Defining better monopolization standards.

AuthorElhauge, Einer

INTRODUCTION I. THE PROBLEMS WITH CURRENT DOCTRINAL STANDARDS A. The Monopoly Power Element B. The Bad Conduct Element II. THE PROBLEMS WITH FOCUSING ON WHETHER THE CONDUCT SACRIFICED PROFITS A. Lack of Fit with the Predatory Pricing Doctrine Being Generalized B. Sacrificing Short-Run Profits to Drive Out Rivals and Reap Long-Run Monopoly Profits Is Normally Good C. Sacrificing Profits Is Not Necessary for Undesirable Exclusionary Conduct Either 1. Horizontal conspiracies, extramarket activities, and tortious conduct 2. Nontortious unilateral market conduct and the single monopoly profit myth D. Conclusion III. RESOLVING BASELINE PROBLEMS WITH PREVAILING EFFICIENCY INQUIRIES. A. Ex Ante Versus Ex Post Efficiencies 1. Ex ante efficiencies and their relation to property rights 2. The contrast with Schumpeter's ex post efficiency claim about monopoly power. 3. Problems with the case-by-case approach of restricting property rights when they are deemed not to create significant incentives to innovate. 4. Sorting out ex ante and ex post efficiency claims: Why proving discrimination on the basis of rivalry is necessary (but not sufficient) B. Whether Conduct Succeeds by Enhancing Monopolist Efficiency or by Worsening Rival Efficiency 1. Conduct that succeeds by improving the monopolist's own efficiency 2. Conduct that succeeds by impairing rival efficiency 3. Conclusion IV. THE CAUSAL LINK TO MONOPOLY POWER A. The Causal Connection to Marketwide Effects B. The Economic Relevance of Market Share C. Enhancing Monopoly Power Versus Slowing Its Decline D. The Irrelevance of Buyer Acceptance, Initiation, or Terminability CONCLUSION INTRODUCTION

We've all gotten used to a little vagueness in law. Sometimes you just can't foresee or account for the full complexity of life, and, when that is so, the best the law can do is define some general guidelines for courts and juries to apply to particular facts. But for decades monopolization doctrine has been governed by standards that are not just vague but vacuous.

Vague standards might be uncertain around the edges as applied to tough facts, but at least offer genuinely guiding normative principles. We may not be able to define precisely how many hairs one needs to lose before one turns bald, but we all understand the general concept of baldness and what mores one closer of further from that state. Vacuous standards, in contrast, are utterly conclusory, failing to identify a coherent norm that provides any real help in distinguishing bad behavior from good of even in knowing which way certain factual conclusions cut. That is the sad state in which current monopolization doctrine finds itself, employing conclusory labels that offer little insight into which forms of conduct should and should not be deemed undesirable or illegal.

Current proposals by academics and enforcement officials to rectify the problem focus on redefining monopolization in terms of whether the defendant sacrificed short-term profits in order to reap long-run monopoly returns by excluding rivals. But this profit-sacrifice test only replicates the underlying problem in another form, for whether of not short-run profits were sacrificed in this way turns out to have no logical connection to whether the conduct was undesirable. To the contrary, sacrificing short-run profits to exclude rivals typically reflects socially desirable investments, and undesirable conduct that excludes rivals normally requires no sacrifice of short-run profits. Nor does a profit-sacrifice test explain the pattern of cases that have been held illegal by current precedent. Delayed gratification is not an antitrust offense, nor is it necessary for committing one. One can attempt to salvage these proposals by focusing not on the timing of actual profits, but on whether the activity would ever be profitable once undesirable profits are excluded. But then the test begs the key question, which is defining when profiting from the exclusion of rivals is desirable.

Other doctrinal strands seem to focus on the efficiency of the relevant conduct. This helpfully begins to point us in the right direction, but has so far failed to grapple with two important baseline problems. First, conduct that is inefficient ex post to a firm's investment in creating, enhancing, or maintaining the sort of intellectual or physical property that is valuable enough to confer monopoly power is often efficient when viewed ex ante. Second, in many cases the sorts of efficiencies cited by defendants--such as economies of scale or network effects--can be achieved only by denying those same efficiencies to rivals. Failure to grapple with these two baseline issues turns out often to be functionally equivalent to focusing wrongly on whether short-term profits were sacrificed.

I will advocate that the proper monopolization standard should focus on whether the alleged exclusionary conduct succeeds in furthering monopoly power (1) only if the monopolist has improved its own efficiency or (2) by impairing rival efficiency whether or not it enhances monopolist efficiency. Where the defendant has improved its own efficiency in order to make a better or cheaper product, it should be free to sell that product at any above-cost price it wants, even though that may shrink rival market share to a size that leaves rivals less efficient. The key is that this conduct can successfully impair rival efficiency only as a byproduct of the defendant improving its own efficiency, which enhances the market options available to consumers. Similarly, when a defendant has increased its own efficiency by investing in its intellectual or physical property, a refusal to share that property with rivals should generally be legal because it rewards the improvement in the defendant's efficiency in a way necessary to maintain ex ante incentives for investment. The one exception is when the defendant discriminates by refusing to do business with rivals--or those who deal with rivals--on the same terms as the defendant does business with other outsiders. Such discrimination on the basis of rivalry is not necessary to support optimal ex ante investment incentives, and its success thus may not depend on increasing the value of the property and the efficiency of the monopolist, but on selectively impairing the efficiency of rivals. While not sufficient to establish monopolization since ex post efficiencies are also relevant, proving discrimination on the basis of rivalry should be necessary where the claim is a refusal to deal or the imposition of conditions on dealing.

Exclusionary conduct should be illegal if it would further monopoly power by impairing the efficiency of rivals even if the defendant did not successfully enhance its own efficiency. Pricing below cost, for example, seeks to reap sales beyond those earned by a monopolist's successful efforts to make itself more efficient, and can thus divert sales from rivals in a way that impairs rival efficiency even if the defendant never made itself more efficient than its rivals. Likewise, exclusionary conditions that discriminate against rivals (or those who deal with them) can foreclose resources, suppliers, or outlets in a way that impairs the efficiency of rivals by denying them economies of scale, scope, learning, or network effects. Although such conditions might also help the defendant secure similar "economies of share," allowing that sort of efficiency defense turns out to be conceptually identical (for any defendant with a market share over 50%) to the commonly rejected claim that a monopolist can defend its conduct by showing that the industry is a natural monopoly. Further, in such cases achieving those efficiencies by internal expansion will generally be a less restrictive alternative to achieving them with exclusionary conditions. Thus, rather than requiring antitrust courts and juries to engage in open-ended balancing in such cases, such exclusionary conduct should be illegal because it would successfully enhance monopoly power by impairing the efficiency of rivals, whether or not it enhanced the monopolist's efficiency.

While existing doctrinal standards on monopoly power cannot be said to be vacuous, they do create unnecessary vagueness because they have difficulty dealing with the ubiquitous pricing discretion of firms in modern brand-differentiated markets, rely on vague references to a "substantial" degree of a market power that itself only exists when substantial, and exhibit an underlying split over whether pricing discretion or market share is the underlying variable whose substantiality matters. I will show that proper economic analysis of how to judge the exclusionary conduct that must be causally connected to that monopoly power explains why monopoly power requires showing both (a) a market share above 50% and (b) an ability to either influence marketwide prices or impose significant marketwide foreclosure that impairs rival efficiency.

I will further argue that these proposed standards would not only provide a more coherent and desirable standard for guiding lower courts and juries but also better explain the actual pattern of Supreme Court case results. But to consider all these issues, we first need to understand the nature of the problems with our current doctrinal standards.

  1. THE PROBLEMS WITH CURRENT DOCTRINAL STANDARDS

    Our current problems start at the top. The fundamental standard, articulated by the United States Supreme Court in Grinnell, is:

    The offense of monopoly under [section] 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. (1) This standard has been reaffirmed by the Court in recent decades. (2) Yet both elements suffer from an uncertainty that is as extensive as it is...

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