[Market Power and Market Definition in Monopolization Cases: A Paradigm
Is Missing]{.underline}

Lawrence J. White

Stern School of Business

New York University

lwhite@stern.nyu.edu

Revised draft: 1/24/07

To be published in

[Issues in Competition Law and Policy]{.underline}

Wayne D. Collins, ed.

[Abstract]{.underline}

The question of market definition for monopolization cases \-- and thus
the issue of the possession of market power by the defendant \-- is
crucial for the outcome of these cases. However, unlike antitrust merger
analysis, where the DOJ-FTC *Horizontal Merger Guidelines* has provided
a successful paradigm for market definition, monopolization cases lack a
guiding market definition paradigm. This chapter addresses this issue,
shows the problems that arise when a market definition paradigm is
absent, and offers some partial remedies. The best remedy, though, would
be the development of a suitable market definition paradigm for these
cases.

JEL Classification Numbers: K21, L12, L41

Keywords: antitrust; monopolization; market definition

[Market Power and Market Definition in Monopolization Cases: A Paradigm
Is Missing]{.underline}

Lawrence J. White[^1]

Stern School of Business

New York University

lwhite@stern.nyu.edu

[I. Introduction]{.underline}[^2]

A major issue in antitrust monopolization cases (e.g., involving claims
of anticompetitive restrictive practices or predatory behavior) is
frequently that of market definition (or delineation). The plaintiff
will claim that the relevant market is relatively narrow and thus that
the defendant had a large market share and was able to exercise market
power; the defendant will claim that the relevant market is relatively
broad and thus that the defendant had a small market share and could not
possibly have exercised market power.

Unfortunately, there is no standard paradigm to which both sides can
refer in their efforts to define the boundaries of the market. This
stands in sharp contrast to the situation with respect to merger
analysis for antitrust purposes. In that arena the market definition
paradigm that was embedded in the *Merger Guidelines* developed by the
U.S. Department of Justice (DOJ) in 1982[^3] has been widely accepted by
plaintiffs, defendants, and the courts \-- in the U.S. and abroad \-- as
the appropriate basis for horizontal merger analysis.

Indeed, the success of that paradigm has sometimes caused parties in a
monopolization case to try to use it in their case.[^4] Only in special
circumstances, however, is the application of the *Merger Guidelines*
market definition paradigm appropriate for monopolization cases;
instead, its mis-application is likely to lead to the perception that
the defendant has no market power, even in instances where it truly does
have market power.

The absence of a guiding paradigm for market definition in
monopolization cases means that outcomes are likely to be erratic.
Though there are some partial remedies that can be offered to deal with
this problem, the best remedy would be the development of a widely
accepted paradigm.

This chapter will expand on these ideas.

[II. The Simple Monopoly Model and the Market Definition
Problem]{.underline}

The simple monopoly model (and its comparison with the model of
competition) is a standard part of any introductory microeconomics
course \-- and explicitly or implicitly underlies modern antitrust
concerns about the presence and/or exercise of market power. We will
reproduce it here, so as to provide a concrete illustration of the
phenomenon and also to show where the market definition problems arise.

In Figure 1 we portray a simple downward-sloping linear market demand
curve and a simple horizontal linear unit cost (average cost, or AC)
curve.[^5] If a large number of sellers have these same costs,[^6] then
the competitive outcome will be a price of P~C~=MC (=AVC=AC), and an
aggregate market quantity of Q~C~. If instead a single firm (monopoly)
faced the same demand and cost conditions (and entry were blockaded),
then that monopolist\'s price[^7] would be higher, at P~M~, and the
monopolist\'s quantity would be lower, at Q~M~.[^8] The monopolist will
also earn above-normal profits (represented by the rectangle
P~M~yzP~C~). This profit rectangle will represent a transfer (of
consumers\' surplus) from buyers to the monopolist. The social loss from
monopoly will be the \"deadweight loss triangle\" yxz, representing the
lost value to buyers of the purchases that they would have made at the
competitive price P~C~ but do not make at the monopoly price P~M~.

There is an immediate implication, which cannot be too heavily stressed:
The essence of the pricing difference between competition and monopoly
is that the monopolist is able to *maintain* a higher price (and earn
higher profits/rents) than can the competitive industry. Thus, the
monopolist\'s market power is manifested through its *maintaining* a
higher price, not in \"raising\" the price. The price P~M~ is the
maximizing price for the monopolist; *the profit-maximizing monopolist
would not want to raise its price any higher than that level* (unless
other conditions changed), because it would lose too many sales \-- as
some potential buyers choose instead to buy other things from other
sellers \-- relative to the higher margins that could be gained.[^9]

This concept of the monopolist\'s being constrained by the loss of
sales, as buyers switch to other sellers, can be made more explicit by
considering the model of a \"dominant firm\" \-- which is dominant
because of a superior production cost technology \-- that must also face
a \"fringe\" of smaller reactive firms that produce the identical item
but with an inferior cost technology.[^10] This model is portrayed in
Figure 2. The linear demand curve D is again the market demand for the
item, and the horizontal unit cost curve again represents the dominant
firm\'s production cost technology. The new element is the supply curve
S~FR~ of the reactive fringe of smaller firms. If the dominant firm
cannot eliminate permanently this fringe through pricing below their
costs, then the dominant firm must tolerate their presence. In essence,
their supply curve must be subtracted from the market demand curve to
reveal the \"residual\" demand D~RES~ that is effectively available to
the dominant firm at each price. The dominant firm can then maximize
against that residual demand curve, finding the quantity at which
MR~RES~ (of the residual demand curve) equals the dominant firm\'s MC.
In this more explicit model, the dominant firm does exercise market
power \-- the price P~DOM~ is *maintained* above the level that would
prevail if the industry were wholly competitive (i.e., if many firms
could replicate the dominant firm\'s production cost technology) \-- but
it is constrained by the market demand curve generally (at higher
prices, buyers in the market switch to other things) and by its residual
demand curve specifically (at higher prices the fringe firms are willing
to supply more and replace more of the dominant firm\'s sales).

Virtually all trained economists understand and would agree with this
presentation. Nevertheless, the language of a monopolist\'s being able
to \"raise\" its price often enters economists\' informal descriptions
of monopoly and market power.[^11] Further, since 1982 the *Merger
Guidelines* have provided a successful market definition paradigm of a
\"hypothetical monopolist\" that (as compared to existing market
conditions) could impose a \"small but significant nontransitory
increase in price\" (SSNIP). This successful paradigm may well have
reinforced the loose use of the \"raise price\" language. However, the
*Merger Guidelines* SSNIP inquiry is sensibly used only in the context
of a *forward-looking* question: \"Will this merger permit the creation
or enhancement of market power?\" The hypothetical monopolist paradigm
(and the SSNIP) then can be used to identify a product or group of
products (sold by a group of sellers) that could potentially be
monopolized (and the remainder of the *Guidelines*\' analytical steps
tries to ascertain whether, in the context of that market, the merger at
hand would likely allow the creation or enhancement of the potentially
available market power).[^12] This paradigm is thus consistent with
reasoning of footnote 7 *infra* that a significant transformation of a
group of sellers (creating the hypothetical monopolist) could lead to a
significant price increase.

Unfortunately, regardless of the source, the \"monopolist\'s power to
raise price\" language has at times crept into some economists\'
discussions of monopoly power in legal contexts. Consider the following:

> "It is the ability of a firm to raise prices or market inferior
> products while excluding competition that constitutes monopoly
> power."[^13]
>
> "Monopoly power is by definition the ability to control (that is to
> raise) prices *without* inducing entry and expansion."[^14]
>
> "\... substantial evidence was introduced at trial that \[original
> equipment manufacturers of personal computers\] would not shift to
> another operating system, even if the price of Windows rose
> significantly."[^15]
>
> "Economists usually define market power as the power to raise price
> above competitive levels."[^16]

This \"raising price\" language has also found its way into legal
decisions in monopolization cases:

> "Market power is usually stated to be the ability of a single seller
> to raise price and restrict output\..."[^17]
>
> "Market power comes from the ability to cut back the market\'s total
> output and so raise price."[^18]
>
> "...a firm is a monopolist if it can profitably raise prices
> substantially above the competitive level."[^19]

The real danger from this muddying language of \"raising price\" arises
if then the ability profitably to \"raise price\" from *currently
observed* prices is used as the test of whether a defendant in a
monopolization case has market power. As the discussion above indicates,
all firms \-- regardless of whether they are competitive or are truly
monopolists \-- will be found to be unable to raise price profitably
from currently observed levels, since they will already have established
a profit-maximizing price for themselves; and thus this \"test\" will
fail to separate the true monopolist that does exercise market power
from the firm that does not have market power.[^20] Similarly, if the
test is phrased as, \"Does this firm face competition (at the margin) at
its current price?\", again the true monopolist as well as competitors
would answer \"yes\", and again the test would fail to distinguish
between the two. Some of this competition at the margin might involve
small-scale entry, so even the presence of entry may not provide a
useful separating criterion.

What other tests might be possible? First, if the competitive price were
known, then that price might be used as a benchmark for judging whether
an alleged monopolist is exercising market power. In some instances,
cross-section data on prices (e.g., the prices for a specific good or
service in different metropolitan areas) and on corresponding structural
characteristics (e.g., seller concentration in those metropolitan areas)
may permit the inference (e.g., through statistical/econometric
techniques) that there are separate markets for that item. Further,
these data may allow the identification of markets that appear
structurally to be competitive and then permit a comparison of the
alleged monopolist\'s price with the competitive benchmark price. These
types of comparisons may be possible in cases involving retail services,
where local geographic areas do appear to be the relevant markets, or
transportation, where city-pair routes appear to be the relevant
markets, so that cross-sectional comparisons can be employed. These
comparisons may also be possible for some goods that have high
weight-to-value ratios (e.g., cement, concrete, many raw materials); in
such instances, transportation costs loom large in the good\'s final
price, which discourages their long-range transport, and relevant
markets tend to be local. Also, if sufficient time series data on prices
and other relevant information are available for a good or service, and
structural changes have occurred over time, again a competitive
benchmark may possibly be identified for comparison purposes.

Unfortunately, in many monopolization cases such cross-section and/or
time series data are not available, so that the identification of the
competitive benchmark becomes problematic.[^21]

Second, profit data might be employed. Recall that one of the
distinguishing characteristics of the monopoly outcome in Figure 1 is
the higher (above \"normal\") profits that are earned by the monopolist.
Through the 1970s, profit data were a standard part of the plaintiff\'s
efforts to show that the defendant possessed market power (and,
implicitly, that the relevant market was relatively narrow).[^22]
Indeed, one could argue that the examination of profit rates was *the
paradigm* used for the determination of market power (and thus,
implicitly, for market definition) prior to the 1980s. The evidence of
profits that were persistently above \"normal\" or \"competitive\"
levels was used as an important indicator of the presence of market
power.

Since the late 1970s, however, the substantial doubts that have been
cast on the use of corporate accounting data,[^23] combined with
inherent issues of cost allocation and profitability in multi-product
firms, have caused profit data to recede in importance as a means of
identifying the presence of market power.

Third, the sensitivity of the defendant\'s price to changes in the
prices of other sellers might be considered. But the demand for a
monopolist\'s product should be expected to be sensitive (at the margin)
to the prices of sellers of some substitutes (the \"dominant firm\"
model makes this point clearly), and thus the monopolist\'s price should
be expected to vary as well. This is yet another test (\"Do the
seller\'s prices respond to changes in prices by other sellers?\") to
which the monopolist as well as competitors could be expected to answer
\"yes\" and thus would not serve as a means for identifying firms with
market power.[^24]

Fourth, the elasticity of the defendant\'s demand curve might appear to
offer useful information. After all, a perfect competitor that sells a
commodity (e.g., the introductory textbook\'s archetypical \"wheat
farmer\") faces an infinitely (perfectly) elastic demand curve, whereby
the slightest unilateral change in price would trigger either the
complete loss of sales (in response to an upward price movement by the
firm) or the complete migration of buyers in the market to that seller
(in response to a downward price movement). By contrast, a monopolist\'s
elasticity of demand should be finite, greater than one (in absolute
value), and satisfy the condition described in footnote 6 *supra*.

However, as Chamberlin[^25] and Robinson[^26] separately realized over
seven decades ago, if there are distinctive firms that are not selling
commodities (so that they cannot be characterized as the perfect
competitor of the \"wheat farmer\" variety), then each firm will face a
downward-sloping demand curve; i.e., at a lower price the firm will sell
more, and at a higher price the firm will sell less (but not the \"all
or none\" phenomenon of the perfectly competitive firm). Such
distinctiveness may be based on the brand-name reputation of the seller
or simply on location (in a context where transportation costs matter).
The equilibrium outcome for each firm will be at an output for that firm
where P\>MR=MC, which is conceptually similar to that of the monopolist
portrayed in Figure 1, and the elasticity of demand for the firm will
satisfy the condition described in footnote 6 *infra*. However, if entry
by similar (though not identical) such firms is easy, the long-run
equilibrium outcome will involve such firms\' earning only \"normal\"
profits. This long-run equilibrium is portrayed in Figure 3. In that
diagram, the Chamberlin-Robinson (C-R) firm is in equilibrium at the
price P~C-R~ and output Q~C-R~, where P\>MR=MC but also where (because
of entry) the firm\'s demand curve is tangent to its average cost (AC)
curve and thus P=AC.[^27]

Though the development of the Chamberlin-Robinson model subsequently led
to a controversy concerning the allocative efficiency of C-R firms,[^28]
that controversy did not involve the exercise of market power in a
meaningful sense. Thus, a firm that can be identified as a C-R firm of
Figure 3 should not raise the antitrust concerns that arise from the
actions of the monopolist of Figure 1 or the dominant firm of Figure 2,
even though the C-R firm\'s elasticity of demand is less than the
infinite elasticity of the perfect competitor and satisfies the
condition specified in footnote 6 *infra*.

Thus, we are left with the fundamental dilemma of determining the
boundaries of the relevant market in a monopolization case and whether
the defendant possesses market power.

[III. What Is to Be Done?]{.underline}

The preceding section described the simple monopoly model and
illustrated the difficulties \-- especially when profit data cannot be
readily employed and adequate cross-section or time series data on
prices and corresponding structural characteristics are not available
\-- of defining the relevant market for an observed firm and thus of
determining whether an observed firm is exercising market power or is
just another C-R firm. Again, the *Cellophane* case[^29] brings out the
issue starkly: Was the relevant market \"cellophane,\" as the DOJ
argued, and did du Pont therefore possess market power? Or was the
relevant market \"flexible wrapping materials,\" as du Pont argued, and
was du Pont therefore just another C-R firm in this wider market? What
is clear from that case is that the district court and the Supreme Court
majority, in addressing this issue, asked the wrong question by focusing
on whether du Pont was restrained from raising its *observed* cellophane
prices for fear of losing too many customers to sellers of other
flexible wrapping materials.

The fundamental problem here is the absence of a paradigm for market
definition in monopolization cases \-- the absence of something
comparable to the *Merger Guidelines* paradigm for market definition
that has proved extremely functional for antitrust merger analysis.

There are, however, a few potential tools that are currently available
and that can and should be used in monopolization cases. First, there
must be some *de jure* or *de facto* lower limit on a defendant\'s size
and importance \-- some *de minimis* standard \-- that can be used to
exclude cases that would involve defendants that are likely to be truly
C-R firms. Antitrust enforcement should not care if Joe (the owner of
Joe\'s Unique Coffee Shop) insists that his manager Nora signs a
\"non-compete\" clause when she decides to leave and start her own
eatery; nor should antitrust care if Joe insists that his customers
order coffee with their donuts (so that donuts and coffee are tied or
bundled together) or if he insists on buying his cheesecake exclusively
from a single supplier and refuses to deal with any other supplier or
(when his \"home-baked\" carrot cake becomes so popular that local
grocery stores want to sell it) if he decides to sell exclusively
through only a single grocery chain and refuses to deal with the others.

Second, as was discussed in the previous section, where cross-section
data, or time series data, or both allow the inference of local markets
and a competitive benchmark, this information can and should be used to
ascertain the relevant market(s) and the likely market power of the
defendant.

Third, careful examination and analysis of profit data may allow its use
in some circumstances.[^30]

Fourth, where the monopolization practice in question is a *prospective*
action and thus where the plaintiff is asking for an injunction to
prevent this prospective action, the *Merger Guidelines* paradigm for
market definition can be effectively employed.[^31] This is possible
because, in this type of situation, the question to be asked is, \"Will
this action permit or enhance the exercise of market power?\", which is
the exact analog to the *Guidelines*\' question \"Will this merger
permit or enhance the exercise of market power?\" The *Guidelines*\'
hypothetical monopolist paradigm and SSNIP test can be used to define
the relevant market, and then the specific prospective practice can be
examined in the context of that market to determine whether it will
permit or enhance the exercise of market power.

Fifth, Nelson and White[^32] suggest that, for cases where the plaintiff
alleges that the defendant\'s actions were exclusionary, the question of
market definition can be largely shunted aside and the focus instead
should be on the price effects of the alleged exclusion; i.e., if the
plaintiff had not been foreclosed by the defendant\'s actions, would the
consequence have been a small but significant non-transitory *decrease*
in the price (SSN*D*P) charged by the defendant? This test requires
considerable care and qualification, including a two-step construction
of the \"but for\" counter-factual: (a) What would the plaintiff\'s
sales have been in the absence of the defendant\'s exclusionary action?
and (b) What would have been the consequences have been for the
defendant\'s price? Still, it provides a means of addressing the issues
that continue to bedevil monopolization cases.

[IV. Conclusion]{.underline}

The suggestions provided in the previous section should certainly help
in many monopolization litigation contexts. Still, the absence of a
generally accepted market definition paradigm is a genuine problem for
monopolization cases. In a real sense, for market definition purposes,
monopolization cases today stand where antitrust horizontal merger cases
stood prior to 1982: There was (is) no generally accepted paradigm for
market definition, and *ad hoc* methods of market definition were (are)
likely to lead to erratic outcomes.

The parties involved in monopolization cases \-- plaintiffs, defendants,
and judges \-- deserve better. A generally accepted paradigm for market
definition is sorely needed.

[Figure 1: A Comparison of Monopoly and Competition]{.underline}

\$

Monopoly profits (transfer of consumers' surplus

from buyers)

y

P~M~ Deadweight loss of consumers' surplus

because of monopoly

z x MC=AC

P~C~

MR D

0 Q~M~ Q~C~ Q

P~C~ = competitive price

Q~C~ = competitive quantity

P~M~ = monopoly price

Q~M~ = monopoly quantity

[Figure 2: The \"Dominant Firm\" and a Competitive Fringe]{.underline}

\$

S~FR~

D Supply by fringe firms

Overall market demand

Residual demand available to the

dominant firm

D~RES~ Marginal revenue derived from the

MR~RES~ residual demand

P~DOM~

MC

0 Q~FR~ Q~DOM~ Q~TOTAL~ Q

[Figure 3: The \"Tangency\" Equilibrium for a Chamberlin-Robinson
Competitor]{.underline}

\$

MC

P = AC

AC

P~C-R~

D

MR

0 Q~C-R~ Q

[^1]: ^^ ^∗^ The author would like to thank Jon Tomlin for helpful
    comments on an earlier draft.

[^2]: ^?^ This chapter draws heavily on Philip B. Nelson & Lawrence J.
    White, *Market Definition and the Identification of Market Power in
    Monopolization Cases: A Critique and a Proposal*, Stern School of
    Business, New York University, Department of Economics Working Paper
    EC-03-26, November 2003. The problem has been previously recognized,
    albeit more briefly, in Thomas G. Krattenmaker, Robert H. Lande, &
    Steven Salop, *Monopoly Power and Market Power in Antitrust Law*, 76
    [Geo L. Rev]{.smallcaps}. 241 (1987); Lawrence J. White, *Wanted: A
    New Market Definition Paradigm for Monopolization Cases*, [Comp.
    Ind.]{.smallcaps} (1999); Lawrence J. White, *Present at the
    Beginning of a New Era for Antitrust: Reflections on 1982-1983*, 16
    [Rev. Ind. Organization]{.smallcaps} 131 (2000); Lawrence J. White,
    *An Appraisal of Antitrust Policy during the Clinton
    Administration*, in Robert W. Hahn, ed., HIGH-STAKES ANTITRUST: THE
    LAST HURRAH? 11 (2003).

[^3]: ^?^ These Guidelines are now officially called the DOJ-FTC
    *Horizontal Merger Guidelines*. They were most recently revised in
    1997 and can be found at

    <http://www.usdoj.gov/atr/public/guidelines/hmg.htm>.

[^4]: ^?^ Unfortunately, Glick et al. appear to indicate that the
    application of the Merger Guidelines market definition paradigm to
    monopolization cases is straightforward and relatively easy: "This
    article maintains that, so long as one understands its inherent
    limitations, judicial application of the Guidelines' market
    definition test can be instructive in nonmerger cases." See Mark A.
    Glick, Duncan J. Cameron, and David G. Magnum, *Importing the Merger
    Guidelines Market Test in Section 2 Cases: Potential Benefits and
    Limitations*, 42 [ANTITRUST BULL]{.smallcaps}. 121, 122. This
    chapter argues that the limitations are central to the problem.

[^5]: ^?^ If the long-run AC curve is horizontal, then long-run AC,
    average variable cost (AVC), and marginal cost (MC) are all
    identical. Also, AC is defined to include a normal profit on
    invested capital.

[^6]: ^?^ As standard texts demonstrate, the linear horizontal line of
    long-run AVC=AC=MC could arise from a large number of identical
    sellers that each have a U-shaped AC curve, the bottom of which is
    at the level of the AC=AVC=MC line in Figure 1, combined with easy
    entry and exit.

[^7]: ^?^ This assumes that the monopolist is not able to practice price
    discrimination and thus can charge only a single price to all its
    customers.

[^8]: ^?^ The monopolist maximizes its profits at that price and
    quantity. This is the quantity at which marginal revenue (MR) is the
    same as (equals) MC. This maximizing outcome can also be represented
    as the solution to P~M~=MC/(1+1/E), where P~M~ in the monopolist\'s
    profit-maximizing price and E is the price elasticity of demand at
    that price.

[^9]: ^?^ The concept of a monopolist\'s \"raising\" its price makes
    sense only in the context of being able to observe the process
    whereby *a previously competitive industry is transformed into a
    monopoly*, and the newly established monopolist would then want to
    raise its price from the competitive level P~C~ to the monopoly
    level P~M~.

[^10]: ^?^ This model can originally be found in George J. Stigler, *The
    Dominant Firm and the Inverted Price Umbrella*, 8 [J. L.
    Econ]{.smallcaps}. 167 (1965). This same general approach would hold
    if the dominant firm\'s dominance instead rested on a superior brand
    reputation (as compared to the brand reputations of the smaller
    firms).

[^11]: ^?^ Again, as was noted in footnote 7 *infra*, the concept of the
    monopolist\'s \"raising price\" is valid in the context of the
    transformation of a competitive industry into a monopoly.

[^12]: ^?^ For a recent collection of assessments of the applications of
    the *Merger Guidelines*, see Jonathan B. Baker, *Responding to
    Developments in Economics and the Courts: Entry in the Merger
    Guidelines*, accessible at
    http://www.usdoj.gov/atr/hmerger/11252.htm; William J. Kolasky &
    Andrew R. Dick, *The Merger Guidelines and the Integration of
    Efficiencies into Antitrust Review of Horizontal Mergers*,
    accessible at http://www.usdoj.gov/atr/hmerger/11254.htm; David
    Scheffman, Malcolm Coate, & Louis Silva, *20 Years of Merger
    Guidelines Enforcement at the FTC: An Economic Perspective*,
    accessible at http://www.usdoj.gov/atr/hmerger/11255.htm; Gregory J.
    Werden, *The 1982 Merger Guidelines and the Ascent of the
    Hypothetical Monopolist Paradigm*, accessible at
    http://www.usdoj.gov/atr/hmerger/11256.htm; Oliver E. Williamson,
    *The Merger Guidelines of the U.S. Department of Justice \-- In
    Perspective*, accessible at
    http://www.usdoj.gov/atr/hmerger/11254.htm.

[^13]: ^?^ Franklin M. Fisher, John J. McGowan, & Joen E. Greenwood,
    [Folded, Spindled, and Mutilated: Economic Analysis and [U.S. V.
    IBM]{.underline}]{.smallcaps} 99 (1983).

[^14]: ^?^ Id., 165.

[^15]: ^?^ Franklin M. Fisher & Daniel L. Rubinfeld, *[U.S. v.
    Microsoft]{.underline}: An Economic Analysis*, in David S. Evans et
    al., [Did Microsoft Harm Consumers? Two Opposing Views]{.smallcaps}
    13 (2000).

[^16]: ^?^ David S. Evans & Richard L. Schmalensee, *Be Nice to Your
    Rivals: How the Government is Selling an Antitrust Case without
    Consumer Harm in [United States v. Microsoft]{.underline}*, in Evans
    et al., DID MICROSOFT HARM CONSUMERS? TWO OPPOSING VIEWS 65 (2000).

[^17]: ^?^ [Fortner Enterprises, Inc. v. United States Steel
    Corp.]{.underline}, 394 U.S. 495, 503 (1969).

[^18]: ^?^ [Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance,
    Inc.]{.underline}, 784 F.2d 1325, 1335 (1986).

[^19]: ^?^ [U.S. v. Microsoft Corp.]{.underline}, 253 F.3d 34, 22
    (2001).

[^20]: ^?^ This is what happened in the \"cellophane\" case, [U.S. v.
    E.I. du Pont de Nemours & Co.]{.underline}, 351 U.S. 377 (1956). The
    district court and the Supreme Court majority employed the test of
    \"can du Pont raise its price profitably for cellophane?\" and,
    finding that du Pont would lose too many customers if it tried to do
    so, decided that du Pont did not have market power and that the
    relevant market therefore had to be the broader \"flexible wrapping
    materials\" market (as du Pont had argued) and not the narrower
    \"cellophane\" market (as the DOJ had argued).

[^21]: ^?^ The importance of this point is underestimated by Glick et
    al., footnote 3 *supra*.

[^22]: ^?^ In the [Cellophane]{.underline} case, the Supreme Court
    minority, echoing an article by Stocking and Mueller that commented
    on the district court\'s opinion, pointed out that du Pont\'s
    profits were far higher in cellophane than in rayon, despite the
    fact that its market shares in rayon (less than 20%) and in du
    Pont\'s claimed \"flexible wrapping materials\" market (17.9%) were
    about the same. *See* 351 U.S. 377, 414 (1956); and George W.
    Stocking & Willard F. Mueller, *The Cellophane Case and the New
    Competition*, 45 [Am. Econ. Rev.]{.smallcaps} 29 (1955).

[^23]: ^?^ Two key articles that criticized the use of accounting data
    are: George J. Benston, *Accounting Numbers and Economic Values*, 27
    [Antitrust Bull]{.smallcaps}. 161 (1982); and Franklin M. Fisher &
    John J. McGowan, *On the Misuse of Accounting Rates of Return to
    Infer Monopoly Profits*, 73 [Amer. Econ. Rev]{.smallcaps}. 82
    (1983). For example, Fisher and McGowan wrote: "there is no way in
    which one can look at accounting rates of return and infer anything
    about relative economic profitability or, a fortiori, about the
    presence or absence of monopoly profits." Nonetheless, others have
    responded, arguing that there is "substantial evidence that
    accounting profits do, on average, yield important insights into
    economic performance." William F. Long & David J. Ravenscraft, *The
    Usefulness of Accounting Profit Data: A Comment on Fisher and
    McGowan*, [74 Am. Econ. Rev.]{.smallcaps} 494 (1984). For others who
    are also less critical of the use of accounting data see: Stephen
    Martin*, The Misuse of Accounting Rates of Return: Comment,* 74 [Am.
    Econ. Rev.]{.smallcaps} 501 (1984); John A. Kay & Colin P. Mayer,
    *On Applications of Accounting Rates of Return,* 96 [Econ.
    J.]{.smallcaps} 199 (1986); F.M. Scherer, *The Validity of Studies
    with Line of Business Data: Comment,* 77 [Am. Econ.
    Rev]{.smallcaps}. 205 (1987). It is worth noting that as early as
    1941, Joe Bain pointed out similar problems: "The unadjusted
    accounting rate of profit, as computed by the usual methods from
    balance sheets and income statements, is *prima facie* an absolutely
    unreliable indicator of the presence or absence either of monopoly
    power or excess profits in the sense defined." Joe S. Bain, *The
    Profit Rate as a Measure of Monopoly Power,* 55 [Q. J. Econ.
    291]{.smallcaps} (1941)[.]{.smallcaps}

[^24]: ^?^ Nevertheless, in [Cellophane]{.underline}, the Supreme Court
    minority, echoing Stocking and Mueller, argued that du Pont\'s
    prices for cellophane were invariant to changes in the prices of
    other \"flexible wrapping materials\". *See* 351 U.S. 377, 414
    (1956).

[^25]: ^?^ Edward H. Chamberlin, [The Theory of Monopolistic
    Competition]{.smallcaps}, 1st edn. (1933). The concept was initially
    presented in Chamberlin's Ph.D. dissertation, which was submitted in
    1927.

[^26]: ^?^ Joan Robinson, [The Economics of Imperfect
    Competition]{.smallcaps} (1933).

[^27]: ^?^ Again, it should be emphasized that average costs include the
    opportunity costs of invested capital, so that the P=AC outcome
    means that the firm is earning a \"normal\" return on its
    investment.

[^28]: ^?^ *See* A. Michael Spence, *Product Selection, Fixed Costs, and
    Monopolistic Competition*, 43 [Rev. Econ. Stud]{.smallcaps}. 217
    (1976); and Avinash K. Dixit & Joseph E. Stiglitz, *Monopolistic
    Competition and Optimum Product Diversity*, 67 [Am. Econ.
    Rev]{.smallcaps}. 797 (1977).

[^29]: ^?^ *See* footnote 19 *supra*.

[^30]: ^?^ Or, as arguably occurred in the [Microsoft]{.underline} case,
    the defendant\'s consistently large accounting profits may override
    any hesitations concerning the acceptability of accounting data in
    helping ascertain that the defendant has market power. [U.S. v.
    Microsoft]{.underline}, 253 F.3d 34 (2001).

[^31]: ^?^ This point is made by Gregory J. Werden, *Market Delineation
    under the Merger Guidelines: Monopoly Cases and Alternative
    Approaches*, 16 [Rev. Ind. Org]{.smallcaps}.. 211 (2000).

[^32]: ^?^ *See* Nelson & White, footnote 1 *supra*.