- European Union — Copyright — Rights — United States
6.1 Market definition is antitrust’s first port of call in analysing non-hardcore offences. It is the foundation on which almost all competition analysis rests. Cases rise and fall on its resolution. Defence lawyers who convince agencies or courts to define the relevant market expansively often defeat liability or merger challenges, while plaintiffs who show a narrow market often establish sufficient market power to trigger application of the pertinent US or EU antitrust statute. The practical result is that the relevant market may be the target of a plausibility challenge at the pleading stage (US law) and later battles of credentialed experts espousing sophisticated economics and econometrics as applied to the industry. Often the most fiercely contested and case-dispositive issue in litigation—and no less a critical issue for merger review—market definition is of utmost importance to antitrust lawyers and their clients.
6.2 Market power, however, is the ultimate consideration. Other than by committing per se or by-object offences, a firm can breach competition law only if it can restrict output, raise price, or otherwise harm consumers. The predicate power sufficient to trigger antitrust scrutiny depends on the impugned conduct: unilateral behaviour requires a greater quantum than concerted restraints do. The concepts of market definition and power are intertwined. Indeed, the economic function of defining the market is to discern the price elasticity of demand experienced by the pertinent company at the competitive price level. Market share is a proxy, while demand elasticity is itself a measure of market power. For that reason, direct evidence of monopoly power can sometimes obviate the need for a full market-definition analysis.
6.3 Being related and often dispositive, market definition and power are natural objects of any book on competition law. Yet, they raise unique issues in the patent setting. Patents yield exclusive rights that sometimes inhibit competition and bestow market power on their owners. Defining a downstream product market (p. 174) where goods incorporate patented technology, or an upstream technology-licensing market where patents exist, raises the question of breadth. If a patent is sufficiently valuable, then the law may draw the market narrowly around the patented good or technology. It would then follow that the patentee has a high market share and likely possesses the market power needed to implicate the relevant antitrust provision (e.g. Section 2 of the Sherman Act or Article 102 TFEU). By the same token, if a patentee has significant market power—or even full-blown monopoly power—then the question arises whether an antitrust violation can result at all due to a patent’s existence. That conundrum has produced a stubbornly persistent mistake: the idea that, if a patentee has market power, that power must flow from the patent grant and hence be lawful. Although few courts have embraced that idea in its most extreme form—that is, the notion that patentees are immune from the antitrust laws—it has infected judicial analysis of patentee conduct.
A. The role of market definition
6.5 What is the legal and economic function of market definition? In scrutinizing agreements and unilateral practices, competition enforcers look to the ‘relevant market’ to focus their analysis. They do so to demarcate the zone of competition that limits the scrutinized firm’s ability to price above cost and to act independently of consumers’ preferences. The enquiry thus reflects antitrust’s defining premise: owners of functionally interchangeable products limit each other’s market power because they compete for sales opportunities among their mutual pool of consumers. By capturing the universe of market constraints on a firm’s price, output, and investment abilities, enforcers can infer the firm’s ability to harm competition.
6.6 In economic terms, market definition illuminates the price elasticity of demand (PED) facing the scrutinized firm at the competitive price level. PED measures how demand responds to a change in price. For example, a vendor facing elastic demand will lose a large volume of sales should he raise price materially. Knowledge of a firm’s demand elasticity allows enforcers and courts to extrapolate whether the company wields durable market power, and could thus damage the competitive process. Market definition thus predicts a restraint’s impact and, by contextualizing impugned restraints, bounds otherwise-free-floating analysis.
6.7 The law estimates market power based on the firm’s share of the relevant market. That inferential process draws on the industrial-organization literature, regulatory experience, and intuition. It is an inexact process, but it has major consequences References(p. 175) under antitrust law. For instance, under US law, a defendant must have a minimum share—in some circuits, 50 per cent, but never less than 30 per cent—of the relevant market to attempt to monopolize a market.1 Without such a share, no ‘dangerous probability’ exists that the firm will successfully acquire monopoly power. To monopolize a market under Section 2, a company usually must account for at least 65 per cent of it.2 To violate Section 1 under the rule of reason, a firm generally must have a market share over 30 per cent.3
6.8 EU law is quicker to find dominance. It generally applies a 40 per cent threshold, which it has even dipped below on occasion.4 Fifty per cent market share creates a rebuttable presumption of a dominant position.5 Those thresholds, of course, are lower than those that apply in the United States. Article 101 TFEU also depends on market share. For instance, presumptively it does not apply to not-by-object restrictions between competitors whose aggregate market share equals or is less than 10 per cent.6 The European Commission has block exempted vertical agreements where the parties account for less than 30 per cent of the upstream and downstream markets, though only absent hardcore restrictions.7
6.9 Those conclusions do not reflect irrefutable empirical evidence, but instead are the law’s best workable proxies—generalizations drawn from economic theory that reflect concern about false positives (e.g. condemning a firm for monopolization when it lacks monopoly power). It is informative that US and EU law apply different minimum market shares. Among other things, it suggests that deducing power from market share is an inexact science, influenced perhaps by non-economic considerations specific to the jurisdiction.
References(p. 176) B. Unique market-definition challenges in the technology sphere
6.10 Even in the bricks and mortar world, market definition can be fraught. The requisite analysis is complex, but the overriding difficulty is that few goods are homogeneous. If consumers perceived a set of products to be identical and other goods to be unappealing alternatives at competitive prices, market definition would be straightforward. In reality, product differentiation is ubiquitous, meaning that all sellers have some market power and pure interchangeability is elusive. Thus, whether one product substitutes for another is a question of degree. Pepsi and Coke are cola drinks that are somewhat interchangeable. Yet, many consumers have brand loyalty to one over the other. Each good limits the other’s market power, but not within small relative price movements, and the effect varies from one consumer to the next. The quality of substitutability is continuous.
6.11 The kick is that the law defines markets in a binary fashion. It omits products that do not sufficiently constrain pricing power. The qualifier ‘sufficiently’, of course, is critical. Cases turn on which side of the line candidate substitute products fall, and legal certainty requires some guidance in demarcating a market’s boundaries. The law does its best to oblige, providing guiding principles that allow antitrust counsel to predict outcomes. For instance, US agency guidelines embrace a 5 per cent price increase as the default analytic point for measuring whether candidate products fall within the relevant market, while the European Commission advises a range of 5 to 10 per cent.8
6.12 Nevertheless, there are limits to predictability. Market definition may be the most fact-intensive enquiry in antitrust jurisprudence. Malleability is thus critical for responsible analysis, which is why the law uses soft in lieu of hard law. A rule that categorically omitted goods that do not constrain a hypothetical monopolist’s 10 per cent price increase over marginal cost, for instance, would exaggerate the incumbent’s market power, sometimes with problematic consequences for the enquiry at hand. Where the goods removed from the relevant market limit power at certain price points or over time, the market-definition enquiry loses material information. That shortcoming is especially likely to bias analysis of dynamic phenomena, of which innovation is an important example. The law accepts that shortcoming for pragmatic reasons. That is why the agencies insist that their SSNIP thresholds are rules of thumb.
6.13 That does not mean that an either-or approach is improper. One could imagine a purer form of assessment in which the law included all products affecting a scrutinized firm’s market power, weighting the impact of each constraint by the price point at which it would become a viable substitute. Such an approach would capture the full universe of economic factors relevant to the target firm’s (p. 177) price-elasticity of demand, thus avoiding the bias afflicting in-or-out evaluations of the market. Practicality is the problem. Binary analysis is workable, and compels fact-finders to focus on what matters most. The alternative would be freewheeling analysis untethered to guiding principles—a recipe for disaster in complex cases involving many variables. Yet, it also means that broad or narrow market determinations artificially control the outcome. Market definition threatens to become formalistic, determining the legality of a restraint when a comprehensive analysis would lead to a different conclusion. That is why courts on both sides of the Atlantic try not to slave themselves to dogmatic conclusions based on market shares.9
6.14 However challenging market definition may be with respect to tangible goods and services, it is more difficult for proprietary technology. The rationale for delineating a market presupposes active commerce in which trades occur. As momentarily explained, that is an inapt characterization of many settings in which technology licensing occurs. Of course, meaningful technology transfer in the presence of competition does take place. It is especially common with respect to the fruits of early-stage biopharmaceutical innovation conducted at the university and government level. When their owners perceive of such proprietary knowledge as commercially viable, they often assign it to the private sector, which will devote the requisite R&D in the hope of securing a viable regimen. When parties contract to transfer patented technology, market definition may simply apply conventional demand-side (and, in EU and sometimes US law, supply-side) principles.
6.15 Yet, there is a mismatch between many patent-licensing settings and the textbook view of markets as places where vendors compete for mutually exclusive sales opportunities and consumers opt between alternatives. Most patents sit dusty on shelves, due to a combination of high assertion costs, dubious relevance to present and new technological products, and the prospect of invalidation.10 Indeed, bringing an enforced patent to trial in the United States costs several million dollars, while empirical studies find that almost half of litigated US patents are invalidated.11 The evidence from Europe is similar. Meanwhile, the sheer number of active patents makes a comprehensive clearing position ex ante unattainable for many technology companies, which thus often tell their engineers to solve technical problems without consulting the teachings of relevant patents. That solution, imperfect as it is, also hinders treble-damage, wilful-infringement claims.
(p. 178) 6.16 Most licensed or assigned patents arise in an ex post setting, where patentees sell rights to firms already using the claimed technologies. In that setting, a patent licence is a de facto tax on third-party commercialization of technology. It is not the sale of an input that a manufacturer uses to create a new product. Thus, for most patents, there is no cognizable ‘marketplace’ analogous to the upstream sale of physical inputs in bricks-and-mortar industries. Those complexities, which uncritical analogies between physical and intellectual property obscure, make defining the market for patent licensing a challenge. Antitrust markets comprised of licensing substitute technologies are often notional.
6.17 Beyond the fact that most patents are never asserted, when technology transfer does occur, it often involves portfolio licensing. Many licenses or assignments transfer an eclectic grouping of technologies related only in that they pertain to a common industry or occupy similar technology classifications. It is rarely the case that one company solicits competing bids for a proprietary solution to a yet-to-be-solved technical problem, thus spurring conventional competition between substitutes. That fact further obscures the appropriate role and methodology of market definition.
6.18 The reality is that patent licensing often occur after commercialization—especially in software-heavy fields, such as information technology. This is not a setting in which one traditionally conceives of a market. The context there is one of irreversible investment in engineering and marketing decisions. Once prospective licensees sink enough capital into a technology that later proves to infringe, potential hold-up results if the litigation process allows a patentee to impose greater than ex ante royalty costs. Irreversible commitments in a product line mean that technologies that were once alternatives to an asserted patent are no longer viable. Defining the relevant market in that ex post setting poses formidable challenges, and has divided courts and economists alike. The closest parallel in traditional product markets involves lock-in to aftermarkets, such as for post-sales services and repair. The law governing these phenomena shed light on the patent problem.
6.19 The offshoot is that, to define technology-licensing markets, one must increasingly grapple with the problem of lock-in. Prospective licensees may once have had a choice between alternative technologies, but once they commit to one, they can no longer freely switch to another in response to price increases. A recurring antitrust issue in the patent domain, then, is whether the law should define the market ex ante—that is, before sunk capital investment hobbles prospective licensees’ choices—or ex post. If it adopts the former perspective, the law draws the relevant market widely, potentially bestowing a modest share on the defendant that fails to reflect the hold-up power that it then holds over purchasers in the market. If the law goes the other way, it draws the market narrowly—potentially making it coterminous with the defendant’s IPRs alone. That methodology accounts for the patentee’s licensing power, but it is not a stable market—it comes into being solely to reflect hold-up, (p. 179) and disappears when the lock-in dissipates. It may also obscure the economic factors responsible for the condition. In particular, did the ex post lock-in arise from the patentee’s strategic conduct or as a natural consequence of prospective licensees’ voluntary business decisions? As market definition cabins analysis, it could lead policymakers to discount the significance of economic factors residing outside the drawn parameters of the market. Whether the law should have a proclivity or distrust of single-brand markets is thus a critical question in the antitrust-patent area.
6.20 Finally, the traditional methodology for defining a market can encounter difficulties in the technology field because it may omit relevant information. Conventional market definition focuses on substitutability, omitting from the relevant market goods that are not interchangeable with one another. Many products in the new economy, however, combine numerous patent-eligible parts. Microelectronic goods, for instance, comprise thousands of discrete technologies. In such settings, myriad patents relate to each other in that they read on the same good, but they are not substitutes because they claim different parts of that good. Where owners of patents relevant to a single good assert them, technically there is no one market for the technology reading on the product. Instead, there are many such markets—potentially hundreds or thousands of them. Yet, it is a mistake to infer that each such market does not affect the others. The economic relationship in this setting is one of complementarity, which is the opposite of substitutability. Accounting for that relationship, particularly in the event of ex post hold-up, raises challenging questions that antitrust law has not yet fully resolved.
6.21 This chapter explores market definition and power in the patent space. First, it lays out the basic EU and US rules. It addresses the enforcement-agency guidelines that apply that theory to the IP context, and explains that conventional principles can find awkward application in technology markets. The second half addresses US and EU law on market power, focusing in particular on how authorities try to separate the fact and legality of monopoly power held by a patentee.
6.22 Market definition is a requisite of an antitrust violation in non-per se cases.12 As the Seventh Circuit has explained, ‘economic analysis is virtually meaningless if it (p. 180) is entirely unmoored from at least a rough definition of a product and geographic market’.13 Market definition identifies both the product (or service) and geographic components of the relevant market.14
A. Basic rules for defining the relevant product market
6.23 US law approaches market definition from one of two related angles. ‘The outer boundaries of a product market are determined by the reasonable interchangeability of use or the cross-elasticity of demand between the product itself and substitutes for it.’15 The two paths differ. The first gauges the level of homogeneity between two products, and—if it deems them functionally equivalent—predicts that consumers will abandon one in favour of the other if the seller of the first materially increases price. The second enquiry seeks to gauge directly the economic relationship between two goods. Positive cross-price elasticity of demand (CPED) between two products indicates that consumers substitute between them. We take the reasonable-interchangeability-of-use and CPED formulations in turn.
a. Reasonable interchangeability of use
6.24 The US Supreme Court has held that ‘[t]he market is composed of products that have reasonable interchangeability’.16 The focus is on functional attributes, as construed in light of the products’ ‘price, use and qualities’.17 The result is a fact-intensive enquiry that determines the extent to which the candidate products are, in fact, substitutes.18 For instance, in DuPont the Court found cellophane to lie in the same market as other flexible packaging materials, which, although not identical, were ‘reasonably interchangeable by consumers for the same purposes’,19 and in Continental Can it considered metal cans and glass jars to be sufficiently interchangeable.20
6.25 The courts recognize that interchangeability occupies a spectrum, not a point. Only good alternatives populate the relevant market. Goods that become acceptable substitutes only when a product’s price rises to onerous levels lie elsewhere. Indeed, even unpalatable alternatives become viable to consumers when a good’s price rises sufficiently high. That is why, at the monopoly price, demand must be References(p. 181) elastic under the assumption of rational profit maximization. The Supreme Court was thus correct to observe that, ‘[f]or every product, substitutes exist. But a relevant market cannot meaningfully encompass that infinite range. The circle must be drawn narrowly to exclude any other product to which, within reasonable variations in price, only a limited number of buyers will turn’.21
6.26 Courts often find that goods belong in the same market when they are functional substitutes.22 Interchangeability drives the analysis, and perfect fungibility is no requisite of market inclusion.23 Analysis does not focus exclusively on goods’ objective qualities, but may consider what consumers perceive those attributes to be.24 Products that are not closely interchangeable typically lie in separate markets.25 Similarly, most alleged markets that do not include all reasonably interchangeable products fail.26
b. Cross-price elasticity of demand
6.27 If two products are so distinct that consumers do not view them as viable alternatives at the competitive price level, then a modest increase in the price of one should not enhance demand for the other. Economists can measure that price-demand relationship directly using price and sales data, thus potentially bypassing an enquiry into interchangeability.
6.28 The CPED between candidate goods represents how the demand for one product changes when the price of another good moves. It is the percentage change in the demand for the second product divided by the percentage rise or fall in price of the first product. A CPED of zero suggests that no economic relationship exists between the candidate goods, which thus reside in distinct markets.27 A negative CPED implies that the products are complements, meaning that a drop in price of one increases demand for the other. Again, the products lie in different markets.28 (p. 182) A CPED over zero suggests that the goods are substitutes and potentially belong in the same market.
6.29 The CPED methodology is influential.29 Goods that bear negative or low cross-price elasticities lie in different markets.30 That conclusion can hold true even if the candidate products are relatively homogeneous, thus producing a narrower relevant market than interchangeability analysis alone would suggest.31 Nevertheless, in regulatory situations, two products may belong together despite a low CPED if price mechanisms do not directly evidence consumer preference.32 Conversely, products that display a high CPED belong in the same market.33
6.30 If plaintiffs want to show that two seemingly interchangeable products occupy different markets, they will have to proffer evidence of low CPED.34 A positive CPED does not itself require that the products lie in the same market.35 The law has not defined a CPED threshold above which goods belong is in the same relevant market.
c. Reconciling the two prongs of market definition
6.31 The interchangeability and CPED enquiries are related, but distinct. They tackle the same problem from different directions. The interchangeability approach is deductive, reasoning from the premise that consumers treat similar goods alike. The CPED approach, by contrast, is inductive because its starting point is empirical.
6.32 One might imagine that the CPED test should always override predictions born of the interchangeability approach, since facts speak louder than predictions. That may be the appropriate rule of thumb (though courts do not always agree).36 Under interchangeability analysis, fact-finders may substitute their view on the relative merits of two products for those of consumers. That danger becomes acute when the conclusion does not reflect market evidence of customer preference. It is (p. 183) consumers’ purchase decisions that drive demand for one good over another, thus creating market power. Focus properly lies in how consumers spend, not how they should spend.
6.33 Yet, the CPED approach is no panacea. Measured CPED is often static—a snapshot of consumer decisions over a particular time frame. Empirical assessment can mask long-term shifts in consumer demand as purchasers educate themselves, or are informed, about parallels between candidate products. Further, the available evidence may be insufficient to answer hypotheses. Less rigorous analysis—such as asking whether prices between two candidate products move in parallel over time—can yield misleading answers absent a determination of causality.37 Further, because CPED is difficulty to apply in many cases, an alternative mode of analysis must be available.
6.34 In that respect, a need for interchangeability analysis lies in practical limitations in CPED calculation. To yield accurate insight, economic analysis must measure the relative demand shift between two products when the price increase is from the competitive level. A problem is that market definition often becomes necessary due to allegations of significant market power. Thus, empirical assessment of historical price movements in the market may entail pricing baselines exceeding marginal cost. The result may be erroneous findings of high CPED. After all, at the monopoly price, price elasticity of demand is high, meaning that good substitutes exist at that price point. That problem is referred to as the Cellophane fallacy, in reference to the case where the Supreme Court made that mistake.38
6.35 Last, an exclusively empirical approach to market definition would lack a check on counterintuitive implications from the data. The two-pronged approach resists mistaken inferences. Illustratively, two brands with embedded, asymmetric consumer preference may display a low CPED, thus indicating weak candidacy for inclusion in the same market. Yet, those findings may mask long-run competitive constraints. Antitrust enforcers would rightly take issue, for instance, with the purchase of Pepsi by Coca-Cola—even if the CPED between them were low due to brand loyalty. Both lines of enquiry drive market definition.
B. Recurring Problems in Market Definition
6.36 This section explores three recurring issues in market definition. First, can products with different characteristics lie in the same market? Second, can a relevant market incorporate two functionally identical or similar products that nevertheless display a low CPED? That question asks how the law should treat relatively (p. 184) homogeneous or functionally comparable goods when empirics show that consumers do not shift purchases between them in response to significant relative price movements?39 The third issue concerns markets that contain just one product, such that the seller is a monopolist. Single-brand markets are controversial, but are now well established and important to market definition involving patented technology.
a. Heterogeneous products can lie in the same market
6.37 Product differentiation is ubiquitous. Firms distinguish their offerings from those of their rivals, appealing to idiosyncratic consumer preferences and developing brand loyalty. Heterogeneity bestows some market power on every business owner. Products that are not fungible, but that are nevertheless functionally interchangeable, thus belong in the same market.40 Similarly, price differentials between two substitutable products do not require separate markets.41 Still, product differentiation limits interchangeability and decreases the CPED between candidate goods. The critical question, then, is what differences are sufficiently material that the market should exclude the candidate product.
6.38 The question, sadly, yields no universal rule. The courts engage in fact-intensive analysis—and consider expert economic testimony—to discern whether goods’ qualities or functions differ to the point that the products lie in different markets.42 Still, the fact of some product differentiation is never enough in itself to exclude a candidate good from the market.43 Fungibility is not a minimum requirement.44 Were it otherwise, products that engender brand loyalty would lie in their own markets, making each seller a monopolist in selling its own product. As such an interpretation would balloon the scope of Section 2, the courts recognize single-brand markets only in rare cases.
6.39 Can functionally identical goods ever belong in separate product markets? The answer is yes, though the result seems odd. Some courts have found that identical products sold by different vendors lie in different markets.45 Such findings appear paradoxical, but the mystery dissolves when one realizes that a good’s objective attributes are not the only factor that drives consumers’ purchasing decisions. Erroneous consumer perceptions may lead to artificial distinctions, bestowing sufficient power to create a stand-alone market.
6.40 The nuance concerns potential divergence between products’ actual and perceived attributes. Consumers’ beliefs about product differentiation, as revealed through purchase decisions, drive demand for a scrutinized firm’s good. If consumers consistently prefer one good over another, even though the goods have the same functionality, then the owner of the greater-in-demand product enjoys greater market power. Put differently, the normative question whether consumers should value one good over an equivalent product differs from the positive question whether consumers actually switch between those goods.
6.41 Resolving this problem implicates the difference between substitutability and cross-price elasticity. Functional equivalence implies positive cross-price elasticity of demand. That theoretical extrapolation makes sense. Generally, we expect that substitutes limit market power. Yet, empirics control. If consumers perceive differences that do not actually exist—or that exist but should not matter—then they may pay a premium to buy their preferred product. Including the objectively substitutable product in the market may lead to underestimation of market power.
6.42 The caveat involves the time frame for the relevant antitrust analysis. Opportunities for learning, plus competition-generated incentives to educate consumers, suggest that erroneous perceived differences will erode. Thus, market definition involving dynamic phenomena should be cautious in excluding substitute—that is, functionally interchangeable—products from the market that may not at that moment constrain an incumbent’s market power, but will likely do so over time. The prototypical example concerns brand-name and generic drugs. Their pharmacological properties are identical, making consumers’ preference for one over the other based on perceived qualitative differences irrational. Yet, after low-price generic entry, branded drug producers often hold or even increase price. That response is profitable because enough consumers rely on brand-name recognition to infer superior attributes that do not exist. How to define the market in that setting? The courts’ approach is an illuminative case study.
(p. 186) 6.43 In Geneva, the producer of a generic, anti-coagulant drug contracted to be the sole purchaser of a critical input in the manufacturing process.46 A rival generic manufacturer sued, alleging that the vertical contract foreclosed access to the market. The question before the Second Circuit was: which market? The district court, relying on traditional interchangeability factors, had found that the relevant market included both the branded drug, Coumadin, and its generic equivalents. The Second Circuit reversed, holding that generic warfarin was a distinct market. Thus, it recognized that even fungible products can lie in separate markets if enough consumers view them as distinct.
6.44 The Second Circuit conceded that it ‘may seem paradoxical to believe that Coumadin and generic warfarin—which have been certified by the FDA as therapeutically equivalent—are nevertheless in separate markets for antitrust analysis’.47 Nevertheless, it credited evidence that the brand-name drug maintained a price point double that of generic equivalents, and that even increased after generic entry. The pioneer drug had a low CPED. Hence, ‘[c]ustomers [who] have remained with Coumadin clearly do not perceive generics to be a reasonable substitute for it. Conversely, price-sensitive customers have flocked to the cheaper generic’.48 That holding is instructive on market definition. The products were materially identical. At most, the court noted that ‘generic drugs may have some minor differences from the branded drug, such as the water content, crystalline structure, and particle size of the active ingredient’.49 Perceived heterogeneity flowed solely from consumer ignorance.
6.45 For purposes of static analysis, the court was likely correct to define the market to exclude products subject to inelastic demand. The question is whether the scrutinized firm could sustainably restrict industry output. The fact that it can do so matters more than the reason why. Nevertheless, a snapshot view of the market can lead courts astray if they focus on static effects, especially as the first step to assessing the dynamic implications of a challenged restraint. Due to information costs, consumer demand can reflect misinformed views as to the qualities of various products. As information percolates, however, dynamics can change and so, too, can the relevant market. It seems likely that the CPED between a branded drug and its generic equivalent will rise over time.
6.46 A second telling case is Staples, where the FTC demonstrated that a distinct market existed for consumable office supplies sold through office superstores.50 Thus, the market did not include identical office supplies sold through other outlets. That holding also discards the traditional rule that functionally interchangeable References(p. 187) goods belong together. The FTC’s approach, however, was economically sophisticated. It looked beyond the inferences-based-on-interchangeability approach to empirics. Specifically, did office supplies sold by vendors other than superstores constrain the power of superstores in selling the same products?
6.47 The court observed that the candidate goods were ‘an example of perfect “functional interchangeability.” The consumable office products at issue here are identical whether they are sold by Staples or Office Depot or another seller of office supplies’.51 Nevertheless, the FTC presented econometric evidence that Staples charged higher prices where it was the only superstore, and lower prices where Office Depot or OfficeMax were in the vicinity. Indeed, the price difference amounted to 13 per cent between the areas where all three were present and where Office Depot was the sole superstore. The district court thought it compelling that a low CPED existed between office supplies sold by superstores and those sold by others. It thus preliminarily enjoined the proposed merger between Staples and Office Depot.
C. Single-brand product markets
6.48 Single-brand product markets have important repercussions for competition law in the new economy. Litigants sometimes claim that a firm enjoys monopoly power in selling its own good. The question can then become whether the firm illegally monopolized its own product, which can be a puzzling concept. The law has reacted coolly to such allegations, limiting when a market contains just one product. Since antitrust plaintiffs in the technology space often argue that a defendant enjoys market power by virtue of its patent holdings, that jurisprudence has crucial application to competition policy in the new economy.
6.49 Some antitrust–patent cases arise in traditional product markets. For instance, a dominant firm may acquire patents reading on its competitors’ goods to exclude them.52 There, market definition proceeds in a conventional fashion, analysing the interchangeability of the patentee’s goods with other downstream products or measuring their CPED to discern the limits of the downstream market. Many antitrust–patent cases, however, focus not just on downstream product markets, but on upstream technology-licensing markets.
6.50 Below, this chapter addresses upstream patent-licensing markets.53 That law derives from precedent that governs single-brand product markets, which we (p. 188) consider here. A ‘market’ presupposes an active zone of commercial activity in which different vendors strive to outdo each other for sales opportunities. For instance, GM, Ford, Chrysler, Toyota, Honda, Nissan, Hyundai, Subaru, Kia, Mercedes-Benz, BMW, Audi, Porsche, and other car manufacturers vie for consumers. Market definition in the car industry would involve a geographic determination and a substitutability or CPED analysis to determine each vehicle maker’s respective share. Imagine the oddity, then, if the relevant market were limited to sales of a single car maker or even to the sales of a single vehicle by that one vehicle producer.
6.51 That oddity is the thing of single-brand product markets. The law is sceptical of such markets for two reasons. First, a product seller usually faces some competitive constraints on its market power. By the same token, every seller also enjoys some freedom to set price above marginal cost without losing all sales. In other words, a threshold level of market power irrelevant to antitrust policy is ubiquitous, while the kind of unbridled power that creates a full-blown monopoly is unusual outside regulated industries. To conclude, then, that no substitute exists for the defendant’s product is to appeal to an atypical situation. Brand loyalty or consumer preference for one vendor’s product over a rival’s functionally interchangeable good generally does not suffice. Were it otherwise, monopolies would exist everywhere.
6.52 Second, antitrust plaintiffs have every incentive to define the market narrowly. If a product occupies its own market, then its owner has a 100 per cent market share. That condition does not itself show a violation of the antitrust laws, of course.54 It is a large step, however, toward doing so. In that respect, markets defined around a defendant’s good can appear gerrymandered or circularly defined. Thus, US courts have often refused to define markets as being the product sold by the defendant.55 As the Northern District of California has observed, ‘[i]n general, a manufacturer’s own products do not themselves comprise a relevant product market ... Single-brand markets are, at a minimum, extremely rare’.56
6.53 Yet, scepticism is not denial, and courts should avoid presumptive conclusions divorced from careful examination of the facts. Single-brand product markets are possible. They exist where consumers have no choice but to deal with a particular vendor, and the competitive dynamics are such that the absence of choice is (p. 189) durable and not a function of consumers’ knowingly agreeing to it. When a seller exercises market power, and its customers have no alternative, a relevant market may exist limited to that seller’s good. In practice, facts sufficient to trigger this condition exist when lock-in occurs under imperfect competition or where a firm cuts off any choice by consumers.
b. US law on single-brand markets
6.54 The general rule is that a firm does not have a monopoly—and almost certainly not an illegal one—in its own product.57 The courts reject alleged single-brand good markets when the pleaded facts make an absence of choice implausible.58 Nevertheless, if the reasonable interchangeability and CPED analyses show that no competitive factors constrain a firm’s pricing power, the law will recognize a narrow product market.59 The reason is that market definition is but a proxy to measure a firm’s power. If there is no competition, then the seller has a monopoly and resides in its own market. Of course, even if a firm is a monopolist, it does not follow that the company has violated the antitrust laws.60 To the contrary, ‘[t]he mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system’.61
6.55 The leading case on single-brand markets is Kodak.62 The Court began with the principle that market definition can be determined ‘only after a factual inquiry into the “commercial realities” faced by consumers’.63 It held that Kodak, a manufacturer of camera copying equipment, could monopolize a market comprised of post-sales parts and servicing of Kodak’s camera equipment—as distinct from parts and servicing of all copiers—due to consumer lock-in. Had customers been free to abandon its purchased copiers in favour of one sold by Kodak’s competitors, when faced with higher prices for parts and services, the parts and services market would have encapsulated the full range of interchangeable parts and services for all copiers. That ruling was divisive because Kodak faced competition in the camera market. Neoclassical economics thus predicted that efforts to raise price on customers in the secondary market would effectively raise price for consumers in the primary market, thus deflecting sales to competitors and making the attempted leverage unprofitable. The Court refused to apply such economic theory, however, absent a References(p. 190) factual foundation for it in the record and hence remanded, holding that a jury could find a distinct aftermarket.
6.56 The critical question involves Kodak’s scope. Consumers and firms routinely bind themselves through contract, limiting their subsequent bargaining options. Some form of lock-in is ubiquitous. Frequent-flier points can make switching to alternative airlines in the event of a price increase unpalatable. Buying a car-servicing plan at the point of vehicle purchase reduces, if not eliminates, the incentive for the purchaser to look elsewhere for maintenance and repair. Franchisees contract to buy their supplies only from designated purchasers, who may later increase price. Since perfect competition is an abstraction that exists only in economics textbooks, no market is sufficiently competitive to deprive a seller of some market power in an aftermarket. An expansive interpretation of Kodak would thus find single-brand and other narrow markets everywhere, appearing and disappearing in line with economic actors’ freedom of choice. Such a rule would work mischief.
6.57 US courts have thus rejected efforts to limit the relevant market to a seller’s product when the lack of choice resulted from the plaintiffs’ own informed decision.64 Courts also eschew narrow market definition, and hence distinguish Kodak, when competition in the primary market sufficiently limits power in the secondary market.65 As recent decisions illustrate, US courts react coolly to claims that a single brand lies in its own market, not least due to scepticism that there really is a lack of competitive alternatives.66 A plaintiff wishing to delineate a market around the contours of a stand-alone product must make a compelling showing why no competitive choice exists.
c. Cluster markets
6.58 Cluster markets also implicate patent-related antitrust issues. Such markets are an oddity as they dispense with the principal methodologies of market definition, which are reasonable interchangeability and CPED. Rather than capture the universe of substitute products or services that compete with one another and constrain price, cluster markets encompass complementary goods that are often sold together and considered as a group by customers. In that respect, cluster markets fold under one umbrella many separate potential markets. Analytically, such markets constitute a convenient shorthand for capturing the competitive dynamics of an industry in which firms combine numerous services or products into a convenient package for customers. Such aggregation can create a separate product in the form of a one-stop-shop that offers a variety of services through one sale.
References(p. 191) 6.59 The Supreme Court has recognized cluster markets. In 1966 in Grinnell, it perceived ‘no barrier to combining in a single market a number of different products or services where that combination reflects commercial realities’.67 It applied that principle to find that fire- and burglary-protection services, despite being distinct, nevertheless lay in the same market where each competitor used automated home detectors to alert a central service station. The commercial reality was that each central station firm had to offer an array of services to compete viably, meaning that the relevant market could encompass the full range of complementary—that is, nonsubstitute—services that consumers purchased as a bundle. Three years previously, in Philadelphia National Bank, the Court had recognized a cluster market incorporating the array of financial services that commercial banks provide to their customers.68 Although other financial entities competed with viable substitutes as to certain of those stand-alone services, they could not offer a comparable array of services and thus could not meaningfully constrain commercial banks’ pricing.
6.60 The most recent appellate case to discuss cluster markets in detail is the Ninth Circuit’s 1997 decision on remand from the Supreme Court in Kodak.69 The Ninth Circuit recognized a cluster market comprised of spare parts and post-sale services, rejecting the argument that each spare part and service lay in a separate market only with substitutes.70 Notably, the Supreme Court has embraced the cluster-market concept in the IPR context. In 1979, it suggested that combining myriad copyrights into a single portfolio can result in a different product—a portfolio licence—that may lie in a different market than its constituent parts.71
6.61 That holding makes cluster-market principles relevant to the antitrust–patent field. Few patent-licensing and assignment deals in the new economy involve a single, standalone technology. Large-scale transfers of patents are typical. Patent licensing rarely involves active competition between substitute patents claiming equivalent products, methods, or functions. Unwavering focus on traditional market definition—based on substitution and cross-price elasticity—is technically the norm, according to US and EU agency guidelines, but in application they can ill suit the industry phenomena they seek to measure. Cluster markets, by contrast, may more fruitfully capture the dynamics of modern patent licensing, which often occurs at the portfolio level and involves rights that are predominantly complements, rather than substitutes.
References(p. 192) D. Geographic market definition
6.62 Although we do not linger here, geography is also critical to market definition. Indeed, antitrust complaints can fail at the pleading stage if they do not allege the market’s geographic scope or aver an implausibly narrow market.72 Depending on the facts, the market’s perimeter may focus on a narrow point or expand to the point of being national or even global.73 The enquiry is analogous to that applied to candidate goods to identify the products comprising a market. It seeks to identify the ‘area of effective competition ... to which the purchaser can practically turn for supplies’.74
6.63 CPED analysis finds equal application here, though price elasticity of supply (the propensity of firms not currently competing in the market to enter following a price increase) may find greater application in the geographic context.75 As with product markets, which plaintiffs wish to portray narrowly around the defendant’s good, so too they try to limit the geographic area of effective competition to exclude substitutes to the extent possible. Courts reject such efforts when narrow geographic markets conflict with commercial realities.76
a. Supply-side substitution as a component of market definition
6.64 Generally, US antitrust law focuses on demand-side substitution alone to define the market.77 It asks whether consumers would respond to a material and prolonged price increase by switching to substitute products. Typically, at the market-definition stage, the law does not enquire into supply-side substitution, as when firms operating in a distinct market might abandon selling there and instead enter the target firm’s market to avail of the higher mark-ups made available by the firm’s price increase. The Justice Department and FTC’s Horizontal Merger Guidelines (p. 193) explain that ‘[m]arket definition focuses solely on demand substitution factors’.78 The benefit of this approach is simplicity.
6.65 Nevertheless, supply-side substitution can control the question of a firm’s market power. Even firms with 100 per cent market share may lack monopoly power when entry barriers are light or absent.79
b. Bypassing market definition with direct evidence of monopoly power
6.66 Market definition is not an end in itself. It is an analytic tool meant to illuminate the price elasticity of demand facing the scrutinized firm at the competitive price level. The ‘relevant market’ facilitates examination of a firm’s market power. It might follow, then, that a plaintiff need not define the market when it marshals sufficient direct evidence that the defendant has monopoly power.
6.67 The US Supreme Court has held that ‘“proof of actual detrimental effects, such as reduction of output,” can obviate the need for an inquiry into market power, which is but a “surrogate for detrimental effects”’.80 Some courts abandon market definition altogether when there is a convincing showing of monopoly power.81 Nevertheless, although US law permits a party to establish monopoly power through direct evidence, some circuit insists that a plaintiff at least outline the relevant market first. According to the Seventh Circuit, Indiana Federation ‘stand[s] for the proposition that if a plaintiff can show the rough contours of a relevant market and show that the defendant commands a substantial share of the market, then direct evidence of anticompetitive effects can establish the defendant’s market power—in lieu of the usual showing of a precisely defined relevant market and a monopoly market share’.82
c. Market definition as a pleading barrier
6.68 The relevant market, as we have seen, is a critical element of all antitrust causes of action other than those challenging hardcore restrictions that are per se illegal. Since 2007, to survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), plaintiffs must demonstrate that their allegations plausibly show an entitlement to relief.83 It stands to reason, then, that an antitrust defendant might fruitfully attack an alleged market that appears implausible as pleaded, including in light of the averred facts.
References(p. 194) 6.69 Notwithstanding Twombly, courts are reluctant to dismiss based on market definition due to its fact-sensitive nature.84 That hesitancy reflects the Supreme Court’s prior observation that ‘proper market definition ... can be determined only after a factual inquiry into the “commercial realities” faced by consumers’.85 Still, the judiciary rejects alleged markets that display glaring deficiencies.86 In practice, courts look askance at alleged markets that strike them as illogical or strategically tailored.87
6.70 The CJEU has long stressed that the ‘definition of the relevant market is of essential significance’.88 A plaintiff must define the market in an action under Article 101 TFEU that alleges a restriction by effect.89 Market definition is also a requisite of merger control.90 Similarly, the first step in an Article 102 case is to define the market where the undertaking supposedly holds a dominant position.91 Market definition only takes a back seat for by-object restrictions.92 Even there, some References(p. 195) consideration—albeit summary—of the legal and economic context must take place.93
6.71 In 2013, the CJEU held in Expedia that a restriction by object has, ‘by its very nature and independently of any concrete effect that it may have, an appreciable restriction on competition’.94 In 2014, the Commission revised its De Minimis Notice to clarify that no by-object restriction can avail itself of the safe harbour, regardless of how small the parties’ market share may be. Still, for hardcore restrictions, consideration of the market helps to discern whether those restraints can affect inter-state trade and thus come within the purview of Article 101. Market shares that exceed 5 per cent allow a challenged restriction to affect member-state trade, while those less than one per cent do not.95 Where the requisite effect on inter-state trade exists, market definition for by-object restrictions is of ancillary significance.96
6.72 The relevant product market encompasses goods that ‘are sufficiently interchangeable with each other’.97 An antitrust market reflects the area of effective competition and sufficient interchangeability as to specific uses.98 One must also define the market’s geographic reach.99 As industry dynamics change, the Commission must define the market afresh when challenging new conduct by a dominant undertaking.100
6.73 A landmark moment was the European Commission’s 1997 Relevant Market Notice, which framed market definition in economic terms.101 The Commission explained that the ‘objective of defining a market ... is to identify those actual (p. 196) competitors of the undertakings involved that are capable of constraining those undertakings’ behaviour and of preventing them from behaving independently of effective competitive pressure’.102 It thus conceptualized the relevant product market as comprising ‘all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use’.103 Similarly, the geographic market ‘comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area[s]’.104
6.74 Those principles mirror US law. EU law, however, displays some idiosyncrasies. First, it is more willing to construe markets narrowly, including around a single product.105 Second, the Commission adopts supply-side factors as part of its market-definition enquiry when entry would be immediate and free of cost.106 Third, EU law is unsettled on whether one can prove a dominant position with direct evidence alone. Certainly, defining the relevant market is necessary in Article 102 cases. Some national authorities consider that they may prove a dominant position with direct evidence alone.107 The Commission has been more circumspect, warning that ‘(q)uantitative analysis should never determine on its own the existence of dominance but it can be very useful to lend additional credibility to a qualitative assessment’.108 Regardless, direct evidence plays a material role. In Microsoft, for instance, the Commission relied on evidence of profitability to bolster its determination that the company held a dominant position.109
6.75 Fourth, the Commission and courts historically defined markets differently depending on whether the case arose under Article 101 or 102 TFEU.110 While the judiciary has consistently required scrutiny of the market in abuse-of-dominance matters, the Commission took a more lackadaisical approach References(p. 197) to market definition in Article 101 cases. True, the General Court once observed that defining the market ‘is a necessary precondition of any judgment concerning allegedly anti-competitive behaviour’.111 Yet, in a subsequent judgment, it whittled back the Commission’s obligation rigorously to define the market in Article 101 cases, holding that the duty derives from the enquiry into the challenged restriction’s effect on trade or competition and must be considered in that context.112 In 1998, however, the court held in European Night Services that, under Article 101, ‘account should be taken of the actual conditions in which [a challenged agreement] functions, in particular the economic context in which the undertakings operate, the products or services covered by the agreement and the actual structure of the market concerned’, other than in by-object cases.113 Following that judgment, which annulled the Commission’s decision, the agency has defined the market more rigorously in Article 101 cases. The General Court requires market definition where it is necessary to determine whether a restriction has an anticompetitive object or effect.114 For that reason, the requisite formality of market definition in Article 101 cases depends on context.
B. The basic rules of market definition in EU law
6.77 The Commission’s notice on market definition identifies three relevant phenomena. In dwindling order of importance, they are demand substitution, supply substitution, and potential competition. The goal is to identify ‘the effective alternative sources of supply for the customers of the undertakings involved’.115 For that reason, formalism should give way to a realistic examination of how the industry operates. Indeed, the economic function of market definition is to facilitate market-share calculations that illuminate the price elasticity of demand (PED) facing the target farm. That is why the Commission has directly estimated an undertaking’s PED when the data make such a measurement possible.116 We address each of the three factors in turn.
References(p. 198) a. Demand-side substitution
6.78 The relevant market incorporates goods to which consumers can turn if the scrutinized undertaking raises price above the competitive level. Such demand-side substitution disciplines pricing and is the primary consideration in defining the market. Theory suggests that purchasers will switch between vendors of functionally comparable goods in response to relative price movements. EU law thus focuses on the consumer in determining whether goods are interchangeable.117 The CJEU has held that reasonably interchangeable products are in the same market if they likely satisfy the same consumer need.118 Indeed, it has explicitly tied the market’s contours to satisfaction of needs and limited interchangeability with other products.119
6.79 The Commission formalizes those principles with a market-definition tool known as the SSNIP test, which stands for ‘small, but significant, non-transitory increase in price’.120 Applying that test, the agency asks whether a firm would lose profit if it increased price by 5 to 10 per cent above the competitive level. If it is unprofitable, then the Commission adds further interchangeable goods within the hypothetical control of the firm until a SSNIP would be profitable. At that moment, the firm is a hypothetical monopolist and the set of goods needed to give it that position comprise the relevant market.
6.80 The SSNIP test is the basic tool of discerning demand-side substitution.121 Sadly, it is not always workable, as when sufficient data are unavailable. Second, if the firm already charges a monopoly price, it will face elastic demand. Applying the SSNIP test at that price point would expand the market to include goods to which consumers would not turn in response to 5 to 10 per cent relative price increases from the competitive point. That mistake would identify an excessively large market, and thus underestimate the undertaking’s market power. That problem, which is known as the Cellophane fallacy, is most likely in Article 102 cases. The danger is less acute with respect to mergers in unconcentrated markets. That is why the Commission generally uses the prevailing market price to apply the SSNIP test in such cases.122 Further, the SSNIP test poses formidable difficulties in high-tech settings, such as those involving patents. We explore those problems below.
References(p. 199) 6.81 Due to such challenges, the courts disregard simplistic appeals to the SSNIP test or related critical-loss analysis.123 The test’s principal contribution may be as a conceptual framework, focusing analysis on the economic phenomena that matter to market definition and, in turn, market power. The agency uses other quantitative tests when possible to measure demand-side substitution. For instance, if it observes a low cross-price elasticity of demand between two products, it may conclude that they lie in separate markets.124 It has also looked to data on the effect of one product’s launch on demand for a potential substitute.125 Further, the Commission has tied an observed price correlation between candidate products to infer that they occupy the same market.126 Caution is important, however, because factors other than demand-side substitution may explain parallel price movements. Thus, the agency must consider such observational data in context. The same is true of using observed price discrimination to draw narrow markets around different customer groups.127 Since a threshold amount of market power is ubiquitous, including in the most competitive markets, so too is the ability to price discriminate to some degree. The Commission and courts need to be careful not to extrapolate erroneous conclusions from a firm’s charging different prices to distinct consumer groups.
6.82 Where data are incomplete, or the SSNIP test is otherwise ineffective, the Commission turns to more impressionistic assessments of whether products lie in the same market. That qualitative approach has drawn criticisms, such as in United Brands where the CJEU held that bananas occupied their own market because their characteristics ‘enable it to satisfy the constant needs of an important section of the population consisting of the very young, the old and the sick’.128 That holding was likely incorrect as the pertinent issue was whether other fruit constrained banana sellers’ pricing. Whether bananas serve a niche audience among a larger population of consumers does not appear to shed light on that question.
6.83 Nevertheless, assessing products’ relative characteristics and use remains a central tool of demand-side substitution to define goods markets.129 In practice, the Commission may contact market participants to discern their understanding of the relevant market, and use marketing studies to identify the extent to which consumers view different products as substitutes.130 Economists question References(p. 200) anecdotal evidence, which is why those working in the neoclassical tradition focus on market-revealed preferences. Some economists worry about the reliability of undertakings’ internal documents as evidence of the relevant market, since the market as perceived by marketing- and strategy-setters may not align closely with the economic definition of a market. Nevertheless, the Commission relies on such evidence when it is available.131
6.84 The agency also considers regulatory and other barriers that may impede substitution between interchangeable goods.132 Further, stable demand for one product over another may indicate an absence of substitutability.133 Importantly, the fact of one-way observed substitution from product A to product B does not necessarily imply that, should relative prices move in the other direction, consumers would move from product B to product A.134
b. Supply-side substitution
6.85 The fear of swift entry into a market after a price increase can discipline incumbent pricing. Indeed, it may do so as effectively as demand-side substitution. The CJEU has thus recognized that a complete market definition requires assessment of demand- and supply-side factors.135 The Commission has occasionally defined the market based on supply-side substitution.136 Where it has done so, the potential competitor produces goods that differ only in quality and grade, meaning that it could enter the market with little delay or cost.137 On other occasions, the agency has justified narrow market definitions, in part, on limited supply-side substitution.138
6.86 Nevertheless, absent lock-in, consumers can usually shift their purchases elsewhere more quickly than firms can shift their manufacturing processes and enter a market. For that reason, emphasizing prospective entry can overstate the short-run constraint that supply-side substitution places on incumbent pricing.139 Broad market definitions that include firms not currently operating in the market may invite underestimations of market power. Thus, the Commission considers supply-side substitution only where ‘its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy’.140 Where entry depends on (p. 201) considerable asset adjustments, investment, or delay, it will not feature in the market-definition stage of analysis.141 The General Court has affirmed the Commission’s decision not to expand a market to include supply-side substitution.142 By the same token, it has also approved of the Commission’s expanding the market to include products that an entrant could rapidly and cheaply alter to render them substitutes.143
6.87 The last factor that potentially constrains a firm’s market power is potential, but not imminent, entry. The Commission views the prospect of future entry to be too contingent and hypothetical to change the relevant product market.144 Still, such potential competition remains pertinent to analysis—sometimes acutely so—for anticipated entry beyond the short run can constrain a firm’s market power. Thus, although the Commission does not consider potential competition in defining the market, it does so in analysing market power and competitive effects.145
the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area[s].147
6.89 Demand- and supply-side substitution informs the market’s scope. The first step is to identify the parties’ market-share distribution, pricing, and price differences (p. 202) across the member states in which sales take place.148 Sales that predominantly occur in a single country would invite an obvious inference, as would customers’ ordering from across the entire Union.149 For instance, where a firm sells only in one member state and accounts for the lion’s share of product sales in that country, the agency may reasonably conclude that the relevant geographic market is for that member state alone.150 Sustained asymmetric prices for the same goods in different countries can suggest distinct geographic markets.151
6.90 Analysing observed data on sales and price distribution contextualizes the more formal analysis that follows to define the contours of the market with precision. Quantitative tests to estimate own- and cross-price demand elasticities are useful when the data suffice.152 More generally, the Commission determines the products’ demand characteristics across local and country lines to discern whether idiosyncratic national tastes elevate demand in one member state vis-à-vis others.153 The agency is also willing to seek customers’ and competitors’ views on the relevant geographic market.154 Of course, impediments to free trade across geographic zones can limit the reach of the relevant market, as when government-erected barriers impede cross-country sales or when the goods at issue are expensive to transport over distance.155 Conversely, low import barriers from one member state to another can expand the relevant geographic market beyond one country.156
6.91 Patents bestow exclusive rights, which sometimes confer market power. That trait potentially invites narrow market definitions drawn around a patented good or process. The market-definition principles most illuminative on this question relate to single-brand product markets. While US law generally eschews markets limited to one seller’s good, EU law is quicker to find single-brand markets.157 The practical result is that market definition, and in turn market power, are less formidable obstacles to enforcers seeking to establish a violation of EU competition rules than they are to plaintiffs suing in the United States.
(p. 203) 6.92 The European Commission and courts often draw the parameters of the relevant market narrowly around an accused undertaking’s product.158 Recently, in AstraZeneca, the CJEU found that proton pump inhibitors, which limit acid production in the stomach, occupied their own market separate from H2 blockers, which perform the same function, albeit less well.159 Another example is Hilti, where the General Court affirmed a finding of three distinct markets for nail guns, gun cartridges, and nails, where the allegedly dominant undertaking bundled cartridges and nails.160 The General Court explained that construing the guns, cartridges, and nails as a single system occupying one market would be ‘tantamount to permitting producers of nail guns to exclude the use of consumables other than their own branded products in their tools’.161 The merits of that concern are debatable, though the court’s approach was purposive.
6.93 In Hugin, a cash-register manufacturer refused to supply spare parts to firms other than those in its distribution network, including its competitor, Liptons.162 Recognizing a post-sales service market for maintenance of repair, the CJEU credited a distinct market for the purchase of Hugin’s spare parts by post-sales service providers. That market was narrow, being limited to the spare parts for the product of just one manufacturer. The Court justified that holding because there was ‘a specific demand’ for Hugin’s spare parts, which were ‘not interchangeable with spare parts for cash registers of other makes’.163 That finding potentially makes every goods manufacturer a monopolist in selling spare parts for which there is demand, regardless of the degree of competition in the primary market. Although one might analogize Hugin and the US Supreme Court’s decision in Kodak, the parallel would be superficial. The question in Kodak was whether a competitive product market necessarily precluded market power in the aftermarket for services and repair. Noting evidence that Kodak had raised price and excluded competition in the aftermarket, the Supreme Court refused to hold that no market power was possible based on neoclassical economic theory alone. The Court thus found that a fact question existed and so it remanded for a trial. US courts have limited Kodak, finding no distinct aftermarket where the primary market is competitive and consumers are informed. Hugin, by contrast, lends itself to no obvious limiting principle. Indeed, the CJEU has repeatedly recognized standalone markets limited to an essential input sold by a single firm.164
References(p. 204) 6.94 The General Court’s 2010 judgment in CEAHR illustrates the divide with US law.165 There, the court reversed the Commission for reaching a decision without sufficient factual examination. Responding to complaints that luxury watch makers had collusively refused to supply spare parts to independent watch repairers, the agency found that no separate aftermarket existed for spare parts and repair. It based that view on the competitive nature of the primary market. The General Court reversed, observing that:
The factors raised by the Commission merely indicate a purely theoretical possibility of switching to another primary product . . . That definition is based on the concept that effective competition itself exists, which presupposes that a sufficient number of consumers would actually switch to another primary product in the event of a moderate price increase for spare parts in order to make such an increase unprofitable.
6.95 Nevertheless, there are limits in EU law to stand-alone markets for inputs into post-sales markets. Aftermarkets do not arise, for instance, where customers engage in whole life costing, internalizing the future cost of purchases in the aftermarket while determining the effective price in the primary market. That is likely to be so if sales are transparent and information is symmetric, as in competitive markets. Where consumers assess the present cost of the primary good and the future cost of secondary products (discounted to present value) at the time of purchase, the market is effectively a single system incorporating both the primary and complementary goods.166
a. Upstream technology markets
6.97 Manufacturers purchase inputs that they use to make the products that they sell to consumers in downstream markets. Upstream input markets are thus a conventional object of market definition and larger antitrust analysis. In the bricks and mortar world, the law defines input markets using conventional principles. It analyses how buyers respond to an increase in the price of an input from the competitive level to discern which other inputs are sufficiently interchangeable to populate the market.
References(p. 205) 6.98 Today’s high-tech industry uses physical inputs in the traditional fashion in building technological devices. The difference is that the new economy also makes pervasive use of technology in their sold products and internal processes. Certain of those technologies are proprietary, making patent licences a modern analogue to traditional inputs. This section reviews how the law defines upstream input markets for licensing patented technology.
6.99 The starting point is that, nominally, the law employs the same market-definition principles that it uses elsewhere. Agency guidelines explain that ‘[t]echnology markets consist of the intellectual property that is licensed ... and its close substitutes’.167 The courts recognize technology markets for the licensing of patented technology.168 As in traditional settings, the focus is on identifying the technologies that materially constrain a patentee’s ability to exercise market power in selling a licence. For example, suppose that a firm improves upon a patented method and patents its enhanced process. Both the original and improved patents may lie in the same technology market if they both claim reasonably interchangeable technological solutions to a common problem and if practising the patented improvement would not infringe the original patent.
6.100 One might imagine then that this section would be brief, referring the reader to the principles addressed above. In fact, technology markets raise unique challenges. The reason is that technology transfer differs from marketing goods and services. First, unlike most property rights over tangible products, technology ownership is probabilistic. Second, information, search, and bargaining costs are sometimes preclusive in the high-tech sector, meaning that there may be no active market for the exchange of know-how. In that setting, licensing occurs post-commercialization, meaning that lock-in partially forecloses substitute technologies and alternative, non-infringing designs. The situation is then somewhat analogous to aftermarkets, such as where a firm requires those purchasing its goods to obtain post-sales service from it alone. In short, the probabilistic validity of the technology assets being sold and the ex post nature of much patent licensing complicate market definition.
6.101 Even demand-side-substitution analysis can become difficult here. The SSNIP test presupposes static price competition. Yet, competition in the new economy is often dynamic, as firms strive to outdo each other with superior new technologies. SSNIP tests may overestimate market power by overlooking R&D-based (p. 206) competition. The premise of demand-side substitution can be ill-suited to the high-tech world, and if applied uncritically may yield narrow market definitions.
6.102 Further, if each owner of a candidate technology has some market power, it may be difficult to identify the price point at which to apply the SSNIP test. The Cellophane fallacy is a risk. Marginal-cost pricing is the competitive baseline, of course, but it may be an imperfect lodestar here. In patent-licensing contexts, marginal cost may be vanishingly small, thus suggesting that each patentee has significant market power under economic tests like the Lerner index. Such analysis may be misleading because, even in competitive licensing markets, royalties equal to the marginal cost of licensing are rare.
6.103 These issues are timely and difficult. Courts are only beginning to wrestle with how to reconcile traditional market-definition principles with dynamic phenomena in the new economy. Defining patent-licensing markets that are fluid, contingent, and evolving is no easy task. Above all, market definition is meant to facilitate informed analysis. It should not employ dogmatic rules that ignore nuance and circumstance. With that principle in mind, we address recurring questions concerning the definition of technology markets.
(a) Single-patent markets
6.104 Can one patent form a single technology market? The answer is yes, but such markets rarely exist.169 Until recently, the law assumed that a patentee enjoyed market power. The Supreme Court jettisoned that assumption in Illinois Tool Works.170 Going forward, a patent will be coextensive with a technology market only where the facts justify that conclusion.171 In practice, a market will contain just one patent when there is distinct demand for a claimed technology for which there is no substitute. If prospective licensees could use an interchangeable technology, or realistically redesign an infringing device or process to avoid the need for a licence, the technology market is larger than a single patent. Most patents claim narrow technological applications or those having tenuous commercial utility. Thus, a relevant technology market will usually comprise more than one patent. US law on this question reflects its larger hostility to single-brand markets.
6.105 Nevertheless, post-Illinois Tool Works decisions have found that a patent formed (or, at the pleading stage, plausibly constituted) a technology market.172 Those decisions come in two variants. One involves industry lock-in to a standard, as to (p. 207) which an asserted patent is essential. We consider that phenomenon momentarily. The other variant is a patent that enables its owner to exclude firms from selling reasonably interchangeable products in the downstream market. Such IPRs are typically life-sciences patents or those covering pioneer inventions. A famous historical example of the latter is the Wright Brothers patent that created an enduring economic monopoly in aviation.173
6.106 Although it no longer assumes that patents confer market power, the Supreme Court recently clarified that ‘[a]n important patent itself helps to assure such power’.174 Although the Court did not define ‘important’, the implication is that a patent excluding generic drug producers from a market qualifies. Indeed, in vigorously challenging pay-for-delay agreements in the pharmaceutical industry, the FTC regularly contends that a relevant market is monopolized under the purview of a potentially invalid patent.175
6.107 While a technology market limited to a single patent is rare, allegations of such a market fare better at the pleading stage than they do on the merits. That is because the law is reluctant to dismiss complaints on the factually intensive question of market definition. A good example involves a recent action by a patent-assertion entity, Cascades, against a defensive patent-buying fund, RPX.176 The complaint alleged that RPX had conspired with its Android-manufacturer members to negotiate for a licence with Cascades only through RPX, so as to achieve monopsony power over royalty rates. The district court dismissed in the first instance based on inadequate market definition because ‘Cascades failed to identify a coherent relevant market, offering instead “subterfuge” in the form of numerous, wildly divergent definitions’.177 The amended complaint, however, alleged a market for the licensing of Cascades’ thirty-eight-patent portfolio, with a relevant submarket limited to a single patent within that portfolio. The district court found that that allegation sufficed, ‘especially given the lack of clarity in the intellectual property arena’.178
6.108 A burgeoning area within antitrust and patent law involves strategic manipulation of the standard-setting process. Industry standards are ubiquitous, as are the organizations (SSOs) that propound them. SSOs include IEEE, which has published or is working on over 1,500 standards in electrical engineering, computer science, and electronics; ETSI, TIA, and ITU in the telecommunications field; JEDEC, (p. 208) which publishes open standards in the microelectronics industry; and countless more besides.
6.109 Industries rely on standardization to facilitate interoperable products that appeal to customers, enhance the value of sold goods, and eliminate costly wars between proprietary systems. In surveying candidate technologies for a proposed standard, SSOs weigh technological value, and sometimes royalty assurances, in their selection criteria. Before an SSO adopts a particular technology, numerous alternatives may exist. Once an SSO chooses a certain technology for the standard and the industry adopts it, previous substitutes in the technology market drop away. Lock-in makes it costly for firms to abandon a mutual standard in lieu of a non-infringing alternative. This dynamic can infuse the owner of a ‘standard-essential patent’ (SEP) with hold-up power in the ex post world. Antitrust issues have arisen when SEP owners fail to disclose their IPRs, or falsely promise to license them royalty-free or on reasonable and nondiscriminatory terms, to induce an SSO to use their technologies.
6.110 The issue here, however, concerns market definition. If the law construes the market broadly to include all prior substitute patents, then the SEP owner may lack monopoly power and thus avoid scrutiny under Section 2. If the law recognizes a single-patent technology market after industry adoption of the standard, then the SEP owner would be a monopolist. To obtain the latter result, one need not define two separate technology markets—one ex ante before industry adoption of the standard and one after. One might instead define just one market comprising all substitute technologies in the ex ante world and then note that, post lock-in, the non-implemented technologies no longer constrain the SEP owner’s pricing.179
6.111 The only federal court of appeals to have considered the question has recognized a relevant technology market coterminous with the standard and each patent comprising it, which thus makes a SEP owner a monopolist. In Broadcom in 2007, the Third Circuit explained the economics of industry lock-in, before holding that ‘[i]t is the incorporation of a patent into a standard—not the mere issuance of a patent—that makes the scope of the relevant market congruent with that of the patent’.180 For that reason, it rejected the argument that a market definition congruent with a patent’s scope ‘would result in every patent holder being condemned as a monopolist’.181 A year later, the DC Circuit could have addressed this question in Rambus, but because it found that the FTC had failed to establish exclusionary behaviour it did not reach the market-definition point.182
References(p. 209) 6.112 As it stands today, then, US law recognizes single-patent technology markets where an industry locks-in to a mandatory industry standard. Nevertheless, it would be a mistake to view this position as ironclad. Market definition in this space is complicated, and the law is evolving. Challenging questions accompany market definitions drawn on a single SEP.
6.113 First, whether a patent is a SEP is contingent. A patent can yield a monopoly in a relevant technology market only if it is both valid and infringed. This complication is not fatal, however, as district courts can bifurcate patent claims and antitrust counterclaims. Second, a SEP can presumably be coterminous with a relevant technology market only if the standard is itself mandatory. When multiple standards exist, they may compete for adoption even after partial lock-in to one of those standards occurs. Inter-standard competition may constrain the market power enjoyed by the owner of a patent reading on just one of those standards. Conversely, when an industry adopts a single standard and abandons others, no such constraint on market power may exist.
6.114 Third, whether lock-in should narrow a market continues to rankle economists. Ex post lock-in magnifies the market power of all SEP holders, who may still compete with each other for shares of downstream licensing revenue. Many such patentees are repeat players who are involved in several SSOs and that may rely on other participants for inputs in the downstream manufacturing process. Reputational constraints may be powerful, and constrain much hold-up. Further, when SEP owners account for many downstream product sales, inciting upstream royalty wars in monetizing SEPs may be counterproductive. For those SEP owners that are NPEs, of course, reputational and downstream-market considerations may be immaterial. Yet, when defining a technology-licensing market involving such patentees, one might ask whether the market should expand to consider price effects from other patentees. Specifically, if licensees have already paid a large share of the standard-generated surplus to other patentees, a SEP owner who subsequently tries to hold up a standard may face price constraints. That consideration usually does not feature in market definition, since it reflects a constraint not flowing from competition on the selling side of the market, but one could make a case for its application in the SEP hold-up setting.
6.115 Fourth, there is the question whether ex post hold-up is even possible in the post-eBay world, where injunctive relief no longer issues as a matter of course, and what its implication would be for market definition. Patents do not take the form of a physical input without which a manufacturer simply cannot make its desired product. The owner of a critical material to the production process can charge a price based on the foregone sales to the purchaser should they not reach agreement. A patentee, by contrast, derives market power based on the threat of suit. In a perfect world, the courts would award damages reflecting the ex ante royalty that the patentee and SSO would have agreed upon but for transaction costs. In that setting, References(p. 210) hold-up would be impossible. In practice, however, damages awards are unpredictable, produce outlier extremes, and are feared by risk-averse technology users. To the extent that the threat of suit allows a SEP owner to extract more ex post than it could have obtained ex ante, then there is at least some argument for defining markets in the ex post setting around SEPs.
6.116 This is all to say that the economics surrounding the definition of technology-licensing markets in the SEP context are complex, while the law remains in its infancy. How it develops will depend on how closely courts adhere to the Broadcom framework espoused by the Third Circuit, which may in turn depend on whether the economic literature produces consensus on market-definition principles in this area.
6.117 Market definition, even in the field of proprietary technology, follows principles of demand-side substitution. Yet, a licence to a stand-alone technology is the exception rather than the rule, as technology-transfer deals increasingly take the form of portfolio licences or acquisitions. Few patent portfolios comprise technologies that claim a single product or method. Invariably, they cover diverse functions connected—if at all—by being relevant to certain PTO classification codes or to a larger industry. Collecting hundreds or thousands of patents under common ownership can implicate myriad technology markets, each drawn on an application and comprising only those patents reasonably interchangeable with one another.
6.118 Such fragmented market definition, however, may overlook portfolio effects. If a firm aggregates complementary patents, it may reduce royalty stacking, but create an unavoidable licensing position. When related, but non-substitute, patents come within the control of a single patentee, a relevant technology market may arise for a portfolio licence.
6.119 BMI in 1979 concerned performing-rights organizations that obtain copyright-licensing authority over myriad musical works and sell blanket licences.183 The Supreme Court held that the ‘blanket licence is composed of the individual compositions plus the aggregating service. Here, the whole is truly greater than the sum of its parts; it is, to some extent, a different product’.184
6.120 Of course, to constitute a relevant market, a portfolio licence would have to meet the demand-side-substitution criteria (and perhaps the supply-side factors) under US law. Here, the reluctance to equate a market with a single firm’s product applies. To overcome the scepticism associated with such a proposed definition, a plaintiff must show that no choice exists but to buy a licence (or presumably to face infringement litigation). First, a portfolio could satisfy that criterion if it subsumed (p. 211) all technological substitutes for carrying out a particular function. Such a case, of course, would simply recognize that a subsection of the portfolio satisfies the traditional characteristics of a technology market. Second, a portfolio might claim so many features of downstream purchasers’ (i.e. licensees’) existing and potentially redesigned businesses that a licence is necessary.185
6.121 Recent decisions have applied those principles to copyrights. A repertory of copyrighted works, which are collectively indispensable to downstream business, may be a technology market.186 In the patent setting, some courts have ordered discovery on allegations that a patent portfolio is a relevant market.187 A major issue at the time of writing is whether a patent-assertion entity’s portfolio may form a relevant technology market. Courts to have addressed that issue to date are divided. One court found that no such market could exist if the antitrust plaintiff contested the validity and infringement of the patents in the PAE’s portfolio.188 A later opinion went the other way, crediting an allegation that a portfolio of 3,500 related patents constituted a technology market.189 This issue is divisive, not least because alleging a portfolio monopoly can be in tension with a defence of invalidity and non-infringement.190 The question of patent validity, however, is an apt segue for the next section.
6.122 Can patents create a market if they are invalid or not infringed? If not, how should a court tackle market-definition allegations before it has resolved validity and infringement issues? Since a ‘market’ presupposes trades that exchange proprietary assets, the issue of probabilistic patent validity raises challenging questions.
[I]t is not obvious how the high incidence of patent invalidity should impact economic analysis of a ‘market’ for patent licences, considering how often the patents underlying those licenses are revealed as worthless. That factor alone would appear to make pricing patent licenses an altogether more volatile and risky proposition than pricing known widgets, with uncertain impacts on the market for such licences. A market would only seem to exist for valid patents, but patent validity may be difficult to predict.192
6.124 As noted in the last section, the Eastern District of Virginia found that a technology market could not plausibly exist for patents that were neither valid nor infringed, even though the patentee insisted that they were both.193 By contrast, the District of Delaware in 2014 held that Symantec had adequately pleaded misuse based on a PAE’s monopolization of a technology market for its portfolio, even though Symantec had alleged invalidity and non-infringement.194
6.125 Although it does not drive US market definition, supply-side substitution matters. In the new economy, firms compete based on technology as much as on price. Static analysis of demand-side substitution can exaggerate the scrutinized firm’s market power. Of course, agencies address the dynamic implications of potential entry, typically in analysing market power and anticompetitive effects. Yet, where policymakers factor entry into their analysis is relevant. Defining a market narrowly, without addressing supply-side constraints, can yield market-share statistics that trigger unwarranted suspicion. This phenomenon may be acute in IPR-heavy markets subject to powerful network effects.
6.126 In the new economy, entry based on breakthrough innovation can displace incumbent firms that had enjoyed commanding market shares. Dominant positions in such industries are vulnerable—even precarious—if their owners cannot match the innovations of their current and potential competitors. This dynamic seems to hold true despite the path-dependence literature suggesting that network effects can lead industries to a tipping point and monopoly that is difficult to dislodge.
6.127 Illustratively, consider the fate of MySpace, which in 2006 was the leading social-media service, with 80 per cent market shares in the United States. Today, it is a relic and Facebook is dominant. Yahoo!, Lycos, Magellan, Alta Vista, and others were leading internet-search providers, but Google revolutionized the industry and now commands, for example, in excess of 90 per cent market share in Europe. Even Microsoft, which in the early 2000s looked impervious, struggles today (p. 213) against Apple, which has established a commanding lead over mobile technological products.
6.128 Market shares based on a screenshot are unlikely to capture the full competitive dynamics of many technology markets. To the extent that enforcement agencies emphasize market-share statistics, and discount supply-side constraints, those phenomena could bias analysis. To be sure, entry-based constraints on market power that are weak in the short run should not immunize a practice or merger harming consumers in the short run without any offsetting gain. Yet, if the competitive implications of a deal or impugned restraint are unclear, overlooking supply-side limits on market power may be a mistake.
6.129 The problem is that it is not easy to incorporate dynamic supply-side effects into a market-definition framework. Today’s market shares are quantifiable, yielding a meaningful—if incomplete—window into the competitive dynamics surrounding a scrutinized restraint. Tomorrow’s entry in the form of new technology is contingent and unpredictable, both as to its fact and effect.
6.130 Of course, there are situations where an existing business could easily shift its manufacturing process to enter a market. A producer of right-hand golf clubs, for instance, might find it trivial to start making left-hand golf clubs, should price rise over the latter. In such circumstances, the supply-side constraint is itself measurable and not speculative. Technological advancement, however, often materializes in unpredictable and disruptive waves. Thus, supply-side limits on market power in technology markets are singularly difficult to incorporate into a workable calculus, but nonetheless of outsize importance.
b. Patented technology in downstream product markets
6.131 Defining the relevant market for goods incorporating patented technology is more orthodox than technology-market definition. Patent protection is simply one factor among many to consider: what products are reasonably interchangeable with the patented good? And is there a high cross-price elasticity of demand between the patented product and other goods? A patent merely grants its owner the right to exclude others from practising the claimed method or product. It confers economic power only if buyers of the relevant good value the claimed technology and if non-infringing alternatives for that technology do not exist. More often, a patented feature simply adds a degree of product differentiation that is immaterial to market definition.
6.132 Plaintiffs sometimes argue that a competitor in the downstream product market has a monopoly in its own good because of the patent. In other words, they contend that a patent creates a single-product market. That approach used to find favour with the courts. As the Supreme Court observed in 1984, ‘if the Government has granted the seller a patent or similar monopoly over a product, it is fair (p. 214) to presume that the inability to buy the product elsewhere gives the seller market power’.195 That presumption no longer stands.196
6.133 Consistent with US law’s general aversion to single-product markets, courts reject attempts to equate a single patented good with the relevant market if the plaintiff fails to satisfy either of the Brown Shoe factors.197 In most cases, the law is rightly sceptical that a relevant market contains just one good on account of a patent.198 It is thus rightly incumbent on a plaintiff to explain why a patented good is so unique vis-à-vis other products that no reasonably interchangeable alternatives, or those having a high cross-price demand elasticity with the patented good, exist.
6.134 Scepticism, however, is not denial. Although most patents are too narrow to confer economic power sufficient to narrow the relevant market, some patents may cover pioneer—that is, revolutionary—technological breakthroughs for which great consumer demand exists. In those rare cases, a patentee can prevent duplication of an essential technology without which entry into the market is impossible. Indeed, the Supreme Court recently observed that an ‘important patent’ helps to assure such power.199 When a patent is ‘important’ is of course a factual question. The condition is most likely to be satisfied in the pharmaceutical industry if a patent prevents generic competition in selling a blockbuster drug.200 Even in the life-sciences industry, however, single-product markets are rare, even in the presence of patent protection, since a court must consider therapeutic alternatives.201
6.135 Although EU law and practice sometimes blur the distinction, the Commission’s technology-transfer block exemption differentiates upstream technology markets from the downstream product markets in which those technologies are inputs.202 The Commission is correct to recognize the distinction, and has found that References(p. 215) upstream technology licensing can entail a separate market activity than downstream commercialization of that technology.203
a. Upstream technology markets
6.137 In defining technology markets, the Commission uses the same demand- and supply-side principles that govern products. Thus, a technology market comprises all technologies that are substitutes for one another.204 One might think that a market cannot exist for nonproprietary technology, which is never the object of a licence agreement and hence not traded. Such technology can deny a patentee any market power, however, if it is a viable substitute for the claimed method or product at the competitive price of zero.
(a) Single-patent technology markets
6.138 An IPR does not necessarily place its owner in a dominant position, let alone create a market unique to that claimed technology.205 Nevertheless, market definition reflects demand- and supply-side substitution, meaning that, if a certain patent is unavoidable, the patent may constitute a relevant market. Should a proprietary technology be uniquely valuable vis-à-vis alternative technologies and if potential licensees have limited design-around possibilities, the patentee may have significant market power. In such situations, a relevant upstream product market can arise limited to a licence to a firm’s technology.
6.139 EU law has recognized a relevant upstream technology-licensing market limited to a single patent—albeit a standard-essential patent that, by definition, is indispensable to implementing a formal standard.206 Nevertheless, case law is scarce. Typically, the patentee or other IP owner has an alleged dominant position in the downstream product market, and so the focus is on whether the undertaking abuses its position there by withholding a licence to an essential input.207 For example, in Magill, monopolists in the publication of weekly television listings refused to license an indispensable copyright and thus eliminated the emergence of References(p. 216) a new product.208 Similarly, in IMS, a firm’s copyrighted database was an indispensable input in the product market where the IP owner was dominant.209 The copyright owner’s refusal to deal was abusive because it foreclosed any competition. In both cases, analysis naturally focused on the downstream product market.
6.140 One could perhaps have focused more in each case on an upstream market for an IPR licence. In Magill and IMS, a stand-alone technology market for a licence to the programme listings and database could have existed.210 The question would then have been whether the IPR owner was dominant in an upstream input market and whether its refusal to license eliminated competition in a relevant market. By contrast, focusing on the upstream market alone could immunize refusals to license, since EU law generally permits refusals within primary markets, but not those that foreclose effective competition in secondary markets.211
6.141 Sometimes, however, one must look exclusively upstream—as when dominance and an abuse both lie in an input market. NPEs, for instance, do not operate in downstream product markets. The best example may be Rambus. In 2007, the Commission served a statement of objections on Rambus for patent ambush. It alleged that Rambus (1) had not disclosed patents essential for practising a DRAM standard to JEDEC, a standard-setting organization of which Rambus was for a time a member when creating the DRAM standard, and (2) had later asserted those patents seeking supracompetitive royalties. The Commission viewed the relevant market as an upstream technology market for DRAM (Dynamic Random Access Memory) interface technology. In late 2009, the Commission closed the matter after Rambus agreed to license its patents royalty-free to those practising standards published when Rambus was a JEDEC member, and to a royalty cap of 1.5 per cent for later DRAM standards.
6.142 In short, a relevant technology market limited to a single patent can exist when a licence is indispensable—an essential input—to effectively compete downstream. The critical quality is indispensability because it implies a lack of demand- and supply-side substitution, and hence the absence of any competitive constraint on a patentee’s pricing. A patent licence can carry that trait, however, in at least two different ways. The first is that there is simply no alternative to the technology due to its unique value. A separate case may arise where downstream firms choose one of several technologies and invest in it. Lock-in then makes it expensive to switch to References(p. 217) alternative technology should price rise. It is to that phenomenon that we now turn.
6.143 Does a firm’s investment in a particular technology create a market unique to that technology? One might think not. The lack of choice is a function not of the universe of demand- and supply-side substitutes, but of the firm’s investment decision. Sunk capital investment follows many business choices, which inevitably constrain freedom of commercial action. Drawing markets around a firm’s ex post choices threatens to make licensing monopolies ubiquitous, even if those firms could have availed themselves of alternative technological avenues ex ante. If lock-in eliminates substitutes, then might every owner of a valid, infringed patent become a monopolist in selling its own licence? Many economists think not, and thus question narrow, ex post market definitions focused on a single firm’s product.
The specificity of SEPs is that they have to be implemented in order to comply with a standard and thus cannot be designed around, i.e. there is by definition no alternative or substitute for each such patent. Therefore, each SEP constitutes a separate relevant technology market on its own.213
6.145 The Commission similarly approached its Motorola and Samsung investigations.214
6.146 Equating a patent with a technology market implicitly assumes that the patent is valid and infringed. Yet, patent invalidity is rife. If the Commission recognized a References(p. 218) technology market limited to a particular SEP and found that the SEP owner abused its dominant position in seeking to enjoin those practising the standard, what would happen if the UPC, EPO, or national court subsequently invalidated the patent?215 By the same token, what if it turns out that the standard does not infringe the patent? If the market were coterminous with the existence of a property right and that right ceases to be, so too does the market. How can an undertaking abuse a dominant position founded on a non-existent right? There are no easy answers. Going the other way would require the Commission to wait until a national court, UPC, or patent office determined both infringement and validity. By the time it acted, the patentee may already have harmed competition.
6.147 Probabilistic patent validity is a thorny issue for market definition, and antitrust law generally. We saw that some US courts respond to the dilemma by staying antitrust proceedings until after infringement and validity litigation runs its course. That path avoids paradoxical outcomes, and facilitates informed antitrust analysis, but at the potential cost of allowing antitrust violations to proceed unchecked for the duration of the patent case. Some US courts have suggested that a relevant market cannot exist for an invalid IPR. To date, the European courts have yet to weigh in on the implications of uncertain validity on the relevant technology market.
6.148 The law’s future path remains uncertain. It may be a mistake, however, to think that a market cannot exist for an asset of indeterminate validity. Price mechanisms should reflect the perceived strength of a licensed patent. While a subsequent invalidity finding should eliminate an invalid patent owner’s claim to royalties or other damages, it is not obvious that the patentee should get a free pass on any anticompetitive conduct that preceded the invalidation.
6.149 In closing this discussion, it bears noting that, even if the law defines a market around a single patent, an Article 102 TFEU violation would not automatically follow. A patent’s existence is not subject to antitrust prohibition, and the exercise of an IPR is rarely abusive, especially where the exercise reflects the patent’s specific subject matter. Still, it remains true that defining the market narrowly around a patent invites close antitrust scrutiny, imposing a special responsibility on the patentee not to distort competition, including in downstream product markets.
6.150 Upstream technology markets and downstream product markets are closely related. Defining a licensing market invariably requires consideration of the goods market, which generates demand for the upstream input. For instance, demand-side substitution by purchasers of downstream products may negate (p. 219) licensees’ ability to raise price in the goods market, thus potentially constraining an upstream licensing patentee’s market power. Nevertheless, conflating the upstream and downstream markets can confuse analysis, especially when defining the market rather than estimating market power.
6.151 The Commission occasionally blurs the lines between those markets. For example, for the purpose of its technology-transfer block exemption, it calculates a patentee’s share of a technology-licensing market by the total sales of both the patentee and its licensees in the downstream product market.216 At first glance, that approach seems to collapse separate issues. Suppose that a firm needs a technology to fulfil a particular function in its planned product. Four separately owned technologies could serve that function. Each patentee would hold a 25 per cent market share of the technology licensing market. If one patent holder offers a better value proposition—a combination of utility and price—and every manufacturer in the downstream market takes a licence and incorporates the patented method, then viewing the patentee-licensor as holding a 100 per cent market share is questionable. That result seems all the more odd if the licensor does not operate downstream. Defining a technology’s market share by the proportion of its downstream implementation overlooks the fact that a patent’s downstream implementation may be a function of upstream competition. Should the patentee raise price, downstream producers remain free to redesign the relevant function using a substitute technology.
6.152 Yet, the Commission’s approach is defensible. Focusing on downstream market share is workable. Few technology-licensing markets are as fluid and observable as product markets, which are a workable proxy. A patent’s downstream use reflects, in part, the demand for the claimed technology vis-à-vis other technologies, and hence illuminates the patentee’s likely upstream market power. Further, since most patent licensing occurs ex post—that is, after the licensee has begun practising the claimed technology—redesigning the product or process to use an alternative technology may not be realistic. Where lock-in is acute, the technology market and product market may be tied at the hip. The distinction between the two markets remains material, but the economic phenomena driving market definition flow from downstream. The Commission’s approach may thus make some sense. Further, outside the safe harbour, the Commission may look at upstream market shares.
b. Patented technology in downstream product markets
6.153 An undertaking may possess an IPR and yet not be dominant.217 Nevertheless, EU courts have recognized narrow product markets limited to a single firm’s (p. 220) patented good. In Hilti, separate product markets existed for nail guns, Hilti-compatible cartridges, and Hilti-compatible nails.218 The court found Hilti to be dominant in each of them. In affirming the Commission’s finding of three separate product markets, the court observed that ‘the very fact that Hilti holds a patent ... in relation to the cartridge strips designed for use in its own tools strengthens its position in the markets for Hilti-compatible consumables. Hilti’s strong position in those markets was enhanced by the patents which it held at the time on certain elements of its DX 450 nail gun’.219 Hilti shows that, if a patent allows an undertaking to prevent others from practising a valuable product feature or process, the IPR may bestow sufficient power to bring the firm within Article 102. That is especially so when patent protection accompanies other factors that indicate dominance.
6.154 Similarly, the CJEU has recognized that IPRs constituting a mandatory input into a downstream product can bestow a dominant position on the IPR owner. In Magill, for instance, the Court noted the General Court’s holding that the accused copyright holder ‘clearly held ... a dominant position’ because it ‘enjoyed, as a consequence of its copyright in ITV and Channel 4 programme listings, ... the exclusive right to reproduce and market those listings’.220
6.155 A firm has market power if it can sustainably charge more than its marginal cost of production. Virtually every firm has that ability. Antitrust concerns itself with significant power—the capacity to injure competition and consumers, such that antitrust intervention is justified. The market power needed to support an antitrust violation depends on the alleged violation.
6.156 Agreements that bring separate economic actors together are more likely to harm the competitive process. Hence, the law requires a more modest showing of power in such cases. Relative to concerted practices, unilateral conduct is more likely to be innocuous, mistaken enforcement is more apt to suppress desirable incentives, and the benefits of intervention are more speculative. Actions against dominant firms thus require a greater showing of market power—the fact or dangerous probability of ‘monopoly power’ under US law and ‘substantial market power’ under EU law. The exception common to both EU and US competition law is hardcore cartel agreements, such as naked horizontal price-fixing, market-sharing, and boycotts. In such cases, liability requires no showing of market power beyond the requisite effect on interstate commerce.
References(p. 221) 6.157 This section briefly outlines US and EU law governing market power before pivoting to a key question relevant to this book: when does a patentee’s market power lawfully fall within its IPR? The issue is whether the patentee’s market power results from the patent instrument itself, thus making any monopoly power consistent with antitrust law, or from anticompetitive conduct. The complicating factor is that a patentee’s power depends on the expected cost to potential licensees of suit. In that respect, the patent instrument always bestows any market power that its owner may enjoy. The complication unravels when one realizes that market constraints also limit patentee market power. When a patentee acquires otherwise non-existent power by dissolving price constraints, it is no defence that the legal right to exclude inherent in the patent grant facilitates that power. This chapter explores that question below.
6.158 The law’s assessment of market power goes hand in hand with the definition of the relevant market. That is because market share is the principal factor that informs a firm’s power. We begin by explaining the market-share thresholds—ill-defined as they may be—that evidence sufficient market power to trigger antitrust scrutiny.
6.159 First, for concerted conduct not involving a per se illegal restraint, analysis proceeds under the rule of reason. To violate Section 1 under that standard, a firm must have ‘the ability to raise prices above those that would be charged in a competitive market’.221 As that standard provides little guidance, the law has adopted de facto market-share floors below which a restraint violates the rule of reason. Unfortunately, the law has not clearly defined those market shares. Most courts hold that parties with less than 20 per cent market share lack sufficient power in rule-of-reason and product-tying cases under Section 1 (the latter of which operate under a quasi-per se rule).222 The Supreme Court has held that 30 per cent market share does not establish enough power to support a tying claim.223 Conversely, market shares exceeding 40 per cent generally show market power that is consistent with a non-per se violation of Section 1.224
(p. 222) 6.160 Second, the monopolization offence under Section 2 requires a heightened quantum of market power—monopoly power: the ability to control price or exclude competition.225 As a preliminary note, it is a mistake categorically to separate market and monopoly power. Each occupies fuzzily demarcated boundaries along a common spectrum charting a firm’s ability to price above marginal cost. Still, the nomenclature of ‘monopoly’ power is useful for Section 2 jurisprudence because it emphasizes a firm’s unilateral ability to affect market outcomes.
6.161 Consistent with that heightened threshold, US law requires higher minimum market shares to trigger Section 2. Most famously, Judge Learned Hand opined in 1945 that a 90 per cent market share would suffice ‘to constitute a monopoly; it is doubtful whether sixty or sixty-four percent would be enough; and certainly thirty-three percent is not’.226 Since then, the law has not pinpointed specific market-share cut-offs. Nevertheless, the weight of the case law identifies a 70 per cent benchmark, above which a firm may have a monopoly.227 The Ninth Circuit has pointed to 65 per cent as the operative threshold, while the Third Circuit has explained that only a share significantly exceeding 55 per cent can constitute a prima facie showing of market power.228 Market shares lying at or below 50 per cent rarely support a monopolization claim.229
6.162 Third, to prevail on an attempted-monopolization claim under Section 2, a plaintiff must show that the defendant has a dangerous probability of acquiring monopoly power.230 Again, the predominant factor relevant to this determination is market share.231 Reflecting the claim’s focus on dangerous probability, an attempt claim under Section 2 requires a lesser market share. Courts often find that market shares exceeding 50 per cent satisfy the dangerous-probability (p. 223) requirement.232 Shares between 30 and 50 per cent rarely suffice.233 A firm possessing a third of the market or less generally cannot attempt to monopolize that market.234 At least one court has found, however, that a 25 per cent market share could suffice.235
6.163 Nevertheless, no market share definitively establishes market or monopoly power under US law. Where entry barriers are low, even a firm accounting for the lion’s share of sales in a market will lack market power.236 Indeed, a company that makes all sales in a market can lack monopoly power due to the promise of rapid supply-side substitution.237 By the same token, a firm possessing modest market share may nevertheless have market power depending on the industry’s characteristics.238
6.164 The meaning of an entry barrier is thus important. The DC Circuit has defined such barriers as ‘factors (such as certain regulatory requirements) that prevent new rivals from timely responding to an increase in price above the competitive level’.239 Since that definition is a conclusion, it provides little guidance. Indeed, economists continue the Stigler-Bain debate on what factors count as entry barriers. Some US courts have adopted the more demanding definition of an entry barrier, which takes the form of ‘“additional long-run costs that were not incurred by incumbent firms, but must be incurred by new entrants” and or “factors in the market that deter entry while permitting incumbent firms to earn monopoly returns”’.240 As especially relevant to this book, a patent can be a powerful entry barrier in the rare case where it forecloses supply-side substitution.241
6.165 As explained below, market-share calculations may shed less light on market power in technology markets than they do in markets for the sale of tangible goods. (p. 224) Nevertheless, courts have continued to require showings of sufficiently high market shares in technology markets, at least absent direct evidence of monopoly power.242
6.166 An undertaking’s market power matters in all EU competition cases other than those involving a by-object restriction. Of course, the mere possession of market power—even unadulterated monopoly power—does not itself violate EU law.243 Nevertheless, a threshold degree of market power may render firms subject to various obligations under EU law.
6.167 In line with its administrative focus and civil-law tradition, EU competition law uses detailed guidelines with safe harbours. Those guidelines rely on market-share calculations, which dictate whether a restriction benefits from a block exemption and whether Article 101 or 102 TFEU applies. For instance, under its 2014 technology-transfer regulation, the Commission presumes that such deals between two competitors satisfy Article 101(3) if they do not contain hardcore restrictions and the parties’ combined market shares do not exceed 20 per cent.244 For technology-transfer agreements between non-competitors similarly devoid of severely anticompetitive restrictions, the presumptively acceptable market share for each party rises to 30 per cent.245 Under its 2014 De Minimis Notice, the Commission concludes that horizontal and vertical agreements fall outside the scope of Article 101(1) if the parties’ aggregate shares do not exceed 10 per cent and 15 per cent, respectively, unless those agreements involve a hardcore restraint.246 Although by-object restrictions harm competition regardless of market share, they evade scrutiny under Article 101(1) if the parties’ market share is so small that the agreement cannot appreciably affect trade between the member states.247
The dominant position referred to in this Articles relates to position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.249
6.169 That classic definition yields little guidance, as ambiguous adjectives in the form of ‘effective’ and ‘appreciable’ control the result. The definition also overlooks the basic law of demand that applies even to monopolists, which always lose sales in raising price above marginal cost and thus can never act ‘independently’. In that respect, one might more fruitfully equate ‘independence’ with significant market power. More recently, the Commission has adopted an economic approach, explaining that an undertaking must have ‘substantial market power’ to be dominant.250 For antitrust purposes, such power means the sustained ability to increase price substantially above the competitive level and to exclude rivals. Many economists construe the requisite power to mean the ability to foreclose equally or more efficient competitors.
6.170 The Commission analyses an undertaking’s market power on three bases: market share, barriers to entry, and countervailing buyer power.251 Of these factors, the first is most important. The CJEU has held that ‘very large shares are in themselves, and save in exceptional circumstances, evidence of the existence of a dominant position’.252 A market share exceeding 50 per cent means that, absent exceptional circumstances, an undertaking is dominant.253 That is especially so if the firm has sustained a high market share over time.254 Coming within that provision is significant because EU law imposes more onerous obligations on firms’ unilateral practices than does US law. Dominant undertakings have a ‘special responsibility’ not to impair competition.255 By contrast, the minimum market-share threshold at which Article 102 applies is less clear. Although one case found a dominant position notwithstanding a 39.7 per cent market share, it would seem that shares less than 40 per cent are unlikely to yield a dominant position.256 An important factor at the margin is whether market shares are heavily asymmetric—a References(p. 226) single undertaking with 35 per cent market share, for instance, may have considerable economic power if the rest of the market is atomized.257 Nevertheless, in the Commission’s view, a merger creating an entity with less than 40 per cent market share may still create or strengthen a dominant position.258
6.171 An important emerging principle of EU law is that ‘high market shares are not necessarily indicative of market power’ in high-tech markets ‘characterised by short innovation cycles in which large market shares may turn out to be ephemeral’.259 Much EU competition jurisprudence developed from structural views in which market concentration tells the most important story on the degree of competition within it. In the new economy, of course, Schumpeterian waves of creative destruction may allow static snapshots that indicate dominance, but in fact fail to capture dynamic effects revealing strong competition in R&D. In Cisco, the General Court thus helpfully moved away from dogmatic assumptions of market power based on market shares in innovation-driven markets.260
6.172 A common mistake is to think that, because a patentee may lawfully exclude, any market power that it exercises must be lawful.261 The existence of an IPR does not always explain—much less justify—a given patentee’s market power.
6.173 The law entitles a patentee to the market power flowing from the patent instrument, given market constraints on the patent’s assertion. When a patentee alters the commercial environment in which its IPRs lie, diluting limits on its ability to extract royalties, antitrust scrutiny may follow. The critical issue is how a patentee enhances its market power. Absent fraud, or perhaps submarine patenting by which a firm amends pending claims to exclude a rival’s existing product, a patent grant is lawful. Patent acquisitions may not be actionable if they transfer fixed market power from one entity to another.262 Eliminating competitive choice on the demand or supply side of a relevant market, however, is a different matter.
6.174 For example, consider two separately held patents that claim alternative solutions to a known problem with commercial application. If the claimed processes are (p. 227) equally valuable and the licences thus fungible, Bertrand competition may deprive both patentees of market power. If a firm acquires both patents, however, economic power may result, especially if licensees cannot design around the claims. Yes, that market power flows from valid patents and their owner’s threat to sue for infringement, but the acquired power resulted from a dissolved competitive constraint. Antitrust law properly objects.
6.175 These principles explain antitrust rules that limit patent procurement, licensing, and assertion. In all cases, courts should determine whether the impugned market power resulted from harm to competition or is simply a function of the patent grant itself. In the latter case, a patentee may enjoy lawful monopoly power or a dominant position in a relevant market.(p. 228)
1 See, e.g., U.S. Anchor Mfg. Co. v. Rule Indus., 7 F.3d 986, 1001 (11th Cir. 1993) (50 per cent); M&M Med. Supplies & Serv. v. Pleasant Valley Hosp., 981 F.2d 160, 168 (4th Cir. 1992) (30 to 50 per cent should usually be rejected).
3 See, e.g., Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 26-27 (30 per cent market share was ‘insufficient as a basis to infer market power’ in a Section 1 tying case). But see United States v. Visa U.S.A., Inc., 344 F.3d 229, 239 (2d Cir. 2003) (26 per cent in a ‘highly concentrated’ market was sufficient to create a fact question on market power).
4 Case T-219/99, British Airways v Comm’n, 2003 E.C.R. II-5917, paras. 183, 209–11 (British Airways held a dominant position despite only having a 39.7 per cent market share) (not raised on appeal, Case C-95/04 British Airways v Comm’n, 2007 E.C.R. I 2331)); Case C-250/92, Gottrup-Klim e.a. Grovvareforeninger v. Dansk Landbrugs Grovvareselskab AmbA, 1994 E.C.R. I-5641, para. 48 (an undertaking holding 32 to 36 per cent of the market ‘may, depending on the strength and number of its competitors, be considered in a dominant position’).
6 European Comm’n, Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) TFEU (De Minimis Notice), 2014 O.J. (C 291) 1, para. 8; cf. Case C-226/11, Expedia Inc. v. Autorité de la concurrence, E.C.R. __ [not yet published],  4 C.M.L.R. 14, paras. 37–38 (Art. 101 TFEU does not apply where the agreement does not have an appreciable impact on competition or trade between Member States, but by-object restrictions that affect trade between Member States have an appreciable effect on competition).
9 See, e.g., United States v. Gen. Dynamics Corp., 415 U.S. 486, 498 (1974) (‘Statistics reflecting the shares of the market controlled by the industry leaders and the parties to the merger are, of course, the primary index of market power; but only a further examination of the particular market—its structure, history and probable future—can provide the appropriate setting for judging the probable anticompetitive effect of the merger.’) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 322 n.38 (1962)); Case T-79/12, Cisco Sys., Inc. v. Comm’n, E.C.R. __ [not yet published],  4 C.M.L.R. 20, paras. 65, 69 (in markets ‘characterised by short innovation cycles in which large market shares may turn out to be ephemeral[,] ... high market shares are not necessarily indicative of market power’).
10 See Chapter 3.
12 See, e.g., United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956) (actual monopolization under Section 2); Heerwagen v. Clear Channel Communications, 435 F.3d 219, 229 (2d Cir. 2006) (same); Spectrum Sports v. McQuillan, 506 U.S. 447, 456 (1993) (attempted monopolization under Section 2); United States v. Microsoft Corp., 253 F.3d 34, 81 (D.C. Cir. 2001) (same); In re Ins. Brokerage Antitrust Litig., 618 F.3d 300, 315-16 (3d Cir. 2010) (rule of reason under Section 1); Realcomp II, Ltd v. Fed. Trade Comm’n, 635 F.3d 815, 825 (6th Cir.), cert. denied, 132 S. Ct. 400 (2011) (same); Worldwide Basketball & Sports Tours, Inc. v. NCAA, 388 F.3d 955, 961 (6th Cir. 2004) (quick-look analysis under Section 1 ‘may only be done where the contours of the market ... are sufficiently well known’); United States v. Marine Bancorp., 418 U.S. 602, 618 (1974) (Section 7).
22 Jacobs v. Tempur-Pedic Int’l, Inc., 626 F.3d 1327, 1338 (11th Cir. 2010); Cable Holdings of Georgia, Inc. v. Home Video, Inc., 825 F.2d 1559, 1563 (11th Cir. 1987); United States v. Visa, U.S.A., Inc., 163 F. Supp. 2d 322, 338 (S.D.N.Y. 2001), aff’d, 344 F.3d 229 (2d Cir. 2003).
23 Telecor Communications v. S.W. Bell Tel., 305 F.3d 1124, 1132 (10th Cir. 2002); Comm’l Data Servs. v. IBM Corp., 262 F. Supp. 2d 50, 72 (S.D.N.Y. 2003); FTC v. Swedish Match, 131 F. Supp. 2d 151, 158 (D.D.C. 2000).
25 United States v. Microsoft Corp., 253 F.3d 34, 54 (D.C. Cir. 2001); Telecor, 305 F.3d at 1136; Olin Corp. v. FTC, 986 F.2d 295, 1303-04 (9th Cir. 1993); U.S. Anchor Mfg. v. Rule Indus., 7 F.3d 986, 996 (11th Cir. 1993); FTC v. Warner Communications, 742 F.2d 1156, 1163 (9th Cir. 1984).
28 An exception may arise where an entity holds many complementary assets—such as a patent portfolio or copyright repertory—and sells them as one product. That product may be different than its constituent parts, and in rare cases may constitute a relevant market itself, even though it is comprised of complementary assets.
29 FTC v. Lundbeck Inc., 650 F.3d 1236, 1240 (8th Cir. 2011) (citing H.J., Inc. v. Int’l Tel. & Tel. Corp., 867 F.2d 1531, 1538, 1540 (8th Cir. 1989)); Worldwide Basketball & Sport Tours v. NCAA, 388 F.3d 955, 962 (6th Cir. 2004).
30 Lundbeck, 650 F.3d at 1236; SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063-65 (3d Cir. 1978); see also Forsyth, 114 F.3d at 1476 (majority) and 1483–84 (Wallace, J., concurring and dissenting); cf. In re Live Concert Antitrust Litig., 863 F. Supp. 2d 966, 985–86 n.11, passim (C.D. Cal. 2012).
39 For a controversial recent example, see FTC v. Lundbeck, Inc., 650 F.3d 1236 (8th Cir. 2011) (observing that ‘functionally similar products may be in separate product markets’ and holding that the FTC had failed to prove that two drugs were in the same market, even though they treated the same condition, because the cross-price elasticity of demand between them was low).
42 Cf. cases deeming product heterogeneity insufficient to exclude good from relevant market, e.g., EAD/SAT v. Assoc. Press, 181 F.3d 216, 228 (2d Cir. 1999); Tarrant Serv. Agency v. Am. Standard, Inc., 12 F.3d 609, 614-15 (6th Cir. 1993); and Murrow Furniture Galleries v. Thomasville Furniture Indus., 889 F.2d 524, 528 (4th Cir. 1989) with those finding that product differentiation warranted narrow market definition, e.g., United States v. Visa U.S.A., Inc., 344 F.3d 229, 239 (2d Cir. 2003); U.S. Anchor, 7 F.3d at 996; Fineman v. Armstrong World Indus., 980 F.2d 171, 199 (3d Cir. 1992); FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 121 (D.D.C. 2004).
44 DSM Desotech Inc. v. 3D Sys. Corp., 749 F.3d 1332, 1339 (Fed. Cir. 2014) (citing United States v. Cont’l Can Co., 378 U.S. 441, 449 (1964)); AD/SAT v. Assoc. Press, 920 F. Supp. 1287, 1299 (S.D.N.Y. 1996) (same).
53 See paras. 6.97–6.130.
54 See TV Communications Network, Inc. v. Turner Network Television, Inc., 964 F.2d 1022, 1025 (10th Cir. 1992) (‘[A] company does not violate the Sherman Act by virtue of the natural monopoly it holds over its own product.’). Cf. Meredith Corp. v. SESAC LLC, 1 F. Supp. 3d 180 (S.D.N.Y. 2014) (sufficient evidence of illegal monopolization to proceed to trial when copyright aggregator achieved monopoly power over its blanket-licence product by taking steps to make its product unavoidable).
55 See, e.g., Intellectual Ventures I LLC v. Capital One Fin. Corp., No. 1:13-cv-740, 2013 U.S. Dist. LEXIS 177836 (E.D. Va. Dec. 18, 2013); HCI Techs. v. Avaya, Inc., 446 F. Supp. 2d 518, 522 (E.D. Va. 2006).
57 See E.I. du Pont, 351 U.S. at 393. Nevertheless, in the few cases where no viable substitute exists for a firm’s product and where that firm takes steps to cement lock-in or eliminate choice, then there may be an antitrust problem. See Meredith, 1 F. Supp. 3d at 180; Radio Music License Comm., Inc. v. SESAC, Inc., 29 F. Supp. 3d 487, 501 (E.D. Pa. 2014).
60 TV Communications Network v. Turner Network Television, 964 F.2d 1022, 1025 (10th Cir. 1992) (‘[A] company does not violate the Sherman Act by virtue of the natural monopoly it holds over its own product.’).
73 Republic Tobacco v. N. Atl. Trading, 381 F.3d 717, 738-39 (7th Cir. 2004) (nationwide); United States v. Eastman Kodak Co., 63 F.3d 95, 104-05 (2d Cir. 1995) (global). The Supreme Court has noted that, ‘although the geographic market in some instances may encompass the entire Nation, under other circumstances it may be as small as a single metropolitan area’. Brown Shoe, 370 U.S. at 337.
75 Heerwagen v. Clear Channel Communications, 435 F.3d 219, 227-28 (2d Cir. 2006). But cf. Kaiser Aluminum & Chem. Corp. v. FTC, 652 F.2d 1324, 1330 (defining market solely based on cross-elasticity of supply is improper).
77 There are some cases, however, in which US courts have considered supply-side factors in defining the market. See, e.g., Rebel Oil v. Atl. Richfield Co., 51 F.3d 1421, 1436 (9th Cir. 1995); Kaiser Aluminum & Chem. v. FTC, 652 F.2d 1324, 1330 (7th Cir. 1981).
81 See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 307 (3d Cir. 2007); PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 107-08 (2d Cir. 2002); see also Radio Music License Comm., Inc. v. SESAC, Inc., 29 F. Supp. 3d 487, 500 (E.D. Pa. 2014). But cf. In re Remeron Direct Purchaser Antitrust Litig., 367 F. Supp. 2d 675, 683 (D.N.J. 2005).
82 Republic Tobacco Co. v. N. Atl. Trading Co., 381 F.3d 717, 737 (7th Cir. 2004); see also Worldwide Basketball & Sports Tours v. NCAA, 388 F.3d 955, 960-61 (6th Cir. 2004) (requiring market definition under Section 1, even where the ‘quick look’ rule of reason applies).
84 E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 443-44 (4th Cir. 2011); Newcal Indus. v. IKON Office Solutions, Inc., 513 F.3d 1038, 1045 (9th Cir. 2008); Todd v. Exxon Corp., 275 F.3d 191, 199-200 (2d Cir. 2001).
89 See Case T-86/95, Campagnie Générale Maritime v. Comm’n, 2002 E.C.R. II-1022, para. 116; Case T-62/98, Volkswagen v. Comm’n, 2000 E.C.R. II-2707, para. 230; Cases T-374/94 et al., European Night Servs. v. Comm’n, 1998 E.C.R. II-3141, paras. 93, 96–97, 103.
90 Cases C-68/94 and 30/95, French Republic and Société commerciale des potasses et de l’azote v. Comm’n, 1998 E.C.R. I-1375, para. 143; European Comm’n, Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings (‘EU Horizontal Merger Guidelines’), 2004 O.J. (C 31) 5, para. 10.
91 See Case T-29/92, Vereniging van Samenwerkende Prijsregelende Organisaties in de Bouwnijverheid v. Comm’n, 1995 E.C.R. II-289, para. 74, appeal dismissed, Case C-137/95 P, 1996 E.C.R. I-1611; Case 247/86, Alsatel v. S.A. Novasam, 1988 E.C.R. 5987, para. 13 (‘In order to ascertain whether a dominant position of that kind exists in a case such as this, it is necessary to assess the economic strength of the undertaking in question on the relevant market, that market to be defined from the point of view of both the activities concerned and its geographical extent.’); see also Case 27/76, United Brands v. Comm’n, 1978 E.C.R. 207, paras. 12–35, 36–57.
92 See European Night Servs., 1998 E.C.R. II-3141, para. 136 (requiring consideration of the market’s structure in Article 101 cases ‘unless it is an agreement containing obvious restrictions of competition such as price-fixing, market-sharing or the control out outlets’); Case T-213/00, CMA CGM v. Comm’n, 2003 E.C.R. II-913, paras. 208–23 (no need fully to define the market to show that a horizontal agreement having an appreciable effect and amounting to a significant restriction of price competition had as its object the restriction of competition), appeal dismissed, Case C-236/03 P, Comm’n v. CMA CGM,  4 C.M.L.R. 7.
93 See Case C-209, Competition Auth. v. Beef Indus. Dev. Soc’y, 2008 E.C.R. I-8637, para. 47; see also Cases T-68/89 et al., Società Italiana Vetro v. Comm’n, 1992 E.C.R. II-1403, para. 159 (‘[T]he appropriate definition of the market in question is a necessary precondition of any judgment concerning allegedly anti-competitive behavior.’).
95 Joined Cases 100/80 to 103/80, Musique Diffusion Française v. Comm’n, 1983 E.C.R. 1825, paras. 81–86 (large turnover figures, and self-calculated market shares of 3.38 per cent in France and 3.18 per cent in the United Kingdom that exceed the market shares of most of their competitors, meant that agreement to restrict parallel imports could affect trade under Art. 101); Case 19/77, Miller Int’l Schallplatten GmbH v. Comm’n, 1978 E.C.R. 131, paras. 9–15 (market shares hovering slightly over 5 per cent, coupled with other facts, could affect trade). See generally Case 5/69, Volk v. Vervaecke, 1969 E.C.R. 295, paras. 5–7 (‘[A]n agreement falls outside the prohibition in Article  when it has only an insignificant effect on the markets, taking into account the weak position which the persons concerned have on the market of the product in question.’).
96 Cf. Case T-61/99, Adriatica di Navigazione v. Comm’n, 2003 E.C.R. II-5349, paras. 30–32 (market definition is still required in cartel cases for legal certainty and identifying area in which the undertakings have distorted competition), appeal dismissed, Case C-111/04 P, 2006 E.C.R. I-22; Case T-62/98, Volkswagen AG v. Comm’n, 2000 E.C.R. II-2707, paras. 230–32.
105 See, e.g., Case T-30/89, Hilti AG v Comm’n, 1991 E.C.R. II-1439 (separate markets for Hilti’s gun, gun cartridge, and nails); Case 85/76, Hoffman-La Roche & Co. v. Comm’n, 1979 E.C.R. 461, paras. 21–30 (each of thirteen different groups of vitamins constituted its own market).
106 Relevant Market Notice, paras. 20–23; cf. US Dep’t of Justice & Fed. Trade Comm’n, Horizontal Merger Guidelines § 4 (2010) (‘Market definition focuses solely on demand substitution factors ... The responsive actions of suppliers are also important in competitive analysis.’).
107 OFT, Assessment of Market Power (2004) p. 27, <http://www.oft.gov.uk/shared_oft/business_leaflets/ca98_guidelines/oft415.pdf>.
109 Microsoft, 2007 O.J. (L 32) 23 (summary decision); full decision, para. 464, available at <http://ec.europa.eu/competition/antitrust/cases/dec_docs/37792/37792_4177_1.pdf>.
110 See, e.g., Case T-61/99, Adriatica di Navigazione v. Comm’n, 2003 E.C.R. II-5349, para. 27 (‘[T]he approach to defining the relevant market differs according to whether Article  or Article  of the Treaty is to be applied.’).
121 The European courts have employed the SSNIP test for this purpose. See, e.g., Case T-321/05, AstraZeneca v. Comm’n, 2010 E.C.R. II-2805, paras. 86–87, aff’d, Case C-457/10 P, AstraZeneca v. Comm’n, E.C.R. __ [not yet published], 4 C.M.L.R. 7 (2013).
124 See, e.g., Tetra Pak/Alfa-Laval, 1991 O.J. (L290) 35, para. 2.1(v); see also Eurofix-Bauco v. Hilti, 1988 O.J. (L65) 19, para. 73 (rejecting Hilti’s econometric study, which purported to show significant cross-price elasticity), aff’d, T-30/89, Hilti v. Comm’n, 1991 E.C.R. II-1439.
153 Ibid. para. 46; see also Case 27/76, United Brands v. Comm’n, 1978 E.C.R. 207, para. 51 (relevant geographic market excluded three states where United Brands’ bananas did not compete on an equal basis); Cases T-346/02 and 47/02, Cableuropa v. Comm’n, 2003 E.C.R. II-4251, para. 18 (Spanish ‘language and administrative reasons’ supported geographic market limited to Spain).
168 See Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297, 315 (3d Cir. 2007); Apple Inc. v. Samsung Electronics Co., Ltd, No. 11–CV–01846, 2012 WL 1672493, at *5 (N.D. Cal. 2012); Hynix Semiconductor Inc. v. Rambus Inc., 609 F. Supp. 2d 988, 1022 (N.D. Cal. 2009); In re Pabst Licensing, GmbH Patent Litig., Civ. MDL Dkt. 1298, 2000 U.S. Dist. LEXIS 12076, at *17–20 (E.D. La. 2000).
171 See, e.g., Carpenter Tech. Corp. v. Allegheny Techs. Inc., No. 08-cv-2907, 2011 WL 4528303, at *7–10 (E.D. Pa. 2011) (the fact that a product was patented was insufficient evidence to create a fact question whether that product constituted its own relevant antitrust market).
172 See, e.g., Broadcom, 501 F.3d at 315; Cascades Computer Innovation LLC v. RPX Corp., 12-CV-1143, 2013 WL 6247594, at *13 n.8 (N.D. Cal. Dec. 3, 2013); Tele Atlas N.V. v. NAVTEQ Corp., 397 F. Supp. 2d 1184, 1186–87, 1191–92 (N.D. Cal. 2005).
194 Intellectual Ventures I LLC v. Symantec Corp., No. 13-440-LPS, 2014 U.S. Dist. LEXIS 134255, at *13–14 (D. Del. Sept. 24, 2014). Note that Symantec involved a patent-misuse defence that, according to the court, did not require the pleading plausibility requirements of Twombly.
197 See, e.g., Elliott v. United Ctr., 126 F.3d 1003, 1004–05 (7th Cir. 1997); Jersey Asparagus Farms, Inc v. Rutgers Univ., 803 F. Supp. 2d 295, 313 (D.N.J. 2011); Bayer Schera Pharma. v. Sandoz, Inc., Nos. 08 Civ. 3710 et al., 2010 WL 1222012, at *2–6 (S.D.N.Y. Mar. 29, 2010); Inc. v. Psystar Corp., 586 F. Supp. 2d 1190, 1198 (N.D. Cal. 2008).
198 See Walker Process Equip., Inc. v. Food Machinery & Chemicals Corp., 382 U.S. 172, 178 (1965) (‘There may be effective substitutes for the device which do not infringe the patent.’); see also CCPI, Inc. v. Am. Premier, Inc., 967 F. Supp. 813, 817-18 (D. Del. 1997).
200 See, e.g., In re Cardizem CD Antitrust Litig., 105 F. Supp. 2d 618, 680-82 (E.D. Mich. 2000); Mutual Pharm. Co. v. Hoechst Marion Roussel, Inc., No. Civ.A. 96–1409, 1997 WL 805261, at *3 (E.D. Pa. Dec. 17, 1997).
206 Google/Motorola, 2012 O.J. (C 75) 1, para. 54, <http://ec.europa.eu/competition/mergers/cases/>.
207 Under EU competition law, where a practice’s anticompetitive effects lie is ‘irrelevant as regards the determination of the relevant market to be considered for the purpose of a finding that a dominant position exists’. J-6/73, Comm’l Solvents v. Comm’n, 1974 E.C.R. 223, para. 21. Accord Case C-62/86, Akzo Chemie BV v. Comm’n, 1991 E.C.R. 1-3359, para. 45.
210 See, e.g., Case T-201/04, Microsoft v. Comm’n, 2007 E.C.R. II-3601, para. 335 (‘The fact that the indispensable product or service is not marketed separately does not exclude from the outset the possibility of identifying a separate market.’).
212 That result follows because, in the case of formal standards, there is no substitute technology that constrains the standardized technology when there is a single standard. Moreover, each SEP is by definition essential since otherwise it would not be a SEP. Of course, a distinct approach would be to equate market power with hold-up power and dispense with market definition.
213 Google/Motorola, 2012 O.J. (C 75) 1, para. 54, <http://ec.europa.eu/competition/mergers/cases/>.
222 See, e.g., Breaux Bros. Farms, Inc. v. Teche Sugar Co., 21 F.3d 83, 87 (5th Cir. 1994) (for ‘per se’ tying claim, ‘possession of 17.5%, much less 9.4%, of a market is not normally sufficient’); Virtual Maintenance, Inc. v. Prime Computer, Inc., 11 F.3d 660, 664 (6th Cir. 1993) (11 per cent is insufficient for a ‘per se’ tying claim); Assam Drug Co. v. Miller Brewing Co., 798 F.2d 311, 318 n.18 (8th Cir. 1986) (19.1 per cent insufficient); Rothery Storage & Van Co. v. Atlas Van Lines, 792 F.2d 210, 221 (D.C. Cir. 1986) (6 per cent insufficient); cf. Kidd v. Bass Hotels & Resorts, Inc., 136 F. Supp. 2d 965, 969 (E.D. Ark. 2000) (less than 20 per cent market foreclosure is insubstantial).
224 See, e.g., United States v. Microsoft Corp., 253 F.3d 34, 70 (D.C. Cir. 2001) (en banc) (referencing ‘the roughly 40% or 50% share usually required in order to establish a § 1 violation’ for exclusive contracting); Wilk v. Am. Med. Ass’n, 895 F.2d 352, 360 (7th Cir. 1990) (over 50 per cent sufficient); Graphics Prods. Distribs. v. Itek Corp., 717 F.2d 1560, 1570–71 (11th Cir. 1983) (70 per cent sufficient).
227 See Eastman Kodak Co. v. Image Tech. Servs., 504 U.S. 451, 481 (1992) (citing Am. Tobacco Co. v. United States, 328 U.S. 781, 797 (1946) for the proposition that ‘over two-thirds of the market is a monopoly’); see also Spirit Airlines v. Nw. Airlines, 431 F.3d 917, 935–36 (6th Cir. 2005) (market share over 70 per cent is potentially enough); Weiss v. York Hosp., 745 F.2d 786, 827 (3d Cir. 1984) (over 80 per cent market share suffices).
229 See, e.g., PepsiCo, Inc. v. Coca-Cola Co., 315 F.3d 101, 108-09 (2d Cir. 2002) (‘Absent additional evidence ..., a 64 percent market share is insufficient to infer monopoly power.’); Bailey v. Allgas, Inc., 284 F.3d 1237, 1250 (11th Cir. 2002) (market shares of 35 to 40 per cent, and close to 50 per cent, are insufficient circumstantial evidence of monopoly); Blue Cross & Blue Shield United v. Marshfield Clinic, 65 F.3d 1406, 1411 (7th Cir. 1995) (‘50 percent is below any accepted benchmark for inferring monopoly power from market share.’). But see Broadway Delivery Corp. v. UPS, 651 F.2d 122, 130 (2d Cir. 1981).
231 See, e.g., AD/SAT v. Associated Press, 181 F.3d 216, 229 (2d Cir. 1999) (no dangerous probability with 33 per cent market share). See generally Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1438 (9th Cir. 1995) (‘[T]he minimum showing of market share required in an attempt case is a lower quantum than the minimum showing required in an actual monopolization case.’).
234 See, e.g., AD/SAT v. Associated Press, 181 F.3d 216, 229 (2d Cir. 1999) (33 per cent is insufficient); Nifty Foods Corp. v. Great Atl. & Pac. Tea Co., 614 F.2d 832, 841 (2d Cir. 1980) (a market share falling from 54.5 per cent to 33 per cent could not support a finding of a dangerous probability of success in monopolizing the market).
235 See, e.g., Energex Lighting Indus., Inc. v. NAPLC, 656 F. Supp. 914, 921 (S.D.N.Y. 1987); see also Rebel Oil, 51 F.3d at 1438 (a 44 per cent market share, supported by high entry barriers and rivals’ inability to increase output, suffices).
236 See, e.g., Tops Mkts. v. Quality Mkts., 142 F.3d 90, 99 (2d Cir. 1998); Barr Labs. v. Abbott Labs., 978 F.2d 98, 113–14 (3d Cir. 1992); Ball Mem’l Hosp., Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d 1325, 1335 (7th Cir. 1986).
238 See, e.g., ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254, 285 (3d Cir. 2012); United States v. Visa U.S.A., Inc., 344 F.3d 229, 239 (2d Cir. 2003); Toys ‘R’ Us, Inc. v. Fed. Trade Comm’n, 221 F.3d 928, 937 (7th Cir. 2000).
242 See, e.g., Intellectual Ventures I LLC v. Capital One Fin’l Corp., No. 1:13-cv-740-AJT/TRJ, 2013 U.S. Dist. LEXIS 177836, at *19–20 (E.D. Va. Dec. 18, 2013); Globespanvirata, Inc. v. Texas Instruments, Inc., No. 03-cv-2854, 2006 WL 543155, at *4 (D.N.J. Mar. 3, 2006). But cf. In re Pabst, 2000 U.S. Dist. LEXIS 12076, at *21–22.
248 As a related point, under EU law, firms can jointly occupy a dominant position and thus come within the purview of Art. 102 TFEU. The conditions for such a finding arise in concentrated markets conducive of parallel behaviour. Thus, oligopolists hold a collectively dominant position when they are economically linked in such a way as to afford them the power to behave to an appreciable extent independently of their competitors. See, e.g., Cases T-68/89 et al., Società Italiana Vetro v. Comm’n, 1992, E.C.R. II-1403, para. 358; see also Case T-193/02, Laurent Piau v. Comm’n, 2005 E.C.R. II-2585, para. 111. The concept of joint dominance receives most attention in the context of merger review, where the prospective of collective dominance justifies prohibiting a concentration. The extent to which oligopolists can violate Art. 102 TFEU by tacitly colluding remains unclear. Collective dominance would not seem to be a contemporary enforcement priority under Art. 102. See European Comm’n, Guidance on its enforcement priorities in applying Article  of the EC Treaty to abusive exclusionary conduct by undertakings, 2009 O.J. (C 45) 7, passim (not addressing the issue).
261 See, e.g., GSI Grp., Inc. v. Sukup Mfg. Co., 05-cv-3011, 2007 WL 2683737, at *5 (C.D. Ill. July 27, 2007) (‘[M]arket power from the use of patents is the consequence of a superior product or business acumen, not illegal monopolization’).