Power + Conduct Framework

The power + conduct framework: every violation of Section 2 has two elements:

1. Market power
   • Proof ideally comes from direct evidence; circumstantial evidence can fill in gaps
     • Direct: power over quantity (NCAA and limitations on quantity of college football)
     • Circumstantial evidence:
       • Market shares (product, geography): 90% is enough, 64% is doubtful, 40% isn't enough
       • Barriers to entry or expansion
2. Exclusionary conduct

Caselaw:

Standard Oil v. U.S. (1911) (sets 90% share as sufficient for monopoly power)

• Holding: defendant violated Section 2
  • Market power: D had 90% share of U.S. petroleum refining
  • Exclusionary conduct: D charged with price cutting, bribery, and commercial espionage
  • Statements by the Court:
    • Section 2 is concerned with the same ends as Section 1, but reaches acts not covered by Section 1
    • Sherman Act does not explicitly prohibit monopoly

U.S. v. U.S. Steel (1920) (sets 40% share as insufficient for monopoly power)

• Holding: no Section 2 violation because no monopoly power
  • Market share had fallen from 95% to 40% for various steel products
  • Emphasizes that exclusionary conduct is a necessary element

U.S. v. Alcoa (1945) (helpful market power benchmarks based on market shares)

• Holding: Alcoa's conduct violates Section 2
  • Court considers 3 market shares based on different interpretations of Alcoa's structure:
    • Alcoa's structure
      • (2) Alcoa transfers virgin ingot to its refinery
      • (1) Sells virgin ingot
    • (3) Imports
    • (4) Secondary market
  • 33% = (1) / ((1) + (3) + (4)) (not enough for monopoly power)
    • Excludes portion Alcoa made but used for its own production, which Hand includes because it is spare capacity that can affect price
  • 64% = ((1) + (2)) / ((1) + (2) + (3) + (4)) (doubtful this is enough for monopoly power)
  • 90% = ((1) + (2)) / ((1) + (2) + (3)) (absurd if no monopoly power here)
    • Exclude the secondary market: Alcoa controls this market, what it sells in the primary market will eventually compete with it in the secondary market
    • Hand chooses this market definition somewhat arbitrarily (legal realism)
  • Based on the choice of 90%, there is monopoly power
  • Exclusionary conduct: expansion of capacity ahead of competitors
• Facts: Alcoa, the sole virgin aluminum ingot producer in the U.S. responsible for between 70% and 90% of virgin ingot for sale in the U.S.
  • Alcoa purchases some of the virgin ingot and fabricates it, although secondary ingot is not accepted for some uses and is usually available at a discount relative to virgin
  • Alcoa has continuously expanded production capacity
• Notes:
  • What survives from this case:
    • Power + conduct is the standard (although P now has burden to show both, rather than P show monopoly and D have burden to show it didn't monopolize)
    • Unilateral conduct is not illegal under Section 1, but can be under Section 2
    • Despite contradicting the holding, defendants often rely on the quote "the successful competitor, having been urged to compete, must not be turned upon when he wins"
  • What does not survive:
    • Industrial consolidations are inherently undesirable
    • Help small business
    • Broad interpretation of exclusion extending to the reemptive expansion of capacity
  • Valid analogy to predatory pricing