1. Class 11 Whiteboard Antitrust, Fall, 2012 Monopolization under Sec. 2 Randal C. Picker Leffmann Professor of Commercial Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2000-12 Randal C. Picker. All Rights Reserved.

2. May 15, 2015Copyright © 2000-12 Randal C. Picker2 Strategic Entry Hypo: Capacity Competition n Starting Point u Incumbent (I) owns single cement plant in town. u Transportation costs preclude shipments from other locations. u I earns profits of $25 per period.

3. May 15, 2015Copyright © 2000-12 Randal C. Picker3 Strategic Entry Hypo: Capacity Competition n Decisions u I can leave its plant capacity alone or expand it. u A potent entrant (E) can build a cement plant and go into competition with I or build a general manufacturing plant and not compete with I.

4. May 15, 2015Copyright © 2000-12 Randal C. Picker4 Incumbent Profits n I would earn: u $25 profits per period from the cement plant if it did not expand it and E entered M. u $30 profits per period from the cement plant if it expanded the plant and E entered M. u $10 profits per period from the cement plant if it did not expand and E entered C. u $5 profits per period from the cement plan if it expanded and E entered C.

5. May 15, 2015Copyright © 2000-12 Randal C. Picker5 Entrant Profits n E would earn $10 profits per period from manufacturing. n E would earn: u $15 profits from entering C if I doesn’t expand its plant. u $5 profits from entering C if I expands its plant.

6. May 15, 2015Copyright © 2000-12 Randal C. Picker6 Profits Table n We can represent this in the following table: Incumbent Entrant Not Exp Expand Enter M Instead (25,10) (10,15) (5,5) (30,10) 1. Suppose that E were going to …, what would I do? 2. Suppose that I were going to …, what would E do?

7. May 15, 2015Copyright © 2000-12 Randal C. Picker7 Simultaneous Moves n Suppose that E and I make their decisions at the same time: what would happen? n Two (Pure-Strategy) Nash Equilibria Exist u If E were going to enter, I would not expand; if I were going to not expand, E would enter. These are strategically consistent decisions, or they form a Nash equilibrium. u If E were going to Man, I would expand, and if I were going to expand, E would Man. This is a 2nd Nash equilibrium.

8. May 15, 2015Copyright © 2000-12 Randal C. Picker8 Substantial Uncertainty n With two Nash equilibria, we can have little confidence in how this game will be resolved.

9. May 15, 2015Copyright © 2000-12 Randal C. Picker9 E Moves First n Suppose E moves first: I expandsI notI expandsI not exp E opens manE enters cement 1 23 (10,30)(10,25)(5,5)(15,10) Payoffs: (E, I)

10. May 15, 2015Copyright © 2000-12 Randal C. Picker10 Results n Use backwards induction to solve this game. u At node 3, I will not expand. u At node 2, I will expand. u At node 1, if E enters, putting I at node 3, I will not expand, and E will get 15; if E manufactures instead, putting I at node 2, I will expand, and E will get 10. n E will enter the cement business.

11. May 15, 2015Copyright © 2000-12 Randal C. Picker11 I Moves First n Suppose I moves first: E opens ME enters CE opens ME enters C I expandsI doesn’t expand 1 23 (30,10)(5,5)(25,10)(10,15) Payoffs: (I, E)

12. May 15, 2015Copyright © 2000-12 Randal C. Picker12 Results n Use backwards induction to solve this game. u At node 3, E will enter C. u At node 2, E will manufacture instead. u At node 1, if I doesn’t expand, putting E at node 3,E will enter, and I will get 10; if I expands instead, putting E at node 2, E will manufacture, and I will get 30.

13. May 15, 2015Copyright © 2000-12 Randal C. Picker13 Results n In the Model u I will expand. u Order resolves the uncertainty, and determines the outcome. n In reality u Is this Alcoa and should we think of it as an SA2 violation?