Eng' 298A 017

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Eng. 298A 017 Eng. 198 003
Public Policy for Engineers Lecture 8 Antitrust
(I) From Railways to the Information Age
Stephen M. Maurer Goldman School of Public
Policy smaurer_at_berkeley.edu
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The Basic Idea . . .
Demand
M.C.
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If the concentrated powers of a combination
are intrusted to a single man, it is a kingly
prerogative, inconsistent with our form of
government, and should be subject to the strong
resistance of the State and national authorities.
If anything is wrong, this is wrong. If we will
not endure a king as a political power we should
not endure a king over the production,
transportation, and sale of any of the
necessaries of life. John Sherman    Power
that controls the economy should be in the hands
of elected representatives of the people, not in
the hands of an industrial oligarchy . . . That
is the philosophy and command of the Sherman Act.
It is founded on a theory of hostility to the
concentration in private hands of power so great
that only a government of the people should have
it. William O. Douglas
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The Sherman Act
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.
  15 USC 1.      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 . .
.   15 USC 2
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WHO CAN SUE?   Department of Justice Private
Parties States    RELIEF   Criminal
Penalties Fines Jail   Injunctions   Structur
al Relief   Treble Damages
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What Does The Sherman Act Mean?   -- Every
contract . . . in restraint of trade   -- The
Rule of Reason !!!   Standard Oil
Co. v. United States, 221 U.S. 1 (1911)   -- A
Balancing Test -- What is The
Market?     Example Exclusive Dealing
Contracts Tampa Elec. Co. v.
Nashville Coal Co., 365 US 320 (1961)
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Markets Market Power
 Herfindahl Index - Sum of Squares of Each
Firms Market Share lt 1,000
Competitive lt 1,800 Problematic gt
1,800 Challenge gt 2,500 Deregulation
o.k. Types of Markets   - Product Geographic
Goods Markets - Technology Markets
(Licenses) - Innovation Markets (RD for goods
close substitutes).   What is a Market?   -
What combination of companies would be needed for
a 5 non- transitory price rise to be profitable?
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Section 1 Per Se Violations
  Horizontal Price Fixing - Vertical
Restrictions Minimum Only   Horizontal Market
Division - Vertical o.k. Continental TV,
Inc. v. GTE Sylvania, Inc., 433 US 36
(1977). Boycotts/Refusals to Deal   -
Market Power Essential Facility -
Cooperation Required to Compete  
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Section 1 Per Se Violations
TYING Rule Separate Products Market Power
in First Market Substantial Effect on Second
Market Rationale Extending market power
from one market to another Economics Why
isnt this just a subsidy?
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Examples
Buyers Cooperatives Northwest Wholesale
Stationery Buyers cooperatives can exclude
members.   Network Externalities Addamax DEC,
SUN, and HP violated the antitrust laws by
pressuring software vendors to write programs for
their computers.   Standards Hydrolevel
Private standards organizations must consider
reasonable technical alternatives.   Allied Tube
Attempts to corrupt standards organizations are
an antitrust violation.   In re Dell Failure to
disclose fact that proposed standard involved
patented technology was an antitrust
violation.   Potter Instrument Patent holder
estopped by failure to disclose patent.
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Section 2
Monopolization
Monopoly Power

Wilful Acquisition
or
Maintenance
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Section 2
Attempted Monopolization
Anticompetitive Conduct

Intent

Dangerous Probability
of Success
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Section 2
Examples
Predatory pricing
Sham Litigation
Patent Fraud
Baseless Patents
Mandatory Packaging Term Extensions Ties
Misusing IP?
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ATT
Bell Operating Companies
ATT Long Distance
Western Electric Bell Labs
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ATT
1949 US Files Suit
1956 Consent Decree
Restricted to Common Carrier Services
Western Electric Limited to Bell System
IP Licenses to All Applicants
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Bell Operating Companies
ATT
ATT Long Distance
vs.
Western Electric Bell Labs
Customer Equipment Makers   - FCC
Regulations   - Protective Connecting
Arrangements
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Bell Operating Companies
ATT
ATT Long Distance
vs.
Western Electric Bell Labs
Telephone Equipment Makers   - FCC
Regulations - Buy Western
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Bell Operating Companies
ATT
ATT Long Distance
vs.
Long Distance Providers  - FCC
Regulations - Customer Premises Rule -
Foreign Exchange Service - Interconnect Prices
Terms - Vaporware - Cross-Subsidies
Western Electric Bell Labs
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ATT
1968 Carterphone
1974 US Files Suit No. 2
1981 Trial Starts
1982 Settlement
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ATT
Bell Operating Companies
Divestiture
ATT Long Distance
x
x
Western Electric Bell Labs
- Baby Bells Split Off - ATT Keeps Western
Electric - ATT Allowed Back into All
Markets - Compulsory Licensing Ends
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ATT
Bell Operating Companies
Epilogue
ATT Long Distance
Optical Fibers Power Systems
x
Western Electric Bell Labs
Agere (2001) Microelectronics
1996 Lucent Spun Off
Avaya (2000) Business Communications
2001 A More Focused Company?
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ATT
Did it Work?
Microeconomic Efficiency
Innovation Policy
"Critical Mass"
The Schumpeter Argument
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Software
IBM
Printers
CPU
Tape
Peripherals
Drive
Disk
Service
Drive
"Data Processing Systems"
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IBM
Chronology
1964 IBM 360 Released 1967 Competing Tape
Drives Gain Market Share   1970 IBM Task
Force   - IBM 370 Launched   -
Repackaged Disk Controller   - IBM
Moves Out of Tape Drives   - Price Cuts
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IBM
Chronology ctd . . .
1971 Long Term Leases   - 25-30 Cuts in
Exchange for Lock-In   - No Cost to
IBM   1972 SMASH Program   - Price Below
Competitors Cost   - Force Redesigns
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Was IBM a Rational Monopolist?
A Competitive Sector is Good For Profits
The "Toehold" Problem
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IBM
Lawsuit
1969 Complaint   1975 Trial Starts (Liability
Phase)   1982 Trial Ends (Projected)   1984 Judgme
nt (Projected)   ???? Damages Phase   ???? Appeals
End
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IBM
The Right Outcome?
Relief
Damages
Fines
Injunction
Structural Relief
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IBM
The Right Outcome?
Uncertainty
Changing Laws
Innovation Policy
Politics