The Capacity-Diversion Defense in Owens-Illinois and Donnelley

• Published date: 01 March 1997
• DOI: 10.1177/0003603X9704200102
• Date: 01 March 1997
• Subject Matter: Symposium: Economics of Antitrust Enforcement

The Antitrust Bulletin/Spring 1997

The capacity-diversion defense in

Owens-Illinois

and

Donnelley

BY DAVID GLASNER*

5

In two recent antitrust cases,

Owens-Illinois

and DonnelLey, the

Federal Trade Commission issued complaints charging that pro-

posed acquisitions would result in discriminatory price increases

to a

subset

of customers with relatively inelastic

demands.'

In

both cases, the Commission staff failed to persuade afederal dis-

trict

court

judge

to

enjoin

the acquisitions.

Nevertheless,

the

Commission in both cases persevered and authorized staff to seek

administrative relief under the FTC Acr.>The Commission staff in

both instances

persuaded

an administrative law

judge

that

the

*Economist, Federal Trade Commission.

AUTHOR'S NOTE: I have benefited from the comments

of

Malcolm Coate,

Tim Daniel, Robert Levinson, John Hilke, Allanah Orrison, Bill Pegram,

David Reiffen, and John Weber. I am solely responsible

for

any remaining

errors. The views expressed here do not necessarily reflect those

of

the

Federal Trade Commission or the individual Commissioners.

Iprovide a formal definition of elasticity below. For now it suf-

fices to think of elasticity as a measure of the reponsivenss of quantity

demanded to price. Demand is inelastic if quantity demanded does not

change very much in response to a change in price.

15 U.S.c. §45.

© 1997 by Federal Legal Publications, Inc.

6 The antitrust bulletin

acquisrtrons

would

indeed

be

anticornpetitive

and

that

the

acquired assests should be divested. However, the Commission

overturned both

of

the initial

ALI

decisions on appeal, dismissing

the

complaints

and

rejecting

the

anticompetitive

theory

under

which the complaints had been brought.

To arrive at these somewhat paradoxical outcomes, the Com-

mission relied heavily on the possibility of capacity diversion.>

Capacity diversion was not the only rationale offered by the Com-

mission

for

dismissing the

complaints.'

but the apparent logical

rigor

of

the capacity-diversion doctrine and its strong implication

about how trivial adiversion

of

capacity would suffice to defeat a

price increase made it, rhetorically at least, the most compelling

of

the

Commission's

arguments for the instability

of

acollusive

discriminatory price increase. While the various arguments for the

instability of a discriminatory collusive price increase are related,

they are logically distinct. My concern in this article is exclu-

sively

with

the

capacity-diversion

doctrine,

which,

as I

shall

show, is logically flawed, ignores relevant considerations that are

critical to the analysis

of

price discrimination, and is seriously

misleading in its implications for antitrust enforcement.

Before

analyzing

the

capacity-diversion

doctrine, I

believe

that it will be useful to put the discussion into context. Section I

In Owens-Illinois (FTC Docket No. 9212, February 26, 1992) the

Commission held that some of the narrow product markets for particular

end uses

of

glass bottles that had been pleaded in the complaint could be

supported. Capacity diversion was a key element in the

Commission's

decision to dismiss the complaint. In Donnelley (FTC Docket No. 9243,

July 21, 1995), the Commission held that the allleged high-volume-publi-

cation gravure market was too narrowly drawn and should have included

high-volume offset as well as high-volume gravure. Nevertheless, the

Commission, for purposes of argument, considered whether an anticorn-

petitive effect would be likely even if the alleged high-volume gravure

market

were

defensible,

and

concluded

that

the

capacity

diversion,

among other factors, would preclude an anticompetitive effect even under

the alleged narrow product market.

4

The

two

other

principal

reasons were (1) differing incentives

among the potential colluders, which would disrupt any agreement to col-

lude, and (2) the existence of large buyers, which would enhance the

incentives for potential colluders to defect from an agreement.