Law Antitrust - Instructor: Dwight Drake United States v. E.I. Du Pont De Nemours & Co (1956) Basic Facts: During period , 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 Antitrust - Instructor: Dwight Drake 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 Antitrust - Instructor: Dwight Drake 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 Antitrust - Instructor: Dwight Drake Microsoft: Warren-Boulton Testimony 1.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. 2.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 Antitrust - Instructor: Dwight Drake Microsoft: Schmalensee Testimony 1. Monopoly claim is red herring. 2. Microsoft has no power over software distribution. 3. Two approaches to monopoly power: Structural & Behavioral. 4. Behavioral approach better when markets blurred – best in software industry. 5. Microsoft constrained by past, present, future. 6. 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 Antitrust - Instructor: Dwight Drake U.S. v Microsoft (D.C. Cir. 2001) – Market Power 1.What was relevant market? Did it include MAC OS? 2.What was Microsoft’s “contradictory” argument regarding potential market threats? 3.How did the court treat the “uniquely dynamic” software argument? 4.What was Court’s view of short-term vs. long-term in defining the relevant market?