“Monopoly” is an economic threat that anyone can understand. Back in 2009, the Federal Trade Commission published a cartoon short for children that illustrates what happens when businesses don’t have to compete for customers, workers, or suppliers. As that cartoon said of the 1890s, “prices were up, and, quality…well…it wasn’t a priority.” In other words, when competition is absent, the monopoly wins, and everyone else winds up paying more money for less product and worse service, and workers get a lower wage.

In recent years, monopoly has re-entered the public’s attention as calls to “break up big tech” have escalated on both the right and the left. In October 2020, the Trump Administration and eleven state attorneys general sued Google in only the second public monopolization lawsuit of the last 20 years.[1] Last July, President Biden signed Executive Order 14036, which identifies monopoly power as a major factor contributing to high prices and depressed wages in broad sectors of the economy including healthcare, financial services, the internet, and many others.

But given that monopoly draws more public attention now than it has in decades, and given that the Sherman Act prohibits monopolization, why aren’t there more lawsuits complaining about monopolies?

Part of the answer is that “monopoly” and “monopolization” are not the same thing. Antitrust law does not make it illegal to simply “have” or “be” a monopoly. Possession of controlled substances is criminal under federal law, but, legally speaking, possession of monopoly is pretty much nothing.

“Monopolization” is a narrow concept. It is not about high prices, low wages, or bad customer service. Rather, it is primarily about a special subset of economically harmful actions that use market power to reinforce a pre-existing monopoly.

To illustrate, imagine a market for nuts and a market for bolts, and imagine there is a monopoly in the market for bolts (let’s call it “Boltopoly”). Consumers need a nut for every bolt. Therefore, if a customer is willing to pay $1 for a nut/bolt pair, and if it costs $0.10 to make a nut and $0.10 to make a bolt, Boltopoly can charge $0.90 for each bolt, yielding a sizeable $0.80 monopoly profit on each sale.

Standing alone, all of that is perfectly legal. So let’s add some facts. Imagine Boltopoly attempts to acquire all of the companies that make nuts (let’s call them, collectively, “The Competitive Nuts”), which would make the new nut/bolt conglomerate even bigger than Boltopoly itself. Under the Sherman Act, that’s likely not a problem either. Section 2 doesn’t prohibit “bigness” of itself, and since Boltopoly already had a monopoly in bolts, it was already able to capture the entire difference between consumers’ $1 willingness to pay and the $0.20 it costs to make a nut/bolt pair. There is no additional monopoly profit to acquire, and no additional consumer harm to impose, by supplementing the bolt monopoly with a nut monopoly.

But what if someone discovers that nut factories are pretty good for making bolts, too? Perhaps, after some lead time, a nut manufacturing plant can be refitted to produce both nuts and bolts. Upon hearing of this turn of events, Boltopoly could acquiesce in its competitive future and prepare to take something less than an $0.80 margin on each bolt sold.

Or it could break the law. Boltopoly might decide to make sure its bolts are the only ones that work. To accomplish this result, it begins installing a microchip in each bolt, and the microchip contains copyrighted software that identifies the bolt as manufactured by Boltopoly.  Second, it proposes the following deal to its largest customers: if you ever want to buy from Boltopoly again, you must design your bolt holes to include a chip reader that tests whether the installed bolt is from Boltopoly and reject any other type of bolt. Let’s say the customers can’t stay in business without Boltopoly long enough to wait for The Competitive Nuts to enter the bolt market. So the customers agree, and products around the world are fitted with components that can’t be assembled or repaired without Boltopoly bolts.

That strategy is a form of monopolization. Using its market power in bolts, Boltopoly has effectively excluded potential competitors from entering the bolt market long into the future.

In the late 1990s, Microsoft perpetrated a similar scheme when it became apparent that Netscape, a now-defunct web browser, had the potential to replace Microsoft Windows by allowing users to operate computer hardware without going through the Windows interface. In response, Microsoft took a variety of steps to undermine Netscape’s compatibility with computers that ran on Windows, and because Windows-based computers were overwhelmingly dominant in the market, Netscape had nowhere to gain a foothold. By interfering in the market for browsers, Microsoft reinforced its monopoly in, or “monopolized,” the market for operating systems.

One key to prosecuting monopolization (and to avoiding monopolization liability) is to identify it correctly. To do that, business owners and managers should raise their antennae to two clues. The first clue is easy – in order to monopolize, the perpetrator has to be a monopoly (100% market share is not required, but a single firm must be legitimately dominant).

The second clue is harder. Members of the business community should train themselves to think about market definition and relationships between markets. Our Boltopoly hypothetical discussed the markets for nuts, bolts, and things like homes, offices, and bridges that use nut/bolt pairs for assembly or construction. The Microsoft example discussed markets for operating systems and browsers. These two elements–dominance in one market, and unusual activity to interfere with a related market–are the scent of monopolization.

Imagine yourself wondering, “my supplier has a monopoly in one product; why is it trying to control the way I use a different product?” If you find yourself asking this question and no reasonable answer comes to mind, then ask the follow-up questions: “What are the markets for these products?” and “Could one of the markets affect my supplier’s monopoly in the other?” If yes, you might want to consider further investigation to determine whether monopolization has occurred. There is no antitrust liability for simply dominating a market, but when a monopoly uses its market power to block the path to competition, that’s when you might have a case.

 

[1]  The other, United States v. United Regional Health Care System of Wichita Falls, Civ. No. 7:11-cv-30-O (N.D. Tx. 2011), targeted a regional hospital system and was far less significant.