Opinion ID: 3009612
Heading Depth: 2
Heading Rank: 7

Heading: AMI's Proposed Submarkets

Text: As a separate ground for reversal, AMI argues that the district court erred by rejecting its two alternate submarkets: the parts and services required for the upgrade and conversion of all large-scale mainframes, and an even narrower submarket confined to parts for upgrading IBM mainframes. The district court rejected the larger submarket based on evidence that upgrades to large-scale mainframes competed with various alternatives, including large-scale mainframes themselves. Allen-Myland, 693 F. Supp. at 282-83. It rejected the narrow submarket because [c]ourts have generally rejected market definitions limited to a defendant's products. Id. at 282 n.43. In Brown Shoe Co. v. United States, 370 U.S. 294, 325, 82 S. Ct. 1502, 1524 (1962), the Supreme Court stated that within a broader product market well-defined submarkets may exist which, in themselves, constitute product markets for antitrust purposes.16 Thus, if upgrades and mainframes are not reasonably interchangeable with each other, a valid submarket would exist here. The district court, however, found that replacing the 16 The use of the term submarket is somewhat confusing, and tends to obscure the true inquiry: whether IBM is constrained by the prices of large scale mainframe computers when pricing its upgrades. If it is so constrained, then the relevant market consists of both mainframes and upgrades. If not, then it is simpler and more accurate to say that the relevant market itself, not some submarket of it, contains only upgrades. See Areeda & Hovenkamp, supra, ¶ 581.1c, at 535-36 (1993 Supp.). Nevertheless, because the term has been commonly used in the reported cases over the years, we will also continue to use it, being nonetheless mindful that it is inaccurate and of the true question before us. computer itself is an alternative to an upgrade. Moreover, it found that IBM priced upgrades and mainframes so that buyers would be indifferent whether to purchase an upgrade or install a more powerful computer. These factual findings are not disputed on appeal, and so the district court's conclusion on the larger submarket must stand. By implication, if the broader submarket fails, the narrower one would appear to fail as well. Instead of arguing that the district court's factfinding was clearly erroneous, AMI attempts to revive its narrow submarket by relying on the testimony of its expert, Professor Levin, that certain IBM mainframe users were locked into upgrading their computers and lacked the alternative of replacing the whole machine. By so arguing, it attempts to bring this issue within the ambit of Kodak, which was decided four years after the district court's opinion in this case. In Kodak, as we have already discussed, the Supreme Court held that when users are locked into a particular vendor by the sunk cost of the product, market power may exist in the aftermarket for parts even though the equipment market is competitive. Here, while the district court found that largescale mainframes were generally reasonable substitutes for upgrades, its opinion did not address whether there was a subpopulation of IBM mainframe users who for economic reasons were locked into MIPS upgrades when they needed increased computing power. AMI's argument appears to be that if a sufficient number of users actually were locked into using upgrades rather than replacing their computers, then IBM may have had the power to set prices for MIPS upgrades, wholly separate from whether it possessed that power over the large-scale mainframe market, including upgrades. Under this reasoning, we should remand and allow the district court to determine the extent, if any, to which this was the case. Such a remand would be futile, however, since if IBM had market power over upgrades with respect to a large number of mainframe users, we would expect it to charge supracompetitive prices for upgrades. Yet, the district court found that IBM prices its upgrades such that the user pays the same amount for an upgrade as the price differential between the prices of the more powerful and the existing computers if purchased new. Allen-Myland, 693 F. Supp. at 282. This belies any special power over an upgrade submarket; IBM's power is limited to whatever control it is able to maintain over the larger relevant market. Hence, we will affirm the district court's finding that a valid IBM-only parts submarket did not exist.