333 U.S. 364, U.S. v. United States Gypsum Co. (1948)
Abstract
The case is between United States v United States Gypsum Co 333 U.S.364 (1948). United States was the plaintiff while the United States Gypsum Company was the defendant. The case was argued on 14th and 15th November 1947. However, it was decided on 8th March 1948. The facts of the case were that the defendants had violated the Sharman Act. They acted in a manner which was likely to eliminate competition in the industry. The first defendant, who was dominant in the Gypsum industry, granted patents to another defendant who accepted them. The second defendant had full knowledge that regarding the industry. The passing of such patents would lead to price fixing of the patented board. This would eliminate competition .
Section 1 of the Sherman Act outlines the basic antitrust prohibition against contracts, business combinations and conspiracies. This relates to restraint of trade or commerce among the several States or with other foreign countries. Section 2 of the Sherman Act prohibits monopolization, any attempts to monopolize in the industry and plans for conspiracy to monopolize. All the prohibitions relate to any part or section of trade or commerce among the States or with other foreign nations. The jurisdictional reach of Sherman Act refers to non-import of foreign trade. Any violation of the Sherman Act may lead to civil or criminal offences. Some of the criminal offenses which are prosecuted under the law include price fixing, customer allocation, cartel activities and bid-rigging. Corporate defendants are legally responsible for a fine of up to $10 million. The other defendants are liable up to $350,000. An individual may be sentenced up to 3 years in prison .
Basis for the ruling and action
The market structure is the pattern or the form in which constituent parts of a particular body relating to market are arranged together. In this case, the defendants were closely related together. The Gypsum industries had an industry-wide license agreement. The agreement had been entered into with the knowledge of the licensor and licensor. The companies had been operating in a competitive market. Under the competitive market, the companies produced homogenous product, gypsum. Entering into a patent licensing agreement would lead to the abolition of competition. This is because the agreement would lead to price fixing. The action would eliminate competition, and the industry would be operating as a monopoly. Monopoly leads to market imperfections. Monopoly inefficiency is responsible for the creation of deadweight loss. Deadweight loss is the measure of how much the consumers are worse off for paying the monopoly price instead of the competitive price.
Monopoly would also lead to increase in the market power. The companies will be able to increase and maintain the prices above that what would prevail under competition. The market power is measured by the price elasticity of demand. In case of a monopoly, the consumers will have to pay for the price of the gypsum. This will lead to high prices for gypsum. The patents would act as a barrier to entry in the gypsum industry. The degree of barrier to entry was taken into consideration when making the ruling. Note 10 of the judgment states that the payment of patent royalties on the production of unpatented board was meant to lock out manufacturers of unpatented board. This was a barrier for other firms to join the gypsum industry.
Conduct that is considered anticompetitive
Conduct refers to the behaviour that firms adopt in the market in which they are carrying out operations in order to achieve well defined goals. In this case, United States Gypsum Company entered into an agreement with other firms in the industry in order to set the product prices. The action of setting the price was considered anticompetitive. United States Gypsum Company had used an anticompetitive pricing strategy through engaging other firms in price setting strategy. In a competitive market, prices are set through the interaction of market demand and supply of commodities. United States Gypsum Company had imposed barriers to entry in the industry. This was by eliminating the production of unpatented board. Manufacturers of unpatented board had to pay patent royalties.
Effect of United States Gypsum Company on other firms
Other firms would experience a reduction in the profits of other firms. United States Gypsum Company would be operating in a monopoly market. This implies that there will be no competition. As a result, its profits would increase while the profits of other firms in the industry decrease. United States Gypsum Company would impose strong barriers to entry. This implies that the production costs for the rival companies would increase due to payment of the patent royalties. Consequently, the main rivals will find it difficult to operate in the industry.
Initial legal action against the defendant
The initial legal action was that the combination by the United States Gypsum Company with other firms in the gypsum industry was unlawful. The legal action was against the defendant. The combination was for the purpose of restraining, dominating and controlling the manufacture and distribution of gypsum products in the Eastern area. This action was unlawful and resulted in non-competitive in the market. Additionally, the actions of United States Gypsum Company limited uniform manufacture of gypsum. However, the initial judgment was reversed in 8th March. The case was referred to the District Court for further hearings and proceedings.
Subsequent legal action in the case
Footnote 11 of the case states that the Supreme Court has the power to reverse the findings of any other trial court in case the findings were erroneously made. This depends on the credibility of the available witnesses. Other legal actions taken found that the defendants had not issued identical licenses to all the industry members. The action was found to be unlawful in light of the law. The patent monopoly was found to be invalid by the Supreme Court. This is according to note 10 of the judgment.
Application of the model of structure-conduct-performance in the case
The market structure of an economy determines the crucial aspect of its market conduct which in turn directly or indirectly determines certain important dimensions of the economy. There is a straight forward line between the structure, conduct and performance of an industry. According to the structure, conduct and performance model, competition is the most effective type of market structure than all the other types. In determining the applicability of the model in the case study, three steps will be followed. The first step involves determining the market structure in which United States Gypsum Company operates. The second step involves determining the behaviour adopted by United States Gypsum Company in order to increase its market share. Such behaviour involves pricing strategies, mergers and acquisition. The third step involves determining the result of the behaviour adopted in the second stage. This involves determining the level of efficiency achieved as a result of market conduct.
United States Gypsum Company operates in a competitive market structure. Under this market structure, there are many firms in the gypsum industry. Firms including United States Gypsum Company are price takers. There are many buyers for the gypsum product. In addition, there are minimal barriers to entry in the gypsum industry. Firms operating in a competitive market do not impose barriers to entry. The rulings of the case aim to discourage monopoly market structure in the gypsum industry. United States Gypsum Company aims at monopolizing the market in order to create barriers to entry in the gypsum industry. The actions of United States Gypsum Company show the first stage involved in explaining the application of the structure, conduct and performance in the case.
The second step involves examining the market conduct of the firms in the gypsum industry. The market conduct is the behaviour firms follow in order to achieve their main objectives. In the case of United States v. United States Gypsum Company, the defendant aims at maximizing profits through creating collusions and cartels. United States Gypsum Company aims at eliminating competition in the gypsum industry. In this case, United States Gypsum Company acts jointly with other firms in the industry. Through acting jointly, the firms will set the selling price for the gypsum. This reduces competition in the market. Monopoly market structure leads to profit maximization by the firms involved. The pricing strategy is the outcome of the monopoly market structure.
Finally, the application of the model is shown by the market performance of the United States Gypsum Company. The market performance is obtained from the market conduct adopted by a firm. Monopoly market structure adopted will lead to market imperfections in the gypsum industry. Despite the increase in profitability of United States Gypsum Company, the consumers will pay higher prices for gypsum than when the United States Gypsum Company was operating in a competitive market. The court ruled against the monopolizing decision in order to protect consumers.
Conclusion
According to the case of United States v. United States Gypsum Company, monopoly market structure leads to market imperfections. There is a direct relationship between market structure, conduct and performance. The performance of a business in an industry depends on the conduct the firm adopts and consequently the type of market structure.
Works Cited
Anderman, S. D. (2007). The Interface Between Intellectual Property Rights and Competition Policy. Cambridge: Cambridge University Press.
Mark D. Janis, M. A. (2001). Ip and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, Volume 1. Orlando: Aspen Law & Business.
