19.3: Monopoly

A monopoly is the control or advantage obtained by one supplier or producer over the commercial market within a given region. Not all monopolies are illegal. In fact, some industries are exempted from antitrust laws:

• Highly regulated industries;
  • Utilities;
  • Railroads;
  • Airlines;
  • Insurance companies;
  • Securities; and
  • Banks
• Labor unions;
• Agricultural and fishing cooperatives (farmers not distributors);
• Exporters;
• Lobbyists;
• States (unclear if includes US territories); and
• Professional baseball.

To be an illegal monopoly, a business must have (1) monopoly power (2) in the relevant market and (3) the intent to acquire and use such power.

Monopoly Power

Monopoly power is the power of a business to fix prices unilaterally or to exclude competition. The size of a business’s market share is a primary factor of whether monopoly power exists.

Courts have found monopoly power when a business controls seventy percent or more of a market.

If a business controls 51-69 percent of a market, then it is possible that monopoly power exists. Courts examine other factors such as number of competitors, market concentration, degree of difficulty for new businesses to enter the industry, and the nature of the industry. If the entry costs and barriers are high and there are few other competitors, a business may have monopoly power when it controls slightly more than half the market.

If a business controls fifty percent or less of a market, then no monopoly power exists.

Relevant Market

To determine whether a business has monopoly power, it must be determined whether it has monopoly power within the relevant market. However, defining the relevant market can be challenging. The relevant market includes both the product or service market and the geographic area.

Product or Service Market

The first element in determining the relevant market is to determine what goods or services are interchangeable in consumers’ minds. This is sometimes called substitutability or functional interchangeability. Defining the exact product or service market is usually heavily litigated because it may result in market concentration or dilution, and ultimately whether a business has enough market share to be deemed a monopoly.

For example, Ford shares the passenger truck market with manufacturers such as Chevrolet, GMC, Dodge, Toyota, Nissan, and Honda. However, Ford shares the commercial truck market with manufacturers such as Peterbilt, Volvo, Daimler, and Volkswagen. If sued for violation of antitrust law, Ford would want a broad definition of the product market, such as “trucks,” to include a greater number of competitors and lessen its own market share. Plaintiffs would want to define the product narrowly, such as “three-quarter ton passenger trucks,” to lessen the number of competitors and heighten Ford’s market share.

As large companies expand their products and services across industries, this inquiry becomes more complex and expensive to litigate.

Geographic Area

Determining a business’s market power also requires determining the geographic area in which the business operates. As globalization and e-commerce increase the geographic reach of businesses, this inquiry is also becoming more difficult.

For example, should the market for Ford passenger trucks be determined by city, state, nation, continent, hemisphere, or globally? Ford trucks may have higher sales in Detroit, Michigan than in Tokyo, Japan. Determining the geographic area of the relevant market may include areas of higher or lesser concentrations of sales. Therefore, parties also heavily litigate what is the appropriate geographic area for the relevant market.

Intent

The third factor is the business’s intent to acquire and use its monopoly power.

Not all monopolies are the result of a business’s predatory actions. Some “boom and bust” industries, such as mining and oil and gas, are difficult to maintain long-term success. If an industry goes through a difficult time and competitors go out of business, the remaining company may end up as a monopoly without engaging in anticompetitive behavior.

To determine intent, courts look at the conduct of the business. Purchasing smaller competitors to increase its market share and engaging in predatory pricing is often evidence of a company’s intent to become a monopoly.

Specifically, an intent to monopolize requires:

1. Predatory or anticompetitive conduct;
2. Specific intent to control prices or destroy competition; and
3. A dangerous probability of success.

A business’s intent is evaluated in the context of the current industry and economic conditions. For example, are there significant changes to the law that affect the profitability of the industry or an economic downturn that impacts competition? Just because a company is large enough to successfully survive a challenging time, it may not have the necessary intent to become an illegal monopoly.