Monopoly Pricing as an Antitrust Offense in the U.S. and the EC: Two Systems of Belief about Monopoly?

• Author: Michal S. Gal
• Published date: 01 March 2004
• Date: 01 March 2004
• DOI: http://doi.org/10.1177/0003603X0404900109
• Subject Matter: Antitrust in the U.S. and the EU: Converging or Diverging Paths?

The

Antitrust

Bulletin/Spring-Summer 2004

Monopoly pricing as an

antitrust offense in the U.S.

and the EC: two systems

of

belief

about monopoly?

BY MICHAL S. GAL*

I.

Introduction

343

Basic economic theory contrasts two industry structures and their

outcomes: acompetitive, atomistic structure, comprised

of

many

similar firms, and a monopoly structure containing but one firm. The

competitive model denies any firm the power to affect price, as all

firms are price takers. Price equals marginal costs of production and

the social optimum of price and output is reached. By contrast, the

textbook monopoly model conveys complete control over price to a

*Senior Lecturer and Director of Law and MBA Program, Haifa

University, Israel; Academic Fellow, NYU Center for Law and Business.

AUTHOR'S NOTE: I wish to thank Margaret Bloom, Guy Harpaz, Alberto

Heimler,

Menachem

Perlman,

Amnon

Reichman,

Eli

Salzberger,

Kurt

Stockmann, Weijer VerLoren van Themaat, Yonatan Yovel

and

Niv

Zecler

for

thoughtful comments on the article

or

parts

thereof

Oren Uzan

and

Ravid

Barzilai

provided

helpful research assistance.

All

errors

and

omis-

sions remain mine. The

name

of

the article borrows

from

Harold

Dem-

setz,

Two

Systems

of

Belief

About

Monopoly,

in

INDUSTRIAL

CONCENTRATION:

THE

NEW

LEARNING

164

(Harvey

J.

Goldschmid,

H.

Michael Mann &J.

Fred

Weston eds., 1974).

©2004by Federal Legal Publications. Inc.

344

The antitrust bulletin

single firm, which is constrained in its pricing and output decisions

only by the costs

of

production and the elasticity

of

demand. A

monopolistic firm that cannot discriminate will raise its price until its

marginal revenue equals its marginal costs.

This increase in price creates a wealth transfer from the consumers

to the monopolist. The more inelastic the demand and the higher the

entry barriers, the larger the monopolist's portion of the total welfare

created and the larger the wealth transfer. Monopoly pricing also

creates a deadweight loss in societal resources due to the fact that

consumers are willing to buy additional products or services at a price

below the monopolistic one and above the competitive one. Similar

effects, although to a lesser extent, are obtained with above-cost

pricing by a firm that dominates a market but does not operate in it

alone, or by oligopolists enjoying joint dominance.

These costs of monopoly are independent of the manner in which

the monopoly was historically achieved or

of

its engagement in

predatory or exclusionary conduct. Even an innocently obtained or

maintained monopoly can and likely will engage in monopoly pricing.

The textbook model thus applies regardless of the way in which

monopoly power was acquired and maintained; neither does it seek to

analyze the effects of monopoly pricing on the erosion of monopoly

power.

The problem with the above analysis is that it is a static one: it

analyzes asituation at a given point in time and disregards the

dynamics that led to that situation or that are created by it. Dynamic

models recognize that efforts to become a monopoly and enjoy high

prices are the fuel of the competitive process of innovation, of the

wish to get ahead of rivals, although such efforts might sometimes be

wasteful.' Monopoly profits are also an important signaling device

that spurs competition, as the higher the price, the stronger the

incentive

of

rival firms to take part in the profits to be had by

undercutting the monopolist. Thus economic theory has shown that

monopoly pricing is not necessarily inefficient. Yet we also know that

the efficacy of the market mechanism depends on the existing market

RICHARD

A.

POSNER, ANTITRUST

LAW

13-14

(2001).

Monopoly pricing :345

conditions.

Asymmetric

information,

network

effects,

scale

economies and strategic behavior are only some of the factors that

may retard the entry or expansion

of

firms, thus enabling monopoly

pricing to be exercised, at least in the short run.

Monopoly pricing is a major concern of antitrust: if firms seek to

raise their profits through merger, they must attain governmental

approval; when several manufacturers of similar products reach an

agreement to raise prices, such contracts are not only unenforceable,

but also subject to criminal charges in many jurisdictions. In short, a

wide

array

of

conducts

that

enable

firms

to

raise

prices

above

competitive levels are constrained by antitrust law. Why then not

tackle monopoly pricing directly?

Monopoly

pricing

per

se,

that

is

without

need

of

proof

of

anticompetitive conduct or intent.? is regulated very differently on

both sides

of

the Atlantic, at least in theory. U.S. antitrust law sets a

straightforward rule: monopoly pricing, as such, is not regulated. In

contrast, under European Community (EC) law excessive pricing is

considered an abuse

of

dominance and is punishable by fine and

subject to a prohibitory order. These approaches fit the divide between

the regulation

of

exclusionary and exploitative conduct: whereas

exclusionary conduct is an offense against antitrust law on both sides

of the Atlantic, exploitative conduct generally only breaches EU law.

This article analyzes these regulatory approaches, their historical

and theoretical roots, as well as the differences that exist in practice

between the two systems. As will be shown, the divergent legal rules

reflect different ideological goals and different assumptions about how

markets

operate.

The

U.S.

views

the

unregulated

economy

as

essentially

competitive,

if

the

creation

of

artificial

barriers

is

prohibited. This approach places significant emphasis on the workings

of the market and considers monopoly created by means other than

2

The

article

does

not

deal

with

prices

that

apart

from

being

exploitative are also part

of

an anticompetitive scheme. Such might be

the case, for example, when an owner of an essential facility charges an

excessive price for granting access to the facility. Such price, apart from

being

exploitative,

can

also

be

exclusionary.

See,

e.g.,

Napier

BrownlBritish Sugar, 1988 O.J. 284/41, [1990] 4 C.M.L.R. 196.