COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT U.S. DEPARTMENT OF JUSTICE 2008 COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT ISSUED BY THE U.S. DEPARTMENT OF JUSTICE SEPTEMBER 2008 This report should be cited as: U.S. DEP’T OF JUSTICE, COMPETITION AND MONOPOLY: SINGLE-FIRM CONDUCT UNDER SECTION 2 OF THE SHERMAN ACT (2008). This report can be accessed electronically at: www.usdoj.gov/atr/public/reports/236681.htm TABLE OF CONTENTS EXECUTIVE SUMMARY .............................................................. vii INTRODUCTION ..................................................................... 1 CHAPTER 1: SINGLE-FIRM CONDUCT AND SECTION 2 OF THE SHERMAN ACT: AN OVERVIEW ................................... 5 I. The Structure and Scope of Section 2 .................................................. 5 A. Monopolization .................................................................. 5 B. Attempted Monopolization ........................................................ 6 II. The Purpose of Section 2 and Its Important Role in Sound Antitrust Enforcement ........... 7 III. Principles that Have Guided the Evolution of Section 2 Standards and Enforcement ......... 8 A. The Monopoly-Power Requirement ................................................ 9 B. The Anticompetitive-Conduct Requirement ......................................... 9 C. Assaults on the Competitive Process Should Be Condemned .......................... 10 D. Protection of Competition, Not Competitors ........................................ 11 E. Distinguishing Competitive and Exclusionary Conduct Is Often Difficult ............... 12 F. Concern with Underdeterrence and Overdeterrence ................................. 13 G. The Importance of Administrability when Crafting Liability Standards Under Section 2 ............................................... 15 IV. Conclusion ........................................................................ 18 CHAPTER 2: MONOPOLY POWER ..................................................... 19 I. Introduction ...................................................................... 19 II. Market Power and Monopoly Power ................................................. 19 III. Identifying Monopoly Power ........................................................ 21 A. Market Shares .................................................................. 21 1. Courts Typically Have Required a Dominant Market Share to Infer Monopoly Power ............................................................. 21 2. Significance of a Dominant Market Share ........................................ 22 3. Market-Share Safe Harbor ..................................................... 24 B. Durability of Market Power ...................................................... 24 IV. Market Definition and Monopoly Power .............................................. 25 V. Other Approaches to Identifying Monopoly Power ..................................... 27 A. Direct Evidence of High Profits, Price-Cost Margins, and Demand Elasticity ............ 28 B. Direct Evidence of Anticompetitive Effects ......................................... 30 VI. Conclusion ........................................................................ 30 CHAPTER 3: GENERAL STANDARDS FOR EXCLUSIONARY CONDUCT ................. 33 I. Introduction ...................................................................... 33 II. Allocation of Burdens of Production and Proof ........................................ 35 III. Proposed General Standards ........................................................ 36 A. Effects-Balancing Test ........................................................... 36 B. Profit-Sacrifice and No-Economic-Sense Tests ....................................... 39 C. Equally Efficient Competitor Test ................................................. 43 D. Disproportionality Test .......................................................... 45 SECTION 2 REPORT IV. Conclusion ........................................................................ 46 CHAPTER 4: PRICE PREDATION ....................................................... 49 I. Predatory Pricing .................................................................. 49 A. Introduction .................................................................... 49 B. Background .................................................................... 50 C. Analysis ....................................................................... 54 1. Frequency of Predatory Pricing ................................................ 54 2. Above-Cost Pricing ........................................................... 58 3. Appropriate Measure of Cost .................................................. 60 a. Analytical Considerations .................................................. 60 b. Average Total Cost ........................................................ 61 c. Measures of Incremental Cost ............................................... 62 d. Emerging Consensus Support for Average Avoidable Cost ...................... 65 4. Recoupment ................................................................. 67 5. Potential Defenses ............................................................ 69 a. Meeting Competition ...................................................... 70 b. Efficiency Defenses ........................................................ 71 6. Equitable Remedies ........................................................... 72 D. Conclusion ..................................................................... 73 II. Predatory Bidding ................................................................. 73 CHAPTER 5: TYING ................................................................... 77 I. Introduction ...................................................................... 77 II. Background ....................................................................... 78 III. Analysis .......................................................................... 82 A. Potential Anticompetitive Effects .................................................. 83 1. Monopolizing the Tied-Product Market ......................................... 83 2. Maintaining a Monopoly in the Tying-Product Market ............................ 84 B. Potential Procompetitive Effects .................................................. 84 C. Price Discrimination ............................................................. 85 D. Technological Ties .............................................................. 87 E. Tying Should Not Be Per Se Illegal ................................................ 89 IV. Conclusion ........................................................................ 90 CHAPTER 6: BUNDLED DISCOUNTS AND SINGLE-PRODUCT LOYALTY DISCOUNTS ... 91 I. Bundled Discounts ................................................................. 91 A. Introduction .................................................................... 91 B. Background .................................................................... 92 C. Analysis ....................................................................... 95 1. Theories of Competitive Harm ................................................. 95 2. Potential Procompetitive Benefits ............................................... 96 3. Safe Harbors ................................................................. 97 a. The Total-Bundle Predation-Based Safe Harbor ................................ 98 b. The Discount-Allocation Safe Harbor ......................................... 99 4. Analysis of Bundled Discounts Falling Outside a Safe Harbor ............................................................... 102 D. Conclusion .................................................................... 105 II. Single-Product Loyalty Discounts ................................................... 106 iv TABLE OF CONTENTS A. Introduction ................................................................... 106 B. Background ................................................................... 108 C. Analysis ...................................................................... 110 1. Predatory-Pricing Analysis ................................................... 111 2. Foreclosure Analysis ......................................................... 113 D. Conclusion .................................................................... 116 CHAPTER 7: UNILATERAL, UNCONDITIONAL REFUSALS TO DEAL WITH RIVALS .... 119 I. Introduction ..................................................................... 119 II. Background ...................................................................... 120 III. Analysis ......................................................................... 123 A. Using the Antitrust Laws to Require a Monopolist to Deal with a Rival ................ 123 B. The Essential-Facilities Doctrine .................................................. 127 IV. Conclusion ....................................................................... 129 CHAPTER 8: EXCLUSIVE DEALING ................................................... 131 I. Introduction ..................................................................... 131 II. Background ...................................................................... 132 A. Supreme Court ................................................................ 133 B. Courts of Appeals .............................................................. 134 III. Analysis