Friday, January 17, 2014

U.S. v. E. I. duPont De Nemours & Co. (Cellophane) case brief summary

U.S. v. E. I. duPont De Nemours & Co. (Cellophane) case brief summary

FACTS
The government alleged that duPont had a monopoly over cellophane (where it had a market share of 75%) in violation of the Sherman act, §2.  However, du Pont argued that it only participated in the flexible packing materials market (where it had a market share of 20%).

DISCUSSION
The Court used a test that looked for reasonable interchangeability demand by consumers to determine the market.  The Court found that cellophane was sufficiently interchangeable with Pliofilm, greaseproof paper, glassnine, waxed paper, and foil.

Notable Facts
  • The Court found that cellophane had similar prices to alternatives as well as similar physical characteristics and uses; other products actually competed effectively with cellophane.
Legal Considerations
  • The Court noted that a high cross-elasticity of demand would indicate that the products compete in the same market.
Analysis
  • The case is perhaps most notable for the Cellophane fallacy: ignoring the fact that a monopolist already charging supracompetitive prices has a high cross-elasticity of demand just the same as a firm without market power in a competitive market.
    • The demand cross-price elasticity is not static, but instead is a function of the price of the good; at some point, everything has a substitute.
    • The Cellophane fallacy only applies to retrospective analyses (looking for substitution in the past), not to prospective analyses (e.g. mergers—unless there is evidence of coordination and supracompetitive prices)
The DOJ and FTC use the Merger Guidelines as a method of determining a market today; they rely upon the actions of a hypothetical monopolist and whether or not it would impose a “small significant but non-transitory increase in price,” (the SSNIP test). This test is used to determine both product markets and geographical markets.

Evidence considered for product markets (from the Merger Guidelines):
  • Evidence that buyers have shifted or considered shifting purchases between products in response to relative changes in price or other competitive factors.
  • Evidence that sellers base their business decisions on the prospect of buyers switching products in the face of changes in price.
  • The influence of downstream competition faced by buyers in their output markets.
  • The timing and the cost of switching products.
Evidence considered for geographical markets:
  • Evidence that buyers have shifted or considered shifting purchases between different geographical regions in response to relative changes in price or other competitive factors.
  • Evidence that sellers base business decisions on the prospect of buyers switching purchases from different geographical regions in the face of price changes.
  • The influence of downstream competition faced by buyers in their output markets.
  • Timing and cost of switching products.
Additional evidence:
  • Expert testimony.

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