Kodak Appeals to Court to Terminate 1921 and 1954 Decrees that Restrict Pricing Policies Eastman Kodak Co.

is one of the dominant market share holders within the camera and other photography-related industries. Kodak pioneered amateur photography an d is often credited for the invention of roll film, and the first camera. The ma rkets for color film and color photofinishing in 1954 were controlled by Kodak. It had over 90% of the amateur color negative film market. 1) What are the decrees affecting Kodaks actions? Why were they put into pla ce? There were two decrees affecting Kodaks action: the first one was put into place in 1921, according to which Kodak had to stop imposing different forms of dealin g contracts on retailers, divest all of the acquired firms, license its photofin ishing processes and technically assist anybody willing to start a photofinishin g business. The decrees main purpose was to provide better conditions for healthy competition in the photo industry. With the development of the color film market, Kodak became its sole leader. The company sold its color film only as a package together with processing. By bund ling the cost of film and processing, Kodak effectively monopolized the photofin ishing industry. This resulted in the new decree being issued in 1954. The decre e was awarded and placed a permanent restriction on Kodak from bundling or other wise connecting in any manner, the sale of its color films to the photofinishing process. It also required Kodak to divest itself of some of its photo labs. Thus, the decrees of 1921 and 1954 had promoted the development of a competitive market for the sale of films as well as processing. The decrees against Kodak i ntended to limit its market power and prevent monopolization of the photographic industry. 2) Who are the competitors for Kodak? What market share does Kodak have com pared to its rivals? What competitive advantages does Kodak have? There are five firms that manufacture and sell camera film in the US: Kodak, Fuj i, Konica, Agfa, and 3M. However, despite a very little difference in the qualit y of film, Kodaks sales vastly exceed the ones of its competitors. The prices tha t the company charges are generally higher as well. According to court, Kodaks sa les in dollar terms constitute about 75% of all the film sales in the US. About 241,000 major retailers carry Kodak film, while only about 71,000 carry its nea rest rival, Fuji, even though Fujis prices are reported to be 10% lower. As for t he other competitors, their market share is relatively small: Konica accounts fo r only 4% of sales, Agfa for 3%, and 3M for 8%. Several acquisitions made by Kod ak, also increased its market share. The most important one was the acquisition of Qualex in 1994 that currently accounts for 70% of all the wholesale macrolab photofinishing market in the US. The main competitive advantage that Kodak has is the consumers trust and loyalty: despite much higher prices, 50% of consumers will only buy Kodak film, while 40 % will prefer to purchase Kodak products. The company also provides various ince ntives to those retailers who sell extra (or only) Kodak film. 3) What is the relevant geographic product market for film? The relevant geographic product market for film is the US is relatively small. A ccording to the definition, a relevant product market comprises all those product s which are regarded as interchangeable or substitutable by the consumer by reas on of the products characteristics, their prices and their intended use. It can be assumed that the relevant market for film includes all of the five firms: Kod ak, Fuji, Konica, Agfa, and 3M. However, not all of the aforementioned firms prod ucts are viewed as fully interchangeable and substitutable by the consumer. Acco rding to statistics, about 50% of consumers will only buy Kodak film despite of substantial price increases. This indicates the consumers firm belief in the supe rior quality of Kodak film. There were two different opinions on the relevant geographic product market for film discussed in the case. According to the district court, the relevant geogra phic market for film is world-wide, since foreign manufactures sell significant amounts of film in the United States and Kodaks market share on the world-wide sc ale is only 36%. However, the government contends that this determination is in

correct and that the relevant geographic market in this case should be limited t o the United States. The main explanation here is that a relevant geographic ma rket comprises an area, where the firm can exercise the market power. Taken into consideration the fact that Kodak charges much higher prices in the US comparin g to other countries, the relevant geographic market for this case can be identi fied as the United States. 4) What evidence does the government provide that Kodak still maintains sig nificant market power in the United States? First of all, according to government, Kodak had engaged in geographical price d iscrimination against its United States customers. The evidence shows that Kodak charges a higher price for its film in the United States than it charges for th e same film in other parts of the world. The prices that Kodak sets within the US are normally above the competitive levels. This, as the government states, i s one of the proofs that Kodak exercises market power in the United States. Anot her important thing is the US customers strong preference for Kodak film and th e resulting premium price that Kodak is able to obtain for its film in this coun try. Despite the price disparity, Kodak still continues to maintain 67%-75% shar e in the US. However, the evidence shows that the quality of Kodak film is no be tter than of its rivals. The last item evidence relied upon by the government to support a finding that Kodak has market power within the United States is the f act that Kodaks own elasticity of demand is two. According to the government, a n own elasticity of two indicates that Kodak is earning excessive profits from i ts film. This, as the government states, is strong evidence that Kodak exercises market power in the United States. The significance of an own elasticity of two , in the governments view, is that it indicates that the sales price of Kodak f ilm is twice the short-run marginal cost. Thus, from Kodaks own elasticity of t wo, the government concludes that Kodak is exercising significant market power i n the United States. 5) What risks are associated with terminating the decrees? More specifical ly, what actions might Kodak take that would hurt competition or unfairly hurt c ompetitors? Terminating the decrees will definitely have some negative impacts and can serio usly hurt the competition. It will provide Kodak with many relatively cheap ways to exclude competitors, such as introducing various price reductions and discou nts, which the company can afford due to high sales volumes and profit margins. However, the same offers will be too expensive for the rivals, which might drive some of them out of business and only increase Kodaks market share. Termination of the 1954 decree will again allow Kodak to bundle the sale of its film to photofinishing, as it did before, and will involve some serious risks as well. As it has been admitted by the company, one of its main goals is improvin g its bargaining position with retailers. Since Kodak already enjoys market powe r over the film it sells to retailers, the termination of the decree will only s trengthen its film monopoly and make it even more challenging for the rivals to compete. Thus, its unlikely that the termination of the decree and allowing of bu ndling will benefit the competition in any way. References Baye, M., R. Kodak Appeals to Court to Terminate 1921 and 1954 Decrees that Rest rict Pricing Policies. Baye, M., R. (2010). Managerial Economics and Business Strategy. New York, NY: The McGraw-Hill Companies.