Tuesday, September 26, 2006

Gratuitous Antitrust Post: It All Depends on What Your Definition of "Market" Is

NOTE: Given that the author is a legal professional, he is required to occasionally post on matters of law in the public interest to keep his blogging license. So as not to turn off regular KAR readers who read this thunderjournal for it's less gravitas-intensive qualities, the author has agreed to insert one or more of KAR's quality running gags that the 30 or so regulars have come to expect from this great blog. Thank you for your patience.

Good news for you if you hate globalization and corporate greed:

Starbucks is gettin' sued!

LOS ANGELES (Reuters) - The owner of a small coffee company sued Starbucks Corp. (SBUX.O: Quote, Profile, Research) on Monday, claiming the coffee shop's anti-competitive business practices put her store out of business.

The suit, which seeks class action status, was filed in Seattle federal court by Penny Stafford, the owner of Belvi Coffee and Tea Exchange Inc.

According to court papers, Starbucks violated federal antitrust laws by leasing prime commercial real estate at above-market prices in return for the exclusive right to sell espresso drinks or specialty coffee in those locations.

Poop poopy poop poop.

As your Friendly Sherman Act Ambassador of Goodwill, I am obliged to comment on this. This is a monopolization case. That is, the plaintiff here needs to prove two things to win: 1) Starbucks has a monopoly in her market; and 2) Starbucks is doing things to squeeze out competitors in that market by means other than competition on the merits (i.e. price and quality).

Now I know what you're saying. You're saying, "Whoa there little pardner! I'm sipping a quality half-caf chai latte slim frappapoopaccino from Caribou Coffee as I read this. You have to be some kind of rediculous looser to believe that Starbucks has a monopoly!"

To which I say: hold on one minute there, Mr. Poopy Pants. You can have a monopoly without being the only game in town. The chief indicator of a monopoly is not whether or not everybody in your town is toting a white cup with an ugly green logo and some stupid bromide on it. What makes a monopoly is whether or not a given firm can reduce output (and thus increase price) in a given geographic area profitably. That's it. For you econ types, here's a familiar chart:

If one surveys the various cases passing on the question of whether or not a given firm has a monopoly (NOT recommended!), you'll find that the market share necessary to reduce output profitably is around 70% and above (although that number is probative, it is not dispositive, as will be explained shortly). So let's go to the numbers:

Starbucks is the world's largest coffee shop chain, with more than 12,000 locations in 37 countries. The lawsuit alleges the chain "possesses monopoly power" because it has "at least" a 73 percent market share of the U.S. coffee shop industry.

Starbucks has said it has a less than 8 percent market share of all coffee consumed in the United States.


Well, that doesn't really clear it up now does it? Sounds like we have the proverbial "genuine issue of material fact." I mean really that's a spread as disparate as one normally seen between the Strib's Minnesota Poll and reality. So who's right?

Well, it depends on how you define the market. Starbucks would naturally apply a super-broad market definition to get that 8% figure, while a plaintiff salivating at the thought of treble damages would plane away as much as she could to get that figure above the magic 70% threshold.


No problemo. Let's put geography aside because it is always case specific and would require us to assume things which we do not know. The calculus that goes into defining a product market can be even more difficult. There are a lot of moving parts. Look at the following list of beverages:

1) Everclear 90 Proof Grain Alcohol
2) Jack Daniels
3) Kendal Jackson Red Zinfandel
4) Night Train
5) Guinness
6) Grain Belt
7) Coke
8) 7-up
9) Tropicana Pure Premium OJ
10) Hi-C Juice-like Beverage Product
11) Kool aid
12) Evian
13) Gatorade
14) Tap water
15) Brackish water

Which if any of those things would be in the same product market? Do you define one market, in numbers 1 to 6, as an alcoholic beverages market? Or is that insufficient? Do each represent their own markets - Suicide liquor, mid-grade whiskey, wine of the Zinfandel varietal, wine of the wino varietal, import beer, shit-tacular beer?

How specific does one get? If you have a geographic market that is inhabited by very very desperately thirsty people, couldn't you make the case that all these liquids are in the same market?

You could also make the case that Everclear has a monopoly on the hyper-flammable-unfit-for-human-consumption vodka market. But if it's merely distilled spirits you're looking at, it's not even close. Could Everclear reduce its output profitably? Is it already at a monopoly price?

And how would you go about proving any of that in court?

QUICK DIGRESSION: Bobo has some thoughts on Everclear.

This is what makes antitrust litigation so damn interesting to me.

So in the Starbucks case, you can see that the small coffee shop owner is trying to define the market as "all retail coffee outlets that sell a certain grade of coffee and coffee products prepared over the counter, within these 5 square blocks" or, in other words, "anything that looks like a starbucks outlet near my shop".

Conversely, Starbucks will try to prove how small its share of the market is by defining the market as "each and every firm that sells coffee in any form, including grocers who sell crap like Maxwell House, in the entire universe."


There, I've done my lawyerly duty. Back to booger, poop, and leftyblogger jokes.

(Bananaman: feel free to incorporate this post into your lesson plan.)

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