MONOPOLISATION
PRACTICES
Economic Case review on exclusionary bundling
and tying
Ethan Aridis
e.aridis@uqconnect.edu.au
ECON3440
Lecturer: Heiko Gerlach
Due Date: Friday, June 4th
Word Count (excluding references): 995
LePage Versus
3M (2004)
The LePage vs 3M case was an argument surrounding monopolisation practices used by 3M
to exclude LePage from the private label tape market by using 3M’s monopolistic advantage
in the transparent tape market. LePage lodged a complaint with the Department of Justice
(DOJ), which was first argued in the district court in 2001, the lowest level of the Federal Court
System (U.S. Attorneys, 2021). The district court returned a decision for Lepage’s on the
grounds of a monopoly maintenance count, specifically determining that 3M violated Section
2 of the Sherman Act via a ‘bundled rebate’ program. A panel for the Court of Appeals for the
Third District reversed the decision made by the district court as part of the initial process in
the Court of Appeals. However, when the court reheard the case en banc, meaning all judges
of the Third Circuit were present for a rehearing whereby the original district court decision
was upheld, declaring 3M had been found guilty of a monopoly maintenance count. Following
this decision, 3M attempted to extend the appeal process to the Federal Supreme Court, the
highest level of the court system in the United States (U.S. Attorneys, 2021). Specifically, 3M
applied for a writ of certiorari where they wished the Supreme Court to hear their argument,
take briefs and ‘conduct oral argument’. However, the request was denied by the Supreme
Court in 2003 and so the lower district court judgement was upheld via the affirmative
decision of the Court of Appeals for the Third Circuit (Supreme Court, 2014).
It was decided that the relevant market was the manufacture and sale of transparent tape,
under the geographical market of the United States. In the early 1990’s, 3M had just over 90%
market share of transparent tape, which constituted most of the overall tape market, and 3M
also conceded it was a monopolist in the transparent tape market. Therefore, 3M was the
major player in the relevant market; however, by 1992 LePage had gained 88% of the
submarket for private label tape, constituting a 14.4% share of the total market (Berkeley
School of Law, 2005). Given LePage’s traction in the private label market, it is likely that 3M
viewed it to be a significant competitor as a whole business. Further, this submarket was
growing considerably and hence 3M realised profits could be made leveraging their
monopolistic power in the broader market for transparent tape.
Following 3M’s entry into the private label market, LePage suffered significantly from what it
alleged was a result of monopolistic practice by 3M. Specifically, it accused 3M of using an
aggressive bundling rebate program whereby they used exclusive dealing to execute the
practices. The bundling was offered across six of 3M’s product lines and provided a strong
incentive to engage in large scale purchasing of multiple products by penalising the retail
customers if they did not fully commit to buying the bundle (Supreme Court, 2014). For
example, the lump sum payment to Kmart, who at the time accounted for a considerable 10%
of LePage’s sales, received $927,000 in rebates and would have been penalised almost half of
this at $450,000 (Berkeley School of Law, 2005). The economic theory behind the
anticompetitive effects of bundling & tying is that 3M did not necessarily drive prices down
in the private label market because it offered rebates across other products. Aside from
competitive downward pressures on prices before the introduction of the rebate program,
3M would have experienced some reduction of profits due to rebates; yet these profits could
be ‘recouped’ by receiving monopoly profits in the transparent tape market. Regardless, since
3M did not have to directly compete in prices, but rather by lump sum transfers, even an
equally efficient firm would find it difficult to compete (Rubinfeld, 2005). Additionally, given
LePage admitted it was less efficient than 3M, this essentially rendered LePage helpless. As a
result, LePage’s total market share decreased from 14.4% in 1992 to 9.35% in 1997, a 35%
loss in 5 years. LePage was also forced to close one of its two factories (Berkeley School of
Law, 2005). It argued that 3M’s bundling rebate program was the cause, also pointing to
exclusive dealing by 3M with LePage’s large retail clients as a conjoining factor. It is important
to note that LePage did not allege any predatory pricing against 3M, yet a large portion of
3M’s defence was that it did not decrease its prices below cost (Supreme Court, 2014). Hence,
a key element of 3M’s defence was essentially made null because it did not necessarily pertain
to the accusations of both bundling and tying, or exclusive dealing. 3M also argued that the
bundling program provided administrative efficiencies; however, the en banc hearing in the
Court of Appeals could not identify "actual economic efficiencies in having single invoices
and/or single shipments” (Supreme Court, 2014).
At the conclusion of the court process, it was determined that 3M did not engage in exclusive
dealing under Section 1 and 3 of the Sherman Act, but damages of over $22 million were
awarded for the violation of section 2 whereby 3M ‘unlawfully maintained a monopoly
through a bundled rebates program’. These damages were trebled, taking the total penalty
to around $68 million (Supreme Court, 2014). The bundling, tying and exclusive dealing
initiated by 3M was certainly anti-competitive in the sense that it significantly damaged the
financial and competitive health of LePage. Despite 3M not engaging in predatory pricing, it
used its monopolistic power to drive down LePage’s profits and therefore its market share.
However, it should be noted that 3M was the more efficient firm, allowing it to offer rebates
to retailers. While this does not necessarily mean prices will be lower for consumers, the court
did not present any evidence that the monopolistic practices were to the detriment of
consumer welfare. In fact, the Sherman Act Section 2 Chapter 6 actually notes that bundled
discounting “usually benefits consumers” (USDOJ, 2015). In any case, the total welfare of all
firms and consumers should be weighed up to determine a net benefit of any business
practice. Moreover, there needs to be clear definitions and rules around bundled rebate
programs to ensure a transparent legal system which still encourages competitive practices.
Bibliography
Berkeley School of Law. (2005). LEPAGE’S INC. v. 3M 324 F.3d 141 (3d Cir. 2003). Retrieved 2
June 2021, from https://www.law.berkeley.edu/wp-
content/uploads/2015/04/LePages-v-3M-2003-excerpt.pdf
Rubinfeld, D. (2005). 3M’s Bundled Rebates: An Economic Perspective. Retrieved 2 June
2021, from https://www.law.berkeley.edu/files/Bundling-LePage's%20Final.pdf
Supreme Court. (2014). 3M v. LePage - Amicus Invitation (Petition). Retrieved 2 June 2021,
from https://www.justice.gov/osg/brief/3m-v-lepage-amicus-invitation-petition
U.S. Attorneys. (2021). Introduction To The Federal Court System. Retrieved 2 June 2021,
from https://www.justice.gov/usao/justice-101/federal-courts
USDOJ. (2015). Competition And Monopoly: Single-Firm Conduct Under Section 2 Of The
Sherman Act : Chapter 6. Retrieved 2 June 2021, from
https://www.justice.gov/atr/competition-and-monopoly-single-firm-conduct-under-
section-2-sherman-act-chapter-6