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Sherman Act Monopolization

13. What is “monopolization” under the Sherman Act?

The Sherman Act § 2 makes illegal the willful acquisition or maintenance of monopoly power in a relevant market when such power is the result of something other than pure competition. Simply possessing monopoly power is fine if such power results from a superior product, better processes, stronger business acumen, or other form of competitive advantage. Obtaining such market power is illegal when it is the result of some act or series of actions that have an anticompetitive effect in the market. Below are some common examples of monopoly power obtained through anticompetitive means:

•    Exclusionary Act – Monopoly power obtained through an exclusionary act is prohibited. If a competitor undertakes an anticompetitive act that harms the competitive process in the market (not just a single competitor in the market), that act is illegal. Examples of anticompetitive, exclusionary acts may include:

⁃    Closing of Resources – Buying up raw materials (especially if you do not need them) to the exclusion of other competitors;

⁃    Note: This does not exclude material purchases that have an operational or financial objective that is not anticompetitive.

⁃    Example: Buying up all raw material, particularly when a quantity is not needed or will go to waste, in an attempt to cause shortages with other competitors may be anticompetitive.

⁃    Exclusive Sales Agreements – Enforcing agreements with suppliers requiring them not to sell to your competitors:

⁃    Note: This may also run afoul of § 1.

⁃    Tying Relationships – Tying the sale of one product to the purchase of a separate product;

⁃    Note: This practice may also run afoul of § 1.

⁃    Forced Acquisition – Forcing a competitor to sell its business to you to eliminate competition;

⁃    Example: Threatening a price war and market blacklisting if a company does not agree to be purchased.

⁃    Mandatory Leasing – Requiring long-term leases or foreclosing a secondary market by leasing and not selling a product are examples of exclusionary acts.

⁃    Example: ABC Corp has proprietary machinery that it will only lease (rather than sell) to customers. This causes a lack of secondary market for this type of equipment and provides ABC with monopoly power in the market.

The acquisition of monopoly power will be reviewed pursuant to the rule of reason. If a court determines that an anticompetitive effect exists, the defendant may offer a pro-competitive justification for the activity.

⁃    Example: A competitor may be able to demonstrate that the activity is pursuant to simple product improvement or meeting consumer demand. The court will then determine whether the anticompetitive harm outweighs the pro-competitive justification.

•    Refusing to Deal – Acquiring monopoly power in a market may be illegal under Sherman Act § 2 if such power is obtained through refusal to deal with competitors. Generally, there is no duty for a competitor to deal with other competitors. There are, however, exceptions to this rule when a refusal to deal has no valid business justification and the refusal is economically harmful to market competition in the long run. Generally, the refusal must be part of a scheme intended to result in increased market power for the company.

⁃    Note: There is a general presumption that a refusal to deal is legal. A plaintiff challenging the refusal must demonstrate the anticompetitive effects and the presence of monopoly power.

⁃    Example: ABC Corp sells cell phones and electronic components. ABC refuses to sell components to 123 Corp, which sells cell phones. The refusal to deal with competitors is generally permissible. If, however, ABC and 123 are the only sellers of smartphones in the US, failing to serve as a component supplier to 123 Corp may be anticompetitive. In such a case, the court would employ the rule of reason to determine legality.

•    Predatory Pricing – Predatory pricing exists where one competitor prices a product arbitrarily low in an effort to monopolize a market. The low price is used to force competitors out of the market. The Sherman Act § 2 makes such conduct illegal per se. Proving a predatory pricing case requires a demonstration of a competitor’s predatory pricing purpose and the dangerous probability that the competitor will recoup those loses by raising prices after other firms are driven out of the market.

⁃    Example: ABC Corp sells the same product as 123 Corp. ABC Corp drops its price to below its average variable cost and thus takes a loss on each sale. ABC’s objective is to take all sales from 123 Corp. ABC can withstand the losses until 123 Corp is forced out of business. Once 123 Corp is defunct, ABC Corp will raises prices again.

⁃    Discussion: Why do you think the law provides exemptions for monopolies acquired through competitive means? How is the effect on the market different when a company acquires a competitive (rather than anticompetitive) monopoly? Do you agree that monopoly power acquired through any of the above-listed, exclusionary acts should be reviewed as anticompetitive?

⁃    Practice Question: ABC Corp is a major player in its industry. It has come under the scrutiny of the FTC for possessing excessive market power bordering on that of a monopoly. ABC maintains that it gained its industry position through competitive means. What will the FTC look for in examining whether ABC holds an illegal monopoly?

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