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Exclusionary Conduct (Monopolization)

Section 2 of the Sherman Act: "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony."

Three offenses: primarily single-firm conduct

  • Monopolization
  • Attempted monopolization
  • Conspiracy to monopolize: also a Section 1 issues
Sports analogy:
  • Section 1 includes the rules for players
  • Section 2: dominant players play by different (more restrictive) rules

Elements of the monopolization offense (see Grinnell):

  1. Monopoly power: possession of monopoly power in the relevant market, i.e., the substantial power to do wrong
  2. Exclusionary or anticompetitive conduct: willful acquisition or maintenance of monopoly power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident
    • Focus on the harm to rivals, which matters because of the effects on parties downstream (Section 2 indirectly protects consumers)
    • Unilateral conduct:
      • Refusals to deal with competitors, suppliers, or distributors/customers (Section 2)
      • Predatory pricing (Section 2): dominant firm sets prices low to drive competition out of the market, raise prices above competitive levels in the future
    • Concerted conduct:
      • Tying (Sections 1 and 2): if you buy a product, you must buy a service
      • Exclusive dealing (Sections 1 and 2): telling transacting party they can't deal with rivals

Similar burden shifting framework as under Section 1:

  1. P's prima facie case:
    • Power: define a relevant product and geographic market and establish that D has substantial market power in this market through direct or circumstantial evidence (or both)
    • Conduct: show D has acquired, maintained, or enhanced this market power through exclusionary (anticompetitive) conduct
  2. Burden of production then shifts to D to give a procompetitive justification or provide procompetitive evidence for the conduct
  3. Burden shifts back to P to show that the anticompetitive harm outweighs any procompetitive benefits

Conduct hierarchy under Section 2:

  1. Violation of another area of law while you have market power
    • Crimes: criminal conduct while you have market power is a clear violation of Section 2
      • E.g., arson, theft, extortion, fraud, embezzlement
    • Torts: intentional torts done by a company with market power are clear violations of Section 2
      • E.g., tortious interference, fraudulent misrepresentation, trade libel
  2. Conduct that is neither a crime nor a tort
    • Exclusionary restraints of trade under Section 1: if a firm has monopoly power, it's reasonable to infer they violated Section 2
      • E.g., exclusive dealing (Lorain), tying
    • Otherwise legal conduct done with monopoly power (liability is rare here)
      • Unilateral refusals to deal with competitors, suppliers, customers, conditional pricing practices, predatory pricing, capacity expansion (Alcoa)

Differences between U.S. and EU:

  • EU: monopoly pricing is illegal
    • Dominant firm will price too high and create losses
    • Surplus from monopoly can be weaponsized by the monopoly against potential competitors
    • Entry into some markets is hard, unreasonable to expect competitors to challenge some monopolists
  • U.S.: monopoly pricing is legal
    • Monopoly pricing encourages entry (as long as there is no exclusion)
    • Administrability issue: court has to decide a fair price

Caselaw​

Lorain Journal v. U.S. (1951) (applies the Grinnell standard of power + conduct)​

  • Holding: finding of attempted monopolization upheld
    • Market power:
      • News market: >90% of families subscribe to the journal
      • Advertisement market: journal accounts for 100% of newspaper advertisement
    • Exclusionary conduct: refuse to deal with advertisers who choose to also advertise on the radio station, harming the competing radio station
    • D's defenses:
      1. Right to choose who to deal with (libertarian): deciding not to deal with advertisers who also deal with the radio station is within their rights
        • Court rejects: effect of this practice is to exclude a competitor from the market
      2. Trying to protect local advertisers by only patronizing those who serve the local market
        • Court rejects: Section 2 doesn't do trade protection
  • Facts: Lorain Journal had a "substantial monopoly" of news and advertising in Lorain
    • Lorain Journal threatened to end ad contracts with advertisers who advertise with new radio station
    • Merchants testify that they had to stop advertising or abandoned plans to advertise with radio station
  • Notes: everyone agrees that this case was decided correctly - consider the following hypos:
    1. Exclusive dealing: Lorain Journal insists in its contracts with all advertisers that they commit not to advertise with other newspapers or radio stations that serve Lorain
      • Exclusionary: arguably worse than the actual situation in Lorain since it excludes more broadly than the pointed exclusion of WEOL
    2. Higher price: Lorain Journal charges a higher price for advertisers that advertise with competitors, constant price for those who only advertise with Lorain Journal
      • Exclusionary: no different than exclusionary contracts, there exists some high price for which this is absolutely exclusionary (can perhaps justify a small price hike)
    3. Loyalty program: charge lower price for advertisers who only advertise with Lorain Journal, constant price for other advertisers
      • Likely not exclusion: responding to competitor's entry by lowering prices, prosecuting would chill competition
    4. Price drop: Lorain Journal aggressively drops its prices for all advertisers after radio station enters
      • Court will not find to be exclusionary: while this is predatory pricing, courts aren't sympathetic

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