United States v' E'I' Du Pont De Nemours

1
United States v. E.I. Du Pont De Nemours Co
(1956)
Basic Facts During period 1923-47, Dupont
controlled 75 of cellophane sold in U.S., which
accounted for 20 of all flexible packaging
products. Government contended Dupont had
illegal monopoly. What was issue regarding
relevant market? What factors did majority
consider? What factors did dissent rely
upon? Who would the post-Chicago analysts likely
side with?
2
The Cellophane Fallacy

• Theory Firm with monopoly power will keep price
  just below mark that will require mass to shift
  to substitute products. So cross-elasticity of
  demand for a product calculated on current price
  only defines the outer-limit of the monopolists
  punitive power.
• SSNIP of 1992 merger guidelines requires that
  cross-elasticity for substitute products be
  measured after small, significant,
  non-transitory increase in price. If it results
  in critical mass move to substitutes, then all
  alternatives are included in relevant market.

3
Eastman Kodak Co v. Image Technical Services
(1992)
Basic Facts Kodak encouraged independent ISOs
to provide after-market service and repair for
its photocopying and micrographic equipment.
Kodak then decided to reclaim service business
and refused to sell parts to ISOs. ISOs sued
under Sherman 1 and 2. What was market issue
before court? Isnt a single brand always a
market unto itself? Is there a tort or a breach
of contract remedy available to ISOs? Is this
relevant to antitrust policy?
4
Microsoft Warren-Boulton Testimony

• Operating system compatible with x/86 Pentium PCs
  relevant market.
• - Horizontal Merger Guidelines price
  power of hypothetical monopolist.
• - Fact that OS is separate product and
  OEMs say they would not switch if
• price raised show power over this market
  segment.
• - High cost to switch to other system.
• - OS cost small share of PC cost (2.5).
  Gives price power.
• Microsoft possess monopoly power.
• - Issue Power to raise market price above
  competitive level or exclude
• competition.
• - Market share very high over 95 OS
  installations.
• - High barriers to entry High scale
  economies and sunk costs customers
• locked-in, high switching costs
  applications positive feedback barrier
• high installed applications is barrier
  IBM failure.
• - Exclusionary conduct Willingness to
  refuse business no regard for cost.
• - High profitability, P/E ratio (twice
  average) and ability to raise prices
• above competitive level.

5
Microsoft Schmalensee Testimony

• Monopoly claim is red herring.
• Microsoft has no power over software
  distribution.
• Two approaches to monopoly power Structural
  Behavioral.
• Behavioral approach better when markets blurred
  best in software
• industry.
• Microsoft constrained by past, present, future.
• Wrong to define relevant market to exclude
  potential new entrants and then
• to measure power by how same new entrants
  are excluded.
• 7. Merger Guidelines bad approach here. Focus
  only on short-run. For
• software, long-term competition is of most
  relevance.
• 8. Long-term, Microsoft faces stiff
  competition.
• 9. Microsoft only 9 of U.S. software revenues.
  This is most relevant.
• 10. Monopoly power All successful software has
  high market share superior
• foresight, ingenuity is reason for success
  OS prices relative to PC prices
  irrelevant high net margin and PC ratios just
  mean profitable in short-run Microsoft
  does not raise prices higher because competition
  exists.

6
U.S. v Microsoft (D.C. Cir. 2001) Market Power

• What was relevant market? Did it include MAC OS?
• What was Microsofts contradictory argument
  regarding potential market threats?
• How did the court treat the uniquely dynamic
  software argument?
• What was Courts view of short-term vs. long-term
  in defining the relevant market?