Kodak’s History
George Eastman and his Eastman Kodak Co. pioneered amateur photography. In a 1921 consent decree , the government concluded that Eastman Kodak monopolized the amateur photography market in violation of the Section 2 of the Sherman Act by buying competitors and imposing various forms of exclusive dealing contracts on retailers. The 1921 decree barred Kodak from “preventing dealers … from freely selling goods produced by competitors,” from hindering dealers in freely selling Kodak products, and from selling “so-called fighting brands” or any product without the Kodak name on it.
Kodak began to market a color slide film called Kodachrome in the late 1930s, and a color print film, Kodacolor, by 1954. At that time, it had over 90% of the color film market. Since Kodak sold its color film only as a package deal with processing included in the price, it also had over 90% of the color photofinishing market. The tying arrangement resulted in a government antitrust suit and a consent decree in 1954. The 1954 decree permanently enjoined Kodak from “[t]ying or otherwise connecting in any manner the sale of its color film to the processing thereof, or the processing of its color film to the sale thereof”.
Kodak’s Current Market Position
Five firms manufacture all the amateur color negative film sold in the United States: Kodak, Fuji, Konica, Agfa, and 3M. Although “there is little, if any, difference in the quality of film manufactured by Kodak, Fuji, Konica, and Agfa” in the United States, Kodak greatly outsells its rivals and commands a substantially higher price.
According to the court, Kodak accounts for about 75% of film sales in dollar terms, and about 67% of unit sales. Worldwide, it accounts for 36% of sales. As would be expected given Kodak’s share in the United States, almost all 241,000 major film retailers, such as mass merchandisers (e.g., K-Mart), food and drug stores, and camera specialty shops, carry Kodak film. By contrast, only about 71,000 outlets carry its nearest rival, Fuji, although they include the stores that sell a majority of the film in the country. Fuji’s prices are about 10% lower than Kodak at the wholesale level. The other films are available at even fewer stores, and their prices are much lower than Fuji’s.
Kodak can greatly outsell its rivals despite charging a higher price primarily because 50% of consumers in this country will buy only Kodak film regardless of price, and another 40% prefer Kodak. Another relevant factor is that Kodak provides rebates to dealers who sell extra (or only) Kodak film.
Kodak not only sells far more film here than its rivals and at higher prices, but those prices vastly exceed Kodak’s marginal costs. Kodak’s expert economist, Jerry Hausman, testified — and the district court agreed — that Kodak has an “own elasticity” of demand of approximately 2. This means that if Kodak raised prices by 5%, it would lose 10% of its sales. As the government’s expert economist, Robert Masson, explained without contradiction, an own elasticity of 2 indicates that “fifty percent of Kodak’s price is in margin above manufacturing costs”. In other words Kodak’s prices are twice its marginal costs.
“The markets for color film and color photofinishing in 1954 were indisputably controlled by Kodak”. Kodak had over 90% of the amateur color negative film market in 1954. Kodak did the photofinishing on all of its own color film, because it controlled the technology, and because its photofinishing was included in the cost of the film.
The 1954 antitrust decree introduced competition into the photofinishing industry, both by barring Kodak from tying its film and photofinishing sales, and by requiring Kodak to license the technology and provide technical assistance to other firms that desired to enter the business. Thus, by about 1968, when color film had captured half the market from black and white film, Kodak was processing less than 5% of its own film. Moreover, in 1977 the first minilab was installed in the United States. The minilab does on-site photofinishing in about an hour. Because of their convenience these small labs expanded rapidly through the 1980s, and now account for about one-third of the photofinishing done in the United States. Macrolabs (including both wholesale and captive labs) have remained viable because they are somewhat less expensive per photo, but they have had to start providing faster service, and overnight wholesale service has become the norm. While there has obviously been interplay between the different types of labs, each has its own niche. Macrolabs cannot provide one-hour service, but minilab costs per print are higher, and they cannot handle the volume of work required by large retail customers. Thus, retailers, such as department stores, food stores, and drug stores, use macrolabs.
Since 1986, Kodak has reclaimed a large market share in photofinishing by making several acquisitions. The most important of these was a joint venture to establish Qualex, Inc. Qualex grew rapidly, largely by acquisition, to a nationwide chain of 65 labs that had 70% of the nation’s wholesale macrolab photofinishing market; at present, three firms — Qualex, Konica, and Fuji — have 95% of the wholesale photofinishing business.
DISTRICT COURT’S RULING
The district court terminated both decrees in their entirety. It stated that it was applying the standard for modifying decrees set forth in Rufo v. Inmates of Suffolk County Jail, 112 S. Ct. 748 (1992), which, in its view, allowed the court “to modify the decrees to fit changes in market conditions”.
The court determined that Kodak no longer had market power, which it defined as the “power of controlling prices or unreasonably restricting competition,” with respect to the sale of film. In doing so it found the relevant geographic market to include not only the United States, but also Western Europe and Japan. In that “world” market Kodak has only a 36% share, clearly not enough to infer market power. Alternatively, even in a geographic market limited to the United States, the court found no market power, despite Kodak’s share of 67% (by units) and 75% (by dollars). It held that “[p]rice elasticities are better measures of market power” than market share data. It found that Kodak had an own elasticity such that if it raised the price 5%, it would lose 10% of sales — an own elasticity of 2. It accepted Dr. Hausman’s representation that this finding is incompatible with the possession of market power. It found that, despite the equal quality of competing film, “Kodak is obtaining a ‘premium’ price for its products in some retail outlets”. But it determined that “Kodak’s price premium is not evidence of market power acquired illegally, but of the perceived quality difference that exists in the minds of consumers who are satisfied with Kodak products”.
“Having found that Kodak does not possess market power in film”, the court had little trouble concluding that the various decree restrictions should be removed.
The court stated that this decree was designed to dismantle Kodak’s technological dominance of the color film photofinishing industry, by requiring Kodak to license and give technical information to competing photofinishers. Finding that the decree had accomplished its essential purpose of creating a competitive photofinishing market, and that neither Kodak nor its affiliate Qualex has power in that market, it thought that allowing Kodak to bundle film and photofinishing would be pro-competitive.
ARGUMENTS CHALLENGING THE DISTRICT COURT’S RULING
The District Court erred in terminating the decrees on the ground that Kodak lacks market power.
The fundamental question for the district court was whether Kodak proved that it no longer has market power in film. In answering that question, the district court made several key findings of fact which, especially when added to important pieces of undisputed evidence, cannot be reconciled with an ultimate conclusion that Kodak carried its burden of establishing that it lacks market power. We believe that the district court’s conclusion as to market power flowed directly from its legally erroneous failure to hold Kodak strictly to its burden. And, in any event, an ultimate conclusion as to market power that is incompatible with the court’s own supporting findings of fact and the undisputed evidence constitutes clear error.
The court’s own findings establish, first, that Kodak sells film no better than its rivals’ at a higher price. That Kodak film sells at a premium is obvious from the difference between Kodak’s share of U.S. film sales measured in units (67%) and measured in dollar volume (75%). It reflects a Kodak price premium over its nearest rival, Fuji, of at least 4.5% at the retail level and at the more relevant wholesale level of 10%. Kodak has even higher premiums over other competing brands. Second, Kodak’s 67%-75% share of U.S. film sales is only slightly below the 75%-80% share found by Judge Hazel in 1915 when he held that Kodak had monopolized film. Third, Fuji, despite selling film of equal quality at 10% under Kodak’s price, has been unable to garner more than 10% of U.S. sales. Finally, Kodak faces a demand elasticity of 2, which indicates that it is pricing at twice its marginal cost. All this is possible because 50% of consumers will not buy any other brand of film regardless of price, and another 40% prefer Kodak film.
We submit that these findings and undisputed facts are sufficient for this Court to hold that Kodak in fact does have market power, order the reinstatement of the decrees, and thus obviate further district court proceedings in this protracted matter. At the very least, a reversal and remand is necessary for the district court to assess the evidence under a correct legal standard.
Previous cases have determined that market power is “the ability to raise prices above those that would be charged in a competitive market.” Monopoly power is a significant degree of market power. It is at the heart of this case and most antitrust cases, because the ability to act anticompetitively depends on the possession of market power. If Kodak still has such power, it can exercise it to the detriment of consumers, and there is abundant reason to maintain the decrees.