Chapter V. Specific Forms of Monopolizing Conduct: Controversial Issues

• Pages: 135-211

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CHAPTER V

SPECIFIC FORMS OF MONOPOLIZING CONDUCT:

CONTROVERSIAL ISSUES

Chapter IV examined the basic debate over the contours of Section

2’s conduct element. This chapter describes the legal standards applied

by courts, or suggested by commentators, for particular types of conduct.

A. Strategically Low Pricing

1. Predatory Pricing: Strategically Low Pricing Without Bundling

or Other Conditions Imposed on the Buyer

a. U.S. Law

In the United States, a lawful monopolist is free to charge as high a

price as it wishes.1Sometimes, however, a monopolist may choose, for

strategic reasons, to sell below the monopoly price. For example, a

monopolist with some competition may try to maximize its profits over

the medium or the long run by choosing to price lower than the short-run

monopoly price.2Moreover, a monopolist faced with potential

competition might choose, for the sake of maximizing long-run profits,

to adopt a “limit pricing” strategy—picking a price above the

competitive price but less than the monopoly price, which is more

profitable yet low enough to deter potential competitors from entering

the market.3Alternatively, a monopolist might choose to “invest” in a

predatory strategy, temporarilyselling its products for less than it costs to

make them in order to drive competitors from the market, cripple them,

or punish them severely for aggressive competition. Because such a

pricing strategy involves deliberate losses, it is not sustainable in the long

1. See Verizon Commc’ns v. Law Offices of Curtis V. Trinko, 540 U.S.

398, 407 (2004).

2. See 3B PHILLIP E. AREEDA &HERBERT HOVENKAMP,ANTITRUST LAW,¶

722 (3d ed. 2008).

3. See id. ¶ 736b1.

136 Monopolization and Dominance Handbook

run, and makes economic sense only if the investment in predation can

later be recouped through future monopoly profits.4

It is, however, fundamental that “[c]utting prices in order to increase

business often is the very essence of competition.”5How should the

courts—giving due consideration to the public policies discussed in

Chapter IV.C.2.a—decide when strategically low pricing is

monopolizing conduct and when it is not?

Brooke Group,6decided by the Supreme Court in 1993, is the leading

case.7There the Court declared, “[t]hat below-cost pricing may impose

painful losses on its target is of no moment to the antitrust laws if

competition is not injured.”8By contrast, the “essence” of predatory

pricing—strategically low pricing as a form of prohibited conduct—is

that “[a] business rival has priced its products in an unfair manner with

an object to eliminate or retard competition and thereby gain and

exercise control over prices in the relevant market,”9that is to say, to

exercise monopoly power.

4. Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 588-89

(1986).

5. Id. at 594.

6. Brooke Grp. v. Brown & Williamson Tobacco Corp., 509 U.S. 209

(1993).

7. Brooke Group’s holding related to the standards of liability for

discriminatory predatory pricing in a case brought by a competitor of the

discriminating firm under the Robinson-Patman Act, 15 U.S.C. § 13(a).

But the Court observed that actionable injury to competitors 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.” Id. at 221. In LePage’s Inc. v. 3M Co., 324 F.3d 141, 151

(3d Cir. 2003), decided ten years after Brooke Group, the Third Circuit

asserted that “nothing in [Brooke Group] suggests that its discussion of

the issue is applicable to a monopolist with its unconstrained market

power.” Four years later, however, the Supreme Court noted that “[i]n

Brooke Group, we considered what a plaintiff must show in order to

succeed on a claim of predatory pricing under § 2 of the Sherman Act”

and that, “the standard adopted in Brooke Group applies to predatory-

pricing claims under § 2 of the Sherman Act.” Weyerhaeuser Co. v.

Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 319 (2007). See

also Pac. Bell Tel. Co. v. linkLine Commc’ns, 129 S. Ct. 1109, 1120

(2009).

8. Brooke Grp., 509 U.S. at 224.

9. Id. at 221.

Specific Forms of Monopolizing Conduct: Controversial Issues 137

The Court might have left things there, simply letting the trier of fact

determine, on a case-by-case basis, whether each challenged case of

strategically low pricing was likely to lead to monopoly power. But

history showed that allegations of predatory pricing were frequent, and

the Court was concerned that, without a more limited and specific

standard, legitimate price competition might be deterred. It reiterated an

earlier observation that “‘predatory pricing schemes are rarely tried, and

even more rarely successful,’”10 adding that “the costs of an erroneous

finding of liability are high . . . . It would be ironic indeed if the

standards for predatory pricing liability were so low that antitrust suits

themselves became a tool for keeping prices high.”11

Accordingly, Brooke Group established two necessary elements for a

predatory pricing claim. Reasoning that “[a]s a general rule, the

exclusionary effect of prices above a relevant measure of cost either

reflects the lower cost structure of the alleged predator, and so represents

competition on the merits, or is beyond the practical ability of a judicial

tribunal to control without courting intolerable risks of chilling legitimate

price-cutting,”12 the Court held, “[f]irst, a plaintiff seeking to establish

competitive injury resulting from a rival's low prices must prove that the

prices complained of are below an appropriate measure of its rival’s

costs.”13

The Court recognized that courts and commentators disagree on what

is the “appropriate” measure of cost but it declined to resolve the

question.14 It remains unresolved today, and it is the subject of much

discussion in the case law15 and commentary. 16

10. Id. at 226 (quoting Matsushit a Elec. Indus. v. Zenith Radio Corp., 475

U.S. 574, 589 (1986)).

11. Id. at 226-27.

12. Id. at 223.

13. Id. at 222.

14. Id. at 222 n.1.

15. Most circuits have approved or adopted an average variable cost (AVC)

measure where prices below AVC will be deemed predatory, while prices

at or above AVC will be deemed non-predatory. See, e.g., Spirit Airlines

v. Northwest Airlines, 431 F.3d 917, 938 (6th Cir. 2005); Stearns Airport

Equip. Co. v. FMC Corp., 170 F.3d 518, 532 (5th Cir. 1999); Advo, Inc.

v. Philadelphia Newspapers, 51 F.3d 1191, 1198 (3d Cir. 1995); Tri-State

Rubbish v. Waste Mgmt., 998 F.2d 1073, 1080 (1st Cir. 1993); Kelco

Disposal v. Browning-Ferris Indus., 845 F.2d 404, 407 (2d Cir. 1988),

aff’d on other grounds, 492 U.S. 257 (1989); McGahee v. N. Propane

Gas Co., 858 F.2d 1487, 1496 (11th Cir. 1988) Henry v. Chloride, Inc.,