Posted by: captainfalcon | January 3, 2013

Monopoly Leveraging

Theoretically, “monopoly leveraging” is the process by which a firm with a monopoly on a product seeks to extract monopoly prices on related products.  An example, for which I am indebted to Herbert Hovenkamp’s The Antitrust Enterprise, arises in a 1931 Supreme Court case called Carbice in which the producer of a patented icebox included a term in its licensing agreement requiring users of the icebox to purchase ice from the producer as well.  The Court held that this practice of “tying” a non-monopoly product to a monopoly product — the Court assumed that the patent on the icebox allowed for monopoly pricing —  was a violation of the antitrust laws on the grounds that it meant that the icebox producer could charge monopoly prices for the ice as well.

According to Hovenkamp, antitrust scholars working at the University of Chicago during the 1950s developed a persuasive argument against the possibility of monopoly leveraging (at least in the context of complementary products).  The basic idea is that one should think of complementary products — such as ice and an icebox — as a single product for which one monopoly price can be charged.  The price can be divvied up between the two products — one can charge a competitive price for the ice and a monopoly price for the icebox, or one can charge super-competitive, but sub-monopoly, prices for both — but a monopolist derives no extra value from tying his monopoly product to a non-monopoly product; he just gets the flexibility of apportioning the monopoly price among two products instead of one.  In fact, as Judge Easterbrook explained in the Seventh Circuit’s 2006 opinion Schor v. Abbott Laboratories, for a would-be monopolist, an equivalently good strategy  to tying his seeming monopoly product to a complementary product is to encourage perfect competition among producers of the complementary product so that he can charge monopoly prices for his product (because, absent perfect competition in the complementary market, the producer is effectively in an oligopoly situation).  This dramatically demonstrates that a monopoly on one complementary product plus tying does not give a firm the ability to extract monopoly prices on the tied product as well.

Chris does that seem basically right to you (particularly the bolded portion)?

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