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Predatory pricing

What is predatory pricing? dominant firm lowers price to either (1) drive rivals out of the market or (2) induce rivals to raise prices (or both). After rivals exit and/or raise their prices, overall prices rise to anticompetitive levels.

Test for predatory pricing (Brooke Group): predatory pricing is unilateral conduct, so can only be reached under Section 2 of the Sherman Act (P basically always loses)

  1. Power: proof of monopoly (substantial market) power
  2. Conduct: (a) pricing below some measure of cost AND (2) "dangerous probability of recoupment"

Compare to non-price exclusion: this test is much more precise than the test for non-price exclusion offered in Aspen Skiing and Trinko

Reasons predatory pricing is mostly defunct: no P has won a sole predatory pricing case

  1. The Chicago Critique (1970s)
    1. Predatory pricing is rarely successful
      • Losses for predator are certain (pricing below costs), while recoupment is uncertain (scheme to coerce competitors will likely fail before firm has to raise prices to avoid losing too much money)
    2. When courts get it wrong, they are chilling price cutting behavior (price cutting is what antitrust seeks to promote!)
      • Costs are frequently mismeasured and misinterpreted, so cost-based tests are more error prone
      • It's hard to measure the opportunity cost of things with fixed costs (how do you apportion costs across time?)
  2. Game theoretic approach (1980s)
    • In many settings "predation" (setting price below costs) is rational and can work
    • These theories do not make for easily administered legal rules: they are based on bespoke cases with details that are not easily generalizable
    • If anything, the approach offers an appeal that intent evidence should be taken seriously: if a company says they are engaging in predatory pricing, we should take them seriously

Caselaw:​

Brooke Group v. Brown & Williamson (1993) (generates test that kills predatory pricing)​

  • Holding: no reasonable jury could have found a violation of the Sherman or Robinson Patman Acts
    • On the facts of the case, D could not reasonably recoup as a matter of law:
      • There was an oligopoly in the market, which would force D to bear the losses from dropping prices below cost but split the gains of a price hike between other market participants
      • Robinson Patman: there was not a reasonable probability of recoupment
      • Section 2: there was no dangerous probability of recoupment
    • Court applies the predatory pricing test:
      1. Price below cost: sufficient evidence to satisfy this element
      2. No reasonable prospect of recovering losses:
        1. Recoupment is unlikely given the market's oligopoly structure, see above
          • P's response: there were really only two firms in the low-quality generic cigarette market (P and D), D's predatory pricing could disadvantage or exclude P from the market
          • P's response: D said they intended to slow the generics market, pricing strategy is one way tot do that. Why not believe them (game theoretic reasoning)?
        2. Generic market expansion: if predatory pricing worked, the market should contract, but it expanded, showing an increase in demand
          • P's response: the market for generics could have grown even faster, which D's own documents suggest was expected
          • P's response: more intent evidence, D's documents showed they thought they had slowed the market's growth
        3. List prices: allegations of price cutting and a consequent increase are based on list prices, which include discounts and don't reflect the actual price paid (not "actually informative")
          • P's response: as long as the list price is correlated with actual prices, they are informative
        4. Parallel pricing: initiating parallel price increases from a drop in prices is too difficult to pull off - it's unclear how the competitors will interpret the drop
          • P's response: this is the tobacco industry, which has a long history of parallel price increases. There is evidence that they did this here.
  • Facts: Price ware between generic cigarette manufacturers Liggett (P) (which introduced its "black and white" generic cigarette) and BW (D). By late 80s, evidence of parallel conduct and stability in prices. P claims D predatorily entered the generic market with low prices to force P to raise generic prices and alleges a violation of the Robinson Patman Act (similar to Sherman Act Section 2).
  • Notes: this case shows the Court is really tough on the dangerous probability standard
    • P has a bunch of obvious counterarguments to each point of the Court's reasoning, but the Court ignores
    • Takeaway: P will almost always lose a predatory pricing argument