ECON3440 Monopoly and Market Power
Monopoly and Market Power
Hello, dear friend, you can consult us at any time if you have any questions, add WeChat: THEend8_
ECON3440 Case Essay
1 Overview
United States of America v AMR Corporation & Ors (‘the American Airlines Case’)
concerned a complaint brought in 1999 by the United States of America (‘the United States’)
alleging that AMR Corporation, American Airlines Inc., and American Eagle Holding
Corporation (together ‘American’) monopolised or attempted to monopolise by participating
in a scheme of predatory pricing, in contravention of Section 2 Sherman Act. At first
instance, American was found not guilty. This finding was upheld on appeal.
Claims for monopolisation require proof that a firm firstly has monopoly power in a defined
market, and secondly that the firm wilfully acquired or maintained this power by means of
anti-competitive conduct.1 Claims for attempted monopolisation on the other hand require
proof that a firm firstly operates in a defined market, secondly that it has a specific intent to
monopolise in that market, thirdly that it furthers that attempt using anti-competitive conduct,
and fourthly that there is a dangerous probability that the attempt will succeed.2
Ultimately, the District Court only considered one element: whether American Airlines had
engaged in anti-competitive conduct. That is because American’s application for summary
judgment only raised that element. Nonetheless, each section of this report discusses an
element of either or both claims.
Section 2 defines the relevant market. Section 3 considers the market or monopoly power of
American. Section 4 briefly considers the evidence of American’s intent to monopolize.
Section 5 considers the central question of whether American’s pricing strategy amounted to
anti-competitive conduct.
2 Relevant Market
American Airlines argued, and the United States agreed, that that the relevant markets were
connecting, one-stop and non-stop airline passenger services between Dallas-Fort Worth
Airport (‘DFW’) and other airports. These services fitted the definition of markets because
passengers do not view different city pairs as reasonable substitutes. In addition, they do not
view connecting, one-stop or nonstop services on the same city pairs as reasonable
substitutes.3
There were two groups of relevant markets. The first group included 4 core markets in which
the United States had expert evidence indicating that actual predatory pricing had occurred.
The 4 city pairs in this group were DFW-MCI, DFW-ICT, DFW-COS, DFW-LGB.4 The
1 TV Communications Network v. Turner Network Television, 964 F.2d 1022, 1025 (10th Cir. 1992).
2 Multistate Legal Studies v. Harcourt Brace Jovanovich Legal and Prof'l Publications, 63 F.3d 1540, 1550
(10th Cir. 1995).
3 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 8. Available at
.
4 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1246 (D Kan, 2001).
3
second group included 44 other markets which the United States claimed were monopolised
by the repudiation for predation that American had built in the four core markets. 5
A relevant feature of the markets operating out of DFW is that DFW is a hub airport. Flow
passengers on connecting or one-stop flights pass through ‘hub’ airports on their way to
spoke airports. Local passengers also use hub airports like DFW to fly directly to their
destinations, whether those destinations are spokes or hubs.
3 Monopoly and Market Power
A monopolisation claim under Section 2 Sherman Act requires proof of monopoly power.
Furthermore, although market power is not an element of an attempted monopolisation claim,
the ‘dangerous probability’ element is ‘usually demonstrated though market power’.6 As a
result, it is important to consider both monopoly and market power. It is also apt to consider
both forms of power in one section because they only differ in degree (monopoly power
being an extreme form of market power7).
The District Court did not directly consider whether American possessed monopoly power.
However, it set out many of the relevant facts at the beginning of its judgment. It also
considered these facts when later determining if there was a dangerous probability that
American could charge supra-competitive prices to recover the losses caused by predatory
pricing. It concluded that a dangerous probability of supra-competitive pricing did not exist.
This implies that it did not view American as a monopolist. I disagree with that conclusion
because American’s market share, the evidence of supra-competitive pricing, and the barriers
to entry all indicate otherwise.
3.1 Market Share and Market Share Growth
Market share is one instructive, but not determinative, factor in whether a firm has market or
monopoly power8. The market share of American Airlines was high compared to the market
shares of other carriers operating at DFW, including the LCCs.
In 2000 American’s share of passengers who boarded at DFW (whether on nonstop, one-stop
or connecting flights) was 70.2%, whilst the share of LCCs was only 2.4%. In 1999,
American’s share of passengers who boarded nonstop flights from DFW was between 61% to
100%.9 Delta Airlines Inc., American’s largest competitor at DFW, carried only 16% of all
passengers boarding nonstop flights from DFW. No other carrier accounted for more than 4%
of nonstop passengers.10 There was no data on the percentage of passengers who boarded
one-stop and connecting flights specifically. However, as the District Court rightly pointed
5 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1273 (D Kan, 2001).
6 Bright v Moss Ambulance Service, 824 F.2d 819, 823 (10th Cir. 1987).
7 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1187.
8 Ibid 1188.
9 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1151 (D Kan, 2001).
10 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 10. Available at
.
4
out, American’s share of passengers on such flights would likely have been higher than its
share of passengers on non-stop flights given that it operated DFW as a hub airport.11
American’s share of passengers at DFW also increased by 3.1% from 1999 to 2000.
However, both the Court and American Airlines pointed out that the passenger share of LCCs
had increased at a greater rate. In 1999 to 2000, the number of passenger carried by low fare
airlines at DFW increase by 30.7%.
Firms with high market shares do not necessarily possess market power if the market
elasticity of demand and the elasticity for supply by rivals are quite high.12 It is therefore
necessary to consider other factors, including price controls and barriers to entry.
3.2 Price Control
I agree with the United States’ argument that American was able to charge supra-competitive
prices in the relevant city pair markets.
The United States argued that supra-competitive prices were evidenced by the difference
between fares in LCC-competitive and non-competitive markets.13 These fare differences, as
the Court rightly stated, were not indicative of supra-competitive pricing because there was
no evidence that the routes subject to comparison were similar in distance, frequency and
cost.14
American’s relatively high price-average cost margins were evidence of supra-competitive
prices on the other hand. In 1999, the margin for all service types ranged from 28% to 59%
and for non-stop services in particular it ranged from 28% to 60%. Furthermore, American’s
price-average cost margin in non-stop markets in which it competed with Southwest Airlines
or other LCCs was 30.2% higher than in non-stop markets without competition.15 Given that
the Court concluded that American’s prices in Southwest and LCC-competitive markets
could be used as proxies for competitive prices, the 30.2% difference is strong evidence of
supra-competitive pricing. When considering the likelihood of American recovering profits
lost due to predatory pricing, the District Court stated, ‘there is no evidence that the prior
fares were in fact supra-competitive’.16 However, that statement plainly contradicts the
evidence.
11 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1147 (D Kan, 2001).
12 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1092-1093.
13 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1152.
14 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1088.
15 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1154 (D Kan, 2001).
16 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1263 (D Kan, 2001).
5
It would be impossible in either a Cournot or Bertrand game (which are both applicable to
airline markets17) for American to have raised prices about the competitive level. Thus, the
price-cost margins discussed above suggest that American had monopoly power.
However, supra-competitive prices alone are insufficient to prove that a firm has monopoly
power. The Lerner Index (and the price-average variable cost margin used in this case as an
estimate of the Lerner Index) is especially ‘misaligned with the competitive counterfactual’
in markets with significant fixed costs such as the aviation industry.18 Such markets could not
function if prices were equal to marginal cost.19 Recognising these deficiencies in the Lerner
Index, most courts have begun require evidence of barriers to entry to find that monopoly
power exists.20