Author: Jarod Bona
Do you or your competitor have a monopoly in a particular market? If so, your conduct or their conduct might enter Sherman Act, Section 2 territory, which we call monopolization.
If you are in Europe or other jurisdictions outside of the United States, instead of monopoly, people will refer to the company with extreme market power as “dominant.”
Of course, it isn’t illegal itself to be a monopolist or dominant (and monopoly is profitable). But if you utilize your monopoly power or obtain or enhance your market power improperly, you might run afoul of US, EU, or other antitrust and competition laws.
In the United States, Section 2 of the Sherman Act makes it illegal for anyone (person or entity) to “monopolize any part of the trade or commerce among the several states, or with foreign nations.” But monopoly, by itself, is not illegal. Nor is it illegal for a monopolist to engage in competition on the merits.
As an aside, I have heard, informally, from companies that are considered “dominant” in Europe that the label of “dominant” effectively diminishes their ability to engage in typical competitive behavior because they are under such heavy scrutiny by EU Competition authorities.
If you are interested in learning more about abuse of dominance in the EU, read this article.
In the United States, monopolists have more flexibility, but they are still under significant pressure and could face lawsuits or government investigations at any time, even when they don’t intend to violate the antitrust laws. There is often a fine line between strong competition on the merits and exclusionary conduct by a monopolist.
Here are the elements of a claim for monopolization under Section 2 of the Sherman Act:
- The possession of monopoly power in the relevant market.
- The willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.
This looks simple, only two basic elements, but it isn’t.
The Possession of Monopoly Power in the Relevant Market
To determine whether an entity has monopoly power, courts and agencies usually first define the relevant market, then analyze whether the firm has “monopoly” power within that market.
But because the purpose of that analysis is to figure out whether certain conduct or an arrangement harms competition or has the potential to do so, evidence of the actual detrimental effects on competition might obviate the need for a full market analysis. If you want to learn more about this point, read FTC v. Indiana Federation of Dentists (and subsequent case law and commentary).
Sometimes this element leads to difficult questions about the line between monopoly power in a relevant market and something slightly less than that. Other times, the monopoly-power element comes down to how the court will define the relevant market. A broader market definition may create a finding of no monopoly power, while a more narrow definition means the powerful company has monopoly power.
What are the Relevant Markets?
The first step is to define—the best you can—the relevant market. This inquiry is divided into two parts: (1) the relevant product or service market; and (2) the relevant geographic market.
Essentially, what you are trying to do is figure out the area of effective competition for a particular product or service. That isn’t always easy, as some products are not perfect substitutes for each other, but do compete. So, for example, laptops and tablets are different products, sort of, and they fulfill similar but not identical purposes. If the price of one goes up, it probably has some effect on the demand for the other, but there are some people that will definitely buy a laptop and others that will take home a tablet (or have both, for different uses).
Our point is not to resolve whether laptops and tablets are in the same market, but to show that it isn’t always easy to definite a relevant product or service market.
To do so, courts often look at (1) cross-elasticity of demand and (2) the interchangeability of one product with others.
Cross-elasticity of demand is economic jargon, which looks at the extent to which a change in the price of one product will alter demand for another product. So if laptops go up in price by five percent, what will that price increase do for demand for tablets? If the effect is insignificant, this is evidence that the products are not part of the same relevant market.
The interchangeability of one product with others looks at more practical factors like the products’ purposes, characteristics, and actual use, among other considerations.
There are also submarkets, which is somewhat controversial in some courts, but we won’t get into that too deeply here. There is a Supreme Court case, however from many years ago called Brown Shoe that described the factors that courts should use to determine the boundaries of submarkets.
I’ll quote from the Brown Shoe case because, regardless of the use of submarkets, the same factors are practical guidance for standard product market definition (going beyond the quantitative economic approaches): “The boundaries of such a submarket may be determined by examining such practical indicia such as industry or public recognition of the submarket as a separate economic entity, the product’s peculiar characteristics and uses, unique production facilities, distinct customers, distinct prices, sensitivity to price changes, and specialized vendors.” Brown Shoe Co. v. U.S., 370 U.S. 294, 325 (1962).
These factors may be important as the Supreme Court is increasingly moving toward practical tests in antitrust and rejecting “overly mechanical” analyses. That is, Courts will increasingly move toward examining the economic realities of markets, apart from prior strict doctrinal tests developed by earlier cases (see American Needle and NC Dental).
Indeed, we saw in the Supreme Court’s Apple v. Pepper decision that both the Majority and Dissent claimed that the other side’s approach elevated form over substance. (You can read the first part of the Apple v. Pepper article here).
The scope of the geographic market may also be important, particularly in hospital and health care antitrust cases with relatively narrow geographic markets.
Geographic-market analyses may include some quantitative analysis. There is, for example, the SSNIP, which you can read about in the Horizontal Merger Guidelines put out by the FTC and DOJ.
Other factors that courts will examine for geographic market definition include, for example, where the competitors actually market their products; how difficult the products are to move (based upon size, perishability, etc.); regulatory requirements that affect the flow of products; shipping limitations inherent in the products or in their cost of shipping (i.e. overly heavy); and other factors.
What is the point of that often expensive effort to define the relevant product and geographic markets? In a monopolization case, it is to determine whether the defendant is, in fact, a monopolist. And that is to figure out whether certain conduct can, in fact, negatively impact competition such that Section 2 of the Sherman Act should interfere with the private functioning of the market.
Monopoly power is the power to control price (or output) or exclude competition within the affected market.
The most common way to determine whether an entity has monopoly power is to look at their market share. It is, however, dangerous to set a specific percentage as the “required” market share for monopoly, because it really depends upon a number of factors, including, for example, entry barriers. It varies in every case. But courts usually end up around seventy-percent as the typical bottom share for a monopolist.
Of course, and this is important, market share is just a proxy for monopoly power. If a plaintiff or government agency can show that an entity is exercising monopoly power, in fact, a market-share analysis may not be necessary. One example of this is that an action against a government might involve a government entity using its control over the market to boost its own competition in the market. In that example, we don’t need to analyze market share to determine whether the entity has monopoly power—we can see that it is exercising monopoly power.
Once a court determines that the defendant is a monopolist, it must examine whether it has engaged in monopolizing conduct.
What is Monopolizing Conduct?
As I mentioned near the beginning of this article, the possession of monopoly power by itself is not illegal. So what is?
As described by the judge-made doctrine, under Section 2 of the Sherman Act, it is the willful acquisition or maintenance of monopoly power—as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident—that leads to antitrust liability.
But what does that mean?
The answer to that question could fill out a book of speculation. This is an area that has led to great disagreements among courts, scholars and other commentators.
There are some easy categories. If the conduct is an exclusionary practice that is usually illegal under different provisions of the antitrust laws—like an exclusionary boycott, bundling, tying, certain exclusive dealing—it may be illegal by a monopolist if there is harm to competition and antitrust injury.
The question is much more difficult when the conduct goes beyond the standard antitrust categories. In that situation, the inquiry turns into an analysis that is similar to the rule of reason in other Sherman Act cases. In other words, the court will effectively weigh the pro and anticompetitive aspects of the conduct. The court will also look at business justifications and examine whether, for example, the monopolist forsake short-term profits to achieve an anticompetitive end.
Ultimately, the question for the court is whether the monopolist is competing on the merits or engaging in exclusionary conduct without a rational business purpose, apart from anticompetitive goals. It is sometimes very difficult to draw the line distinguishing these two sides.
Some examples of pernicious monopolizing conduct include sham litigation (to drive out competitors—a common claim in intellectual property cases), tortious misconduct, fraud, false statements, etc.
If you are trying to determine whether your company or your competitor is engaging in monopolistic conduct, this short article isn’t enough to give you true guidance, you really need to call an antitrust attorney because the question is context-specific.
You should also understand that there are variations of monopolization claims like attempted monopolization, joint monopolization, and conspiracy to monopolize. These have slightly different elements, but go to the same core issues.
Monopolization claims are not easy to make or prove, but they create substantial risk for defendants and require great care and expertise to litigate. They are also fascinating cases that have significant implications for our economy.
photo credit: Mic V. Portchester, Hampshire -England via photopin (license)