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

2. 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

3. LePage’s District Court Result Jury trial
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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

4. Framing the Antitrust Issues
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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

5. Buying Non-Dealing Hypo
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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

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

7. Shelfspace Auctions Hypo
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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

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

9. Predatory Pricing? Hypo Predatory?
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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

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

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

12. How The “Good” Monopolist Responds to Entry?
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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

13. The Business Justification Defense
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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

14. The Business Justification Defense
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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

15. Being a Monopolist Hypo Any antitrust issues?
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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

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

17. Second Market Entry Hypo Any antitrust issues?
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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

18. Answer No Monopolists get to enter other businesses as well
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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

19. Enter to Kill? Hypo Any antitrust issues?
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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

20. 12/6/2018
Answer
???
December 6, 2018

21. Bundling Hypo Hypo Any antitrust issues?
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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

22. Answer More Going On Here
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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

23. 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

24. Answer Bundling and Scale of Entry Bundling alters scale of entry
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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

25. Sales Volume and Costs Says the Court
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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

26. 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

27. 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 ”
December 6, 2018

28. 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

29. 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