Opinion ID: 3009612
Heading Depth: 2
Heading Rank: 6

Heading: Peripheral Devices and Software

Text: AMI also argues that the district court erred when it added peripheral devices and software into the relevant market. The court found that these items, which provide data input, storage and output capabilities and direct the computer in its processing of information, provided significant and reasonable alternatives to a wide variety of upgrades and modifications of large scale mainframes. Allen-Myland, 693 F. Supp. at 276. Similar or substitute products are those that have the ability -- actual or potential -- to take significant amounts of business away from each other. SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir.), cert. denied, 439 U.S. 838, 99 S. Ct. 123 (1978). Thus, the relevant product market is composed of products that have reasonable interchangeability for 15 If it does so, the district court should then proceed to determine the percentage of the mainframe market occupied by existing mainframe users who are locked in to that type of computer by prohibitively high switching costs; the greater that percentage is, the more power IBM has to maintain supracompetitive prices in the mainframe market. See Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law ¶ 521.1a, at 604-05 (1993 Supp.). The court can then determine if IBM's power in the large-scale mainframe market is constrained by the existence of smaller capacity computers, and if so, whether such computers should be included in the relevant market. It may be that the district court will conclude that, while smaller capacity computers cannot be fully excluded from the market, neither can they be fully included. The court may, after considering the evidence and the nature of the market, exercise its discretion and reduce IBM's market share by a number greater than zero percent but less that the full extent of the market for smaller capacity computers. the purposes for which they are produced -- price, use and qualities considered. Id. at 1062-63 (quoting United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 404, 76 S. Ct. 994, 1012 (1956) (The Cellophane Case)); Tunis Bros. Co. v. Ford Motor Co., 952 F.2d 715, 722 (3d Cir. 1991), cert. denied, 112 S. Ct. 3034 (1992). Interchangeability implies that one product is roughly equivalent to another for the use to which it is put; while there might be some degree of preference for the one over the other, either would work effectively. A person needing transportation to work could accordingly buy a Ford or a Chevrolet automobile, or could elect to ride a horse or bicycle, assuming those options were feasible. The key test for determining whether one product is a substitute for another is whether there is a crosselasticity of demand between them: in other words, whether the demand for the second good would respond to changes in the price of the first. Tunis Bros., 952 F.2d at 722. In the six years since the district court issued its opinion, the personal computer has consolidated its position in modern life, and what once seemed mired in impenetrable technical jargon is now within the vocabulary of the general public. Moreover, technology changes rapidly and if one has an older computer and wishes to use the latest software applications, one often must either upgrade the central processor -- the equivalent of a MIPS upgrade -- or buy a new computer. Increasing the size of the disk drive, buying more memory or installing the latest version of the operating system may help in some cases but in many others will be ineffective. It thus may be argued that the same situation obtains in the case of larger computers; that is, peripherals and software are complementary goods but are not substitutes for mainframe computers. The issue, nevertheless, remains a factual one for the district court to resolve. Here, if peripherals and software are reasonable substitutes for mainframes, we should expect to see an increased demand for them as the price of mainframes rises, but the district court cited no evidence of this type. Instead, it relied on the fact that IBM considers peripheral products and software when pricing its computer systems. Allen-Myland, 693 F. Supp. at 276. Pricing a large mainframe system on the basis of peripherals included with it against competitive offerings by other manufacturers, however, is simply not evidence that peripherals and mainframes are substitutes for one another. The district court relied even more heavily on several anecdotes in which large mainframe users had upgraded memory, disks, software or other peripherals rather than perform a MIPS upgrade. Id. at 276-77. This testimony fell into two categories. First, some users testified that it was possible to delay a MIPS upgrade for a while by upgrading peripherals or software: akin perhaps to saying that installing new brakes may delay the necessity of purchasing a new car, but it is not sufficient evidence on which to conclude that the products are reasonably interchangeable in use. See Kaiser Aluminum & Chemical Corp. v. Federal Trade Comm'n, 652 F.2d 1324, 1331-32 (7th Cir. 1981) (specialties, which delayed the necessity of replacing refractory bricks in furnaces, did not belong in the same relevant market). Second, there was testimony to the effect that there are many ways to enhance the performance of a computer system, including MIPS upgrades and peripheral/software upgrades. Although it is doubtless true that improvements to peripherals or software will improve a computer's performance somewhat under certain circumstances, we find no evidence on how much or under what conditions improvement could be expected. There was thus no evidence from which to conclude whether peripheral and software upgrades were reasonably interchangeable with either a MIPS upgrade or a different mainframe computer in enough cases that those alternate upgrades could properly be termed substitutes. Nor was there evidence that, because of a price change in mainframes, there was a greater or lesser demand for peripheral/software upgrades. In sum, the evidence was insufficient to support the wholesale inclusion of peripherals and software into the relevant market for large-scale mainframes. We emphasize, however, that we are not holding that peripheral and software must be excluded from the relevant market, only that, upon review, the evidence cited in the district court's opinion is insufficient to warrant including them. On remand, the district court will of course determine whether there is some degree of interchangeability or other evidence of cross-elasticity of demand. If there is, then the court is free to adjust IBM's share of the market by its best estimate of the true competition from peripherals and software.