practical application of industrial economics: antitrust law november 24, 2008 by kinga guzdek

Practical application of industrial economics:Antitrust Law

November 24, 2008

By Kinga Guzdek

Practical application of IO by Kinga Guzdek 2

United States

The Sherman Antitrust Act (1890)

Section 1. applies to agreements among competitors

Section 2.applies to firms with monopoly power


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.


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 (…).


European Union

Treaty establishing the European Community

Article 81:Prohibition of restrictions of competition

Article 82:Prohibition of abuse of a monopoly power


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 (…).


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.


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)


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


§ 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


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?


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


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


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)


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


Other market factors (1)

Reasonable interchangeability for the demand and supply side

similarity of performed function(s) product and price differentiation quality restraints


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


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?


Microsoft case

EU:

Did Microsoft want to exclude competition with Windows Media Player from the market? Did it violate Article 82 EC?


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?



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)?



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)


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?



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?



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.



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?



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?



§ 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.



What would happen if the court found that IE is a separate (independent) market form the market for PC operating systems market?



Probably no monopoly power on the side of MS!

No charge with violation of § 2 Sherman Act

Possible liability for tying.


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.


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.


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.


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.



Do operating systems and media players belong to the same or different product

markets?



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).


Thank you for your attention.

practical application of industrial economics: antitrust law november 24, 2008 by kinga guzdek

Documents

common market

prohibition of abuse

market structure

prohibition of restrictions

practical example

market freedom of companies

european unionarticle

european provisions