IV. When Is Single-Share Analysis Applied to Competitor Collaborations?
The members of joint ventures may eliminate three types of competition among themselves. First, the members may stop competing against each other outside of the joint venture, i.e., they will refrain from independent business activities outside of the venture which are related to the joint venture market. Second, the members may not compete on price or output within the joint venture.(48) Finally, members may not compete against the joint venture through participation in other ventures.
When all three types of "insider competition"(49) are eliminated, single-share analysis(50) may be used in assessing a venture's competitive effects in markets affected by the joint venture. Because the parties will, by definition, end all competition between themselves through the creation and operation of the joint venture, their collaboration can be assigned a single market share, as is done in merger analysis.
This section examines cases where courts have applied single-share analysis to joint ventures that have eliminated insider competition.(51) The first part discusses the use of single-share analysis to predict the competitive effects of exclusive joint ventures between actual competitors. The second portion examines the application of single-share analysis to predict the competitive effects of exclusive collaborations between potential competitors. The final section focuses on the use of single-share analysis to assess the effects of restraints among competitors that have already combined their activities in a joint venture.
A. Predicting the Market Power of Actual Competitors Who Will Cease Competing Against Each Other and Their Collaboration in the Joint Venture Market
The formation of joint ventures between actual competitors raises issues similar to those assessed under conventional merger analysis. Merger analysis may be useful in predicting the effects of transactions in which the parties contribute all of their productive assets in the relevant market to the collaboration and jointly determine output and price. Even when these ventures are of limited duration, and even if the parties retain a legal right to withdraw from the collaboration, they may result in the same short-term anticompetitive effects as a merger.(52)
Perhaps the most exhaustive review of a joint venture under merger analysis occurred in United States v. Ivaco, in which the district court granted a preliminary injunction against a joint venture between the two leading manufacturers of automatic railroad tampers.(53) Under the joint venture agreement, the two companies would have shared equal ownership and control and would merge their automatic tamper and railway maintenance of way businesses.(54)
According to the district court, "analysis of whether the proposed transaction will injure competition does not differ materially when the transaction is characterized as joint venture rather than a merger."(55) The court first defined the relevant product market as automatic tampers. The defendants argued that the market consisted either of a cluster of tamper markets (manual, conventional and continuous) or of entirely separate tamper markets. The court found that the defendants' argument for a cluster market was premised upon low entry barriers, but asserted that low entry barriers would be inconsistent with their argument that the joint venture was necessary to compete in the continuous action tamper market.(56) The court then determined that the government had made a statistical showing of prima facie illegality; the HHI in the relevant market would increase from 3549 to 5809.(57) The court also pointed to extensive evidence that the defendants had previously competed vigorously, engaging in drastic price-cutting before the formation of the joint venture.(58)
The defendants offered two primary contentions to rebut the government's prima facie statistical showing of illegality: (1) the partners were failing firms in a declining market, and (2) the collaboration would be able to develop innovative products. The court rejected both of these arguments. After finding that neither firm's exit from the market was imminent or inevitable, the court ruled in the alternative than even if one firm would soon exit without the joint venture, "the resulting market structure would be 'natural,' in the sense that it would be the product of competition rather than the product of a transaction between the two biggest competitors in that market."(59) The court also found that although the venture may have been the most attractive financial method for innovation, there were less restrictive alternatives available, such as vertical joint ventures with major railroad customers.(60) Finally, the court expressed skepticism that efficiencies produced by joint venture integration would facilitate innovation, noting that it was "unpersuaded that the cost savings would, in fact, be high enough to fund the development of the new machine without the imposition of price increases on the current products."(61)
The court's analysis in Ivaco underscores the circumstances in which it can make sense to apply single-share analysis to joint venture formation. The collaboration clearly would have ended all price and output competition between the parties in the relevant market. The potential anticompetitive effects of the transaction were essentially the same as those that would result from a merger between the parties. Using historic market share data, the court assigned a single "post-joint-venture" market share to the parties to assess the likely market power of the joint venture in the relevant market. After finding that the defendants had failed to rebut the government's showing of likely anticompetitive effects, the court enjoined the transaction.(62)
B. Predicting the Market Power of Potential Competitors Who Will Cease Competing Against Each Other and Their Collaboration in the Joint Venture Market
Joint ventures between potential competitors involve many of the issues that arise in transactions among actual competitors, including market definition, market share calculations, and competitive effects analysis.(63) Potential competition analysis requires the comparison of two futures: (1) a future with the joint venture, in which the potential entrant becomes an actual entrant, but as a member of the joint venture, and (2) a future without the joint venture, in which the potential entrant may either enter the market independently or be perceived by incumbent firms as likely to enter.(64) Courts and agencies must determine whether the potential entrant will exert a more procompetitive force, on the one hand, by entering through collaboration or, on the other hand, by entering independently or remaining (for the time being) outside of the market. Joint ventures involving potential competitors may raise more complex market power issues than transactions between actual competitors because the impact of the potential entrant (with and without the joint venture) may be more difficult to assess.
The Supreme Court addressed these complexities in United States v. Penn-Olin Chemical Co.(65) Pennsalt and Olin Mathieson formed Penn-Olin to produce and market sodium chlorate in the southeastern United States. Although both had considered independent entry, management from both companies had rejected that possibility in the years preceding the joint venture.(66) In 1960, Pennsalt and Olin Mathieson formed Penn-Olin. Each company made equal contributions, owned 50% shares, and assumed joint control. Penn-Olin added 26,500 tons of manufacturing capacity to a market that had previously been dominated by two producers with a total of 54,500 tons of capacity. By 1962, a fourth competitor, PPG, entered the market with 15,000 tons.
The Justice Department attempted to enjoin the joint venture under § 1 of the Sherman Act and § 7 of the Clayton Act. The district court dismissed both counts. The government appealed the lower court's holding that under § 7 the government had to show that both companies were probable actual entrants in the southeastern market to prevail.
The Supreme Court found that the joint venture may have reduced competition that had existed and would have existed in the absence of the transaction. The Court reasoned that the formation of the joint venture eliminated the potential competition that both companies offered on the periphery of the market: "[t]he existence of an aggressive, well equipped and well financed corporation engaged in the same or related lines of commerce waiting anxiously to enter an oligopolistic market would be a substantial incentive to competition which cannot be underestimated."(67) The Court pointed to the dramatic expansion of capacity by the two dominant southeastern manufacturers once they caught wind of potential entry from Olin Mathieson and Pennsalt.(68)
The Court also articulated factors that made independent entry reasonably likely for either joint venture partner: (1) rapid market expansion; (2) technical know-how; (3) reputation; and (4) attractive profitability.(69) According to the Court, "[u]nless we are going to require subjective evidence, this array of probability certainly reaches the prima facie stage. As we have indicated, to require more would be to read the statutory requirement of reasonable probability into a requirement of certainty."(70) The Court remanded the case to the district court to determine whether one of the two companies would have entered, while the other would have remained a strong potential competitor.(71)
Another case involving a joint venture between potential competitors was Yamaha Motor Co., Ltd. v. Federal Trade Commission.(72) Brunswick, the second-largest manufacturer of outboard boat engines in the United States, established a production joint venture with Yamaha, a Japanese manufacturer that had previously but unsuccessfully attempted to enter the United States market. Under the terms of their agreement, Yamaha and Brunswick formed Sanshin, a joint venture company in which each parent would have a 38% ownership share. Yamaha would appoint six of Sanshin's directors; Brunswick would appoint the remaining five. The joint venture was scheduled to last ten years and would be renewed every three years in the absence of three years' notice that either partner wished to terminate the venture. Under the terms of their agreement, Sanshin would sell all of its production to Yamaha, which would subsequently resell a portion to Brunswick. Brunswick retained the exclusive right to sell Sanshin products in the United States, marketing the venture's production under the "Mariner" logo. Yamaha pledged not to manufacture similar engines outside of the venture. Although the United States market was enjoying rapid growth, it had become very concentrated. The top two producers (including Brunswick) produced 72.9% of new units and controlled 85% of dollar sales.
In the first stage of litigation at the FTC, the Administrative Law Judge concluded that although Yamaha was a potential entrant in the high-horsepower engine market, independent entry was unlikely.(73) The ALJ also concluded that the joint venture was procompetitive because it added Brunswick's Mariner line to a concentrated United States market.
The Commission reversed, finding that Yamaha was an actual potential entrant, that Mariner was not a new "entrant," and that three collateral agreements were also anticompetitive.(74) The Eighth Circuit held that Commission had relied on substantial evidence that the joint venture would substantially lessen competition, agreeing that Yamaha had the means to enter the American market independently, and that its independent entry would have produced significant deconcentration.(75) The court pointed to evidence that Yamaha had already attempted to enter the United States market, was well-known for its technical expertise, and would not avoid entering the most profitable market in the world in the absence of the joint venture.(76)
Brunswick argued that the joint venture would nevertheless offer significant procompetitive effects. First, it argued that the temporary nature of the agreement limited any potential for anticompetitive effects. The Eighth Circuit, however, found that the joint venture agreement was only "terminable," not temporary.(77) Second, Brunswick argued that the joint venture would enhance Yamaha's ability to enter and expand in the United States market after the joint venture ended. Once again, the Eighth Circuit disagreed, observing that Sanshin's production capacity existed before the joint venture agreement, and that subjecting Yamaha's capacity to control by Brunswick "did not bring into the market an additional independent decisionmaker, as Brunswick would have us believe, but only added to the productive capacity of the second largest firm in a four-firm-dominated industry."(78) The court also looked at the nature of the agreement in determining that it would result in anticompetitive effects. The chairman of Mariner (Brunswick's joint venture line) had been the president of Mercury (Brunswick's self-produced North American line), and would presumably maximize the profits of both lines of Brunswick products. Perhaps most significantly, collateral agreements between Yamaha and Brunswick limited the joint venture's cannibalization of Brunswick's North American products.(79)
In Brunswick and Penn-Olin, the Commission and the courts identified the central market power issue raised by joint ventures between potential competitors: the elimination of potential competition may enable incumbent firms to raise or maintain prices above competitive levels in the relevant market. Although the venture in Brunswick appeared to add new production to the United States market, the court and Commission correctly pointed out that the capacity existed before the formation of the joint venture, and that Yamaha probably would have used it to enter the United States market independently. It appears that Brunswick was attempting to protect its dominant position in the United States market by excluding a significant potential entrant and expanding its own share of production. The facts in Penn-Olin, however, were less clear. Neither company was an actual competitor in the market, and neither had constructed additional capacity before the collaboration. Instead, the venture created additional capacity in a heavily concentrated market. Even if the joint venturers were perceived independent potential competitors that stood on the periphery of the market, their actual entry through the joint venture may have been more effective in reducing the ability of incumbent firms to exercise market power. Both cases suggest that courts and agencies should be careful to distinguish joint ventures that permit incumbent firms to expand their market power from collaborations that facilitate entry and expansion in the relevant market.
C. Assessing the Market Power of Firms that Have Ceased Competing Against Each Other and Their Collaboration in the Joint Venture Market
Courts and agencies have also used single-share analysis to assess competitive effects where firms that have already combined all of their productive assets in the joint venture market. In cases involving such joint ventures, the parties are assigned a single market share reflecting all production, purchases, or sales of the collaborators in the relevant market. When single-share analysis has revealed significant market shares, courts and agencies have conducted more detailed inquiries into possible anticompetitive effects. When, on the other hand, the parties's output has represented only a small portion of the relevant market, some courts have found that any non-per-se-illegal agreements between the parties could not result in anticompetitive effects.
One case that demonstrates the potentially dispositive role of market shares is Rothery Storage & Van Co. v. Atlas Van Lines, Inc.(80) In Rothery, the D.C. Circuit addressed whether a joint venture's restrictions violated § 1. The defendant was a national moving company comprised of individual agents responsible for shipping goods under the Atlas logo. Atlas passed rules permitting it to refuse to deal with members that handled non-Atlas interstate carriage without Atlas' approval unless the agent created a separate company for non-Atlas operations. The plaintiffs alleged that the joint venture's new rules represented a concerted refusal to deal that unreasonably restrained trade.
After rejecting the plaintiffs' claim that the new rules were per se illegal, Judge Bork assessed their contentions under the rule of reason. According to the court, "[a]nalysis might begin and end with the observation that Atlas and its agents command between 5.1% and 6% of the relevant market, which is the interstate carriage of used household goods. It is impossible to believe that an agreement to eliminate competition within a group of that size can produce any of the evils of monopoly."(81) The court shored up its conclusions about Atlas' market power by conducting an analysis under the 1984 Merger Guidelines, finding that the HHI of the relevant market was 520, far below the threshold required for more detailed analysis.(82) But the court cautioned that even if HHI analysis had revealed a concentrated market, the arrangement would not necessarily violate § 1. According to the court, HHI analysis applies to mergers reviewed under § 7, which allows courts and agencies to prevent transactions beyond the scope of the Sherman Act. Under § 1's rule of reason, the court would require a stronger showing of market power.(83)
According to the court, drawing inferences from traditional market power analysis was legitimate and manageable because "[a]ntitrust adjudication has always proceeded through inferences about market power drawn from market shares."(84) The court found that market share analysis should be applicable to horizontal restraints among joint venture partners:
A joint venture made more efficient by ancillary restraints is a fusion of the productive capacities of the members of the venture. That, in economic terms, is the same thing as a corporate merger. Merger policy has always proceeded by drawing lines about allowable market shares and these lines are based on rough estimates of effects because that is all the nature of the problem allows. If Atlas bought the stock of all its carrier agents, the merger would not be challenged even under the Department of Justice Merger Guidelines because of inferences drawn from Atlas' market share and the structure of the market. We can think of no good reason not to apply the same inferences to Atlas' ancillary restraints.(85)
Because Atlas had a low market share, the court presumed that its exclusivity requirements were efficient. But the court would not have held the opposite to be true.(86) Judge Bork's opinion thus makes market power dispositive only if the joint venture lacks it.(87)
Other courts have applied single-share analysis to find that an absence of market power eliminated concern under the rule of reason.(88) But most of these courts have also examined the actual effects of the collaboration and its restrictions in the relevant market.(89) Single-share analysis is therefore not the only factor in determining whether competitor collaborations have harmed consumers.(90) Plaintiffs also may show that joint ventures have resulted in anticompetitive effects on price or output in the relevant market.(91) Conversely, defendants may show that joint ventures have had a procompetitive impact despite high market shares.(92) Thus, even in the case of joint ventures that eliminate insider competition, single-share analysis may not be dispositive in determining whether a collaboration has resulted in anticompetitive effects.
48. In this form of collaboration, members do not make independent decisions about the price or level of joint venture output. Even if parties continue to compete against each other outside of the venture, they may agree not to compete on price or output within the joint venture. Conversely, parties that cannot or do not compete against each other outside of the collaboration may still compete on price and output within the joint venture.
49. Steven Salop has labeled these three types of rivalry "insider competition," a term that will be used for the remainder of the paper. Steven C. Salop, When and How Is it Proper for Competitors to Collude, at 225, in OSSERVATORIO GIORDANO ELL'AMORE SUI RAPPORTI TRA DIRITTO ED ECONOMICA DEL CENTRO NAZIONALE DI PREVENZIONE E DIFESA SOCIALE, THE VALUE OF COMPETITION 218 (1992).
50. As discussed above, "single-share analysis" means that the venture and its members are assigned a single market share in analyzing the market power of the collaboration. If the HHI is used to analyze the formation of a joint venture, the "single-share" approach treats the collaboration as a merger between the members in markets affected by the venture.
51. Circumstances in which one or more forms of "insider competition" remain (i.e., are not eliminated) are discussed in Section V infra.
52. Especially because such ventures may dissolve and the members return to individual competition, the competitive analysis may require an examination of matters such as spillover effects and collateral agreements as well. A discussion of those issues is beyond the scope of this paper.
53. 704 F. Supp. 1409 (W.D. Mich. 1989).
54. Id. at 1412.
55. Id. at 1414.
56. Id. at 1417 n.4.
57. Id. at 1419.
58. Id.
59. Id. at 1425.
60. Id. at 1425-26.
61. Id. at 1427.
62. For other cases applying § 7 to joint ventures that eliminated price and output competition among the parents in the joint venture market, see Federal Trade Commission v. Warner Communications, Inc., 742 F.2d 1156, 1159 (9th Cir. 1984) (preliminary injunction against exclusive joint venture between two of the top six distributors of prerecorded music which might facilitate tacit collusion); Federal Trade Commission v. Harbour Group Investments, L.P., 1990-2 Trade Cas. (CCH) ¶ 69,247 (D.D.C. 1990) (enjoining exclusive joint venture between the last two competitors in the relevant market); Union Carbide Corp. v. Montell, N.V., 1996-2 Trade Cas. ¶ 71,650 (S.D.N.Y. 1996) (denying motion to dismiss § 7 claim against formation of joint venture between polypropylene producers in heavily concentrated market). For a less restrictive view of exclusive joint ventures between actual competitors, see The Treasurer, Inc. v. Philadelphia National Bank, 1988-1 Trade Cas. ¶ 67,943 (D.N.J.) (permitting exclusive ATM network to acquire assets of direct competitor), aff'd mem., 853 F.2d 921 (3d Cir. 1988), discussed infra at 44-45.
63. Cf. United States v. Engelhard Corp., 1997-1 Trade Cas. ¶ 71,773 (M.D. Ga. 1997) (dismissing § 7 case against the formation of a joint venture between incumbent and new entrant where court found that government failed to define proper product market).
64. See Joseph Kattan, Antitrust Analysis of Technology Joint Ventures: Allocative Efficiency and the Rewards of Innovation, 61 Antitrust L.J. 937, 947 (1993) ("In the context of potential competition, the analysis follows the same structural paths but asks whether the removal of a potential entrant will either diminish existing constraints on incumbent firms' ability to price supracompetitively (perceived potential competition) or eliminate future entry that may undercut incumbents' existing ability to price supracompetitively (actual potential competition).").
65. 378 U.S. 158 (1964) (hereinafter, Penn-Olin).
66. Id. at 166-67.
67. Id. at 173-74.
68. Id.
69. Id. at 174-75.
70. Id. at 175.
71. On remand, the district court concluded that neither firm was reasonably likely to enter the market independently, and allowed the joint venture to proceed. See United States v. Penn-Olin Chemical Co., 246 F. Supp. 917, 928 (D. Del. 1965), aff'd per curiam, 389 U.S. 308 (1967).
72. 657 F.2d 971 (8th Cir. 1981), cert. denied, 456 U.S. 915 (1982).
73. Id. at 975.
74. Id.
75. Id. at 977.
76. Id. at 977-78.
77. Id. at 979.
78. Id. at 980.
79. Id. at 981. The court also objected to a collateral agreement prohibiting Yamaha from manufacturing any similar engines outside of the joint venture, which prevented it from marketing products in competition with the Mercury or Mariner lines in the United States.
80. 792 F.2d 210 (D.C. Cir. 1986) (hereinafter Rothery), cert. denied, 479 U.S. 1033 (1987).
81. Id. at 217.
82. Id. at 220. In conducting the HHI analysis, the court assumed that Atlas' restrictions would effectively preclude all independent operations by its agents, i.e., that the rules would prevent members from competing with each other or the venture through non-Atlas operations.
83. Id.
84. Id. at 230 n.11.
85. Id. at 230.
86. Id. at 220 ("We do not mean to suggest that if the HHI were higher and within one of the more concentrated categories, the arrangement would necessarily be illegal.").
87. Although concurring in the court's ruling, Judge Wald attacked a market power safe harbor as inconsistent with Supreme Court precedent. According to Judge Wald, "nothing in BMI, NCAA, or Pacific Stationery supports the panel's new per se rule of legality." Id. at 230. Instead, Judge Wald found it preferable "to proceed with a pragmatic, albeit nonarithmetic and even untidy rule of reason analysis, than to adopt a market power test as the exclusive filtering-out-device for all potential violators who do not command a significant market share. Under any analysis, market power is an important consideration; I am not yet willing to say it is the only one." Id. at 231-32.
88. See, e.g., Retina Assocs., P.A. v. Southern Baptist Hosp. of Florida, Inc., 1997-1 Trade Cas. ¶ 71,722 (11th Cir. 1997) (adopting district court's opinion granting summary judgment to opthamology collaboration which controlled only 15% of referrals in the relevant market).
89. See, e.g., Metro Industries v. Sammi Corp., 82 F.3d 829 (9th Cir.) (affirming summary judgment for exclusive marketing joint venture where plaintiff failed to offer sufficient evidence of market power or actual anticompetitive effects), cert. denied, 117 S. Ct. 181 (1996).
90. See, e.g., General Leaseways, Inc. v. National Truck Leasing Ass'n, 744 F.2d 588, 596 (7th Cir. 1984) (affirming preliminary injunction against enforcement of joint venture exclusivity requirements where plaintiff offered evidence of high entry barriers and greater profits in local markets with fewer competitors).
91. See, e.g., NCAA, 485 U.S. at 105 n.29 (exclusive joint venture's joint marketing of college football telecasts resulted in fewer games on television); Key Enterprises of Delaware, Inc. v. Venice Hosp., 919 F.2d 1550, 160 n.7 (11th Cir. 1990) (though exclusive venture reduced HHI in relevant market from 5708 to 4780, it resulted in actual anticompetitive effects), vacated and reh'g granted, 979 F.2d 806 (1992), appeal dismissed, 9 F.3d (1993), cert. denied, 114 S. Ct 2132 (1994).
92. See, e.g., Sewell Plastics, Inc. v. Coca-Cola Co., 720 F. Supp. 1196, 1213 (W.D.N.C. 1989) (granting summary judgment to exclusive input production joint venture possessing 40% of relevant market where collaboration had reduced prices in the input market), aff'd per curiam, 912 F.2d 463 (4th Cir. 1990), cert. denied, 498 U.S. 1110 (1991); Belcher Oil Co. v. Florida Fuels, Inc., 1991-1 Trade Cas. (CCH) ¶ 69,375 (S.D. Fla. 1991) (granting summary judgment for exclusive collective buying arrangement that ensured survival of new entrant in upstream market).