Facts

Pipefittings join together pipes and help direct the flow of pressurized water in pipeline systems. Certain municipal, state, and federal laws require waterworks projects to use fittings made in the United States, so specifications for such projects may require the use of "domestic fittings." As a result, buyers sometimes issue "domestic-only specifications" for their projects.

McWane, Inc., is the dominant producer of domestic ductile iron fittings. When Star Pipe Products entered the market, McWane instituted a new policy. Unless McWane's distributors bought all of their domestic fittings from McWane, they would lose any rebates they had earned previously and would be cut off from purchases for twelve weeks. The Federal Trade Commission (FTC) brought an action against McWane alleging that McWane's policy was an unlawful attempt to maintain monopoly power by keeping competitors out of the market. The FTC ultimately ordered McWane to stop requiring exclusivity from distributors. McWane appealed the FTC decision to a federal court.

Issue

Did McWane's exclusivity policy constitute an illegal attempt to maintain monopoly power?

Decision

Yes. The U.S. Court of Appeals for the Eleventh Circuit affirmed the FTC's order. This conclusion was supported by McWane's market share, the amount of capital needed to enter the market, and McWane's power to control prices in the market.

Reason

The FTC found that the relevant product market consisted of projects that specified domestically made fittings. When a law or a user's preference required a project to use domestic fittings, imported fittings were not reasonable substitutes. In that market, McWane consistently charged higher prices20 to 95 percent more than for other projects.

As for McWane's monopoly power, the FTC found that the firm's share of the domestic fittings

market had been 100 percent until Star Pipes began to compete. But the competitor's share of the market was never more than 10 percent, and its entry into the market had no effect on McWane's ability to control prices. The FTC also found substantial barriers to entry into the market. A "significant" capital investment was required to overcome the existing relationships among manufacturers, distributors, and users, and to develop the necessary pipefitting patterns and moldings. McWane's exclusivity policy posed a further barrier by "shrinking" the number of distributors.

Critical Thinking

Economic How did McWane's exclusivity policy harm competition? Explain.??????