Shankar Gopaldas 43101098

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Econ 3440 Regulatory Economics : Assignment 1








Name: Shankar Gopaldas
Student Number: 43101098
Assignment Topic: Case Review Of United States Vs Dentsply
(1998 2005)
Word Count: 2330 Words









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Econ 3440 Regulatory Economics : Assignment 1
The antitrust case between the United States Department Of Justice against Dentsply
which is one of a dozen manufacturers of artificial teeth and other restorative device, can be
seen to be one of the highly profiled cases in antitrust law prosecution, where Dentsply was
prosecuted by the third circuit appeals court to having been involved actively in engaging
exclusionary contracts with its distributors. In 1993, Dentsply introduced its Dealer
Criterion 6 contract which prohibited its dealers to distribute any other competing lines of
artificial tooth brands that was introduced and distributed after 1993. Hence, the plaintiff
United States Department of Justice brought forward a legal suit to the federal court in
1998, alleging the breach of section 2 of the Sherman act by Dentsply which stipulates that
any person monopolizing or attempting to monopolize or combine and conspire with
another party to monopolize any part of the industry would be deemed guilty of a felony.
During the initial trial, the district court concluded that although the Dealer Criterion 6
policy used by Dentsply excluded its competitors from the market, the Department Of
Justice (DOJ) failed to prove that these exclusive agreements used foreclosed a substantial
share of the market to the competitors of Dentsply. This is in which the district court held
that although competitors were excluded from accessing the distributors of Dentsply, it
found that it was more viable and advantageous for the competitors to deal directly with
the laboratories. However, the third circuit appeals court overturned the judgement made
by the federal court, in which it concluded that Dentsply had a significant market share
indicating monopoly power, where it controlled 75% - 80% of the market share of artificial
teeth sales, which was 15 times larger than its closes competitors Ivoclar and Vita. This is in
which the court used the general rule to suggest dominant market power held by a firm
within an industry which is to be more than 55%, although this figure is subjected to
numerous factors such as industry market size and number of competitors.
Hence, in an economist view in considering if Dentsply was a dominant firm with sufficient
market power to monopolize the industry, three main criterias are to be considered, that is,
if Dentsply has complete discretion over the prices its willing to charge (Lerner Index : L > 0
when P > MC ), if there are substantial barriers to entry into the industry and finally, the
significance of market share held by Dentsply within the industry.

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In applying the first criteria on the case of Dentsply, it can be seen that the firm was a
price leader due to its large market share, in which it aggressively increased its prices to
create a high-price umbrella where competitors would price accordingly, without even
taking into consideration to lower its prices when its competitors decided not follow suit.
Thus, these actions undertaken by Dentsply goes in contrast with the theory of perfect
competition in which firms would price accordingly to market demand and supply, hence
suggesting Dentsply to have a certain dominant market power within the industry. Besides
that, by applying the second criteria onto Dentsply, it can be deduced that barriers to entry
were subjected to the competitors of Dentsply by the introduction of Dealer Criterion 6,
where new entrants were required to directly deal with labs and not with the dealer market,
which connects the distribution of artificial teeth to over 100 labs. This is in which for fear of
being excluded by Dentsply from distributing its product lines, distributors were forced to
pull away products of other competitors to ensure its profits sustained from the distribution
of Dentsplys products remained.
Moreover, with a relatively moderate competitor market with eight other relevant firms in
direct competition with Dentsply, a market share of 75% - 80% with profits up to 80% on
average teeth and 90% on premium teeth, in a market that has a stagnant growth rate
would suggest that Dentsply has a dominant market power within the industry. This can be
supported by taking into account the profits margins earned by Dentsply competitors during
the same period which were only 50%. Although this can be argued to suggest inefficiencies
among the competitors of Dentsply that resulted to a lower profit margin, the fact that the
market was relatively stagnant in growth for long periods would suggest flat or small profit
margin growths for Dentsply ( in a perfect equilibrium market) and not steady increases in
profit income as seen.
Looking beyond that, in what can be seen to be a significant judgement made by the third
circuit appeals court to include distributors and end-users in defining the market share of
Dentsply, this thus suggested that Dentsply had monopoly power, as it controlled 75% of
the market in which it prevented its competitors from accessing. This is in which the third
circuit appeals court defined the market share as the total sales of artificial teeth to
laboratories and dealers combined. This decision made by the third circuit appeals court is
significant in which it concluded that the only way Dentsply had access to 75% of consumers
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Econ 3440 Regulatory Economics : Assignment 1
in the artificial teeth industry was through its distributors. The reasoning made by the court
in its decision was mainly due to the market structure of the artificial teeth industry, in
which distributors had a wide access and influence in supplying artificial teeth to
laboratories, hence enabling them to comprise as a large percentage of buyers of
manufactured artificial teeth. Although proving sufficient, it can be argued that the third
circuit appeals court failed to underline important questions raised when including
distributors to the market share, in which it failed to explain if distributors unaffiliated with
Dentsply could have reached end-user laboratories. Hence, this could have lead the court to
overstate the market share owned by Dentsply. Thus, from an economic point of view, it can
be concluded that Dentsply had sufficient market power to be considered a dominant firm
within the industry.
Moving on, as it has been established that Dentsply had sufficient market power in the
artificial tooth industry, the Deparment Of Justice would hence need to provide the
rationale/ mechanism of anticompetitive methods used by Dentsply within the industry. In
the case of Dentsply, the Department Of Justice used the elements included within the
Dealer Criterion 6 which forced dealers distributing products of Dentsply to exclude the
distribution of product lines sold by the competitors. This had a significant effect in helping
preserve Denstplys monopoly power in which it helped reduced and keep competing rivals
below the critical level, thus reducing the threat and preserving the market share of
Dentsply. For an example, dealers unwilling to adhere to the agreement set out by Dentsply
were threatened with refusals by Dentsply to continue supplying its products and at times
even terminating its agreements with dealers who failed to comply with the exclusive
contract set out. Besides that, through the restriction of competitors product lines sold by
distributors, Dentsply evidently created a barrier to entry within the industry in which new
entrants would be forced to deal directly with laboratories and not with the industries
dealers. By using the anti-competitive effects of exclusive contracts by Aghion and Bolton
(1987), it can be seen that in order for a new entrant / competitor to enter the distributor
market of Dentsply, it would need to ensure the cost element is lower than the price and
penalty charged by the incumbent (Dentsply), in which ( CE p d ). This is in which buyers
(distributors) would only include products sold by Dentsplys into its distribution line if and
only if ( t CS(p=c) CS( p = pm(C)), where t is the compensation needed to be paid by the
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entrant for the monopoly profits forgone by the distributor by including the entrant. As
Dentsply has a dominant presence within the market, the losses (penalty price) sustained by
dealers from deviating away from the contract is enormous, hence making it difficult for
entrants / competitors to lure distributors to include their product lines in distribution.
Hence by gaining sufficient market share through the introduction of its exclusive contract,
Dentsply could increase its profits in the stagnant growth artificial teeth industry by setting
above market prices. Thus, it can be deduced that the Dealer Criterion 6 introduced by
Dentsply formed a solid pillar of harm to competition within the artificial teeth industry.
Finally in the argument raised by the Department Of Justice to prosecute Dentsply for
engaging in anticompetitive behaviour, it has to provide evidence that practices conducted
by Dentsply reduced welfare within consumers while taking into account possible
precompetitive justifications. In the case of Dentsply, with the introduction of its collusive
contracts, consumers were seen to be paying prices that annually increased by 1% - 1.5%
above inflation. With higher prices, consumer surplus would adversely decrease which it
creates a deadweight loss within the economy due to market inefficiencies, hence
decreasing total consumer welfare. Besides that, the collusive contract introduced by
Dentsply decrease consumer welfare by reducing the variety of product choices available to
end users (laboratories). This can be explained in which as distributors are forced to only
carry product lines from Dentsply, end-users were not able to obtain products from other
manufacturers as they mainly obtain their supply from distributors. Although it was claimed
that the main reason for implementing exclusionary contracts was due to the differences in
services and efficiency of distributors, the plaintiff in this case managed to prove otherwise.
This is in which when non-collusive distributors were compared with collusive distributors, it
was found that both distributors were equally efficient and effective as the other.
Looking forward, the arguments that can be brought forward by Dentsply to argue its case
on the inclusion of exclusionary contracts between its dealers could be by using the
procompetitive effects of the exclusionary contract. This can be explained in which by
having exclusionary contacts in place between Dentsply and its distributers, this would
minimize the risk of expropriation through the free riding effect. For an example, the
investment made by Denstply to ensure its products and services are marketed well within
the industry and also to ensure that its distributers provided good service to its customers
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Econ 3440 Regulatory Economics : Assignment 1
can be exploited by another manufacturer selling similar products using the same
distributer. This is in which as customers are able to purchase products between different
manufacturers through its distributers, this would enable other manufacturers to free ride
on the investments made the particular manufacturer (Dentsply) to ensure excellent
services are provided to customers. Besides that, with the inclusion of exclusionary
contracts, manufacturers and end-users would benefit through the specialization of
distributors and also manufacturers, in which they would be able to pay higher rebates to
promote higher usage of its products to end-users. For an example, this can be seen in the
aggressive sales campaigns carried out by Dentsply during the exclusionary contract period
where end -users (Laboratories) benefited through achieving higher rebates for an increase
in usage of products manufactured by Dentsply. Hence, it can be deduced that through
specialization effects obtained from exclusionary contracts imposed, firms would be able to
become more efficient, thus benefiting end-users.
Furthermore, by taking into view the Chicago school model, it can be argued that buyers
would only sign into exclusive contracts if they benefit from it and not otherwise. This is in
which as buyers face a competitor which is more efficient than the incumbent (Dentsply),
exclusion of the competitor from the dealer would only hurt themselves as excluding a more
efficient competitor is non-profitable from the distributors perspective. For an example, it
can be argued that if the competitor was efficient enough to produce at a lower cost CE C
even with an entry cost, f, set by the exclusive contract of Dentsply with its dealers, the
entrant would still be able to penetrate and win the market share since ( C CE) D(C) > f.
This is in which as the competitor are efficient enough to price their products just below the
incumbent (Dentsply), the competitor would win the market share and would be able to
make profits to cover up the entry cost imposed. Looking beyond that, Dentsply could also
put forward its argument as being a natural monopoly to explain its large market share
within the industry. This is in which as foreign manufacturers failed to cope with demand
changes of consumer that moved from porcelain products to plastic teeth, Dentsply was the
sole provider that met the demand requirements of American consumers, hence enabling
them to garner a larger market share compared to its competitors.
Finally, in concluding the decision made by the third circuit appeals court in prosecuting
Denstply for anticompetitive behaviour, it can be deduced that the court may have over-
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Econ 3440 Regulatory Economics : Assignment 1
emphasized the Dealer Criterion 6 agreement without taking into account relevant
theories suggested as those made by The Chicago School view. Besides that, the failure of
the court to enquire if distributors would have switched or deviated away against Dentsplys
exclusive agreement if its competitors provided a cheaper, more efficient and suitable
alternative could have caused the court to reach an incorrect judgement by wrongly
identifying Dentsplys market power. This is in which as distributers were not locked into
contracts, they were at free will to determine the most efficient and cost effective
manufacturers products to be included in their distribution line. Last but not least, the
failure of the third circuit appeals court to explain the findings of the district court
suggesting that competitors of Dentsply were inefficient and unwilling to compete
aggressively could have led to a significant change in the direction of judgement made. This
is in which if the appeals court were to have explained and found significant inefficiencies
within the competitors of Dentsply, this would hence suggest that the exclusive contracts
imposed by Dentsply would not have made any difference in promoting anti-
competitiveness within the industry.












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References
Scott A. Sher and Scott D. Russell (2005). Adding Bite to Exclusive Dealing: An Analysis of the
Third Circuits Dentsply Decision. The Anti-trust source.

James W. Kim (2005). Third Circuit Finds Prohibited Exclusive Dealing in United States v.
Dentsply International, Inc. Institute for Consumer Antitrust Studies.

Richard G. Andrews, Judith M. Kinney, Mark J. Botti, William E. Berlin, Jean Lin and Michael
D. Farber (1991). Brief in support of defendants motion to dismiss for lack of subject matter
jurisdiction.

Weis J (2005). Exclusive dealing arrangements: United States V Dentsply International, Inc.

United States District Court For The District Of Delaware (2005). Final Judgement: United
States Of America V Dentsply International, Inc.

United States Court Of Appeals For The Third Circuit. Final Brief: United States Of America V
Dentsply International, Inc.

Lawrence J. White (2013). Market Power: How Does It Arise? How Is It Measured?. The
Oxford Handbook in Managerial Economics.


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