Opinions of the United
1995 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


4-14-1995

Advo v Phila Newspapers Inc
Precedential or Non-Precedential:

Docket 94-1812




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              UNITED STATES COURT OF APPEALS
                  FOR THE THIRD CIRCUIT
                       ___________

                       No. 94-1812
                       ___________

                       ADVO, INC.,
                                     Appellant

                            v.

              PHILADELPHIA NEWSPAPERS, INC.,
               d/b/a PHILADELPHIA INQUIRER;
                  PHILADELPHIA DAILY NEWS
                     _________________

    On Appeal from the United States District Court
       for the Eastern District of Pennsylvania
              (Civil Action No. 93-3253)
                    _______________

                 Argued February 13, 1995

BEFORE:   STAPLETON, GREENBERG and COWEN, Circuit Judges,

                 (Filed: April 14, 1995)
                      ______________

                             John DeQ. Briggs (argued)
                             Margaret M. Zwisler
                             Jerrold J. Ganzfried
                             Richard A. Ripley
                             Howrey & Simon
                             1299 Pennsylvania Ave., N.W.
                             Washington, DC 20004
                             David M. Steger
                             Advo, Inc.
                             One Univac Lane
                             Windsor, CT 06095

                                     Attorneys for Appellant

                             Robert C. Heim (argued)
                             Richard C. Rizzo
                             Judy L. Leone
                             George G. Gordon
                             Dechert Price & Rhoads
                             1717 Arch St.
                             4000 Bell Atlantic Tower
                                   Philadelphia, PA 19103

                                          Attorneys for Appellee

                                   Anne K. Bingaman
                                   Assistant Attorney General
                                   Diane P. Wood
                                   Deputy Assistant Attorney
                         General
                                   Catherine G. O'Sullivan
                                   David Seidman
                                   U.S. Department of Justice
                                   10th & Pennsylvania Ave., N.W.
                                   Washington, DC 20530

                                          Attorneys for Amicus
                                          Curiae United States of
                                          America



                      OPINION OF THE COURT



GREENBERG, Circuit Judge.


          Appellant Advo, Inc. sued appellee Philadelphia

Newspapers, Inc. ("PNI") charging that PNI attempted to

monopolize the market for delivering preprinted advertising

circulars in the greater Philadelphia area, in violation of

section 2 of the Sherman Antitrust Act, 15 U.S.C. § 2.      Advo

alleged that PNI has offered predatorily low prices to major

purchasers of services for delivering circular advertising, and

that, in light of specific features of the market, PNI's scheme

to force Advo from the market has a dangerous probability of

succeeding.

          After extensive discovery, the district court entered

summary judgment in favor of PNI.    Because we concur that PNI
could not have recouped the investment in predation it might have

made, and because Advo failed to present evidence that could

support a finding that PNI either priced below cost or had a

specific intent to monopolize, we will affirm.


                              I.   Introduction

                         A.    Factual Background

           1.   General Features of the Market for Retail

           Advertising

           Before presenting the specific facts of this case, we

find it useful to provide general information on the relevant

advertising markets.     Until recent decades, grocery stores,

discount stores, hardware stores, and other large retailers

promoted their goods primarily through newspapers.       They used two

kinds of advertisements.       Those appearing directly on newspaper

editorial pages are called "run of press" ("ROP") advertising.

Separate pieces of paper included with the newspaper (e.g.

supermarket multi-page ads) are called "circulars" or

"preprints."

           Retailers found newspaper advertising wanting in two

ways.   First, it provides only limited "penetration" into an

area's households.    For example, in Philadelphia the major daily

newspapers reach only 25.4% percent of the households and even

the Sunday paper reaches only 49.1%.        Second, newspaper

advertising cannot focus on specific neighborhoods within a large

metropolitan area.    To give a concrete example of both of these

shortcomings, a supermarket chain understandably wants its
advertisements to reach every household within close proximity to

its stores.    Newspaper advertising, be it ROP or preprint, cannot

provide such targeted saturation coverage.

          In response to these shortcomings, literally hundreds

of "marketing communications" services ("MC services") have

sprung up over the last 30-odd years.   Taking advantage of

comprehensive computer databases containing the addresses of

every household in a region, they have been able to provide

almost complete penetration in delivering advertising materials,

be it in an entire metropolitan area or within, e.g., specific

zip code areas.   These services, of course, deliver only

preprints since they do not publish any sort of newspaper.     The

dispute in this case involves the delivery of print advertising

for retailers targeted at consumers within a metropolitan area.

          MC services deliver either by United States mail or by

hiring delivery people to walk door-to-door and hang bags of

preprints on doorknobs.   The former is often called "shared

mail"; the latter is known as "alternate delivery."    Some costs

are common to both methods; e.g. computerized mailing lists, and

labor to stuff preprints into packets and sort the packets in

order of delivery.   Alternate delivery involves other significant

fixed costs.   In addition to hiring delivery persons and planning

their routes, management must employ a second tier of "verifiers"

to perform spot-checks and ensure that delivery employees simply

are not dumping their packets into the first available dumpster.

          Because mail rates increase with the weight of the

advertising packets, alternate delivery becomes attractive,
despite these high fixed costs, as an MC service attracts more

customers.    Once delivery and verification staff are in place,

the incremental costs of adding more advertising material to the

packet are minimal.

           To cover the high fixed costs of alternate delivery, or

even the lower but still significant fixed costs incurred in mail

delivery, MC services need "base players" that distribute large

numbers of circulars on a routine basis.     Supermarket chains,

which depend on multi-page weekly circulars to attract shoppers,

are one of the most important types of base players.    Large

discount chains, such as K-Mart, also play this role.    There are,

of course, only a small set of such base players in a given

metropolitan area.


                 2. Advo and the Philadelphia Market for Preprint

Advertising

             Advo is a national MC services company and is the

largest full-service direct mail marketing company in the
country.   It distributed at least three billion advertising

packages in 1992, generating nearly a billion dollars in revenue.

Advo began operating in the eight-county area that comprises the

Philadelphia market1 in the mid-1960s, and appears to have grown


1
 . The parties stipulate that the relevant geographical market
in this suit consists of the following eight counties:
Philadelphia, Bucks, Montgomery, Chester, and Delaware counties
in Pennsylvania; Camden, Burlington, and Gloucester counties in
New Jersey. This is the same area as the Census Bureau's
Philadelphia Primary Metropolitan Statistical Area.
rapidly since obtaining the Acme supermarket chain as a base

advertiser for shared mailings in 1983.

          Ironically, Advo faced a Sherman Act section 2 suit as

a result of capturing the Acme account and expanding its business

in Philadelphia.   Cassidy Distrib. Serv. v. Advo-Sys., Inc., No.

84-3464 (E.D. Pa. 1984).   A small competitor that previously had

serviced Acme sued Advo charging predatory conduct in furtherance

of a plan to monopolize the market for distributing advertising

circulars in the region.   In the course of countering this

charge, Advo argued that there are few, if any, barriers to

entering the business of marketing communications, and thus there

is little, if any, chance that a predator could recoup the costs

of illegally obtaining a monopoly.   See app. at 1772-1908, 2317-

2340, 2341-2348.

          The market for circular advertising distribution

appears to have become more competitive in recent years.   When

Advo changed its delivery schedule in 1989 to accommodate Acme,

other major customers became dissatisfied and invited CBA, a MC

services company from outside the area, to enter the Philadelphia

market.   Despite start-up costs of over $3,000,000, CBA turned a

profit within 14 months.   In a move admittedly taken to avert a

"price war," Advo acquired CBA's Philadelphia preprint

distribution operations in 1992.   This acquisition apparently

encountered no antitrust scrutiny.
          3. The Effect of Marketing Communications Services on
          Major Philadelphia Newspapers, and Their Response


          Much of Advo's growth has come at the expense of PNI,

publisher of the Philadelphia market's major daily newspapers,

The Philadelphia Daily News and The Philadelphia Inquirer.     PNI

estimates that it has lost at least $4,000,000 per year in ROP

and circular advertising to Advo and similar competitors.

          To counter Advo's advantages in market penetration and

the ability to target specific neighborhoods, PNI in 1991 began

working on a "total market coverage" ("TMC") program to

supplement ROP advertising with alternate delivery to non-

subscriber households.    PNI started implementing the program in

small stages by 1992.    Although it faced substantial start-up

costs, PNI claims that it hoped to turn a profit on its TMC

program by 1995.

          Facing the same cost structure as Advo, PNI needed a

base player to help cover the high fixed costs of delivering

preprinted advertising packets door-to-door.    In September 1992,

and again in January of 1993, PNI offered to distribute circulars

for the Super Fresh supermarket chain, a major Advo customer, for

about $30 per thousand circulars.     As part of its proposal, PNI

offered discounts on ROP advertising tied to the total volume of

advertising that Super Fresh purchased.    Advo retained the

account by cutting its rate by about 37%, from $58 to $36 per

thousand circulars.     Thus, Super Fresh retained Advo despite its

base rate exceeding that in PNI's proposal by about 20%.

Although the expert opinion testimony is conflicting, there
appears to be no factual basis to Advo's claim that PNI's

proposed prices were below its costs.    There is also no support

for Advo's claim that PNI tendered Super Fresh prices below those

offered to comparable advertisers.

            PNI made similar efforts to wrest the accounts of Acme

and Fleming Foods supermarkets, Bradlees department stores, and

Circuit City consumer electronics stores from Advo; in each case

Advo retained the accounts after cutting its rates substantially.

In fact no major account has switched from Advo.    Thus, it is

clear that to date PNI's activities have been pro-competitive, as

they have resulted in lower prices.


                       B. Procedural History

            Advo filed its complaint against PNI on June 17, 1993,

alleging that PNI was engaged in a predatory pricing scheme

designed to achieve a monopoly over the Philadelphia market for

circular and ROP advertising in violation of section 2 of the

Sherman Act, 15 U.S.C. § 2.    Advo requested damages, 15 U.S.C.

§ 15, and injunctive relief, 15 U.S.C. § 26.   The district court

exercised subject matter jurisdiction over Advo's antitrust

claims under 28 U.S.C. § 1331 (federal question jurisdiction) and

28 U.S.C. § 1337 (interstate commerce jurisdiction).

            The parties undertook extensive discovery, including

deposing at least 30 of each other's corporate officials as well

as other industry experts.    Each side presented expert economic

analysis.    In addition, the eight-volume appendix, running to
over 2300 pages, includes relevant documents such as business

plans, annual reports, and internal memoranda.

          After reviewing this voluminous record, receiving

extensive briefs, and hearing oral argument, the district court

on June 13, 1994, granted PNI's motion for summary judgment on

the antitrust claims.     Advo, Inc. v. Philadelphia Newspapers,

Inc., 

(E.D. Pa. 1994).       The court found that

even if it accepted, arguendo, that PNI had engaged in predatory

conduct with specific intent to monopolize, there was no

dangerous probability that PNI could achieve a monopoly and

maintain it long enough to recoup the costs of predation.      The

court reaffirmed its decision in response to Advo's motion under

Fed. R. Civ. P. 59(e) for reconsideration on July 15, 1994.2

          On August 11, 1994, Advo timely appealed from the

district court's order of summary judgment and from the order

denying the motion for reconsideration.       We have jurisdiction

under 28 U.S.C. § 1291.


                           II.   Discussion

               A.   The Standard for Summary Judgment

          1.   Predatory Pricing Suits in Particular

          For its case to survive PNI's motion for summary

judgment, Advo had to show that there is a "genuine issue as to


2
 . Because these rulings disposed of all federal questions in
Advo's complaint, the court exercised its discretion and
dismissed without prejudice a supplemental state law tort claim
for tortious interference with prospective contractual relations.
[a] material fact" that, if decided in its favor, would legally

entitle it to prevail on its attempted monopolization claim.

Fed. R. Civ. P. 56(c); see Celotex Corp. v. Catrett, 

, 322-26, 

, 2552-54 (1986).     The Supreme Court's

decision in Matsushita Elec. Indus. Co. v. Zenith Radio Corp.,

, 

(1986), led some to believe that

there was a special summary judgment standard for antitrust cases

in general, or for predatory pricing cases in particular.      In

Matsushita, the Court reversed this court and held that we erred

in reversing a summary judgment which the district court granted

to the defendants in a predatory pricing suit.    Expressing

skepticism about the rationality of predatory pricing schemes,

the Supreme Court reasoned that "if the factual context renders

[an antitrust plaintiff's] claim implausible-if the claim is one

that simply makes no economic sense-[the plaintiff] must come

forward with more persuasive evidence to support [its] claim than

would otherwise be necessary."    

106 S.Ct. at 1356

(citations omitted).

          Other language in the opinion, however, demonstrated

that the Court grounded its reasoning in the general standard for

summary judgment under Rule 56.    "Where the record taken as a

whole could not lead a rational trier of fact to find for the

non-moving party, there is no genuine issue for trial," id
(internal quotations omitted).    See also Petruzzi's IGA

Supermarkets, Inc. v. Darling-Delaware Co., 

, 1230-

32 (3d Cir.), cert. denied, 

(1993).    If there was
any doubt about the matter, the Court settled it in Eastman Kodak

Co. v. Image Technical Serv., Inc., 

, 2083 (1992):

          The Court's requirement in Matsushita that
          the plaintiffs' claim make economic sense did
          not introduce a special burden on plaintiffs
          facing summary judgment in an antitrust case
          . . . . Matsushita demands only that the
          nonmoving party's inferences be reasonable in
          order to reach the jury, a requirement that
          was not invented, but merely articulated in
          that decision. If the plaintiff's theory is
          economically senseless, no reasonable jury
          could find in its favor, and summary judgment
          should be granted.



          In its most recent predatory pricing case, the Court

indicated that summary judgment will be appropriate in a host of

specific contexts.   "In certain situationsfor example, where

the market is highly diffuse and competitive or where new entry

is easy, or the defendant lacks adequate excess capacity to

absorb the market share of his rivals and cannot quickly create

or purchase new capacitysummary disposition of the case is

appropriate."   Brooke Group Ltd. v. Brown & Williamson Tobacco

Corp., 

, 2589 (1993).3
3
 . While the plaintiff in Brooke Group alleged "primary line"
price discrimination under the Clayton Act, as amended by the
Robinson-Patman Act, 15 U.S.C. § 13(a), the Court made clear that
such price discrimination was factually identical to predatory
pricing and thus that the analysis in the opinion applies as well
to predatory pricing suits under section 2 of the Sherman Act.

          [P]rimary-line competitive injury under the
          Robinson-Patman Act is of the same general
          character as the injury inflicted by
          predatory pricing schemes actionable under
          § 2 of the Sherman Act . . . [T]he essence of
          the claim under either statute is the same: A
          business rival has priced its products in an
          Matsushita caused some confusion because it in effect

created a legal presumption, based on economic logic, that

predatory pricing is unlikely to threaten competition.    The

Court, citing a long list of scholarly works, found that "there

is a consensus among commentators that predatory pricing schemes

are rarely tried, and even more rarely successful."    

, 106 S.Ct. at 1357; see also Brooke 

(citing this passage from Matsushita).     In a

nutshell, economic analyses stress that (1) predatory pricing,

unlike collusion or merger, involves an expensive "investment in

predation," since presumably the predator will have to price

below costs; (2) this investment must be more than offset by

discounted future monopoly profits; and (3) the ability to

(..continued)
          unfair manner with an object to eliminate or
          retard competition and thereby gain and
          exercise control over prices in the relevant
          market.

               Accordingly, whether the claim alleges
          predatory pricing under § 2 of the Sherman
          Act or primary-line price discrimination
          under the Robinson-Patman Act, two
          prerequisites to recovery remain the same.
          [1.] [prices] below an appropriate measure of
          a rival's costs . . .
          [2.] a demonstration that the competitor had
          a reasonable prospect, or, under § 2 of the
          Sherman Act, a dangerous probability, of
          recouping its investment in below-cost
          prices.

Brooke 

.

          Advo could not make a claim under the Robinson-Patman
Act, since the Act applies only to commodities and not services
like advertising.
maintain a monopoly for long enough to recoup an investment in

predation is uncertain, since supracompetitive prices will

attract new entrants (or returning competitors).4

          Empirical studies support these theoretical insights.

While it once was believed widely that turn-of-the-century

"robber barons" commonly practiced predatory pricing to eliminate

competitors, research over the last few decades has exposed this


4
 . Some recent work has demonstrated that predatory pricing may
be viable in a limited number of special situations. See, e.g.,
Jonathan Baker, Predatory Pricing After Brooke Group: An Economic
Perspective, 62 Antitrust L.J. 585 (1994).

          Baker provides a typical situation where predatory
pricing might work:

          Suppose a chain store faces a non-chain rival
          in each of a large number of towns. The
          chain cuts its prices drastically in a few
          towns. When the chain's rivals in those
          towns either exit or begin to compete less
          aggressively with the chain, the price war
          ends and high prices are restored. In
          addition, the chain store's rivals in all the
          other towns, in which the chain did not cut
          prices, also respond by avoiding aggressive
          competition with the chain. As a result
          prices also increase in the towns in which
          predation did not occur.

Predation makes economic sense in such cases because
the predator needs to make a relatively small investment (below-
cost prices in only a few markets) in order to reap a large
reward (supracompetitive prices in many markets).

          Advo, however, has made no argument that PNI's
predation is anything like this special case where price
predation is economically sensible. This is probably because the
facts of this case do not fit under such a theory. PNI competes
in only one market, and Advo presents no evidence that PNI's
parent, Knight-Ridder Corporation, is using Advo as an example
for competitors it faces in other markets.
belief as a myth.   For instance, a seminal article demonstrated

that John D. Rockefeller invariably used mergers, and not

predatory pricing, to lessen competition in the oil industry.5

          Based on this combination of economic logic and

empirical verification, the Court has concluded that "economic

realities tend to make predatory pricing conspiracies self-

deterring:   unlike most other conduct that violates the antitrust

laws, failed predatory pricing schemes are costly to the

conspirators."   

, 106 S.Ct. at 1360.

"[I]f [the alleged predators] had no rational economic motive to

conspire, and if their conduct is consistent with other, equally

plausible explanations, the conduct does not give rise to an

inference of conspiracy."   

106 S.Ct. at 1361.6

          Erroneous jury verdicts for plaintiffs in predatory

pricing cases pose a unique threat.   "[C]utting prices in order

to increase business often is the very essence of competition.

5
 . John S. McGee, Predatory Price Cutting: The Standard Oil
(N.J.) Case, 1 J. Law & Econ. 137, 168-69 (1958). See also
Morris Adelman, A&P: A Study in Price-Cost Behavior and Public
Policy (1966) (showing that national supermarket chain did not
engage in predatory pricing to eliminate local rivals); Kenneth
G. Elzinga, Predatory Pricing: The Case of the Gunpowder Trust,
13 J. Law & Econ. 223, 240 (1970) (showing that gunpowder
manufacturers did not use predatory pricing to achieve monopoly
power). The Supreme Court has cited approvingly the empirical
work of McGee and others, 

.
6
 . Matsushita involved alleged predatory pricing conspiracies
among a group of oligopolistic defendants. Nevertheless, the
Court in Matsushita expressed equal skepticism about the
plausibility of predatory pricing by a single defendant. "These
observations apply even to predatory pricing by a single firm
seeking monopoly power." 

, 106 S.Ct.
at 1357 (emphasis in original).
Thus, mistaken inferences in cases such as this one are

especially costly, because they chill the very conduct the

antitrust laws are designed to protect."   

, 106 S.Ct. at 1360.    "[C]ourts should not permit factfinders

to infer conspiracies when such inferences are implausible,

because the effect of such practices is often to deter

procompetitive conduct."   

106 S.Ct. at 1359.    We

cannot ignore the danger of chilling competition in this case,

since PNI's acts clearly have benefited consumers, in the short

run at least, with lower prices.   There are antitrust problems

only if PNI has the intent and the power to harm these consumers

in the long run.


          2. Burden on Advo in General

          The United States, in its amicus brief, claims that we

stated in Big Apple BMW, Inc. v. BMW of North America, Inc., 

, 1363 (3d Cir. 1992), cert. denied, 

(1993), that summary judgment is inappropriate where plaintiffs

have "advanced even a 'mere scintilla' of evidence" in support of

their theory of recoupment.   Br. at 12.   This statement perplexes

us as it misstates the holding in Big Apple.     The relevant

passage in Big Apple explicitly requires more:    "if the opponent

[to a summary judgment motion] has exceeded the 'mere scintilla'

threshold and has offered a genuine issue of material fact, then

the court cannot credit the movant's version of events against

the opponent, even if the quantity of the movant's evidence far

outweighs that of its 

(emphasis
added).   See also Petruzzi's 

.   In keeping

with Rule 56(c) and Celotex, we clearly stated in Big Apple that

a plaintiff cannot survive summary judgment unless it can produce

more than a "scintilla" of factual support for their theory of

legal recovery.

          To summarize, then, in order to establish a "genuine

issue" that entitles it to reach trial on its attempted

monopolization claim premised on predatory pricing, Advo must

present more than a scintilla of evidence that the alleged

predatory conduct makes economic sense.   In this appeal, the main

hurdle for Advo is to show that PNI reasonably could expect to

recoup an investment in the predatory pricing of distribution of

circular advertising.


                     B. Elements of Predation

          "[I]t is generally required that to demonstrate

attempted monopolization a plaintiff must prove (1) that the

defendant has engaged in predatory or anticompetitive conduct

with (2) a specific intent to monopolize and (3) a dangerous

probability of achieving monopoly power."     Spectrum Sports, Inc.

v. McQuillan, 

, 890-91 (1993).     See also Barr Labs.

Inc. v. Abbott Lab., 

, 112 (3d Cir. 1992).     The

district court assumed arguendo that Advo had demonstrated that

there were genuine issues of material fact surrounding the first

two elements of its attempted monopolization case:     predatory

conduct, in the form of predatory, below-cost pricing; and
specific intent to monopolize.    It nonetheless found no dangerous

probability that PNI could achieve monopoly power.

          While we concur with the district court's conclusion,

see § II.B.3 infra, we first examine Advo's evidence on predatory

conduct and specific intent.    We find that Advo failed to produce

evidence sufficient to survive summary judgment on any of the

three elements of its attempted monopolization claim against PNI.


          1. Below-Cost Pricing

          "[P]redatory pricing means pricing below some

appropriate measure of cost."    

n.8 (internal quotation marks omitted).    Yet

"[t]here is a good deal of debate, both in the cases and in the

law reviews, about what 'cost' is relevant in such cases," 

consensus has yet been reached on the proper definition

of predatory pricing in the antitrust context . . . ."    Cargill,

Inc. v. Monfort of Colorado, Inc., 

, 117 n.12, 

, 493 n.12 (1986).    The Supreme Court, however, recently

reaffirmed that "the reasoning in both [Matsushita and Cargill]

suggests that only below-cost prices should suffice, and [that it

has] rejected elsewhere the notion that above-cost prices that

are below general market levels or the costs of a firm's

competitors inflict injury to competition cognizable under the

antitrust laws."   Brooke 

.   In Brooke

Group, the Court accepted for the purposes of the case the

parties' agreement to use average variable cost, but "again
decline[d] to resolve the conflict among the lower courts over

the appropriate measure of cost."   

n.1.

          Under microeconomic theory, the most important measure

is marginal cost - the cost of producing each incremental unit

of output.   As long as a firm's prices exceeds its marginal cost,

each additional sale decreases losses or increases profits.    Such

pricing is presumably not predatory.

          Like many economic abstractions, marginal cost is

difficult to measure.   The most widely cited approach to dealing

with this problem, Phillip Areeda & Donald F. Turner, Predatory

Pricing and Related Practices Under Section 2 of the Sherman Act,

88 Harv. L. Rev. 697, 716-18 (1975), divides costs into two

categories: fixed costs that do not vary with the level of output

(e.g. interest on borrowings, insurance premiums), and variable

costs that do vary with the level of output (e.g. overtime wages,

electricity bills, material costs).    Because it is practically

impossible to calculate the portion of variable costs

attributable to each additional unit of output, Areeda and Turner

argue that courts should use average variable cost as a proxy for

marginal cost.

          Regardless of the measure of a defendant's costs on

which a plaintiff premises a predatory pricing claim, a plaintiff

cannot anchor its case on theoretical speculation that a

defendant is pricing below that measure.    Indeed, "[a]s a

practical matter, it may be that only direct evidence of below-
cost pricing is sufficient to overcome the strong inference that

rational businesses would not enter into conspiracies such as
this one."    

n.8 (emphasis added).7

            Despite extensive discovery, Advo apparently is unable

to produce any direct evidence that PNI offered to distribute

circulars at prices below any relevant measure of cost.      As a key

step of his analysis, Advo's economic expert states that

"[a]verage variable costs for [PNI's TMC program] were

estimated."     App. at 1630 (emphasis added).   The basis for these

estimates is weak.     For instance, with no more foundation than a

statement by PNI's publisher that inserting circulars involves

"extensive costs," the expert concluded that PNI "potentially

vastly understated" this variable cost.     Other components of the

expert's cost estimates similarly lack a factual basis.

             As Brooke Group makes clear, expert testimony without

such a factual foundation cannot defeat a motion for summary

judgment.    "When an expert opinion is not supported by sufficient

facts to validate it in the eyes of the law, or when indisputable

record facts contradict or otherwise render the opinion

unreasonable, it cannot support a jury's verdict . . . .      Expert

testimony is useful as a guide to interpreting market facts, but

it is not a substitute for them."     Brooke 

.   Advo failed to present facts establishing a genuine issue

over whether PNI priced circular advertising distribution



7
 . As we explain in 

, the Court's use of the word
"conspiracy" here in no way limits the application of this
language to Sherman Act section 1 cases.
services below some measure of costs.    This omission provided

sufficient grounds for granting summary judgment.


            2. Specific Intent to Monopolize by Predation

            In addition to demonstrating predation, plaintiffs

alleging monopolization under section 2 must produce intent

evidence.    Courts sometimes infer specific intent directly from

proof of below-cost pricing.    Inasmuch as Advo failed to create a

genuine issue over pricing, however, it needed to prove specific

intent by other means.    Its two attempts, based on (1) statements

in internal PNI documents, and (2) PNI's alleged targeting of

Advo's key customers, are not sufficient to withstand PNI's

motion for summary judgment.

            Antitrust plaintiffs often establish specific intent

with "smoking gun" documents that articulate antitrust scienter

in no uncertain terms.    Advo found no such documents; instead, it

attempted to cut and paste unrelated and innocent clauses

together to produce guilty declarations.    To take one example,

Advo misrepresents that PNI's TMC Business Plan states that:

            [T]he 'ultimate benefit' of the TMC program
            was that PNI would be the 'one-stop buy,'
            i.e. the only competitor left, in the eight
            county Philadelphia market when rates would
            become 'upwardly adjustable.'



Appellant's Br. at 24.    The phrases "ultimate benefit" and "one-

stop buy" do occur in the same sentence in the plan, app. at 738,

and correctly portray PNI's overall objective.   The phrase
"upwardly adjustable," however, comes eight paragraphs later,

app. at 739, as the discussion progresses from an overview of the

plan to the nuts and bolts of various hypothetical business

scenarios.    PNI used the phrase "upwardly adjustable" in a

scenario in which it assumed that prices "are deemed to be very

competitively set . . . ."    This is a far cry from an admission

that it was charging predatory prices to start with, or that it

planned to charge monopolistic prices in the future.

            Advo officials themselves have used aggressive-sounding

language.    Its CEO, Robert Kamerschen, once directed his managers

"to seize the OPPORTUNITY inherent in the stumbling PROBLEMS of

the newspaper industry," and quoted McDonald's founder Ray Kroc

for the advice that "[w]hen [you] see the competition drowning,

. . . stick a water hose down their throats."     App. at 459.

            The antitrust statutes do not condemn, without more,

such colorful, vigorous hyperbole; there is nothing to gain by

using the law to mandate "commercially correct" speech within

corporate memoranda and business plans.    Isolated and unrelated

snippets of such language "provide no help in deciding whether a

defendant has crossed the elusive line separating aggressive

competition from unfair competition."     Morgan v. Ponder, 

, 1359 (8th Cir. 1989).    We thus conclude that nothing quoted

from PNI's internal documents displays PNI's specific intent to

monopolize the market for distribution of circular advertising.

            Advo's claim that PNI's "targeting" of its key accounts

demonstrates such specific intent is similarly unavailing.       As we

§ I.A.1, circular advertising distributors need
"base players," that advertise frequently and on a large scale,

to cover their high fixed costs.        Inasmuch as there are

relatively few base players in the Philadelphia market, any firm

competing in the market for distribution of circular advertising

necessarily would try, as a first step, to wrest one or more of

these large accounts away from Advo.       PNI's proposals to Advo's

largest customers are exactly what we would expect from a

legitimate competitor.     That such behavior also might be

consistent with predation does not mean that Advo can survive

PNI's motion for summary judgment.       "If [seemingly predatory]

conduct is consistent with other, equally plausible explanations,

the conduct does not give rise to an inference of conspiracy."

Matsushita, 475 U.S. at 

.


            3. Dangerous Probability of Recoupment

            Finally, we concur with the district court's

determination that Advo failed to establish a genuine issue of

material fact about PNI's ability to recoup any investment made

in predation (§ II.B.3.a infra).     The Supreme Court instructs

that "[i]f market circumstances or deficiencies in proof would

bar a reasonable jury from finding that the scheme alleged would

likely result in sustained supracompetitive pricing, the

plaintiff's case has failed."    Brooke 

.
The district court found, in effect, that "[t]he evidence is

inadequate to show that in pursuing this scheme, [PNI] had a

reasonable prospect of recovering its losses from below-cost

pricing,"   

   We agree.
          In addition, we reject Advo's theories that PNI can

scare away potential entrants by "strategic deterrence"

(§ II.B.3.b infra), or can "leverage" its monopoly over ROP

advertising to gain a monopoly over the distribution of circular

advertising (§ II.B.3.c infra).     Finally, we find no support for

Advo's theories for how PNI could recoup an investment in

predation via either price discrimination (§ II.B.3.d infra) or

long-term contracts (§ II.B.3.e infra).


                  a. Low barriers to entry

          For the purposes of this section, we accept the

contention that PNI is pricing below cost, with specific intent

to obtain a monopoly in the distribution of advertising

circulars.     We further assume, arguendo, that it will be able to

complete successfully the first stage of its plans by eliminating

Advo and all other competitors from the Philadelphia market.

But, as we 

§ II.A, in order to defeat the motion

for summary judgment Advo must demonstrate that PNI has a

dangerous chance to recoup the losses it necessarily would incur

in pricing below cost.

             If it is easy to enter the circular distribution

business, PNI's scheme is doomed to failure:     any attempt to

recoup by charging supracompetitive prices after it has gained a

monopoly simply will attract new (or old) distributors who will

undercut PNI and force prices back down to competitive levels.

Predatory pricing schemes that fail at the recoupment stage may

injure specific competitors like Advo, but do not injure
competition (i.e. they do not injure consumers) and so produce no

antitrust injury.    See Brunswick Corp. v. Pueblo Bowl-O-Mat,

Inc., 

, 487-90, 

, 697 (1977).   Such

futile below-cost pricing effectively bestows a gift on

consumers, and the Sherman Act does not condemn such inadvertent

charity.

           In deciding that low barriers to entry would defeat any

attempt by PNI to recoup an investment in predation by raising

prices, the district court properly analyzed the specific

features of the Philadelphia market for circular advertising.

"In order to determine whether there is a dangerous probability

of monopolization, courts have found it necessary to consider the

relevant market and the defendant's ability to lessen or destroy

competition in that market."    Spectrum 

.

           We do not see the difficulty of entering the business

of assembling and distributing bags of advertising circulars,

whether by mail or door-to-door.   The inputs required are readily

available: a small cadre of experienced managers; a sales force;

computerized address lists available from a variety of vendors;

and a large number of low-skill employees to stuff circulars into

packets, and then either to stuff them into newspapers or hang

them on doorknobs.

           Nobody has a monopoly over any of these commonly-

available goods and services.   Managers with experience in the

circular advertising distribution business are probably the

scarcest of the requirements, but if Advo exited the Philadelphia

market, a new entrant might be able to hire its local management
team.    The Supreme Court has observed that driving a competitor

out of business may do no more than allow a new entrant to buy up

the idled physical and human capital at bargain prices.    See

n.15.     In any

event, the business involved here hardly is of a highly

sophisticated nature.

           High capital requirements also pose no barrier to

entry.   The total start-up investment, based on CBA's successful

entry into the Philadelphia market, is a couple of million

dollars.   While this sum is not trivial, it is not so high that

it would prevent new competitors from jumping in if PNI tried to

charge supracompetitive prices.8

           Advo itself made substantially all of these points in

defending against a similar claim ten years ago, Cassidy Distrib.

§ I.A.2.   According to Advo's expert in that case,

"[e]ntry into the market [for distribution of circular

advertising] is comparatively easy.   Little initial capital is

required relative to many other businesses.   Mailing lists and

operational expertise are available from many sources."    Revised

Preliminary Report of Dr. Almarin Phillips, app. at 2345.9     In
8
 . It is also noteworthy that Advo may have deeper pockets than
PNI. Although it is difficult to extract financial information
for PNI from the annual report of its parent corporation Knight-
Ridder, we can ascertain that Advo's revenues in 1992,
$910,000,000, were more than double those of PNI, $422,000,000.
While it is true that Knight-Ridder's 1992 revenues,
$2,300,000,000, were in turn more than twice those of Advo,
Advo's theory of recovery focuses exclusively on the PNI
subsidiary.
9
 . Advo has not objected to PNI's reliance on Phillip's report
on the possible ground that the report was not admissible
addition, Advo's expert in the Cassidy case noted two other

sources of competition.    First, advertisers, individually or as a

group, could form their own circular distribution ventures if a

monopolistic vendor raised prices significantly.    Second,

unconventional shared mail vendors, such as utilities and credit

card companies that send out bills every month, would become more

attractive if conventional sellers overprice their services.

            Advo tries to distance itself from its position in

Cassidy by arguing that conditions in the Philadelphia market

have changed in the intervening years.    While Advo arguably shows

that CBA might be unable to repeat its 1989 entry today due to

increased competition and PNI's altered delivery schedule, it

fails to undermine any of the observations it made in Cassidy:

the business is simple, capital requirements are not excessive,

and there are a variety of ways to compete in the market for

distributing circulars.

            Although Advo did not mention "know-how" or credibility

in the Cassidy case, it now claims that these factors present

significant barriers to entering the circular distribution

business.    We agree with the district court that these arguments

are unconvincing.   In the words of Advo's economic expert, the

know-how barrier stems from "the substantial efforts that must be

undertaken to obtain the necessary business . . . the experience

required for ensuring the delivery of preprinted advertising to

(..continued)
evidence on the motion for summary judgment and thus we do not
address that question.
over 2,300,000 households on a weekly basis (on a given day of

the week), and coordinating the logistics associated with

ensuring quality control and customer satisfaction."   App. at

1615.

          Oddly, Advo claims that the complexity of PNI's TMC

Plan proves that know-how is a significant barrier to entry.      To

the contrary, the fact that PNI was able to plan and implement

(according to Advo's pleadings) an effective plan in less than a

year shows that entry into the circular distribution business

does not require extraordinary know-how.   Beyond the bald

assertions of its expert, that are without factual significance,

Brooke 

, Advo presents no evidence that

its business requires know-how any different from other

businesses.   Indeed, the record indicates that circular

distribution is relatively simple.   Tellingly, Advo cites only

two dated district court decisions arguing that know-how can be a

significant barrier to entry.10   In any event, the value of

precedent on this point is limited, as the importance of know-how

can be determined only in the context of a particular business.

          Advo also emphasizes the need for a reputation for

providing reliable service as a barrier to entering its business.

This approach, however, proves too much.   New entrants and

customers in virtually any market emphasize the importance of a


10
 . Marnell v. United Parcel Svc., Inc., 1971 Trade Cas. (CCH)
¶ 73,761 (N.D. Cal. 1971); Kennecott Copper Corp. v. Curtiss-
Wright Corp., 

, 965 (S.D.N.Y), aff'd in part,
rev'd in part on other grounds, 

(2d Cir. 1978).
reputation for delivering a quality good or service.    Federal

Express had to establish a strong reputation for on-time delivery

in order to create an entire new industry; because of its

reputation McDonald's has flourished despite having numerous

competitors.   The number of examples is extensive.

          Advo's argument, without some limiting principle (that

it fails to supply), implies that there are barriers to entry,

significant in an antitrust sense, in all markets.     We find this

proposition implausible and, moreover, precluded by Supreme Court

precedent.   See Brooke 

(suggesting

summary judgment is appropriate in predatory price suits "where

new entry is easy," implying that there are easy-entry markets);

see also 

n.15

("Respondents offer no reason to suppose that entry into the

relevant market is especially difficult . . . .").    While we do

not question the judgment of other courts of appeals that in

other market contexts reputation is a significant barrier to

entry,11 Advo has failed to create a genuine issue over the

existence of barriers to entry in this case.

          We also point out that the reputation may be of only

marginal significance where there are only a limited number of

11
 . See Thompson v. Metropolitan Multi-List, Inc., 

, 1577 (11th Cir. 1191) (finding "goodwill," a partial
synonym for reputation, could be barrier to entry in real estate
listings market), cert. denied, 

(1992); U.S.
Philips Corp. v. Windmere Corp., 

, 703 (Fed. Cir.
1988) (finding that "the need to have a well-known brand with
wide consumer acceptance" amounted to a barrier to entering the
market for rotary electric shavers), cert. denied, 

,

(1989).
consumers for a service as is the case here.     After all, a new

entrant need only convince a few businesses to use its services

for it to be successful in the circular distribution business.

Thus, this case differs from a situation in which the competitors

seek their customers in a large retail market.

          Assessing barriers to entry is not an easy task.     In

the ideal world of neoclassical economics, the implicit

assumption is that there are no such barriers.    Of course in real

world markets this assumption never holds and new entrants face a

variety of hurdles.   The question is, how far from the economic

ideal do the special features of a given market take us?     We

agree with the district court that neither know-how nor

reputation make entry into the market for distributing circular

advertising so difficult that PNI could charge supracompetitive

prices for a significant period of time.   Thus competition would

prevent PNI from recouping the cost of predation.    In the next

four subsections, we explain that "strategic entry deterrence,"

PNI's monopoly power in the ROP market, its ability to engage in

price discrimination, and its use of supposedly long-term

contracts do not alter this conclusion.


               b. Strategic entry deterrence

          The idea behind "strategic entry deterrence" is that a

monopolist who pursues predatory pricing with sufficient zeal and

frequency will earn a reputation formidable enough to scare off

all potential entrants indefinitely.   The firm then can charge

monopolistic prices long enough to recoup its investment in
predation.    Like Advo's arguments that know-how and reputation

create barriers to entry, its strategic entry deterrence theory

sweeps too broadly.   Without some limiting principle, it would

bar summary judgment in every predatory pricing case, a result at

odds with Matsushita and Brooke Group.

          As a matter of economics, ease of entry makes the

threat implicit in strategic entry deterrence non-credible.

Potential competitors will realize that at some point the

predatory firm will be unable or unwilling to charge below-cost

prices and absorb further losses, since nobody's pockets are

bottomless.   High prices will attract a stream of competitors who

eventually will sap the predator's bank account.


                c. Leveraging ROP market power

          PNI alone distributes newspapers across the entire

Philadelphia market, and we assume that it has a monopoly over

ROP advertising in the metropolitan area taken as a whole.    Advo

claims that PNI offered discounted ROP rates to customers placing

circulars in its TMC program.   Advo argues that such "leveraging"

of existing monopoly power in an attempt to gain monopoly power

over a related market amounts to anticompetitive conduct in

violation of the Sherman Act.

          While such leveraging arguments have long been a staple

of antitrust suits, they have come under increasing attack as

economically groundless.12   They appear to be based on analysis

12
 . Robert H. Bork, The Antitrust Paradox 372-73 (2d ed. 1993);
Richard A. Posner, Economic Analysis of Law § 10.10 (4th ed.
akin to the myth that a monopolist can charge any price it wants.

That, of course, is not true; an exclusive seller will raise

prices only to the point where the higher price is not more than

offset by a decrease in quantity demanded.    The shape of the

demand curve constrains the behavior of all sellers, even

monopolists.

            Similarly, leveraging arguments like Advo's imply that

a monopolist somehow magically can multiply monopoly power in one

market into monopoly power in two markets.    This makes no sense.

PNI's monopoly in the Philadelphia market for ROP is worth so

much a year, say $X.    The simplest way for PNI to exploit this

monopoly is to set ROP price and output levels so that its

supracompetitive profits on ROP advertising are $X.    Advo alleges

that instead, PNI is lowering the price of ROP advertising (and

thus raising quantity) in an attempt to gain circular advertising

business.    In the extreme, it is possible that PNI could charge

competitive prices for (and produce a competitive quantity of)

ROP advertising, and use the entire value of its ROP monopoly to

increase its circular market share.

            The question is, what would PNI accomplish by such a

strategy?    Even if it successfully monopolizes the circular

distribution advertising market by investing the proceeds from

its ROP monopoly in predation, it will be unable to recoup those

profits as long as there are low barriers to entering the

(..continued)
1992); Richard Markovitz, Tie-ins, Leverage, and the American
Antitrust Laws, 80 Yale L.J. 195 (1970).
circular distribution market.   Any attempt to earn back the

foregone profits by charging monopoly prices on distribution of

circular advertising, as we 

§ II.B.3.a, merely

will lead to a wave of new entrants who will drive prices down to

competitive levels.

           The Supreme Court has recognized this point.    In

Matsushita, the plaintiff American producers claimed that their

Japanese competitors had a monopoly over the Japanese domestic

television market and were using the profits derived in Japan to

fund a predatory pricing scheme in America.   The Supreme Court,

taking these propositions as true, found no antitrust problem

since the defendants were unlikely to recoup their foregone

profits:

           Nor does the possibility that petitioners
           have obtained supracompetitive profits in the
           Japanese market change this calculation.
           Whether or not petitioners have the means to
           sustain substantial losses in this country
           over a long period of time, they have no
           motive to sustain such losses absent some
           strong likelihood that the alleged conspiracy
           in this country will eventually pay off.



Matsushita, 475 U.S. at 

(emphasis in

original).

           Even if we agreed that PNI somehow could multiply its

monopoly power in the ROP market because of some unusual

interdependency with the circular distribution market, there is

little, if any, evidence that it attempted to use leverage.     The

record shows that PNI simply offered discounts based on the total
amount of advertising purchased by a customer.   PNI did not

threaten to deny ROP service to customers that refused to place

their circular distribution business with it, nor did PNI grant

extraordinary discounts for customers of its TMC program.        PNI's

discounts, based on the total amount of dollars spent by a

customer, offend no antitrust principles.13   Such "total

quantity" discounts distinguish this case from SmithKline Corp.

v. Eli Lilly & Co., 

(3d Cir.), cert. denied, 

, 

(1978), where we found that discounts tied

to the purchase of specific items might amount to unlawful

leveraging of monopoly power.


               d. Price discrimination

          Advo claims that PNI can recoup its investment in

predation by charging high prices to small accounts, while

retaining base players with lower, competitive prices.      It

asserts that PNI's ability to retain base players with low (but

above cost) prices will deter new entrants.

          What Advo wishes to characterize as price

discrimination is, again, nothing more than quantity discounting.

A host of Advo assertions to the contrary are without foundation.

Advo claims that "PNI does not afford non-base players such

benefits," Br. at 22, but cites no record support.    It buttresses

its assertion that "PNI further discriminates between base

13
 . Tellingly, Advo offers precisely the same kinds of
discounts; e.g. customers who buy enough shared mail receive
discounts on all other services purchased from Advo.
players and non base players by giving the base players large

discounts off the published price,"    Br. at 22, with no less than

four cites to the appendix, but none of the cited material

provides any real support.    Finally, Advo contends that "PNI

offered the special ROP discounts only to Advo base players."

Br. at 23 (emphasis added).    Although it gives three cites to the

appendix, none remotely support this crucial assertion.     The

record indicates that PNI offered quantity discounts to all

customers on an equal basis.    Such common commercial practice

does not offend the Sherman Act.

           In addition, our ease of entry 

§ II.B.3.a, applies to small buyers as well as base players.      If

PNI tried to charge supracompetitive prices to smaller accounts,

we see no economic reason why new entrants could not successfully

gain this business by charging lower prices.    Indeed, suburban

newspapers are an existing source of competition for many local

retailers, and most of these local publications have implemented

programs to reach non-subscribing households.   We previously

rejected Advo's theory of predation in Barr 

.   The plaintiff in Barr claimed the defendant was selling at
low prices to big drug store chains, but charging more to smaller

retail pharmacies.   We questioned the economic logic of this

claim, noting that "competitors would step in with lower prices

[to small retailers] to defeat Abbott's strategy."


                e. Long-term contracts
           We also find no merit in Advo's claim that PNI plans to

monopolize the circular advertising market by signing long-term

(two-year) contracts with base players.     We begin by noting that

contracts to purchase are never per se violations of the

antitrust laws, even in their most restrictive forms.      Tampa

Elec. Co. v. Nashville Coal Co., 

, 333, 

,

631 (1961).    The proposed two-year contracts were not highly

restrictive; they were neither requirements contracts compelling

buyers to purchase all of their circular advertising from PNI,

nor did the offers contain exclusionary clauses barring

advertisers from dealing with other vendors.

             Moreover, there is clear evidence in the record that

one- and two-year contracts are standard in the industry.      App.

at 1616.   CBA, now owned by Advo, had a two-year contract with

Super Fresh.    App. at 1965-66.   Indeed, in its brief, Advo flatly

states that "[b]ase players typically purchase preprint

distribution through long-term contracts of twelve months or

more."   Br. at 22.   Since PNI's proposed contract length, two

years, did not depart from standard industry practice, Advo in

effect must be claiming that all distributors of circular

advertising engage in exclusionary behavior by using long-term

contracts.    It provides no support for this improbable

conclusion.

             We note also that base players are not small,

unsophisticated entities likely to sign contracts of adhesion in

favor of PNI.    They are major regional and national retailers who

presumably do not enter into agreements unless the terms are in
their interests.   These retailers have proved to be keenly aware

of supracompetitive pricing for distribution of circular

advertising, and explicitly have invited competitors to enter the

market when they felt prices were excessive.   It is unlikely that

they would agree to a deal that permitted PNI to sock it to them

down the road.

          While it is true that PNI internal documents discuss a

desire to "lock up" base players with "multi-year" contracts,

app. at 1137-38, this is merely another example of harmless

commercial rhetoric that we 

§ II.B.2.   It is of

no antitrust significance.


                          III. Conclusion

          We close with the following observation.   There can be

little doubt but that PNI's adoption of the TMC program has

resulted in lower prices for distributing advertising circulars

in the Philadelphia market.   Yet Advo would have us condemn PNI

because of what Advo contends, without basis, will be the long-

range consequence of PNI's actions.   We reject Advo's argument.

This case is a text-book example of a situation in which a

plaintiff is, in the words of Matsushita, using the antitrust
laws in an attempt to chill the very conduct the laws were

designed to protect.

          Accordingly, because the district court correctly

determined that PNI had no reasonable prospect of recouping any

investment made to obtain predatorily a monopoly in the market

for distributing circular advertising, we will affirm its order
of June 13, 1994, granting summary judgment against Advo and its

order denying reconsideration on July 15, 1994.   As additional

ground for affirming, we find that Advo failed to establish a

genuine issue of material fact to support its case on the other

two elements of its Sherman Act section 2 claims, predatory

conduct and specific intent to monopolize.   Finally, we note that

the district court did not abuse its discretion in dismissing the

state-law tortious interference with contractual relations claim

once it had resolved all substantial federal questions in the

case.




          ADVO, INC. v. PHILADELPHIA NEWSPAPERS, INC.,

No. 94-1812



STAPLETON, Circuit Judge, concurring:

          I agree with the court's conclusion regarding one of

the case dispositive issues presented in this appeal.    Advo

failed to establish a genuine issue of material fact as to

whether there was a dangerous probability that PNI would recoup

its alleged investment in predation.    I write separately because

my reasons for reaching that result differ somewhat from those

offered by the court.

          Advo bore the burden of establishing a genuine issue of

material fact on the recoupment issue.   To meet this burden, Advo

attempted to show that various impediments to market entry or

reentry would tend to keep potential competitors out of the
market long enough for PNI to recoup its investment in predation

through the charging of supracompetitive prices.   Advo's task of

presenting a record that would permit a rational factfinder to so

conclude was made substantially more difficult by PNI's evidence

establishing that CBA, as recently as 1989, had successfully

entered the market in well under a year during a period when no

one was charging supracompetitive prices.   Advo attempted to meet

the challenge presented by CBA's entry by pointing to evidence

which tended to show that there are barriers in the market today

which were not present when CBA entered the market.

          Advo no doubt has presented facts from which a rational

jury could infer that various market factors would tend to impede

market entry or reentry.   Showing that various factors might

impede market entry is not enough, however.   Summary judgment is

appropriate here because Advo has failed to provide a rational

basis for an inference that the various market-entry impediments

are substantial enough to deter entry for a period sufficient to

permit recoupment through the charging of supracompetitive

prices.

          Having concluded that Advo failed to meet its burden on

the recoupment issue, I would not reach the issues of whether

Advo met its burdens on the predatory-pricing or specific-intent-

to-monopolize elements of its § 2 claim.