United States v. E.I. Du Pont De Nemours & Co (1956)

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? Law 552 - Antitrust - Instructor: Dwight Drake

2. United States v. E.I. Du Pont De Nemours & Co (1956) • Holding: Relevant market is flexible packaging – no monopoly. • What is required is appraisal of cross-elasticity of demand of other products. • No challenge to evidence that cellophane only partially used for many products and must compete with other packaging materials. • Cellophane price higher than some subs, lower than others. • No evidence that cost differences gave Dupont monopoly power. • Market is composed of products that have reasonable interchangeability – • price, use and qualities considered. • Dissent (Warren, Black, Douglas): Cellophane had phenomenal growth; its price constantly rose; Dupont made killer profits (31% pre-tax); Dupont stopped Sylvania’s market entry with infringement suit and settlement; price rises just led to more profits, not more competition; no competitive structure and no competitive behavior. Law 552 - Antitrust - Instructor: Dwight Drake

3. 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 monopolist’s 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. Law 552 - Antitrust - Instructor: Dwight Drake

4. 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? Isn’t 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? Law 552 - Antitrust - Instructor: Dwight Drake

5. 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. • Market Issue: Could single brand product constitute relevant monopoly market for Sherman 2 purposes. • Holding: Yes • - Relevant market determined by choices available to Kodak customers. • Since repair parts not interchangeable, relevant market is only those who can provide service on Kodak products. • Competition in primary market not applicable to after market because customer is locked in. • Must make factual inquiry into “commercial realities” faced by consumers. • Dissent (Scalia, O’Connor, Thomas): Court has transformed Section 2 into an all-purpose remedy against run-of-the-mill business torts. Law 552 - Antitrust - Instructor: Dwight Drake

6. 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. Law 552 - Antitrust - Instructor: Dwight Drake

7. 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. Law 552 - Antitrust - Instructor: Dwight Drake

8. U.S. v Microsoft (D.C. Cir. 2001) – Market Power • Relevant Market is all Intel-compatible PC operating systems. • Relevant market must include all reasonably interchangeable products. • MAC OS not included: Windows users won’t switch to MAC if increase price • because of hardware costs, learning curve and fewer applications. • Information appliances (handhelds) not included because perform many fewer functions and consumers view as supplements. • Middleware (browsers that host applications with own APIs) not included because no competitive threat now. Future potentials not issue; relevant market defined by “foreseeable future”. • Not contradictory to exclude from relevant market potential threats that Microsoft allegedly is excluding. Fact that others are not developed enough to be present threats and included in market doesn’t matter as to conduct. Law 552 - Antitrust - Instructor: Dwight Drake

9. U.S. v Microsoft (D.C. Cir. 2001) – Market Power • Microsoft has market power • 95% market share. • Large barriers to entry: “Chicken and egg” – Consumers want OS with many • applications and application creators want many consumers. • Issue not how Microsoft obtained market power through merit, but what it • is wrongfully doing to preserve market power by excluding others. • Reject “uniquely dynamic” software argument that monopoly power should be determined by looking at actual behavior – Microsoft not act like monopolist. Invests in R & D, keeps prices low. • Structural analysis works in changing market – looks to near term. • Dist. CT. found some of Microsoft’s actions characteristic of monopolist – setting prices without considering rivals. Law 552 - Antitrust - Instructor: Dwight Drake