United States. Congress. Senate. Committee on the.

The Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) online

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Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 114 of 140)
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in each case the point at which freedom to trade must give way to control
under § 2 of the Sherman Act. An individuafs freedom to trade in the market
is unqualified so long as a monopoly is not sought or enjoyed. "

C6. I ])elieve the applicable rule to be that monopolization in violation of
Section 2 of the Sherman Act involves two elements: (1) The possession of
monopoly power in the relevant market or submarket and (2) the willful
acquisition or maintenance of that power with intent to monopolize, which
intent need not be evidenced by predatory practices but which is not to be
gathered merely from growth or development as a consequence of a superior
product, business acumen or historic accident. See United States v. Grinnell
Corp.. 384 U.S. 563 (1966) ; United States v. Aluminum Co. of America, 148
F.2d 416 (2d Cir. 1945) (sitting for the United States Supreme Court by
certification) ; Hanover Shoe v. United Shoe Mach.. 392 U.S. 481 (1968) (ex-
prt^^sly approving Judge L. Hand's opinion in United States v. Aluminum Com-
pany of America, .y«/;ra). Cf. International Boxing Cli;b v. United States, 3.58
U.S.' 242 (1959).

C7. Monopoly power is the power to control prices or to unreasonably re-
strict competition. United States v. Grinnell Corp.. 384 U.S. 563 (1966), supra;
United States v. E. I. Du Pont De Nemours & Co., 351 U.S. 377 (1956), supra;
American Tobacco Co. v. United States. 328 U.S. 781 (1946), supra. Deter-
mination of a relevant market, from both geographic and product standpoints,
is essential to a finding of unlawful monopolization because an assessment of
monoiioly power is dependent upon such determination. Ignited States v. Grinnell
Corp., 384 U.S. 563 (1966), supra; United States v. E. I. Du Pont De Nemours
& Co.. 351 I^.S. 377 (1956), supra; United States v. Columbia Steel Co., 334 U.S.
4m (194S) ; Reynolds Metals Company v. F.T.C., 309 F. 2d 223 (D.C. Cir. 1962).

CS. A relevant geographic market is the territorial area in which businessmen
effectively compete. Competition in t}^e sale or lease of peripheral products
plug compatible with IBM CPU's, as well as that in the electronic data process-
ing industry in general, is conducted on a national level by both IBM and its
competitors. It is understood that neither side questions this conclusion irre-
spective of the EDP market or submarket to be defined.

C9. Plaintiffs say that the criteria for determining the boundaries of a rele-
vant product market for purposes of assessing monoply power under Section 2
of the Sherman Act are the same as those for fixing l)oundaries of a relevant
product market for purpo.ses of Section 7 of the Clayton Act. citing United States
v. Grinnell Corp., 384 U.S. .563 (1966). supra; Case-Swayne Co. v. Sunkist
Growers, Inc., 369 F. 2d 449, rer'd on nther grounds, 389 U.S. .384, see also .355
F. Supp. ^08 : Twin City Sportservice. Inc. v. Charles O. Finley & Co., 72 Trade
Cases •! 74,1.50 (N.D. Cal. 1972) : Credit Bureau Reports. Inc. v. Inc. v. Retail
Credit Company. 72 Trade Cases 1173.813 (S.D. Tex. 1971) : Marnell v. United
Parcel Service of America, 71 Trade Cases H 73,761 (N.D. Cal. 1971) : Rea v. Ford
Motor Company, 3-37 F. Supp. 9.50 (W.D. Pa. 1972). The latter case seems to
have no bearing upon the point, but the others cited are persuasive that as
indicated in Crrinnell there is "no reason to differentiate between 'line' of
commerce in the context of the Clayton Act and 'part' of commerce for pur-
poses of the Sherman Act." The defendant does not directly challenge this con-
clusion but has sought to soften the force here of some relevant market cases
by emphasizing that they involve Section 7 of the Clayton Act. not Section 2
of the Sherman Act. On the other hand, as hereinafter pointed out, it has cited
A'arious Section 7 cases to support its ai'gument of "supply sul>stitutability" as
an element in relevant market definition for the purposes of the Sherman Act.



5763

In my opinion, while tliere may be possible differentiation between a "part of
commerce" and a "line of commerce'' in the solution of some problems that might
arise under the respective acts, no practical distinction would be justitied in
the context of the present case. Here, as the Supreme Court has done else-
where, we may look for guidance to each line of cases. Nor need we decide,
as suggested by Mr. Justice Clark in the Section 2 case of Marnell v. United
Parcel Service of America, supra, that the reasonable iuterchangeability rule of
United States v. E. I. Du Pont De Nemours & Co., supra, has been retined and
modified by the Supreme Court in subsequent Section 7 cases. Whether accepted
as modifications or as mere refinements or applications to different states of
fact, subsequent decisions of the court must be looked to in the light of the
principles of Du Font in determining the present issues. Our task is aided by
the more recent cases which explore the new terrain of differing facts which
Du Pont pointed to without assuming to decide :

"The varying circumstances of each case determine the result. In considering
what is the relevant market for determining the control of price or competition,
no more definite rule can be declared than that commodities reasonably inter-
changeable by consumers for the same purposes make up that "part of the trade
or commerce,' monopolization of which may be illegal.'' (351 U.S. at 395.)

A-; if to warn against the freezing of applications, the following comment is
added in Du Pont by its footnote 22 from Maple Flooring Ass'n. v. United States,
268 U.S. 563, 579 :

"It should be said at the outset, that in considering the application of the
rule of decision in these cases to the situation presented by his record, it
should be remembered that this court has often announced that each case arising
under the Sherman Act must be determined upon the particular facts disclosed
by the record, and that the opinions in these cases must be read in the light of
their facts and of a clear recognition of the essential differences in the facts of
these cases, and in the facts of any new case to which the rule of earlier decisions
is to be applied."

CIO. The more recent cases teach in new applications of old principles that
the term "reasonable interchangeability" should be given a practical application
in view of conditions in the marketplace and that while with respect to outer
markets a somewhat broad leeway for interchangeability may be indulged, recog-
nition of submarkets within broad markets may be recognized in view of
comi>etitive realities, where a lower degree of differentiation may suffice. Brown
Shoe Co. V. United States, 370 U.S. 294 (1962), supra; United States v. Grinnell
Corp.. 384 U.S. 563 (1966), supra; Reynolds Metals Company v. F.T.C., 309 F.2d
223 (D.C. Oir. 1962) ; supra; Case-Swayne Co. v. Sunkist Growers, Inc., 369 F.2d
449 (9th G\Y.),rev'd on other grounds, 389 U.S. 384 (1907) ; see also 355 F. Supp.
408 (C.D.Cal. 1971), supra; Power Replacement Corporation v. Air Preheater
Co., Inc., 356 F. Supp. 872 (E.D. Pa. 1973) ; Marnell v. United Parcel Service of
America, 71 Trade Cases If 73,761 (N.D. Cal. 1971) : Credit Bureau Reports, Inc.
T. Retail Credit Co., 358 F. Supp., 780 (S.D. Tex. 1971), aff'd, 476 F.2d 989 (5th
Cir. 1973). See Southern Blowpipe & Roofing Co. v. Chattanooga Gas Co., 360 F.2d
79 (6th Cir. 1966) ; Twin City Sportservice, Inc. v. Charles O. Finley & Co., 72
Trade Cases H 74,150 (N.D. Cal. 1972) ; United States v. Aluminum Co. of
America, 148 F.2d 416 (2d Cir. 1945), s«pra. See also United States v. Paramount
Pictures, 334 U.S. 131, (1948).

Thus, it has been variously held that in fixing relevant product market bound-
aries there may be differentiations between virgin ingot and secondary ingot:
first run motion pictures and subsequent run motion pictures; promotion of
championship fights and the promotion of non-cliampionship fights; accredited
central station protection services and non-accredited central station protection
services, local alarm systems and other onsight protection services ; replacement
elements for air preheaters and the air preheaters themselves ; gas ranges and
electrical ranges ; major league baseball concessions and concession services for
other large spectator sporting events, including professional football, basketball
or horse racing; regularly scheduled and consolidated retail delivery service and
all other forms of delivery services for retail establishments; and non-local
credit reporting, life and health insurance reporting, fire and casualty insurance
reporting and personal reporting. Even products that are physically identical
or fungible are not necessarily to be grouped in the same relevant product market
If, in fact, they are marketed to different classes of customers and are separately
treated as of different commercial value by end-users. Reynolds Metals Co. v.
F.T.C., 309 F.2d 223 (D.C. Cir. 1962), supra; (decorative foil and florist foil).



5764

Inquiry should focus on the practical business realities of the marketplace and
not on mere economic theory. Brown Shoe Co. v. United States, supra. "A mean-
ingful definition for the relevant market must focus on what the huyers do and
not upon what the sellers do, or theoretically can do." Credit Bureau Reports,
Inc. V. Retail Credit Co., supra.

Cll. The defendant has sought to holster its position with reference to demand
or use exchangeability or elasticity with the argument of "supply substituta-
bility" ; indeed, its economic expert placed prime reliance upon such a theory.
Defendant argues that "supply substitutability between two products exists
where the producer of one product can within a reasonable period of time devote
his resources to production of the other product" and that "where such a condi-
tion exists, a producer has no power to exclude competition and its power over
the price of its product is limited by those alternative sources of supply." It
cites United States v. Columbia Steel Co., 334 U.S. 495 at 510-11; FTC v.
Proctor & Gamble Co., 386 U.S. 568, 580-1 (1967) ; United States v. Penn-Olin
Co., 378 U.S. 158, 174 (1964), and United States v. El Paso Gas Co., 376 U.S.
651, 65S-9 (1964), and could well have added along the same line the late case
of United States v. Falstaff Brewing Corp., 410 U.S. 526 (Feb. 28, 1973). The
latter case cites most of the authorities now relied upon by defendant, but ren-
ders it clear that what is there being talked about is not the Section 2 concept of
exchangeability or substitutability but the effect of a potential competitor upon
"the edge of the market" in negating the desirability of its merger in a Section
7 case. This is a much more diffused inquiry than the one with which we are
concerned although the two are related.

In United States v. Penn-Olin Co., 378 U.S. 158 (1964), supra, a joint venture
was attacked by the government as being in violation of Section 7 of the Clayton
Act. The distinction between these kinds of cases and the present one well
appears from the court's emphasis upon the critical circumstance that in Section
7 cases it must be concerned not only with whether companies would probably
have entered the market but also whether the joint venture eliminated the
potential competition of a company that might have stayed on the edge of the
market threatening to enter it. It is plain that United States v. Columbia Steel,
334 U.S. 495 (1948), supra, another Section 7 case, is also essentially different.
Here we are not concerned per se with mere risks or probabilities that others
might enter a market but what effect this and other circumstances actually had
upon competition at a given time as a matter of reality in the marketplace. To
argue broadly, as does the defendant that, since the same general technology is
involved in all EDP products and all manufacturers are capable in time and with
suflBcient inducement to enter every part of the market, there can be no sub-
markets is glorifying a theory of supply substantially beyond reality. It as well
could be said that in any part of commerce there can be no geographical limits to
a market because manufacturers outside of it, although not actually competitors
in the limited market, theoretically could enter it if the inducement were high
enough. The next step of apparent logic would be to say that there could be no
monopolization of any market because theoretically if an alleged monopolist raised
prices high enough other manufacturers would retool, or come in from distant
areas, and restore competition in response to increased inducements. We cannot
accept this contention of IBM in its full breadth, but supply substitutability must
be and has been recognized to the extent that it has been shown by the evidence
to have influenced actual competitive conditions in any market.

C12. No proper application of the criteria of substitutability, exchangeability,
or elasticity, supports the defendant's position that we are concerned with only a
single relevant market consisting of "electronic data processing services and
equipment." Moreover, such a general classification in the realities of the market-
place and on the record before this court would be designed to render Section 2 of
the Sherman Act relatively innocuous and ineffective and would permit the de-
fendant with impunity to continue to monopolize and attempt to monopolize a
relevant market and submarkets one by one by unilateral predatory action until
the entire industry could be irreparably demoralized. It would be a gross, sweep-
ing and invalid generalization to say, as IBM contends, that it "is engaged in the
manufacture, sale and lease of data processing systems and that such economic
power as it may have is determined by all the competitive factors affecting the
market of such systems . . . because of the variety of equipment and services
which may be used to serve a particular data processing function and the
variety of functions which said services and equipment can serve . . .", and "be-
cause the various devices which comprise a data processing system are to a



5765

large degree built from common electronic and electro-mechanical components
and can be manufactured by application of an essentially common technology and
production facilities."

C13. Having determined on the facts that the relevant market for the purposes
of this case cannot be reasonably considered to be the EDP, CPU or general sys-
stems markets in general, and that the EDP peripheral market as a whole is not
an ecDnomic entity or market within which real, measurable or meaningful com-
petition exists, the legal basis for tying a market concept to the products of a
single manufacturer merits further discussion. Every manufacturer, of course, is
the sole producer of its own particular product or product line and certainly
not every manufacturer has an illegal monopoly with regard to the product or
I)roduct line that it manufactures. But a manufacturer's product or product line
may constitute a relevant product market for the purpose of Section 2 if in the
realities of the marketplace widespread competition has been developed around
it as a separate economic entity recognized and acted upon by the manufacturer,
competitors, and end-users as such. United States v. Aluminum Co. of America
148 F. 2d 416 (2d Cir. 194.5), supra, (sole domestic producer of virgin aluminum),
see Deterjet Corp. v. United Aircraft Corp., 211 F. Supp. 348 (D.C. Del. 1962)
(sole domestic producer of a hydromatic propellor system) ; United States v.
Klearflax Linen Looms, Inc., 63 F. Supp. 32 (D. Minn. 1945) (sole domestic
producer of linen rug materials). And components of a manufacturer's product
or product system and their direct competition may constitute a relevant prod-
net market. Calnetics Corporation v. Volkswagen of America, Inc., 348 F.
^upp. 606 (CD. Cal. 1972) ; Power Replacements Corp. v. Air Preheater Co., Inc.,
3.56 F. Supp. 872 (E.D. Pa. 1973) ; Deterjet Corp. v. United Aircraft Corp., supra.
To treat defendant's' peripheral products as immune from separate market con-
sideration in view of the competition focused upon them would recognize an im-
munity in favor of IBM from the operation of the antitrust laws akin to that
it unsuccessfully sought in a tying framework, since here also, as will be pres-
ently noted, it has avoided the proscription of Section 3 of the Clayton Act
in predatory action equallv anti-competitive. See International Business Ma-
chines Corp. V. United States, 298 U.S. 131 (1936) .

C14. Having determined that the relevant market for appraising IBM's mar-
ket power in this case is the market for peripheral EDP products plug com-
patible to IBM CPU's or their channels, it is now necessary to determine whether
the plug compatible peripheral EDP market can or should be subdivided in
appraising IBM's market power. Applying criteria gathered from the cases
cited in light of GrinncU and Brovn Shoe, it is concluded that the sale and lease
of disk, tape, printer, memory and communication controller type peripheral
products that are plug compatible with IBM central processing units are separate
and distinct relevant submarkets forming parts of the plug compatible peripheral
EDP market and within which IBM's market power must be appraised. In these
markets I have found that while the business of leasing companies involving
the separate lease or sale of such plug compatible peripherals should be included,
the systems business of leasing companies should not be. This is a correlation
of the finding that general systems or CPU's are not a part of the relevant market
or submarkets with which we are concerned. Each of these types of plug com-
patible products performs a basically unique and distinct functions when utilized
with an IBM CPU.

In the case of memories, disks, and tapes, the storage capacity, data rate,
access time, media or lack thereof, storage of media, cost and consequent cost
performance and customer utilization of each type of device is sufficiently dis-
tinct so that the distribution of each type of device constitutes a separate rele-
vant product submarket. Particularly should this be recognized imder the cir-
cumstances as shown by the record. In the sophisticated complex, and organized
maintenance and attempted extension of its dominant position, IBM separately
focused its market analyses and competitive responses upon and against this
limited market and these several submarkets with resulting concentrated im-
pact. It would be neither realistic nor consistent with the policy of the antitrust
laws to ignore the severance and separability of these fields of competition or in
more broadly defined markets to leave the dominant power free to sharpshoot
at essentially separate and distinct components and to eliminate them one by
one shielded, as IBM claims the right to be, by lack of control of the entire
EDP market. The very contention of IBM that it should be free to launch the
"competitive responses" of the predatory nature appearing here against its plug
compatible competition merely because it may not have equivalent market power
in the general systems market seems a confirmation of its monopolistic intent



5766

in the narrower markets. Nor do we think it to be any valid objection to the
sub-classification that it involve competition on the one hand of a single corpo-
ration ; IBM's activities are as varied, extensive and significant as those of
numerous other corporations combined.

C15. From its found predominant market shares, the court infers and con-
cludes that IBM had and exercised monopoly power in the relevant market
and submarkets herein defined. Circumstantial evidence apart from that relat-
ing to market share is indicative of IBM's market power in the relevant market
and submarkets as they have been defined. Its own strategy, investigations, and
planning were premised to an important degree upon the assumption that it
had such power. The very predatoi-y intent with which, as already has Ijeen
found, its strategies were planned, as well as the nature and direction of its
competitive responses, strongly suggest a consciousness of market power and
a determination to utilize it to the extent that it was considered this could
be done without a breach of its confidential plans or its becoming involved in
legal difficulties. This is not to say that there was any ruthless or nakedly
aggressive programs contemplated or carried out: anything that was done by
way of strategy was sophisticated, refined, highly organized, and methodically
processed and considered. But in this day and age such conduct is hai'dly less
acceptable than the naked aggressions of yesterday's industrial powers if un-
lawfully directed against competition. The organized, selective, .snrttle
sophisticated approach, indeed, may pose more danger under modern conditions
than instantly more obvious strategies.

C16. The court further concludes that IBM willfully maintained its monopoly
power in the relevant product market for plug compati!)le peripheral products
and in the relevant product submarkets for plug compatible disk, tape, printer,
memory and communication controller type peripheral products.

C17. The willful maintenance of a defendant's monopoly power does not
require that the defendant specifically intend to monopolize — that is, to control
prices or exclude competition. United States v. Grinnell ( "orp., Hupra. Neither the
actual exclusion of competitors nor the realization of unreasonably high profits
are elements essential to the offense of monopolization. United States v.
Aluminum Co. of America, supra; American Tobacco Co. v. United States, supni.
A specific intent to monopolize is not an essential element of the offense of
monopolization. It is sufficient that monopoly power is willfully acquired or
maintained as distinct from the growth or development in a consequence of a
superior product, busines acumen or historic accident. United States v. Grinnell
Corp, supra; United States v. Griffith, 334 U.S. 100 (194S) ; United States v.
Aluminum Co. of America supra.

To be "willfully maintained" it is not essential that monopoly be accomplished
by unreasonable restraints of trade or predatory practices. Hanover Shoe v.
United Shoe Mach.. supra; United States v. Grinnell Corp.. supra; United
States V. United Shoe Machinery Corp., 110 F. Supp. 295, aff'd per curiam. 347
U.S. 521 (1954) ; United States v. Aluminum Co. of America, supra. Such prac-
tices, of course, coupled with monopoly power may underscore and often char-
acterize the offense of monopolization but it is not necessary to monopolization
that market power be maintained by "maneuvers not honestly industrial".
United States v. Aluminum Co. of America, supra. The requisite willful mainte-
nance can result from acquisitions. United States v. Grinnell Corp., supra, loans
Twin City Sport-service, Inc. v. Charles O. Finley & Co.. supra, tlie construriion
of new capacity to absorb consumer demand. United States v. Aluminum Co. of
America, supra, or discriminatory leasing arrangements in extension of pat>^nt
rights. Peelers Company v. 'Wendt, 260 F. Supp. 193 (W.D. Wash. 1966). And
the unlawful maintenance of a monopoly can be accomjilished, as here, also by
the maintenance or raising of i)rices on CPU's and lowering prices on plug
compatible peripheral products against which the most threatening challenge to
an existing monopoly position liad arisen and through long-term le.nses with
punitive termination provisions to cut the new order rate of plug compatible
competitors for a time by almost half.

CIS. Correspondingly, the court concludes that .such maintenance of IBM's
monopoly power in the relevant product market for plug compatible peripheral
products was not the result of IBM's superior skill, foresight, or industry and
was not the result of superior products, business acumen or historic accident.
To an extent, it was its failure, as IBM itself recognized, to develop new tech-
nology and superior performing products as rapidly and effectively at is had
hoped, and the capal)ility of plug compatible manufacturers to keep abreast of,
and in limited instances surpass, some of the technological developments that



57(i7

jeopardized its monopoly position in the relevant product market, and tliat
motivated it to undertal^e predatory pricing and long term leasing to stem the
growth of its plug compatible competitors.

Ciy. Plaintiffs contend that in addition to the unlawful conduct above-
mentioned there were "technological obsolescence through mid-life kickers" and



Online LibraryUnited States. Congress. Senate. Committee on theThe Industrial reorganization act. Hearings, Ninety-third Congress, first session [-Ninety-fourth Congress, first session], on S. 1167 (Volume pt. 7) → online text (page 114 of 140)