Role of Market Power in the Digital Economy
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DRAFT 12/13/2017 New York State Bar Association Annual Meeting Unilateral Conduct Committee: Role of Market Power in the Digital Economy Moderator Outline by Eric Hochstadt, Weil, Gotshal & Manges LLP and Kellie Lerner, Robins Kaplan LLP1 I. Overview of Market and Monopoly Power a. Market Power i. The technical definition of market power under Section 2 is “the ability to raise prices above those that would be charged in a competitive market.”2 b. Monopoly Power i. The technical definition of monopoly power is “the power to control prices or exclude competition.”3 ii. Monopoly power is analyzed in Section 2 monopolization and attempted monopolization analyses, as well as the Section 7 merger analysis. c. Key Distinctions in Analyzing Market and Monopoly Power i. Courts often use these terms interchangeably.4 ii. The technical definitions of market and monopoly power, which were established in NCAA and DuPont, appear to require a higher burden of proof 1 The authors would like to thank Charles N. Hurley and Shannon R. Rozell for their substantial assistance in preparing this detailed outline for the session. The views expressed herein are intended to be summary in nature and should not be interpreted to reflect any specific position taken by the authors or their respective law firms. 2 NCAA v. Bd. of Regents, 468 U.S. 85, 109 n.38 (1984). 3 United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 391 (1956). 4 See, e.g., NCAA, 468 U.S. 85, 109 n.38, 112 (defining “market power” and noting that it is linguistically different from “monopoly power,” while also citing DuPont for the definition of both market and monopoly power); Hanover Shoe v. United Shoe Mach. Corp., 392 U.S. 481, 481 n.3 (1968) (using “market” and “monopoly” power interchangeably when discussing Section 2 monopolization); Tops Mkts v. Quality Mkts., 142 F.3d 90, 97-98 (2d Cir. 1998) (“Monopoly power [is] also referred to as market power.”); Int’l Distrib. Ctrs, Inc. v. Welsh Trucking Co., Inc., 812 F.2d 786, 791 n.3 (2d Cir. 1987) (stating that “‘Market power’ is a synonym for ‘monopoly power.’”). C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\(FINAL VERSION) DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX for “market power” than “monopoly power” since it requires proof that the prices were raised beyond a specified level.5 iii. No Supreme Court decision has explicitly distinguished between monopoly power and market power. II. Direct Evidence and Circumstantial Evidence of Market Power a. Direct Evidence i. Generally, direct evidence is found where the firm profited from raising prices substantially above competitive levels, i.e. proving that defendant actually set prices above competitive levels or excluded competition.6 b. Circumstantial Evidence i. Circumstantial evidence is found through a market structure analysis, i.e. where defendant possesses a dominant share of the relevant market that is protected by entry barriers.7 c. Screening for Market Power –Types of Circumstantial Evidence i. Dominant Share of the Relevant Market 1. Monopolization – Courts have had difficulty drawing the lines for “dominant market share.”8 • 90% is considered to be enough9; • 60% to 64% is doubtful and is probably not enough10; • 33% is certainly not enough11; • 70% or more plus substantial barriers and lack of expanded output for existing competitors establishes a prima facie case of 12 monopoly power; 5 Compare NCAA, 468 U.S. 85, with E.I. duPont, 351 U.S. 377. 6 United States v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001). 7 Id. at 56-57. 8 United States v. Aluminum Co. of America, 148 F.2d 416, 424 (2d Cir. 1945). 9 Id. 10 Id. 11 Id. 2 C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\(FINAL VERSION) DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX • 80% allows for an inference of monopoly power, but that inference is rebuttable by showing entry into the market is easy;13 • 50% to 70% range provides the greatest uncertainty, but anything below 50% is generally not enough. 2. Attempted Monopolization – A dominant market share for attempted monopolization is established by proving that there is a “dangerous probability of achieving monopoly power”14 • 50% or greater is generally considered a dangerous probability15; • 30% to 50% is rarely considered a dangerous probability16; • 30% or less is never considered a dangerous probability.17 ii. Existence of Significant Barriers to Entry 1. Entry barrier is defined as a cost that the entrant would have to bear that the incumbent would not or any condition that would inhibit entrants on a substantial scale as a response to the incumbent’s price increase.18 If entry is easy, courts will probably not find monopoly power, regardless if a firm has 100% market share. 2. Specific Types of Entry Barriers: 12 Spirit Airlines v. Nw. Airlines, 431 F.3d 917, 935-36 (6th Cir. 2005). 13 Eastman Kodak Co. v. Image Tech. Servs, 504 U.S. 451, 481 (1992). 14 Spectrum Sports v. McQuillan, 506 U.S. 447 (1993). 15 See, e.g., Am. Tobacco Co. v. United States, 328 U.S. 781, 797 (1946) (66% is sufficient); Kelco Disposal v. Browning-Ferris Indus., 845 F.2d 404, 409 (2d Cir. 1988) (55% is sufficient). 16 See, e.g., Smith Wholesale Co. v. Philip Morris USA, Inc., 219 F. App’x 398, 410-11 (6th Cir. 2007) (49-56% with low barriers to entry is insufficient); U.S. Anchor Mfg. Co. v. Rule Indus., 7 F.3d 986, 1001 (11th Cir. 1993) (less than 50% does not establish dangerous probability); M & M Med. Supplies & Serv. v. Pleasant Valley Hosp., 981 F.2d 160, 168 (4th Cir. 1992) (30% to 50% shares should usually be rejected). 17 See, e.g., Arthur S. Langenderfer v. S.E. Jonhson Co., 917 F.2d 1413, 1443 (6th Cir. 1990) (19% to 29% is insufficient). 18 Microsoft, 253 F.3d at 51; see also W. Parcel Express v. UPS, 190 F.3d 974, 977 (9th Cir. 1999). 3 C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\(FINAL VERSION) DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX • Legal license requirements19; • Regulations20; • Control of natural advantages or supplies21; • Market is too small for more firms22; • IP rights23; • Exclusivity arrangements24; and • Brand name and reputation.25 iii. Existing Competitors Have Reduced Output • A firm can exercise its anticompetitive economic power by restricting the output of its rivals (excluding competition). This is generally accomplished by raising prices or critical inputs above competitive levels, which forecloses competitors from competing in the market.26 iv. Market Structure and Market Performance 1. The Market Structure Characteristics Courts Consider:27 • Relative size and strength of competitors; • Economies of scale and scope; • Probable development of the industry; • Elasticity of consumer demand; • Homogeneity of products; • Dwindling market demand; • Potential competition; and 19 See, e.g., Rome Ambulatory Surgical Ctr. v. Rome Mem’l Hosp., 349 F. Supp. 2d 389, 418-19 (N.D.N.Y. 2004) (New York’s certificate of need is an example of a license requirement). 20 See, e.g., RSA Media v. AK Media Grp., 260 F.3d 10, 15 (1st Cir. 2001). 21 See, e.g., United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 342 (D. Mass. 1953). 22 See, e.g., United States v. Griffith, 334 U.S. 100, 102 (1948). 23 See, e.g., Microsoft, 253 F.3d 34. 24 See, e.g., United States v. Dentsply Int’l, 399 F.3d 181, 189 (3d Cir. 2005). 25 See, e.g., Chicago Bridge & Iron Co. v. FTC, 534 F.3d 410, 437 (5th Cir. 2008). 26 See, e.g., Townshend v. Rockwell Int’l Corp., 200 U.S. Dist. LEXIS 5070, at *36 (N.D. Cal. 2000). 27 See ABA SECTION OF ANTITRUST LAW, ANTITRUST LAW DEVELOPMENTS 237 n.59 (7th ed. 2012) (listing market structure characteristics). 4 C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX C:\USERS\HURLEYCH\DESKTOP\ANTITRUST OUTLINE\(FINAL VERSION) DIGITAL PLAYERS AND ENTRY IN THE MERGER CONTEXT_WEIL_96382508_1.DOCX • Pricing trends and stability of market share over time. 2. The Market Evidence Courts Consider:28 • Pricing trends; • Pricing practices; • Stability of markets over time. III. Digital Players and Market Entry a. Regulatory Background for Mergers i. Section 7 of the Clayton Act, 15 U.S.C. § 18, declares unlawful mergers that “may substantially lessen competition or tend toward monopoly”; ii. The standard is “incipiency” and for unconsummated mergers requires a prediction of probable effects;29 iii. Since United States v. Philadelphia Nat. Bank, 374 U.S. 321, 363 (1963), a “structural presumption” has guided much of merger analysis – a merger that creates a firm with an “undue percentage” of a relevant market and results in a “significant increase in market concentration” is presumptively anticompetitive; iv. But the presumption can be rebutted by, among other things, evidence that market shares inaccurately predict likely anticompetitive effects,30 or that the incentive to raise price will be eliminated due to likely entry or efficiencies31; In practice, the parties look to the Merger Guidelines. Regarding entry, defendants carry the burden of showing that the entry or expansion of competitors will be “timely, likely and sufficient in its magnitude, character, and scope to deter or counteract the competitive effects of concern.32 The 28 See United States v.