Kodak Company Case Study

Hyun Lee Eastman Kodak v. Image Technical Services complainant This is yet an early(a) case that concerns the step for sarcoidset judiciousness in an antitrust controversy. The principal issue here is whether a defendants lack of grocery storeplace military unit in the primary equipment trade precludes as a takings of law the possibility of grocery store power in derivative af destinationarkets. Eastman Kodak gild manufactures and shell outs photocopiers and micrographic equipment. Kodak excessively removes dish up and second-stringer part for its equipment.Respondents be 18 nonparasitic operate organizations (ISOs) that in the early 1980s began go Kodak copying and micrographic equipment. Kodak afterwards adopted policies to limit the availability of fall in to ISOs and to make it to a greater extent thorny for ISOs to compete with Kodak in servicing Kodak equipment. Respondents instituted this action in the United States territory philander for the N orthern District of California alleging that Kodaks policies were unlawful under slightly(a)(prenominal) 1 and 2 of the Sherman Act, 1 and 2.After truncated discovery, the District Court granted summary judgment for Kodak. The Court of Appeals for the Ninth Circuit reversed. The appellate hook found that respondents had turn ined decent grounds to raise a echt issue concerning Kodaks market power in the redevelopment and part markets. It rejected Kodaks contention that lack of market power in emolument and split must be assumed when such power is absent in the equipment market. Kodak manufactures and sells multiform bank line machines as relevant here, spunky multitude photocopier and micrographics equipment.Kodak equipment is anomalous micrographic software programs that operate on Kodak machines, for example, are not compatible with competitors machines. Kodak split are not compatible with opposite manufacturers equipment, and vice versa. Kodak equipment, alt hough expensive when new, has undersize re sales event value. Kodak bids armed service and separate for its machines to its customers. It produces some of the move itself the rest are do to order for Kodak by independent original equipment manufacturers (OEMs).Kodak does not sell a complete system of original equipment, lifetime service, and lifetime part for a single damage. Instead, Kodak provides service after the initial warranty period both through annual service contracts, which include all necessary parts, or on a per call basis. It bangs, through negotiations and bidding, incompatible prices for equipment, service, and parts for unalike customers. Kodak provides 80% to 95% of the service for Kodak machines. Beginning in the early 1980s, ISOs began limiting and servicing Kodak equipment.They excessively sold parts and re destineed and sold used Kodak equipment. Their customers were federal, state, and local giving medication agencies, banks, insurance companie s, indus tally enterprises, and providers of specialized copy and microfilming services. ISOs provide service at a price substantially cut back than Kodak does. Some customers found that the ISO service was of laster reference. In 1985 and 1986, Kodak implemented a policy of selling replacement parts for micrographic and copying machines only to buyers of Kodak equipment who use Kodak service or repair their take in machines.As part of the similar policy, Kodak sought to limit ISO feeler to other sources of Kodak parts. Kodak and the OEMs hold that the OEMs would not sell parts that fit Kodak equipment to anyone other than Kodak. Kodak to a fault pressured Kodak equipment avouchers and independent parts distributors not to sell Kodak parts to ISOs. In addition, Kodak took steps to hold back the availability of used machines. Kodak intended, through these policies, to make it more difficult for ISOs to sell service for Kodak machines. It succeeded.ISOs were unable to obtain parts from unquestionable sources, and many were squeeze out of business, while others lost substantial revenue. Customers were hale to switch to Kodak service even though they preferred ISO service. In 1987, the ISOs charge upd the present action in the District Court, alleging, inter alia, that Kodak had unlawfully tied the sale of service for Kodak machines to the sale of parts, in violation of 1 of the Sherman Act, and had unlawfully monopolized and assay to monopolize the sale of service for Kodak machines, in violation of 2 of that Act.Kodak filed a motion for summary judgment before respondents had initiated discovery. The District Court permitted respondents to file one set of interrogatories and one set of requests for production of documents, and to take sextette depositions. Without a hearing, the District Court granted summary judgment in favor of Kodak. As to the 1 claim, the court found that respondents had provided no render of a fix arrangement among Koda k equipment and service or parts. The court, however, did not address respondents 1 claim that is at issue here.Respondents allege a tying arrangement not between Kodak equipment and service, but between Kodak parts and service. As to the 2 claim, the District Court shut downd that although Kodak had a locoweedcel monopoly over the market for parts it sells under its name, a unilateral refusal to sell those parts to ISOs did not violate 2. Noting that the District Court had not considered the market power issue, and that the record was not fully developed through discovery, the court declined to require respondents to conduct market analysis or to pinpoint precise imperfections in order to withstand summary judgment.The court then considered the ternion business justifications Kodak pr posted for its restrictive parts policy (1) to guard a assemblest inadequate service, (2) to humble inventory costs, and (3) to prevent ISOs from free riding on Kodaks investment in the copier and micrographic industry. The court concluded that the trier of fact might influence the product quality and inventory reasons to be perpetual and that thither was a less restrictive alternative for achieving Kodaks quality related goals.The court also found Kodaks third justification, preventing ISOs from profiting on Kodaks investments in the equipment markets, legally in commensurate. As to the 2 claim, the Court of Appeals concluded that sufficient deduction existed to support a determination that Kodaks implementation of its parts policy was anticompetitive and exclusionary and involved a specific end to monopolize. It held that the ISOs had come forward with sufficient evidence, for summary judgment purposes, to disprove Kodaks business justifications.The dissent in the Court of Appeals, with respect to the 1 claim, accepted Kodaks argument that evidence of emulation in the equipment market necessarily precludes power in the derivative market. With respect to the 2 monopolization claim, the dissent concluded that, merely apart from market power considerations, Kodak was entitled to summary judgment on the basis of its first business justification because it had submitted extensive and un difference of opiniond evidence of a marketing dodge based on high quality service. A tying arrangement is an agreement by a party to sell one product but only on the condition that the buyer also buys a different (or tied) product, or at to the smallest degree agrees that he leave alone not leverage that product from any other supplier. Such an arrangement violates 1 of the Sherman Act if the seller has appreciable stinting power in the tying product market and if the arrangement affects a substantial volume of commerce in the tied market. Kodak did not dispute that its arrangement affects a substantial volume of interstate commerce.It, however, did challenge whether its activities represent a tying arrangement and whether Kodak exercised appreciab le economic power in the tying market. We consider these issues in turn. For the respondents to defeat a motion for summary judgment on their claim of a tying arrangement, a commonsensical trier of fact must be able to find, first, that service and parts are two distinct products, and, second, that Kodak has tied the sale of the two products.For service and parts to be considered two distinct products, thither must be sufficient consumer demand so that it is efficient for a firm to provide service separately from parts. Jefferson Evidence in the record indicates that service and parts pee been sold separately in the past and still are sold separately to self service equipment owners. Indeed, the development of the entire high technology service industry is evidence of the efficiency of a separate market for service.Kodak insists that because there is no demand for parts separate from service, there cannot be separate markets for service and parts. By that logic, we would be forced to conclude that there can never be separate markets, for example, for cameras and film, computers and software, or automobiles and tires. That is an presumptuousness we are un leaveing to make. We have often found arrangements involving functionally coupled products at least one of which is useless without the other to be command tying devices. Kodaks assertion also appears to be incorrect as a factual depicted object.At least some consumers would purchase service without parts, because some service does not require parts, and some consumers, those who self service for example, would purchase parts without service. Finally, respondents have presented sufficient evidence of a tie between service and parts. The record indicates that Kodak would sell parts to third parties only if they agreed not to buy service from ISOs. Having found sufficient evidence of a tying arrangement, we consider the other necessary feature of an illegal tying arrangement appreciable economic power in t he tying market. commercialise power is the power to force a purchaser to do something that he would not do in a competitive market. It has been defined as the ability of a single seller to raise price and restrict output. The existence of such power ordinarily is venturered from the sellers self-denial of a rife distribute of the market. Respondents contend that Kodak has more than sufficient power in the parts market to force unwanted purchases of he tied market, service. Respondents provide evidence that certain parts are available exclusively through Kodak.Respondents also assert that Kodak has control over the availability of parts it does not manufacture. tally to respondents evidence, Kodak has prohibited independent manufacturers from selling Kodak parts to ISOs, pressured Kodak equipment owners and independent parts distributors to abjure ISOs the purchase of Kodak parts, and taken steps to restrict the availability of used machines. Respondents also allege that Kod aks control over the parts market has excluded service competition, boosted service prices, and forced unwilling consumption of Kodak service.Respondents offer evidence that consumers have switched to Kodak service even though they preferred ISO service, that Kodak service was of higher price and lower quality than the preferred ISO service, and that ISOs were driven out of business by Kodaks policies. at a lower place our prior precedents, this evidence would be sufficient to entitle respondents to a trial on their claim of market power. To review Kodaks theory, it contends that higher service prices will lead to a disastrous drop in equipment sales. Presumably, the theorys corollary is to the achievement that low service prices lead to a dramatic increase in equipment sales. check to the theory, one would have expected Kodak to take advantage of lower priced ISO service as an opportunity to expand equipment sales. Instead, Kodak adopted a restrictive sales policy consciously des igned to eliminate the lower priced ISO service, an act that would be expected to devastate either Kodaks equipment sales or Kodaks faith in its theory. Yet, according to the record, it has done neither. Service prices have risen for Kodak customers, but there is no evidence or assertion that Kodak equipment sales have dropped.Respondents offer a forceful reason why Kodaks theory, although perhaps intuitively appealing, whitethorn not undefiledly inform the behavior of the primary and derivative markets for complex durable goods the existence of significant information and work shift costs. These costs could take in a less responsive connection between service and parts prices and equipment sales. For the service market price to affect equipment demand, consumers must inform themselves of the wide cost of the package equipment, service and parts at the time of purchase that is, consumers must engage in accurate life cycle price.Lifecycle pricing of complex, durable equipment is difficult and costly. In order to arrive at an accurate price, a consumer must exact a substantial amount of lancinating selective information and undertake sophisticated analysis. The necessary information would include data on price, quality, and availability of products involve to operate, upgrade, or enhance the initial equipment, as well as service and repair costs, including estimates of breakdown frequency, nature of repairs, price of service and parts, length of downtime and losses incurred from downtime. Much of this information is difficult some of it impossible to acquire at the time of purchase.During the life of a product, companies may change the service and parts prices, and develop products with more advanced features, a decreased need for repair, or new warranties. In addition, the information is in all likelihood to be customer specific lifecycle costs will vary from customer to customer with the type of equipment, degrees of equipment use, and costs of downtime. Indeed, respondents have presented evidence that Kodak practices price favoritism by selling parts to customers who service their own equipment, but refusing to sell parts to customers who hire third party service companies.Companies that have their own service staff are likely to be high volume users, the same companies for whom it is most likely to be economically worthwhile to acquire the complex information needed for comparative lifecycle pricing. A second agentive role undermining Kodaks claim that supracompetitive prices in the service market lead to ruinous losses in equipment sales is the cost to current owners of shifting to a different product.If the cost of switching is high, consumers who already have purchased the equipment, and are thus locked in, will tolerate some level of service price increases before ever-changing equipment brands. Under this scenario, a seller profitably could adjudge supracompetitive prices in the aftermarket if the switching cost s were high relative to the increase in service prices, and the tote up of locked in customers were high relative to the number of new purchasers. Moreover, if the seller can price discriminate between its locked in customers and potential new customers, this strategy is even more likely to prove profitable.The seller could simply charge new customers below marginal cost on the equipment and recoup the charges in service, or offer packages with life time warranties or languish term service agreements that are not available to locked-in customers. Respondents have offered evidence that the heavy initial outlay for Kodak equipment, combined with the required support material that full treatment only with Kodak equipment, makes switching costs very high for existing Kodak customers.And Kodaks own evidence confirms that it varies the package price of equipment/parts/service for different customers. In sum, there is a question of fact whether information costs and switching costs foil the simple assumption that the equipment and service markets act as pure complements to one another. We conclude, then, that Kodak has failed to demonstrate that respondents inference of market power in the service and parts markets is unreasonable, and that, consequently, Kodak is entitled to summary judgment.It is clearly reasonable to infer that Kodak has market power to raise prices and drive out competition in the aftermarkets, since respondents offer direct evidence that Kodak did so. It is also plausible, as discussed above, to infer that Kodak chose to gain immediate profits by exerting that market power where locked in customers, high information costs, and discriminatory pricing limited and perhaps eliminated any long term loss. The alleged conduct higher service prices and market foreclosure is facially anticompetitive and exactly the harm that antitrust laws aim to prevent.Respondents also claim that they have presented genuine issues for trial as to whether Kodak has monopolized or attempted to monopolize the service and parts markets in violation of 2 of the Sherman Act. The offense of monopoly under 2 of the Sherman Act has two elements (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as tell apart from growth or development as a consequence of a superior product, business acumen, or historic accident. The existence of the first element, possession of monopoly power, is easily resolved.As has been noted, respondents have presented a triable claim that service and parts are separate markets, and that Kodak has the power to control prices or exclude competition in service and parts. Monopoly power under 2 requires, of course, something greater than market power under 1. Respondents evidence that Kodak controls nearly 100% of the parts market and 80% to 95% of the service market, with no readily available substitutes, is, however, sufficient to survive summary judgment under the more stringent monopoly standard of 2.The second element of a 2 claim is the use of monopoly power to foreclose competition, to gain a competitive advantage, or to destroy a competitor. If Kodak adopted its parts and service policies as part of a final cause of willful acquisition or maintenance of monopoly power, it will have violated 2. As recounted at length above, respondents have presented evidence that Kodak took exclusionary action to maintain its parts monopoly and used its control over parts to strengthen its monopoly share of the Kodak service market.Liability turns, then, on whether valid business reasons can explain Kodaks actions. Kodak contends that it has three valid business justifications for its actions (1) to promote interbrand equipment competition by allowing Kodak to vehemence the quality of its service (2) to improve asset management by reducing Kodaks inventory costs and (3) to prevent ISOs from free riding on Kodaks chief city investment in equipment, parts and service. Factual questions exist, however, about the validity and sufficiency of each claimed justification, making summary judgment inappropriate.As respondents argue, Kodaks actions appear conflicting with any need to control inventory costs. Presumably, the inventory of parts needed to repair Kodak machines turns only on breakdown rates, and those rates should be the same whether Kodak or ISOs perform the repair. More importantly, the justification fails to explain respondents evidence that Kodak forced OEMs, equipment owners, and parts brokers not to sell parts to ISOs, actions that would have no effect on Kodaks inventory costs.None of Kodaks asserted business justifications, then, are sufficient to prove that Kodak is entitled to a judgment as a matter of law on respondents 2 claim. In the end, of course, Kodaks arguments may prove to be correct. It may be that its parts, service, and equipment are components of one unified market, or that the equip ment market does discipline the aftermarkets so that all three are priced competitively overall, or that any anticompetitive effects of Kodaks behavior are outweighed by its competitive effects.. Accordingly, the judgment of the Court of Appeals denying summary judgment is affirmed.