Class 14 Antitrust, Winter, 2018 Bundled Discounts 12/6/2018 Class 14 Antitrust, Winter, 2018 Bundled Discounts Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago Copyright © 2000-18 Randal C. Picker. All Rights Reserved.

LePage’s Quick Facts 3M has monopoly in transparent tape market 12/6/2018 LePage’s Quick Facts 3M has monopoly in transparent tape market LePage’s enters and targets private label tape sales 3M enters private label sales and introduces bundled pricing LePage’s faces financial trouble and sues December 6, 2018

LePage’s District Court Result Jury trial 12/6/2018 LePage’s District Court Result Jury trial 3M wins on alleged violations of SA 1 and Clayton Act 3 Loses on monopolization and attempted monopolization under SA 2 Roughly $23mm in damages, trebled to $69mm December 6, 2018

Framing the Antitrust Issues 12/6/2018 Framing the Antitrust Issues Questions If 3M is monopolizing, in what market? Attempting to monopolize, in what market? CA 3 tying: what to what? December 6, 2018

Buying Non-Dealing Hypo 12/6/2018 Buying Non-Dealing Hypo 3M approaches Office Depot and offers them $1 million not to buy from LePage’s Depot accepts No deal regarding an obligation by Office Depot to buy from 3M December 6, 2018

12/6/2018 Buying Non-Dealing Antitrust violation? Under what theory and section? Does it matter where the money comes from? December 6, 2018

Shelfspace Auctions Hypo 12/6/2018 Shelfspace Auctions Hypo Office Depot approaches LePage’s and 3M regarding OD’s private label business Asks for bids Simple version: what is the lowest price you will offer us to provide us with all of our private-label tape for the year? December 6, 2018

Shelfspace Auctions OD selects 3M; antitrust issues? 12/6/2018 Shelfspace Auctions LePage’s names one price, 3M a lower one OD selects 3M; antitrust issues? December 6, 2018

Predatory Pricing? Hypo Predatory? 12/6/2018 Predatory Pricing? Hypo Incumbent is efficient producer; its relevant marginal cost is $50 When no threat of entry, charges monop price of $100 Entrant appears with marginal cost of $70 Incumbent sets price of $69 Predatory? December 6, 2018

Predatory Pricing? Hypo Does that change the analysis? 12/6/2018 Predatory Pricing? Hypo Continuing; after entrant exits, Incumbent raises price to $100 again Does that change the analysis? December 6, 2018

Rules for Entry Again Critical Issue 12/6/2018 Rules for Entry Again Critical Issue What is a permissible response by an incumbent to entry? December 6, 2018

How The “Good” Monopolist Responds to Entry? 12/6/2018 How The “Good” Monopolist Responds to Entry? As competitive production increases, monopolist faces reduced demand curve P PM Demand Curve Overtime, M’s P and Q drop, and deadweight loss decreases Profits Marginal Cost TC Q QM Marginal Revenue December 6, 2018

The Business Justification Defense 12/6/2018 The Business Justification Defense Says the Court As one court of appeals has explained: In general, a business justification is valid if it relates directly or indirectly to the enhancement of consumer welfare. Thus, pursuit of efficiency and quality control might be legitimate competitive reasons ..., while the desire to maintain a monopoly market share or thwart the entry of competitors would not. December 6, 2018

The Business Justification Defense 12/6/2018 The Business Justification Defense More from the Court Thus, for example, exclusionary practice has been defined as “a method by which a firm ... trades a part of its monopoly profits, at least temporarily, for a larger market share, by making it unprofitable for other sellers to compete with it.” Richard A. Posner, Antitrust Law: An Economic Perspective 28 (1976). December 6, 2018

Being a Monopolist Hypo Any antitrust issues? 12/6/2018 Being a Monopolist Hypo Only producing product A (Scotch brand transparent tape) MC per unit for 3M: $40 Sets monopoly price of $100 Any antitrust issues? December 6, 2018

Answer No Just monopoly power being exercised 12/6/2018 Answer No Just monopoly power being exercised A bad thing, but antitrust doesn’t regulate legitimately obtained monopolies December 6, 2018

Second Market Entry Hypo Any antitrust issues? 12/6/2018 Second Market Entry Hypo LePage’s enters Product B (private-label transparent tape) and 3M responds by entering product B market MC per unit for 3M, $50; for L, $40 3M sets price of $60, L of $55 Any antitrust issues? December 6, 2018

Answer No Monopolists get to enter other businesses as well 12/6/2018 Answer No Monopolists get to enter other businesses as well On these facts, 3M shouldn’t compete successfully in private-label tape market December 6, 2018

Enter to Kill? Hypo Any antitrust issues? 12/6/2018 Enter to Kill? Hypo Replay prior hypo with different numbers MC per unit for 3M, $40; for L, $41 3M sets price of $40.50, L of ?? Any antitrust issues? December 6, 2018

12/6/2018 Answer ??? December 6, 2018

Bundling Hypo Hypo Any antitrust issues? 12/6/2018 Bundling Hypo Hypo 3M bundles together A&B and sells at price of $139 Continues to sell A alone at $100, B alone at $60, while L sells B for $55 Assume MCs of: 3M: for A, $40, for B, $50; L: for B, $40 Any antitrust issues? December 6, 2018

Answer More Going On Here 12/6/2018 Answer More Going On Here If purchaser wants both A and B, will buy bundle for $139 This is bad, probably for two reasons We now have the inefficient producer making B (3M’s costs are $50 for B, L’s $40) December 6, 2018

12/6/2018 Answer If the private-label market competes with branded-market, this may weaken private-label competitor in the long-run December 6, 2018

Answer Bundling and Scale of Entry Bundling alters scale of entry 12/6/2018 Answer Bundling and Scale of Entry Bundling alters scale of entry Might need to enter branded-tape market and private-label tape market simultaneously Seems low probability of successful entry in branded-tape market December 6, 2018

Sales Volume and Costs Says the Court 12/6/2018 Sales Volume and Costs Says the Court “It lost key large volume customers, such as Kmart, Staples, American Drugstores, Office Max, and Sam’s Club. Other large customers, like Wal-Mart, drastically cut back their purchases. As a result, LePage’s manufacturing process became less efficient and its profit margins declined. In transparent tape manufacturing, large volume customers are essential to achieving efficiencies of scale.” December 6, 2018

Does 3M’s Intent Matter? Does intent matter? Why should it matter? 12/6/2018 Does 3M’s Intent Matter? Does intent matter? Why should it matter? Says the Court “There was evidence from which the jury could have determined that 3M intended to force LePage’s from the market, and then cease or severely curtail its own private-label and second-tier tape lines. For example, by 1996, 3M had begun to offer incentives to some customers to December 6, 2018

12/6/2018 Does 3M’s Intent Matter? increase purchases of its higher priced Scotch-brand tapes over its own second-tier brand. The Supreme Court has made clear that intent is relevant to proving monopolization, Aspen Skiing, 472 U.S. at 602, and attempt to monopolize, Lorain Journal, 342 U.S. at 154-55.” December 6, 2018

Peace Health Three Approaches to Bundled Discounts Aggregate Discount Rule Predatory if PBundle – MCBundle < 0 Ortho Test Predatory pricing if excludes equally efficient competitor December 6, 2018

Peace Health Three Approaches to Bundled Discounts 3. Discount attribution rule Discount (D) is ƩPeachitem – Pbundle Predatory if Pitem – D < MCitem Court adopts discount attribution rule December 6, 2018