1. Class 2 Antitrust, Winter, 2018 Introduction: Market Power
11/19/2018
Class 2 Antitrust, Winter, Introduction: Market Power
Randal C. Picker
James Parker Hall Distinguished Service Professor of Law
Ludwig & Hilde Wolf Teaching Scholar
The Law School
The University of Chicago
Copyright © Randal C. Picker. All Rights Reserved.

2. Demand Curve Idea: Consumers will buy more at lower prices
11/19/2018
Demand Curve Idea: Consumers will buy more at lower prices P Q
Demand Curve 10
P = 10 – Q
November 19, 2018

3. Competitive Outcome: Price = Marginal Cost
11/19/2018
Competitive Outcome: Price = Marginal Cost P Q
Demand Curve 10
Consumer Surplus
P = 10 – Q
MC = 4 PC
Total Revs (TR)/Total Costs (TC)
Marginal Cost QC
November 19, 2018

4. Taking Stock Competitive Quantity At P = MC Meaning at 10 - Q = 4
PC = 4, QC = 6
November 19, 2018

5. Taking Stock Amount of Consumer Surplus
Just area of red triangle = ½ * base * height
Meaning ½ * 6 * 6 = 18
This is the extra social value generated by the competitive process
November 19, 2018

6. Why Are Monopolies Bad? The Simple Answer Reduced Output
11/19/2018
Why Are Monopolies Bad?
The Simple Answer
Reduced Output
A monopolist will produce less than would be produced under competitive conditions
The output reduction makes society worse off
November 19, 2018

7. What Do Monopolists Do? First Answer Same answer, different way
Maximize profits
Same answer, different way
Set Marginal Revenue = Marginal Cost
MR = MC
November 19, 2018

8. Deriving Marginal Revenue
11/19/2018
Deriving Marginal Revenue
TR = P x Q = (10 – Q) x Q = 10Q – QxQ
Differentiate TR with respect to Q:
November 19, 2018

9. Monopoly Outcome: Marginal Revenue = Marginal Cost
11/19/2018
Monopoly Outcome: Marginal Revenue = Marginal Cost P Q
Demand Curve 10 CS
P = 10 – Q PM
Profits
DWL
MC = 4
MR = 10 – 2Q PC TC
Marginal Cost
DWL = Deadweight Loss QM QC
Marginal Revenue
November 19, 2018

10. Taking Stock Monopoly Outcomes
MR = MC  10 – 2Q = 4 so QM = 3 and PM = 7
Consumer surplus = ½ * 3 * 3 = 4.5
Profits = 3 * (7 – 4) = 9
DWL = 4.5
November 19, 2018

11. Taking Stock
Comparing the Competitive Outcome and the Monopoly Outcome
Comp: SWF = 18
Monop: SWF = 13.5
18 split into three components and the 4.5 DWL is the difference in SWF between the two situations
November 19, 2018

12. Bottom Line Monopolies reduce output to boost profits
11/19/2018
Bottom Line
Monopolies reduce output to boost profits
That transfers value from consumers to the monopolist
The monopolist declines to make sales that would increase social welfare
November 19, 2018

13. Wrinkle Two-Part Pricing How do we assess that?
Require consumers to pay a membership fee to access the good
Set that price = 18 (17.99 if you like) and then set the price of the good at 4
How do we assess that?
November 19, 2018

14. Answer
If …
Demand curve really is that of a representative consumer and all consumers are identical, this will work
Once in the door consumers will face the correct social price for the good—marginal cost—and will buy the competitive amount
November 19, 2018

15. Answer If … Does this work in reality?
The monopolist fully extracts the social surplus through the membership fee and no DWL arises
Does this work in reality?
November 19, 2018

16. Du Pont (US 1956) Key Questions
How does du Pont’s position in cellophane arise?
Does that matter?
What does it tell us about whether du Pont has market power or how it is exercising that market power?
November 19, 2018

17. Du Pont (US 1956) Key Facts Does du Pont have market power?
Cellophane “market” is 75% du Pont and 25% Sylvania with the latter’s position limited by patent licenses
Cellophane is 20% of flexible packaging materials “market”
Does du Pont have market power?
November 19, 2018

18. Says the Court Substitutes?
“Determination of the competitive market for commodities depends on how different from one another are the offered commodities in character or use, how far buyers will go to substitute one commodity for another.”
November 19, 2018

19. Says the Court Cross-Elasticity of Demand?
“What is called for is an appraisal of the ‘cross-elasticity’ of demand in the trade. See Note, 54 Col. L. Rev The varying circumstances of each case determine the result. In considering what is the relevant market for determining the control of price and competition, no more definite
November 19, 2018

20. Says the Court Cross-Elasticity of Demand?
“rule can be declared than that commodities reasonably interchangeable by consumers for the same purposes make up that ‘part of the trade or commerce,’ monopolization of which may be illegal.”
November 19, 2018

21. Cross-Elasticities Key Idea
11/19/2018
Cross-Elasticities
Key Idea
How much does a rise in the price of one good change the quantity consumed of a second good?
November 19, 2018

22. Defining Cross Elasticity
11/19/2018
Defining Cross Elasticity
The percentage change in quantity of good 1 divided by the percentage change in price of qood 2.
Formally:
November 19, 2018

23. Examples Increase of price of McDonald’s hamburger:
11/19/2018
Examples
Increase of price of McDonald’s hamburger:
How many more hamburgers are sold by Burger King?
How much more chicken is sold by KFC?
How many more meals are sold by Alinea?
How many more pairs of shoes are sold?
November 19, 2018

24. And in du Pont Itself Conclusion
“That market is composed of products that have reasonable interchangeability for the purposes for which they are produced—price, use and qualities considered. While the application of the tests remains uncertain, it seems to us that du Pont should not be found to monopolize cellophane”
November 19, 2018

25. And in du Pont Itself Conclusion
“should not be found to monopolize cellophane when that product has the competition and interchangeability with other wrappings that this record shows.”
November 19, 2018

26. Merger Guidelines: Mergers and Markets
Don’t necessarily need to define the market
“The Agencies’ analysis need not start with market definition. Some of the analytical tools used by the Agencies to assess competitive effects do not rely on market definition, although evaluation of competitive alternatives available to customers is always necessary at some point in the analysis.”
November 19, 2018

27. MG: Mergers and Markets
Substitutes and Market Definition
“Market definition focuses solely on demand substitution factors, i.e., on customers’ ability and willingness to substitute away from one product to another in response to a price increase or a corresponding non-price change such as a reduction in product quality or service.”
November 19, 2018

28. MG: Market Definition: The HMT
11/19/2018
MG: Market Definition: The HMT
The Hypothetical Monopolist Test
“The Agencies employ the hypothetical monopolist test to evaluate whether groups of products in candidate markets are sufficiently broad to constitute relevant antitrust markets. The Agencies use the hypothetical monopolist test to identify a set of products that are reasonably interchangeable with a product sold by one of the merging firms.”
November 19, 2018

29. MG: Market Definition: HMT
11/19/2018
MG: Market Definition: HMT
The Hypothetical Monopolist Test
“The hypothetical monopolist test requires that a product market contain enough substitute products so that it could be subject to post-merger exercise of market power significantly exceeding that existing absent the merger.”
November 19, 2018

30. MG: Market Definition and SSNIP
11/19/2018
MG: Market Definition and SSNIP
Defining SSNIP
“Specifically, the test requires that a hypothetical profit-maximizing firm, not subject to price regulation, that was the only present and future seller of those products (“hypothetical monopolist”) likely would impose at least a small but significant and non-transitory increase in price (“SSNIP”)
November 19, 2018

31. MG: Market Definition and SSNIP
11/19/2018
MG: Market Definition and SSNIP
Defining SSNIP
“on at least one product in the market, including at least one product sold by one of the merging firms.”
November 19, 2018