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Sherman Act Monopoly

9. What is a “Monopoly”?

Section 2 of the Sherman Act regulates monopolies or conspiracies or attempts to monopolize any part of interstate or foreign commerce. It is directed at single firms and does not purport to cover shared monopolies or oligopolies.

•    Monopoly – In US v. Grinnel Corp, the federal court defined a monopoly as, “(1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.” “Monopoly power” is generally understood to mean “the power to control prices or exclude competition”. The “relevant market” is determined by the geographic area where the product or service is sold, either by the subject party or competitors. Section 2 focuses on acquiring the monopoly through improper means. There must be some anticompetitive conduct, such as exclusionary or predatory practices.

⁃    Note: There must be some monopolistic effect, such as limiting supply or raising prices. This means there must be long-lasting market power, rather than temporary or fleeting power. Any execution of legally acquired market power to acquire or maintain a monopoly may be prohibited.

⁃    Example: Buying up existing competitors in order to secure distribution rights for all products in a given industry would be the willful acquisition of monopoly power.

•    Attempts to monopolize – In Spectrum Sports, Inc. v. McQuillan, the court held that an attempt to monopoly requires proof “(1) that the defendant has engaged in predatory or anticompetitive conduct, (2) with a specific intent to monopolize, and (3) a dangerous probability of achieving monopoly power.” The attempt does not have be successful. It is sufficient that there was intent and a dangerous probability of success exists. For conduct to have a dangerous probability of resulting in a monopoly, a court will evaluate the market or industry and the relative power of the business. The same activity by different firms may be illegal based upon the probability of their conduct resulting in monopoly power.

⁃    Note: Competing hard in an industry does not demonstrate an intent to create a monopoly. Intent to monopolize means a specific intent to eliminate competition and to secure singular or monopoly power for a firm.

⁃    Example: Predatory pricing employed with the objective of pushing competitors out of the market may constitute an attempt to monopolize. If the firm has a dangerous probability of achieving its objective,  the attempt may be illegal.

•    Conspiracy – Conspiracy to monopolize requires an agreement between two or more parties with the specific intent of acquiring monopoly power. Following the agreement, it requires at least one overt act to accomplish the objectives. Unlike a cause of action for attempt, an actual ability to achieve a monopoly or a show of power is not required.

⁃    Example: ABC Corp agrees to share intellectual property rights and jointly sell a product that will eliminate similar products from the market. The companies begin working together to come up with the common design. This level of cooperation with the specific intent to gain monopoly power for the joint venture would constitute a conspiracy to monopolize.

Often a business will develop monopoly power through a competitive advantage (such as a differentiation or cost strategy). It is important to emphasize that, without the intent to eliminate competition and secure monopoly power, this conduct is not illegal. A business that acquires monopoly power, however, must avoid suppressing competition from potential or existing competitors. Such conduct may constitute an attempt to maintain or extend monopoly power.

•    Discussion: How do you feel about the multiple causes of action under Section 2 of the Sherman Act? Do you agree that an attempt to maintain monopoly power that was not illegally acquired should be illegal? Why do you think a cause of action for attempt to create a monopoly requires a showing of a dangerous probability of achieving the objective? Should a conspiracy require a probability of achieving a monopoly or is an overt act in that direction sufficient? Why or why not?

•    Practice Question: ABC Corp is a competitor in the cable Internet space. The company has extremely efficient operations and strong customer service. As a result, it holds approximately 55% of the available market share. ABC generally buys any smaller companies that attempt to enter the space. They are also in a price battle with the second largest competitor. They are currently pricing phone plans at a loss in hopes of acquiring a greater market share. There have been preliminary negotiations to halt the price war and to work with the competitor to effectuate an increase in both company’s market share. Which of the following activities could be subject to challenge under Section 2 of the Sherman Act? Why?

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