Class 11 Whiteboard
Antitrust, Fall, 2012
Monopolization
under Sec. 2
Randal C. Picker
Leffmann Professor of Commercial Law
The Law School
The University of Chicago
773.702.0864/[email protected]
Copyright © 2000-12 Randal C. Picker. All Rights
Strategic Entry Hypo:
Capacity Competition

Starting Point
Incumbent
(I) owns single cement plant in
town.
Transportation costs preclude shipments
from other locations.
I earns profits of $25 per period.
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Strategic Entry Hypo:
Capacity Competition

Decisions
I
can leave its plant capacity alone or
expand it.
A potent entrant (E) can build a cement
plant and go into competition with I or build
a general manufacturing plant and not
compete with I.
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Incumbent Profits

I would earn:
$25
profits per period from the cement plant
if it did not expand it and E entered M.
$30 profits per period from the cement plant
if it expanded the plant and E entered M.
$10 profits per period from the cement plant
if it did not expand and E entered C.
$5 profits per period from the cement plan if
it expanded and E entered C.
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4
Entrant Profits


E would earn $10 profits per period from
manufacturing.
E would earn:
$15
profits from entering C if I doesn’t
expand its plant.
$5 profits from entering C if I expands its
plant.
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Profits Table

We can represent this in the following table:
Incumbent
Not Exp
Expand
Entrant
Enter
M Instead
(10,15)
(25,10)
(5,5)
(30,10)
1. Suppose that E were going to …, what would I do?
2. Suppose that I were going to …, what would E do?
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Simultaneous Moves


Suppose that E and I make their decisions
at the same time: what would happen?
Two (Pure-Strategy) Nash Equilibria Exist
If
E were going to enter, I would not expand;
if I were going to not expand, E would enter.
These are strategically consistent decisions,
or they form a Nash equilibrium.
If E were going to Man, I would expand, and
if I were going to expand, E would Man.
This is a 2nd Nash equilibrium.
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Substantial Uncertainty

With two Nash equilibria, we can have little
confidence in how this game will be
resolved.
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E Moves First

Suppose E moves first:
1
E opens man
E enters cement
2
I expands
3
I not
I expands
(10,30) (10,25)
(5,5)
Payoffs: (E, I)
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Copyright © 2000-12 Randal C. Picker
I not exp
(15,10)
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Results

Use backwards induction to solve this
game.
At
node 3, I will not expand.
At node 2, I will expand.
At node 1, if E enters, putting I at node 3, I
will not expand, and E will get 15; if E
manufactures instead, putting I at node 2, I
will expand, and E will get 10.

E will enter the cement business.
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I Moves First

Suppose I moves first:
1
I doesn’t expand
I expands
2
E opens M
3
E enters C E opens M
(30,10) (5,5)
July 13, 2017
E enters C
(25,10) (10,15)
Payoffs: (I, E)
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Results

Use backwards induction to solve this
game.
At
node 3, E will enter C.
At node 2, E will manufacture instead.
At node 1, if I doesn’t expand, putting E at
node 3,E will enter, and I will get 10; if I
expands instead, putting E at node 2, E will
manufacture, and I will get 30.
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Results

In the Model
I
will expand.
Order resolves the uncertainty, and
determines the outcome.

In reality
Is
this Alcoa and should we think of it as an
SA2 violation?
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