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Defending the "right" to market share

August 11, 2006

Tags Monopoly and Competition

This week the U.S. Sixth Circuit Court of Appeals said an antitrust complaint brought against 3M could proceed to trial. NicSand accused 3M of attempting to illegally monopolize the automotive abrasives market by signing exclusive contracts with four of the six largest retail distributors of such abrasives. Judge Ann Aldrich of the U.S. District Court in Cleveland dismissed the complaint for failing to allege an "antitrust injury." The Sixth Circuit reversed Aldrich and said the case could proceed to trial. One appellate judge, Jeffrey Sutton, dissented and authored a well-written opinion that explains much of what's wrong with contemporary antitrust practice:

As this case comes to the court, it presents a most unusual candidate for antitrust protection. The case, to begin with, involves a claim by one competitor against another and thus implicates the classic rejoinder that the antitrust laws protect competition, not competitors.
When courts nonetheless have permitted one competitor to deploy the antitrust laws against another, that typically has been because one of them—usually, the larger competitor—has engaged in some form of predatory pricing or illegal tying. But here NicSand (the smaller competitor) concedes that 3M has not engaged in any form of predatory pricing and makes no allegations about any form of illegal tying.
Stranger still, NicSand's "monopolization" claim seeks treble damages for its loss of a corner on this market and its loss of 40–50% profit margins on sales of automotive sandpaper. According to the allegations in NicSand's amended complaint, the retail market for do-it-yourself automotive sandpaper in 1997 consisted primarily of six large retailers—Advanced Auto, Autozone, CSK, KMart, Pep Boys and Wal-Mart—which made up 80% of the retail market for the sandpaper. And the wholesalers to this large-retailer market consisted of just two players—NicSand and 3M. In 1997 (and for several years before that), Wal-Mart sold 3M sandpaper, Pep Boys sold NicSand and 3M sandpaper, and the four other large retailers sold NicSand sandpaper. Before 3M's alleged misconduct, NicSand acknowledges that it controlled 67% of the entire market and sold its sandpaper at approximately 40–50% over cost.
Between 1997 and 2000, 3M entered into contracts to supply automotive sandpaper to Advanced Auto, Autozone, CSK and KMart and did so at prices ranging from 10% to 30% over NicSand's costs. But nothing about this sequence of events suggests an antitrust violation. As to the market share that 3M garnered over these years, "it takes one to know one" is hardly an accredited hallmark of antitrust liability—particularly when NicSand's apparent solution to this problem is not to encourage the entry of other suppliers to this lopsided market but to preserve its 67% market share. As to 3M's discounting, NicSand of course has no right—under the antitrust laws no less—to preserve 40–50% margins on a product that (so far as the allegations are concerned) does not take any ingenuity to make. One can fairly doubt the size of NicSand's and 3M's R&D departments for automotive sandpaper.
Unable to argue that 3M's discounting amounted to anything but legitimate (and apparently long-overdue) competition, NicSand focuses on the fact that 3M entered into exclusive contracts with the four large retailers that switched from NicSand to 3M. Yet according to NicSand's amended complaint, the retailers made exclusivity one of the preconditions for doing business with a new supplier. The complaint says that the large retailers (1) choose to carry just one brand of automotive sandpaper for sale to consumers, (2) re-negotiate these one-brand contracts just once a year, (3) require a new supplier to purchase the retailer's existing supply of automotive sandpaper, (4) require a new supplier to provide racks and other display equipment, (5) require a new supplier to produce a full line of automotive sandpaper and (6) require a new supplier to provide a discount on the retailer's first order. NicSand of course complied with these requirements in obtaining the supply business it held in 1997, and 3M complied with them in winning some of that business away. If retailers have made supplier exclusivity a barrier to entry, one cannot bring an antitrust claim against another supplier for complying with that precondition. Put another way, NicSand did not sue 3M insisting that it had a right to share shelf space; it sued 3M because it wanted that shelf space all to itself—just as it had it in 1997. This is precisely the kind of all-for-one-and-all-for-one competitor claim that the antitrust laws do not protect.
There being no right under the antitrust laws for NicSand to preserve a 67% market share, there being no right to preserve its 40–50% margins, there being no impermissible discounting or other predatory pricing by 3M and there being no right to prohibit 3M from entering into exclusive contracts, NicSand picks up the only arrow left—the length of 3M's exclusive contracts. What NicSand decries, then, is not so much that 3M entered into exclusive contracts with these four retailers but that it did so for more than one year.

3M faced a similar lawsuit a few years ago from a competitor in the transparent tape market. There 3M successfully competed against the incumbent for a particular subset of the market, and the result was an antitrust judgment of more than $60 million. The Third Circuit Court of Appeals actually rewrote the existing standard of Section 2 liability so that a company that priced "above cost"--the purported standard for "predatory" pricing--could still be held liable. Clearly that decision encouraged NicSand to pursue its own complaint against 3M.

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