Kodak is the largest film manufacturer in the United States, accounting for 75% of all retail film sales (in dollars) in the U.S. Due to previous antitrust suits, Kodak is governed by two decrees that affect its pricing policies. The 1921 decree was put in place when it was determined that Kodak had illegally monopolized the amateur photography market. It prohibits Kodak from using arrangements that prevent dealers from freely selling competing brands. The 1954 decree resulted from Kodak's efforts to package the sales of its film with the color photofinishing process. Among other things, it prohibits Kodak from tying or connecting the sale of its color film to the processing of that film. Kodak has won a district court ruling that these decrees may be lifted; however, the Department of Justice has appealed that ruling based on the grounds that Kodak still has monopoly pricing power.
The key issue is whether Kodak maintains market power in the United States. According to the decrees, they are to remain in place unless the market conditions have changed, that is, Kodak no longer has market power. The court determined that there is little or no difference in the quality of film sold by Kodak and its rivals, yet Kodak sells at 5-10% premium. Kodak is able to maintain high market share at a price premium due to consumer loyalty and perception that its film is significantly better. Market evidence shows that Kodak's own price elasticity is 2, which indicates that its price is twice its marginal cost. The fact that Kodak has high market share, selling at a price premium, with a similar quality of product indicates that it has market power.
Read each question carefully and answer the questions in DETAIL. Use your textbooks, readings, and PowerPoint presentations to guide your response.
- What are the decrees affecting Kodak's actions? Why were they put into place?
- Who are the competitors for Kodak? What market share does Kodak have compared to its rivals? What competitive advantages does Kodak have?
- What is the relevant geographic product market for film?
- What evidence does the government provide that Kodak still maintains significant market power in the United States?
- What risks are associated with terminating the decrees? More specifically, what actions might Kodak take that would hurt competition or unfairly hurt competitors?