Antitrust Treatment of Monopoly: Introduction

Monopoly (or monopolization) is the subject of section 2 of the Sherman Act. Section 2 has proven to be a difficult statute for the courts to interpret. Among the difficult issues confronted by the courts:

	On what basis can it be established that a firm has monopoly power?
	Did Congress intend to proscribe the structural condition of monopoly--i.e., is monopolization illegal *per se*?

The most straightforward statement of the Supreme Court's position on section 2 came in the Grinnell case [U.S. v. Grinnell Corp. 384 U.S. 563 (1966)], which set forth a 2-pronged test for illegal monopoly:

"The offense of monopoly under section 2 of the Sherman Act has 2 elements: (1) the possession of monopoly power in the relevant market; and (2) the willful acquisition and maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or superior product."

Note the following:

	Test (1) above is especially tough in that we *never* encounter a case wherein the relevant market can be unambiguously defined and the defendant has a 100 percent share of market sales.
	Some economists have suggested the following simple definition of monopoly power: The ability of the firm to persistently raise price above marginal cost without attracting entry of new firms. The Lerner Index (L ) of monopoly is given by:

L= P - MC/ P

Bain suggested an operationalized form of the Lerner Index for use in section 2 cases. The Bain Index (B ) is given by:

B = R - C - iV

Where R is revenues, C is costs (including depreciation), and iV is the interest rate times the book value of outstanding equity (iV is a proxy for "implicit" cost).

The courts have in actuality taken a more complex approach to the problem. Specifically, they have delineated the relevant product and geographic market and then sought to establish "monopoly power in the relevant market" based on the defendant's share of market sales. Some antitrust scholars cite the du Pont Cellophane Case [U.S. v. E.I. du Pont de Nemours, 351 U.S. 377 (1956)] as illustrative of the problems inherent in this approach.

	If the product market was defined as "all flexible packaging materials," (including cellophane, pliofilm, wax paper, glassine, and aluminum foil) the du Pont share was a mere 18 percent.
	If, however, the market was defined as "cellophane only," the du Pont share was 75 percent.
	The court selected the "broad" market definition and the government lost its case. Had the court decided on the "narrow" definition, would 75 percent have been enough to constitute a monopoly? Judge Hand in the Alcoa case stated that "90 percent is enough to constitute a monopoly; it is doubtful whether 60 to 64 percent would be enough; and certainly 33 percent is not."

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