting E at

node 3,E will enter, and I will get 10; if I expands instead, putting E at node 2, E will manufacture, and I will get 30.


Results

In the Model I will expand. Order resolves the uncertainty, and

determines the outcome. In reality

Is this Alcoa and should we think of it as an SA2 violation?

class 11 whiteboard antitrust, fall, 2012 monopolization under sec. 2 randal c. picker leffmann...

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