Are Predatory Commitments Credible? Who Should the Courts Believe?

• Author: HELLAND, ERIC A.
• Position: Review

* Are Predatory Commitments Credible? Who Should the Courts Believe? By John R. Lott Jr. Chicago: University of Chicago Press, 1999. Pp. 168. $29.00 cloth.

In the 1960s and 1970s, the conventional wisdom in the economics of industrial organization was that monopoly power was pervasive and that a strong antitrust policy was needed to combat such power. A small band of economists and lawyers associated with the University of Chicago attacked the conventional wisdom, knocking out the theoretical underpinnings of antitrust law in general and the theory of predatory pricing in particular. The Chicago School analysts showed that, in theory, predatory pricing was unlikely to work because it required the predator to lower prices on an increased quantity of product, thereby taking large losses in the short run. Moreover, even if the competitor were driven out of business, the higher long-run price needed to recoup the short-run loss would encourage entry, and in the final accounting the predation would prove unprofitable. Empirical analysis backed up the Chicago School theory. Indeed, economists could not adduce a single clear-cut case of actual predatory pricing--hence, the title of the survey article by Roland H. Koller II, "The Myth of Predatory Pricing" (Antitrust Law and Economics Review 4 [summer 1971]: 105-23).

By the 1980s, the Chicago School ideas had become the conventional wisdom, at least among the senior staff at the Federal Trade Commission and the Justice Department during Ronald Reagan's presidency. In fact, the Chicago School was so dominant that when Joel Klein wanted to bring an antitrust case against Microsoft in 1997, he was forced to hire outside counsel to try the case. No government lawyers skilled in such cases remained at the Department of Justice (William E. Kovacic, "The Microsoft Case: Its Implications for Network Industries," speech to the Thirteenth Annual Advanced Workshop in Regulation and Competition, Monterey, Calif., July 5-7, 2000).

As the Chicago School ideas triumphed in Washington, they came under attack in the academy. One source of attack was the new industrial organization (NIO), based on game theory, which was revolutionizing all areas of economics. More recently, the analysis of "path dependence" has formed a second prong of attack. The game theorists created a host of models showing that with certain assumptions about information, strategy, and the structure of the game, a threat to use predatory pricing...