Part 11- Regulation of Business, Chapter 49: Antitrust The Sherman Act, Note 6

Key Points on Monopolization under the Sherman Act (§ 2) Definition and Elements of Monopolization Under § 2 of the Sherman Act, monopolization occurs when a firm willfully acquires or maintains monopoly power, rather than achieving dominance through legitimate business practices such as innovation, efficiency, or historical circumstances. Elements of Monopolization 1. Monopoly Power in a Relevant Market: o The ability to control prices or exclude competition in a defined market. o Often inferred when a firm holds a dominant share of the market (typically >70%) coupled with high entry barriers. o Courts define the relevant market in terms of:  Geographic scope: Where competitors effectively operate.  Product market: Products that are “reasonably interchangeable” by consumers for the same purpose. 2. Willful Acquisition or Maintenance of Power: o Conduct aimed at eliminating competition rather than competing on the merits. o Includes predatory pricing, exclusive dealing, and coercive tactics. 3. Intent to Monopolize: o Evidence of deliberate actions to gain or maintain monopoly power. o Courts distinguish between exclusionary behavior (harmful to competition) and vigorous competition (beneficial to consumers). Determining the Relevant Market Courts carefully assess the relevant market in monopolization cases, as it is pivotal to establishing monopoly power. Geographic Market   Defined by the area where effective competition occurs. Factors include transportation costs, consumer preferences, and regional availability. Product Market   Determined by the functional interchangeability test: Products must serve as substitutes in terms of functionality and consumer perception. Example: In United States v. E. I. du Pont de Nemours & Co., the Court rejected the narrow market for cellophane alone and instead considered all “flexible wrapping materials” as part of the relevant market. Monopoly Power and Entry Barriers Monopoly power is typically inferred from a dominant market share combined with entry barriers, such as:    High startup costs for new competitors. Network effects that favor the incumbent (e.g., compatibility requirements for operating systems like Microsoft Windows). Consumer reliance on existing systems due to established compatibility with other products. The Microsoft Case The U.S. government and states accused Microsoft of monopolizing the market for Intel-compatible PC operating systems. Findings on Monopoly Power:    The market was defined as Intel-compatible PC operating systems worldwide, excluding alternatives like Apple’s Mac OS and middleware software. Microsoft’s 95% market share, along with structural entry barriers (e.g., the “applications barrier to entry”), solidified its monopoly status. Middleware (e.g., Netscape Navigator and Java) was considered insufficiently competitive to constrain Microsoft's power. Exclusionary Conduct:  Microsoft was found to engage in anticompetitive behavior to maintain its monopoly, such as: o Restricting competitors' access to its operating system APIs. o Bundling its Internet Explorer browser with Windows to disadvantage Netscape Navigator. Requisite Intent to Monopolize To prove intent to monopolize:  Courts look for deliberate actions to maintain monopoly power through anticompetitive means, such as: o Predatory pricing: Selling below cost to drive out competitors. o Exclusive dealing: Forcing customers or suppliers to avoid rivals. o Tying arrangements: Bundling products to coerce purchases. Judicial Standards for Monopolization   Harm to Competition: Anticompetitive conduct must harm the competitive process and consumer welfare, not just competitors. Procompetitive Justifications: A monopolist may defend conduct as necessary for innovation, efficiency, or consumer benefit. Courts weigh these justifications against the harm caused.