The upshot is this: Antitrust law is not J omics. It depends heavily on legal policy judgments about how best to minimize both the costs of enforcement errors and compliance costs. The relationship between economic analysis and legal policy judgments is a recurring theme in antitrust law and one to which we will return repeatedly throughout this book. Vo lobrise ogsoidO ords admirda Gloodo PROBLEM 2.1 THE BATTLE FOR SAWVILLE smidge orom ellisforon For a number of years there have been three "regular" motion picture theaters and one "art" house in Sawville, New York, a suburb of New York City about a 40-minute drive from Times Square. The "art" house-the Frolic-has a policy of showing foreign films and more esoteric films of independent domestic producers not regularly handled by national distributors; the films are almost always "X-rated" or have not been submitted for classification. There has only been sufficient demand for "art films" in Sawville to permit profitable operations by one theater, but the management of the Frolic has noticed that its theater is increasingly filled to capacity and sometimes patrons must be turned away. The Frolic is locally owned. It charges more than the three regular theaters for general evening admission ($12 as compared to $9), and, unlike the other three, is open every weekday evening for a midnight show, but closed all day Sunday. A study for a local newspaper showed that almost all patrons of the Frolic have visited the other three movie theaters at least once in the previous six months, and about 30 percent of the patrons of the three regular theaters have attended the Frolic at least once in the last six months. The closest art houses to Sawville are in mid-town New York and they charge, on average, an admission price of $10. Sawville's local cable company, which is owned by a non-profit corporation with strong moral and ethical commitments, has refused to show "X-rated" films, but such films are Sawville. available on DVD (at an average rental of $5 per day), for home video use in The Frolic has earned about 30 percent on its investment in each of the last three years, while the three regular theaters have earned about 10 percent on investment. One reason for the difference in profitability is that God nwoTabson let, lolfl fisdoff to Tanol!Paused 3.0 ney+ | Movies ... 630 EXCLUSION CHAPTER 5 PROBLEM 5.4 THE BATTLE FOR SAWVILLE: ROUND 2 Referring to the facts of Problem 2.1 (supra), assume that the product market is exhibition of films in "art houses" and the geographic market is Sawville. After being rebuffed in previous efforts to enter the market, Read Theaters, the largest chain of art houses on the East Coast, purchased the Bramble Bush, one of the three motion picture theaters previously devoted to "regular" films, and converted it to art films. Since the Bramble Bush was uniquely well-located, Read was willing to take the risk that it could challenge the entrenched Frolic. The new Bramble Bush, ultramodern in decor and comfort, has been operating for two years. Read used its extensive bargaining power, partly derived from the fact that it is the only art house in some of the towns in which it operates, to bring the best art films to Sawville simultaneously with their New York City runs. The films were made available to Read on an exclusive basis, and could not be shown elsewhere until 90 days after they stopped being shown by Read. Furthermore, it reduced admission charges from the $12.00 level formerly set by the Frolic, requiring the Frolic to lower prices as well. It also engaged in extensive and costly promotion and advertising-tripling its newspaper ad budget. The net result was that the Bramble Bush, unlike any of Read's other art houses, operated at a net loss during its first two years as an art house. However, because many expenses of a movie theater are fixed rather than variable, it managed to stay barely above average variable costs. At the end of the first year, the Bramble Bush had won a large share of the Frolic's clientele, causing the Frolic to suffer losses for the first time in its history. At the end of the second year, it had achieved near full-capacity attendance and was comfortably in the black. The Frolic then went out of business. As soon as that happened, the Bramble Bush raised its prices to $14.00, $2.00 more than the Frolic had charged before the Bramble Bush entered the market. Is Read a monopolist and has it violated $ 2? If so, what remedy would you impose? qu at sterfa deadism abool mortemA PROBLEM 5.5 Stegioions JOINT RESEARCH AND PRODUCTION OF CHEMICAL RESEARCH ASSOCIATES In order to counter the research laboratories of larger chemical companies, seven small manufacturers of industrial chemicals formed Chemical Research Associates, a partnership. Each of the seven manufacturersCR 2 SECTION 3 THE CHALLENGES OF APPLYING THE ANTITRUST ves LAW (AND THE CONCEPT OF MARKET POWER) 11 bits the Frolic spends little on advertising, new equipment, decor, and maintenance. live will There is one empty building in Sawville-an auditorium once used for res club meetings and amateur theater productions-that could be converted will promptly and without great expense to a movie theater. About six months do ago there were rumors that Read Theaters, a large East Coast chain of art houses, was negotiating to purchase the building and convert it into an art ose house. Whether the rumors were true or not, the Frolic's owners purchased ese the empty building announcing that they believed demand in Sawville would soon be sufficiently great to support a second profitable art theater operation. . It To date, however, the building remains dark and the Frolic remains the only art theater in Sawville. ize The Does the Frolic have monopoly power? Has it violated $ 2 of the Sherman Act? is a urn PROBLEM 2.2 THE MCAVOY HEALTH SYSTEM MERGER CASE STUDY McAvoy Health System owns 3 of 11 hospitals or urgent care centers in the Kansas City metropolitan area. The KC Health owns 3 hospitals or urgent care centers as well. Royal Health owns 2 hospitals or urgent care ture centers, and two operate independently. Over the last 10 years, with an ork explosive growth in population, the number of hospitals or urgent care -the centers in the area has grown from 7 to 11. Each of the centers or hospitals s of sees a comparable number of patients per year. onal been In the market for urgent care, patients can choose to go to a hospital or "art urgent care center for a range of ailments or emergencies. (More serious the issues require treatment at a hospital.) To start a new urgent care center illed (where most of the growth is), the center must hire a critical mass of doctors. Since most of the doctors hired come from the local medical school, the total ular for growth. cumber of MDs who graduate each year is a critical driver (or limiting factor) like but Another important driver for whether a hospital or urgent care center t all Ka reimburse pay jan develop is whether a health care insurance company is willing to center. The one center in ce