Georgetown University

Isn’t Price Fixing Sweet?: or Restoring “the functionality of the marketplace”  What is this case?  Where is it being filed?  Who are the defendants?  Why is this a class action suit?  How does market structure affect the merits of this case?  What did the “conspirators” do?  What triggered the public investigation?

Chocolate Industry Structure HersheyMarsCadberryNestle Distributors Plaintiff 2 Plaintiff 3 Plaintiff 4 Plaintiff 1 Customer Class:

A Chocolate Conspiracy Plaintiffs’ Arguments Defendants’ Arguments

Market Concentration  Market Structure [CR3 = 76; HHI3 > 2538] Hersheys 43 Hersheys 43 Mars 25 Mars 25 Nestles 8 Nestles 8

Changing composition of Chocolate demand Healthy GoodExpensive Demand frequency 1.Market definition? 2.Elasticities & Pricing

Sherman Act (1890)  Section 1 “Any contract, combination or conspiracy in restraint of trade...is hereby declared illegal.”  Section 2 “Every person who shall monopolize or attempt to monopolize...any part of trade or commerce among the several states shall be guilty of a felony.”

Monopoly: Profit Maximization $ Q P(Q) MR QMQM PMPM PROFIT ATC MC

The Supreme Court on Monopoly Power ( in Law Offices of Curtis V. Trinko, LLP, 2004)  “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system.  The opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.  To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.”

“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 distinct from growth or development as a consequence of a superior product, business acumen or historical accident” United States v. Grinnell Corp. 384 U.S. 563, (1966)

Definition of monopoly power 1.The ability to control prices and exclude competitors 2. The ability to raise prices above marginal cost (competitive levels) without losing so many sales so rapidly that the price increase must be rescinded Monopoly power is “analog” not digital Significant and insignificant monopoly power Lerner Index L = (p-mc)/p L= 1/η, where η is the (absolute value of the) firm-level price elasticity of demand. 0 ≤ L < 1

Measuring Market Power  The Dominant Firm Model: Assume a single “dominant” firm facing a competitive “fringe” Assume a single “dominant” firm facing a competitive “fringe” The dominant firm calls out a price The dominant firm calls out a price The competitive fringe responds as a price taker setting its output The competitive fringe responds as a price taker setting its output

The Dominant Firm-Competitive Fringe Model P Q S=Σmc D d mr P1P1 QdQd mc d = D - S

Market Power Determinants L = S/[η m + (1-S)e f ] 1.Market share (S) 2. Elasticity of Market demand ( η m ) 3. Elasticity of Supply of the fringe firms ( e f ) firms ( e f )

Market definition Market -A geographic area and a set of products within which price is determined Importance of market definition a. Microsoft (operating systems, software) b. Coca-Cola – Dr. Pepper, Pepsi -7-up mergers IF a relevant market then set of firms and geographic area that DOES determine price Firms/areas that do affect price are included

Market Definition Exercise  Begin with a small geographic and product market and ask: Could a hypothetical monopolist within the proposed relevant market raise price by a small but significant and nontransitory amount? Could a hypothetical monopolist within the proposed relevant market raise price by a small but significant and nontransitory amount? demand side product substitutabilitydemand side product substitutability demand-side geographic substitutabilitydemand-side geographic substitutability supply-side product substitutabilitysupply-side product substitutability supply-side geographic substitutabilitysupply-side geographic substitutability

The Slippery Slopes of Market Definition: The Case of Aspen Skiing  Precedent setting monopolization case (1) Relevant market (2) Monopoly power (3) Exclusion (1) Relevant market (2) Monopoly power (3) Exclusion “at or near the outer boundary” of the Sherman Act’ prohibition against monopolization. “at or near the outer boundary” of the Sherman Act’ prohibition against monopolization. Defines the standard for “duty to deal.” Defines the standard for “duty to deal.”  But what about the relevant market? At trial, the market was judged to be “downhill skiing in the Aspen area.” At trial, the market was judged to be “downhill skiing in the Aspen area.” Supreme Court Justice Powell: Supreme Court Justice Powell: “As a matter of general antitrust law, I would have thought that that’s a perfectly absurd finding…With all the other mountains in that area, it seems absurd to have a market that narrow.”“As a matter of general antitrust law, I would have thought that that’s a perfectly absurd finding…With all the other mountains in that area, it seems absurd to have a market that narrow.” Monopoly, monopolization implications.Monopoly, monopolization implications. Market Share = 85 % or 15% Market Share = 85 % or 15% 18

Foundations of Market Definition – “Relevant Market”  Plaintiff’s Market “…the sale of downhill skiing services in the Aspen, Colorado area” “…the sale of downhill skiing services in the Aspen, Colorado area”  Defendant’s Market “the national and international arena in which the defendants operate and compete for the distribution of their services.” “the national and international arena in which the defendants operate and compete for the distribution of their services.” 20

Foundations of Market Definition – Plaintiff’s “Model” 21

Foundations of Market Definition – Legal Tactics  Market Definition A Matter of Fact, or A Matter of Fact, or A Matter of Law A Matter of Law  The Appeal Submarkets Submarkets  The Appeal’s Court “Smack-Down”  So, seriously, what do we know about the spatial dimensions of competition in the skiing industry? 22

Foundations of Market Definition – Postscript 23 Whipple Van Ness "Whip" Jones Donates Aspen Highlands to Harvard1993 Donates Aspen Highlands to Harvard Harvard establishes Chair in Economics Department Harvard establishes Chair in Economics Department Harvard sells stock to…Harvard sells stock to… Aspen Skiing Corporation!!!

Aspen: “The Power of Four” 24