Opinion ID: 75782
Heading Depth: 4
Heading Rank: 1

Heading: Possession of Market Power

Text: 31 The most common method of demonstrating a predator possesses sufficient market power to set supracompetitive prices is to show the existence of a monopoly. A monopoly may arise where one seller controls all or the bulk of a product's output. See generally IIA Areeda, supra ¶ 403a (defining the term monopoly). A less common method of demonstrating market power is to show the existence of an oligopoly. 14 An oligopoly may arise where a handful of relatively large sellers control the bulk of a product's output. See generally IIA Areeda, supra ¶ 404a (defining the term oligopoly). Whether the Baileys can prove Allgas operated in either a monopoly or an oligopoly environment will be examined in turn. 1) Existence of a Monopoly 32 The most direct method of establishing monopoly power is through economic proof, namely, demand and supply curves. See generally IIA Areeda, supra ¶ 507. Because demand is difficult to establish with accuracy, evidence of a seller's market share may provide the most convenient circumstantial measure of monopoly power. See generally United States v. Grinnell Corp., 384 U.S. 563, 571, 86 S.Ct. 1698, 1704, 16 L.Ed.2d 778 (1966) (noting [t]he existence of such [monopoly] power ordinarily may be inferred from the predominant share of the market); U.S. Anchor Mfg. v. Rule Indus., Inc., 7 F.3d 986, 999 (11th Cir.1993) (stating the principal measure of actual monopoly power is market share). 33 The first step in assessing a seller's market share is to define the relevant market. See Rebel Oil, 51 F.3d at 1434 (Without a definition of the relevant market, it is impossible to determine market share.). Defining the relevant market requires identification of both the product at issue and the geographic market for that product. Spectrofuge Corp. v. Beckman Instruments, Inc., 575 F.2d 256, 276 (5th Cir.1978). Once the relevant market has been determined, it is possible to calculate a seller's percentage share of that market. Construction of the relevant market and a showing of monopoly power must be based on expert testimony. See Colsa Corp. v. Martin Marietta Servs., Inc., 133 F.3d 853, 855 n. 4 (11th Cir.1998). 34 After a thorough examination of the record, we conclude the evidence presented by Gunther, the Baileys' sole expert, does not provide a sufficient basis upon which a reasonable jury could find Allgas possessed monopoly power. As discussed in more detail below, Gunther's assessment of the relevant product market was cursory and unclear. In defining the relevant geographic market, Gunther ignored instructive guidelines set forth in this Court's precedent. Furthermore, even if the geographic market had been correctly drawn, Gunther failed to determine Allgas' market share for that particular geographic area. Finally, even assuming Gunther's determination of Allgas' market share was correct, the percentage share calculated by Gunther is insufficient as a matter of law to constitute circumstantial evidence of a monopoly. a) Failure to Prove the Relevant Product Market 35 A relevant product market does not consist solely of the specific product over which parties engage in a price war. Rather, in determining a seller's monopoly power, it is necessary to examine both the product at issue and all reasonable substitutes available to consumers. The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it. Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S.Ct. 1502, 1523-24, 8 L.Ed.2d 510 (1962). 36 In his preliminary report, Gunther stated the relevant product market was liquid propane gasoline. Additionally, at various times in his report, Gunther indicated the relevant product market was limited to propane gas sold for residential use. 15 See, e.g., Letter from Gunther to L. Vastine Stabler, Jr. enclosing the Preliminary Report (Gunther Letter) at ¶ 2 (stating there tend to be few product substitutes for propane gas for home heating purposes); March 19, 1997 Preliminary Report of Dr. William Gunther (Preliminary Report) at 3 (This report focuses primarily on the second largest use of propane gas, residential/commercial use, and the retailing (marketing) of the propane gas to the final customer.). Despite recognizing propane gas is viewed as homogeneous by the final consumer, Gunther did not analyze whether residential use constitutes a legitimate sub-market for the propane gas market. 37 Of equal concern is Gunther's cursory assessment of reasonable substitutes for liquid propane gas. Gunther acknowledged the existence of several alternative residential fuel sources, including electricity, coal, wood, and heating oil. 16 Nevertheless, he quickly dismissed these alternative sources as reasonable substitutes for propane gas based on the expense of installing or retrofitting heating equipment. See Preliminary Report at 7 (For a home located in the rural areas, there would appear to be limited substitutability of one fuel source for others given the required infrastructure to switch sources.) Despite acknowledging the majority of residential homes have electricity, Gunther immediately dismissed electrical heat as a reasonable substitute for liquid propane gas. His rejection of coal, wood and heating oil heat as reasonable substitutes was equally as brief. Gunther, however, was presented as an expert in economics, not an expert in the liquid propane gas industry. The sole extent of his research on the industry itself consisted of visiting the website of a national liquid propane gas association and placing two brief telephone calls to unknown persons at the association. At no point did Gunther conduct a survey of the homes in the geographic market, or otherwise research the area, to determine the percentage of houses already fitted for alternative heating sources. Gunther also failed to calculate the actual cost of retrofitting the houses in order to determine the cross-elasticity of demand between propane gas and other fuel sources. In light of these deficiencies, we conclude Gunther's evidence is insufficient to establish the relevant product market. b) Failure to Prove the Relevant Geographic Market 38 The relevant geographic market is the area of effective competition ... in which the seller operates, and to which the purchaser can practicably turn for supplies. Tampa Elec. Co. v. Nashville Coal Co., 365 U.S. 320, 327, 81 S.Ct. 623, 628, 5 L.Ed.2d 580 (1961). Measurement of the relevant geographic market depends on a number of factors, including [p]rice data and such corroborative factors as transportation costs, delivery limitations, customer convenience and preference, and the location and facilities of other producers and distributors. T. Harris Young & Assocs., Inc. v. Marquette Elecs., Inc., 931 F.2d 816, 823 (11th Cir.1991). 39 In his preliminary report, Gunther indicated the relevant geographic market was comprised of the 20-mile radius encircling Susan Moore, Alabama. In making this determination, however, Gunther failed to properly assess the factors which must be considered when measuring the relevant geographic market. Gunther did not conduct any analysis of the historical prices charged by Allgas and its competitors within northern Alabama. Likewise, Gunther did not determine the location or facilities of any other propane gas retailers. Finally, Gunther's report failed to address customer convenience and preference. 40 The only factors Gunther considered were transportation costs and delivery limitations. Noting transportation costs are a significant component of final price, Gunther concluded the geographic markets for propane gas are highly localized. Nevertheless, Gunther struggled to pinpoint the actual delivery range applicable to the propane gas market. In his preliminary report, Gunther relied heavily on evidence from Allgas' records, which purportedly indicated most customers resided within a 10-mile radius of the facility from which they were serviced: 41 Indeed, based upon Allgas records, the transportation distances from a retailer tank site to customers tends to be in the range of 10 miles one way or 20 miles round trip. That would argue that customers which are more than 20 miles away from the tank site would be better served by a competitor provided they were located closer. 42 See Preliminary Report at 6. In a later portion of his preliminary report, however, Gunther sought to measure the projected annual sales volume available to Bailey's Propane Gas by calculating the number of housing units within a 20 mile radius of the company's office. Id. at 8. Gunther's deposition testimony was equally as contradictory. On the one hand, Gunther confirmed Allgas' customers were located within 10 miles, one-way, of its tanks. See March 19, 1997 Deposition of Dr. William Gunther (Gunther Depo.) at 36. On the other hand, Gunther indicated he assessed market share by using a 20-mile radius. Id. at 38-39. Ultimately, it is impossible to determine from Gunther's evidence whether propane gas retailers tend to serve customers within a 10-mile or 20-mile radius of their facilities. The difference between the two is significant — a company which serves customers within a 20-mile radius has a 400% larger service area than a company with a service area of 10 miles. 17 43 Regardless of the inconsistencies regarding delivery limitations in the retail propane gas market, Gunther's determination of the relevant geographic market is unacceptable as a matter of law. In his deposition, Gunther admitted he chose the 20-mile radius surrounding Susan Moore as the relevant geographic market solely because it coincided with the intended service area of Bailey's Propane Gas: 44 Q. .... Now, I just want to make sure I understand your testimony right. The radius for what the relevant market is should be 10 miles from the headquarters? 45 A. No. The AllGas material shows that their average distance was 11 miles but Mr. Bailey testified or I'm told he did, that his intended radius, or where he would go, would be about 20 miles. 46 Q. Okay. 47 A. So I used a 20 mile radius for Susan Moore. 48 Gunther Depo. at 78; see also Gunther Depo. at 80 (The Susan Moore Market was a 20 mile radius because Mr. Bailey said that was what he intended to drive in order to serve his customers.). The law is clear, however, that a geographic market cannot be drawn simply to coincide with the market area of a specific company. See Am. Key Corp. v. Cole Nat'l Corp., 762 F.2d 1569, 1581 (11th Cir.1985) (The relevant market is the `area of effective competition' in which competitors generally are willing to compete for the consumer potential, and not the market area of a single company.). Based on these deficiencies, Gunther's evidence is insufficient to establish the relevant geographic market. c) Failure to Establish Market Share 49 Once the relevant market has been defined, both in terms of the relevant product market and the relevant geographic market, a predator's percentage share of that market can be determined. Measurement of a predator's market share is necessary to assess whether the predator possesses sufficient leverage to influence market-wide output. See Rebel Oil v. Atl. Richfield Co., 51 F.3d 1421, 1437 (9th Cir.1995); see also IIA Areeda, supra at ¶ 403a. A monopolistic predator controls such a large portion of the market that its own restriction of output results in a market-wide reduction which cannot be offset by the expanded output of competitors. Rebel Oil, 51 F.3d at 1437. Such a predator has the power to charge supracompetitive prices merely by restricting its own output. Id. 50 The evidence presented by Gunther failed to demonstrate Allgas possessed a sufficiently large share of the relevant market for it to be characterized as a monopolist. First, Gunther neglected to calculate Allgas' market share of the purportedly relevant market. Moreover, even if Gunther's estimate of market share was for the correct market, the market share attributable to Allgas was insufficiently low to infer the existence of monopoly power. i) Market Share of the Incorrect Market 51 Several propane gas retailers competed against Allgas and Bailey's Propane Gas in northern Alabama, including Dowdle Gas, Ferrell Gas, Country Gas, Amerigas, Jordan Gas, Empire Gas, and Southland Gas. Gunther, however, did not personally assess the market shares of any of these competitors within the purported relevant market, an area defined by Gunther as encompassing the 20-mile radius surrounding Susan Moore. In lieu of conducting his own analysis, Gunther relied on the affidavit Max Bailey for generalized estimates of market share. In his affidavit, Max Bailey estimated Allgas' overall market share as 35-40% and its market share of sales to residential customers at close to 50%. 18 The overall market shares of competitors was estimated to be 35-40% for Dowdle Gas, 20-30% split between Ferrell Gas and Country Gas, and the remaining small percentage split between Amerigas, Jordan Gas, Empire Gas, and Southland Gas. Adopting these estimates, Gunther concluded Allgas possessed a 35-40% overall share of the relevant market and a close to 50% residential share of the relevant market. 52 Regardless of the propriety of an expert relying solely on the opinion of a lay witness when measuring market share, Gunther's reliance on Max Bailey's affidavit is fundamentally flawed because Bailey did not estimate market shares for the purportedly relevant market. Rather, Max Bailey estimated the market shares of Allgas and its competitors for the Altoona District. See April 8, 1997 Affidavit of Max Bailey at ¶ 6. The Altoona District was defined as the service area of Allgas' Altoona district office. Id. ¶ 5. The service area of Allgas' Altoona district office, however, was not coextensive with the service area of Bailey's Propane Gas; i.e., the Altoona District was not limited to the 20-mile radius surrounding Susan Moore. The affidavit of Max Bailey, therefore, reveals nothing about the respective market shares of competitors within a 20-mile radius of Susan Moore. As a result, Gunther's reliance on the affidavit for his sole evidence of market share is insufficient to establish the market share of Allgas in the allegedly relevant market. 19 ii) Insufficiently Low Market Share 53 Even if Gunther's measurement of market share was correct, such that Allgas possessed 35-40% of the overall propane gas market and close to 50% of the residential propane gas market surrounding Susan Moore, these market shares would be insufficient circumstantial evidence that Allgas was a monopolist. A market share at or less than 50% is inadequate as a matter of law to constitute monopoly power. See, e.g., Yoder Bros., Inc. v. California-Florida Plant Corp., 537 F.2d 1347, 1368 (5th Cir.1976) (finding 20% market share insufficient); U.S. Anchor Mfg., Inc. v. Rule Indus., Inc., 7 F.3d 986, 1000 (11th Cir.1993) (we have discovered no cases in which a court found the existence of actual monopoly established by a bare majority share of the market); Cliff Food Stores, Inc. v. Kroger, Inc., 417 F.2d 203, 207 n. 2 (5th Cir.1969) (indicating something more than 50% of the market is a prerequisite to a finding of monopoly); IIIA Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 801a (2d ed. 2002) (Although one cannot be too categorical, we believe it reasonable to presume the existence of substantial single-firm market power from a showing that the defendant's share of a well-defined market protected by sufficient entry barriers has exceeded 70 or 75 percent for the five years preceding the complaint.). As a result, we conclude the Baileys cannot establish Allgas possessed market power through the existence of a monopoly. 2) Existence of an Oligopoly 54 An oligopoly differs from a monopoly in that no one firm can control the market price of a product merely by altering its own output. IIA Areeda, supra ¶ 404a. Where a market is highly concentrated, however, it is possible for sellers to share market power sufficient to control prices by recognizing their shared economic interests and their interdependence with respect to price and output decisions. Brooke Group, 509 U.S. at 227, 113 S.Ct. at 2590. Thus, the distinctive characteristic of oligopoly is recognized interdependence among the leading firms: the profit-maximizing choice of price and output for one depends on the choices made by others. IIA Areeda, supra ¶ 404a. 55 The hallmark of an oligopoly is tacit collusion among competitors. Although economic theory suggests oligopolies can arise in any market comprised of only a handful of competitors, the practical realities of the marketplace make the actual existence of an oligopoly unlikely: 56 Firms that seek to recoup predatory losses through the conscious parallelism of oligopoly must rely on uncertain and ambiguous signals to achieve concerted action. The signals are subject to misinterpretation and are a blunt and imprecise means of ensuring smooth cooperation, especially in the context of changing or unprecedented market circumstances. This anticompetitive minuet is most difficult to compose and to perform, even for a disciplined oligopoly. 57 Brooke Group, 509 U.S. at 227-28, 113 S.Ct. at 2590. Nevertheless, the United States Supreme Court has recognized the possibility that competition could be injured through the operation of a successful oligopoly. See generally id. at 229, 113 S.Ct. at 2591. 58 The method by which an aggrieved competitor can prove the existence of an oligopoly has not been extensively discussed by the courts. The most reliable method of proving an oligopoly may be through extensive analysis of the historical price and output data for all the competitors within a relevant market. By examining such data, and even comparing the data with similar retailers operating in non-oligopolistic markets, it may be possible to discern whether there is an interdependence in price and output between leading retailers in the market. It also may be possible to discern whether the prices charged in the relevant market are inflated as compared with non-oligopolistic markets. In this case, however, we need not decide whether such evidence would be sufficient to prove the existence of an oligopoly, as Gunther made no attempt to analyze the historical price and output data of Allgas and its competitors. 59 Despite failing to analyze the interdependence of retailers within the alleged relevant market, Gunther nevertheless concluded Allgas' Altoona office operated within an oligopoly. This conclusion was based on his determination the company as a whole extracted supracompetitive profits in 1993 and 1994. The method by which Gunther determined Allgas earned supracompetitive prices was to compare Allgas' estimated rate of return on assets (ROA) for those two years with the average rate of return for Fortune 500 companies. 20 For example, finding Allgas earned a 12.12% ROA in 1993 as compared with an average Fortune 500 ROA of 3.5%, Gunther concluded in 1993, Allgas, Inc. earned a supranormal profit in the retail marketing of propane gas and the Altoona, Alabama market was a significant contributor to the supranormal profits being earned by Allgas, Inc. See Gunther Letter, ¶ 4. 60 As an initial matter, we are highly skeptical of the reliability of Gunther's methodology in measuring oligopoly power. Although the consistent extraction of supracompetitive profits may be an indication of anticompetitive market power, such profits could just as easily be obtained as a result of good management, superior efficiency, or differences in accounting, none of which is inconsistent with an efficient market. In re IBM Peripheral EDP Devices Antitrust Litig., 481 F.Supp. 965, 981 (N.D.Cal.1979). 61 More troubling is Gunther's use of a seller's ROA to measure supracompetitive profits. A company's ROA is based upon data collected and analyzed by accountants, not economists. As a result, these rates of return are more a reflection of various accounting conventions than true economic profit. 21 A company's ROA, thus, reveals very little about its market power: 62 [T]he rate of return indicated by accounting data is greatly influenced by the firm's growth rate, accounting procedures, the useful life of its assets and the way that those assets are depreciated, and which expenses are capitalized or treated as current costs. Moreover, when a firm produces products in addition to the one under scrutiny, there may be serious dispute over the allocation of overhead and joint costs. These factors are largely irrelevant to economic profit. The overall picture suggests extreme caution in using such data to infer market power. 63 IIA Areeda, supra ¶ 516f1. In light of these inadequacies, it is not surprising the use of ROA to measure market power has yet to be accepted by any circuit. See generally Blue Cross & Blue Shield United of Wis. v. Marshfield Clinic, 65 F.3d 1406, 1412 (7th Cir.1995) ([N]ot only do measured rates of return reflect accounting conventions more than they do real profits (or losses), as an economist would understand these terms, ... but there is not even a good economic theory that associates monopoly power with a high rate of return.). 64 Even if ROA legitimately could be used to measure market power, the comparison of a company's ROA to the average ROA for Fortune 500 companies, over the course of only two years, would be insufficient to prove supracompetitive profits indicative of an oligopoly. In order for the comparison to have any significance, the predator's ROA must be measured against the ROA of similar firms in the same or similar industries. One must have not only industries with the same risk level, but also assets that have been evaluated and depreciated in the same way, and markets that have faced the same growth rate. IIA Areeda, supra ¶ 516f2. Simply comparing a predator's ROA with the average ROA of the Fortune 500, which contains a broad cross-section of industries and types of companies, will not provide a true measure of excessive returns. 22 65 Not only would a company's ROA need to be compared against an appropriate benchmark, but the ROA also would need to be compared over the course of several years. Whatever the structure of the market, excess returns are a necessary ingredient of the dynamic adjustment of an industry's capacity to respond to changes in demand. IIA Areeda, supra ¶ 516b. When demand increases, existing firms may enjoy a period of inflated profits until such time as existing competitors can expand their capacity or new entrants provide additional supply. Id. The mere existence of supracompetitive profits for some period of time, thus, may be entirely consistent with an effective market. Only when excess returns are persistent over a longer period of time may there be an indication of an unhealthy market. 23 See generally id. ¶ 516f2 (indicating one to five years is not a sufficient amount of time to compare rates of return). 66 Gunther's own analysis demonstrates the need to measure ROA over the course of several years. In his report, Gunther presumed Allgas operated in an oligopoly because its ROA for 1993 was 12.12% and its ROA for 1994 was 12.55%. Noting the Fortune 500 average ROA for 1993 was 3.5%, Gunther concluded Allgas earned supracompetitive profits and, from this, Gunther inferred the existence of an oligopoly. 24 Omitted from Gunther's report, however, were Allgas' ROAs for 1992 and 1995. According to Gunther's calculations, Allgas had a negative ROA of -7.3% in 1992, and a minimal ROA of 4.10% in 1995. Thus, Gunther's own calculations indicated Allgas was not earning supracompetitive profits in 1992 and 1995. Gunther's complete ROA calculations, therefore, belie the existence of an oligopoly. Especially in light of its ROAs for 1992 and 1995, the fact Allgas may have enjoyed supracompetitive profits in 1993 and 1994 is insufficient to establish the existence of an oligopoly. 25 67 An additional deficiency with Gunther's methodology was measurement of the ROA for Allgas as a whole rather than for its Altoona, Alabama district. The oligopoly alleged by the Baileys existed in and around the geographic area serviced by Allgas' Altoona district office. Gunther, however, did not measure the retained earnings of the Altoona district office to determine whether that office, in fact, was earning supracompetitive profits. Rather, Gunther calculated the ROA of the entire company. Allgas operates in the entire state of Alabama, but the Altoona district covers only a small portion of the state. As a result, even if the company as a whole was earning supracompetitive profits as alleged by Gunther, that fact alone indicates nothing about whether the Altoona district was the cause of such profits. Consequently, Gunther's measurement of ROA for the entire company, without more, is virtually meaningless. 26 68 Even if the existence of an oligopoly could be substantiated through measurement of ROA, and even if Gunther's methodology was not otherwise fundamentally flawed, his evidence nevertheless is insufficient to demonstrate Allgas' Altoona district operated within an oligopoly. According to Gunther's testimony, Allgas earned supracompetitive profits in 1993 and 1994. The primary period of predation, however, occurred in 1994. Purportedly, Allgas dropped the residential price of its propane gas to 50¢, a price allegedly below its costs, in September 1994. Allgas did not raise its prices until late December 1994. If Allgas was engaging in predation during one-third of the year, it is illogical the company would have earned supranormal profits for 1994. Gunther's evidence, therefore, is inconsistent with the facts. Based on the foregoing, we conclude Gunther's testimony is insufficient to prove the existence of an oligopoly.