In 1947, the US government instituted a case against E.I. DuPont de Nemours and Company for violation of s 2 of the Sherman Act. DuPont was charged for monopolizing, attempting to monopolize, conspiring to monopolize interstate commerce in cellophane and cellulosic cap. The District Court, however, dismissed the case on the grounds that cellophane is only a part of the market of flexible wrapping materials. Despite selling 75% of cellophane in the US, cellophane constituted only less than 20% of the flexible wrapping materials. The plaintiff filed an appeal with the Supreme Court contesting the lower court’s finding that the defendant was not liable for the monopoly of cellophane.
The Sherman Act
The law relied upon by the government was s 2 of the Sherman Act. Section 2 imposes fine or imprisonment or both for any person guilty of monopolizing, attempting to monopolize, or combining or conspiring to monopolize interstate or international commerce. DuPont’s alleged violation of this provision was the acquisition and maintenance of a position that allowed it to monopolize the market.
Rationale for the Supreme Court Decision
Extent and Trend in Competition. Between 1928 and 1950, there was an expansion, according to the Court, of commodity-packaging habit because of the efficient marketing of merchandise brought about by increasing competition.
a) Market structure. According to the Court, the delineation of one market from other markets is not determined by physical similarities, but by substitutability. Thus, DuPont did not have monopoly over cellophane because customers can use other alternative products in the flexible wrapping materials market, even though DuPont sells 75% of the cellophane in the US.
b) The line of products in question (cross elasticity of demand). According to the Court, cellophane has a high interchangeability with other products in the market. Evidence showed that consumers were sensitive to price changes of cellophane so that any slight decrease in its price triggered consumers to switch to other products. Moreover, according to the Court, cellophane constituted only 20% of the flexible wrapping market.
c) Geographical domain of the product and its relation to ‘monopolization’ or ‘dominance.’ Cellophane produced by DuPont is being sold throughout the US, but constituted only 20% of the flexible wrapping materials sold throughout.
d) Trend in the firm’s profits. There was increase in sales of plain and moisture-poof cellophane by the defendant between 1928 and 1950, which the Court had attributed to the expanding trend in commodity-packaging habits, the developments in chemical research and the production of synthetics. The increasing profits, thus, could not be attributed to the elimination of competitors that would have pointed to a monopoly.
e) Growth in market power. The firm’s growth in market power is due to its expansion efforts of operations into a bigger geographic area that included the North and Central Americas, as well as efforts in research to perfect the moisture-proof quality of its cellophane.
f) Barrier to entry. Initially, DuPont entered into license agreements and technical agreements with other companies to sell its products in limited areas, but these licenses were eventually canceled. Those not covered by any agreements, such as Sylvania, cannot be prevented by DuPont to manufacture their cellophane products in the US.
g) The conduct in question. The conduct in issue of DuPont was that it engaged in monopoly and attempt to monopolize trade over cellophane, by acquiring and maintaining a monopoly position, in violation of the law, over cellophane, and dominating cellophane production by producing 75% of cellophane sold in the US.
h) Non-product strategies of DuPont. DuPont’s non-product strategies included the enhancement of production efficiency, decreasing production costs, and improving relationships with its customers. Furthermore, it helped improved bundling machineries that could be used by both cellophane and other adaptable wrapping materials. It defined the relations of the company itself and its customers providing clients with technical administrations to help them fix issues related to the use of cellophane. It took into account the purchasing habits of customers in general and directed business studies to focus on the impact on deals of bundling an item in cellophane. It reduced production costs to get into new and more extensive markets (Stocking & Mueller 29-63).
i) Effect of DuPont’s conduct on other firms in the industry. According to the Court, DuPont has no power to prevent other companies from producing or manufacturing flexible wrapping materials. The only power it has stemmed from its patent over its technique. In other words, its position in the industry was due to its technical skill and other activities that enhanced its competitiveness.
History of Legal Actions For/Against Defendant
The US government initially brought a civil suit for anti-trust against DuPont in 1947 in the District of Columbia. The case was transferred to the District of Delaware in 1949. After the government lost in the District Court, it filed an appeal with the Supreme Court in 1956.
Application of Structure-Conduct-Performance
The use of the SCP paradigm was very evident in the DuPont case because the Court highlighted the very characteristics that are employed in this model in determining whether the company was engaged in a monopoly or not. Some of these characteristics included parameters of structural characteristics such as barriers to entry, customer concentration, existence of substitutes and level of product differentiation between competitors (Delorme et al 2136). For example, the Court lengthily discussed the interchangeability and levels of differentiation of cellophane with other products such as wax paper, glassine, vegetable parchment paper, waxing paper, aluminum foil, cellulose acetate, pliofilm, among others, which are products classified as flexible wrapping materials, concluding as a result that cellophane is also a product in the same category. The substitutability of cellophane with the aforecited products negated, in its opinion, the charge of monopoly against DuPont. In the conduct aspect, the Court looked into areas that also characterized by SCP determination such as pricing, product strategylevels of investment (Delorme 2136), among others. The Court, for example, closely considered the pricing and pricing effects of DuPont concluding that it did not have the power to set prices of cellophane as it was limited by the pricing of competing products within the flexible wrapping market. Finally, performance parameters usually include strategies to maximize customer welfare and improving product quality, to name a few (Delorme 2136). All these have been looked into by the Court to assist it in determining the existence of monopoly in this case.
Delorme, Charles and David Kamerschen, Peter Klein, Lisa Ford Voeks. “Structure, Conduct and Performance: A Simultaneous Equations Approach.” Applied Economics, vol. 34, pp. 2135-2141. 2002. Web. http://web.missouri.edu/~kleinp/papers/dkkv_2002.pdf.
Stocking, George and Willard Mueller. “The Cellophane Case and the New Competition.” The American Economic Review, vol. 45, no. 1, (1957) pp. 29-63.
United States v. E.I. DuPont de Nemours and Company 351 US 357 (1965). 2015. Web. 19 June 2015. http://caselaw.findlaw.com/us-supreme-court/351/377.html.