Single Firm Conduct

• Pages: 71-123

71

CHAPTER 4

SINGLE FIRM CONDUCT

The previous chapter provided an overview of the application of

Section 1 of the Sherman Act to horizontal agreements among

competitors. This chapter first explains how a single firm acting

unilaterally or with others may harm competition through exclusionary

conduct and then summarizes the proscription of price discrimination by

a single firm under the Robinson-Patman Act.

1

A. Monopolization

Monopolization is prohibited by Section 2 of the Sherman Act. Mere

size is not illegal, however. A violation requires (1) possession of

monopoly power in the relevant market and (2) the willful acquisition

and maintenance of that power as distinguished from growth or

development resulting from historical accident, business skill, or a

superior product or service. Determining whether a violation has

occurred generally requires a searching fact inquiry under the rule of

reason. Moreover, when private plaintiffs assert monopolization claims,

they must demonstrate that the anticompetitive conduct at issue resulted

in an “antitrust injury,” rather than some other type of harm to the

plaintiff.

2

Energy utilities have been viewed traditionally as natural

monopolies, and thus granted the exclusive right to serve a defined

territory subject to regulatory oversight by state utility commissions. So

long as the utility was subject to active state supervision, its conduct

generally was immune from antitrust scrutiny under the state action

immunity doctrine. Deregulation, however, brings with it a

corresponding loss of this protective immunity. As deregulation

progresses, claims of abuse of monopoly power may become

increasingly common, both as a means for challenging efforts of

traditional suppliers to retain or expand market share, and for contesting

new arrangements to market energy and energy services.

1

. 15 U.S.C. § 13.

2

. Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488–89

(1977).

72 Energy Antitrust Handbook

1.

Possession of Monopoly Power in the Relevant Market

Market share often is used as a proxy or first screen to determine if a

party possesses market power. The precise market share required has not

been specified by the Supreme Court, but “lower courts generally require

minimum market share of between 70 percent and 80 percent.”

3

A

market share below 50 percent generally is insufficient to establish

market power.

4

In regulated industries, in which an entity’s market share

may result from regulation, rather than conduct in the marketplace, some

courts have held that market share i s not as good an indicator of market

power as in other industries, and may overstate the ability of a party to

control prices and reduce output.

5

Market share is useful only as a first step in analyzing whether

market power exists. In determining the necessary market share, a court

will examine a series of market characteristics, including the size and

strength of competitors, barriers to entry, the degree of concentration,

profit l evels, and whether the market share of the challenged party has

increased in recent times.

6

In the coal industry, for example, to determine

3

. Colorado Interstate Gas Co. v. Natural Gas Pipeline Co., 885 F.2d 683,

694 n.18 (10th Cir. 1989); see also E.I. du Pont de Nemours & Co. v.

Kolon Indus., 637 F.3d 435, 450–51 (4th Cir. 2011) (market share in

excess of 70 percent warrants inference of market power); Metronet

Servs. Corp. v. U.S. West Comm., 329 F.3d 986, 1003 (9th Cir. 2003)

(stating co urts ge nerally r equire a 65 percent o r greater market share to

establish prima facie market power), vacated on other grounds, 540 U.S.

1147 (2004); Majory Mart v. Mitchell Distributing Co., 46 F. Supp. 3d

639, 661 (S.D. Miss. 2014) (holding 70 percent market share combined

with high b arriers to entry create a question of fact as to the existence o f

monopoly power, which must be resolved by the trier of fact ); In re Educ.

Testing Serv., 429 F. Supp. 2d 752, 756 (E.D. La. 2005) (market share of

greater than 70 percent generally sufficient to establish market power).

4

. See, e.g., United States v. Dentsply Int’l, 399 F.3d 181, 187 (3d Cir.

2005) (absent other pertinent factors, a share significantly larger than 55

percent has been required to establish prima facie market power); United

States Anchor Mfg. v. Rule Indus., 7 F.3d 986, 1000 (11th Cir. 1993).

5

. Metronet, 329 F.3d at 1003-04; see also Consolidated Gas Co. v. City

Gas Co., 880 F.2d 297, 300 (11th Cir. 1989), reinstated on reh’g, 912

F.2d 1262 (11th Cir. 1990) (en banc) (per curiam), vacated as moot, 499

U.S. 915 (1991).

6

. Oahu Gas Serv. v. Pac. Res., 838 F.2d 360, 366 (9th Cir. 198 8);

Natsource LLC v. GFI Grp ., 332 F. Supp. 2d 626, 635 (S.D.N.Y. 200 4)

(even market shares of 50 percent are insufficient to determine market

Single Firm Conduct 73

market share and market concentration, courts have examined coal

reserves, load out, production, and practical capacities.

7

A static market

share analysis typically must be supplemented by looking at other factors

affecting the parties’ ability to collude or exercise market power. For

instance, in an order on rehearing in AEP Power Marketing Inc.,

8

the

Federal Energy Regulatory Commission (FERC) established two

indicative screens for assessing an electric generation supplier’s market

power when the supplier applies to be allowed to establish market-based

rates. The first, called a “pivotal supplier analysis,” focuses on the ability

to exercise market power unilaterally by measuring market power at peak

times. A seller is “pivotal” if demand cannot be met without some

contribution of supply by the seller or its affiliates.

9

The second screen,

called the “wholesale market share screen,” is an analysis of the seasonal

uncommitted market share of the seller and tests whether the applicant

has coordinated market power. The relevant market share is based on the

number of megawatts of uncommitted capacity in each season owned or

controlled by the seller as compared to the uncommitted capacity of the

entire relevant market for that season.

10

A seller owning 20 percent or

more of the market’s total uncommitted capacity in a given season fails

the screen.

11

Both analyses also consider a supplier’s native load

obligations and other commitments.

12

In 2007 FERC codified these two screens via Order No. 697, which

states: “Sellers that fail either screen will be rebuttably presumed to have

market power.”

13

Under the order, relevant sellers have the opportunity

to rebut a presumption of market power via a Delivered Price Test (DPT)

power where other factors such as lo w barriers to entry and strong

competition exist).

7

. FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 127-28 (D.D.C. 2004).

8

. 107 F.E.R.C. ¶ 61,018, 61,054-55 (2004).

9

. Id. at 61,061.

10

. Id.

11

. Id.

12

. Id. at 61,055; see also W isconsin Pub. Power Inc. v. FERC, 493 F.3d

239, 251 (D.C. Cir. 2007) (independent electricity transmission system

operator created market power mitigation measures that reduced seller

electricity generators bids if the y exceeded certain “conduct” and

“impact” thresholds that were defined in relation to an estimate of the

seller’s marginal costs).

13

. Order No. 697, Market-Based Rates for Wholesale Sales of Electric

Energy, Capacity and Ancillary S ervices by Public Utilities, 72 Fed. Reg.

39,904, 119 F.E.R.C. ¶ 61,295 (July 20, 2007).