Predatory Pricing Analysis in the Supreme Court

Published date01 June 1994
Date01 June 1994
DOI10.1177/0003603X9403900206
AuthorDaniel J. Gifford
Subject MatterArticle
The Antitrust Bulletin/Summer 1994
Predatory pricing analysis
in the Supreme Court
BY DANIEL J. GIFFORD*
431
Predatory pricing has been asubject of antitrust concern at least
since the perceived activities of the old Standard Oil Company
helped
give
birth
to
section
2 of
the
Clayton
Act in
1914.
1
Although the problem is an old one, it has received increasing
attention during the last several decades.> The Supreme Court,
*Robins, Kaplan, Miller &Ciresi Professor
of
Law at the Univer-
sity of Minnesota Law School.
Clayton Antitrust Act, 38 Stat. 730, ch. 323, §2 (1914); H.R.
REP.
No. 627, 63d Cong., 2d Sess., pt. 1, at 8 (1914); S.
REP.
No. 698, 63d
Cong., 2d Sess.
2-4
(1914). See also John S. McGee, Predatory Price
Cutting: The Standard Oil (N.J.) Case, 1 J.L. &
ECON.
137 (1958).
2See, e.g., Page I. Austin, Predatory Pricing
Law
Since Matsushita,
58
ANTITRUST
L.J. 895 (1990); Wesley J. Liebeler, Whether Predatory
Pricing? From Areeda and Turner to Matsushita, 61
NOTRE
DAME
L.
REV.
1052 (1986); Joseph F. Brodley &George A. Hay, Predatory Pricing:
Competing Economic Theories and the Evolution
of
Legal Standards, 66
CORNELL
L.
REV.
738 (1981); Paul L. Joskow &Alvin K. Klevorick,
AFramework for Analyzing Predatory Pricing, 89
YALE
LJ.
213 (1979);
Oliver Williamson, Predatory Pricing: A Strategic and Welfare Analysis,
87
YALE
L.J. 284 (1977); F.M. Scherer, Predatory Pricing and the Sher-
man Act: A Comment, 89
HARV.
L.
REV.
868 (1976); Phillip Areeda &
© 1994 by Federal Legal Publications, Inc.
432
The antitrust bulletin
whose supervisory role over the lower federal courts is grounded
ultimately in a need to foster consistency and coherence in the
federal case law, has faced predatory pricing and allied issues suf-
ficiently to warrant acritical examination of the Court's work."
During the past 30 years, the Court's approach to predatory
pricing has ranged from one broadly protective
of
competitors,
qua competitors, with little or no attention to market structure (as
in Utah
Pie
Co. v. Continental
Baking
CO.4)
to one in
which
the now generally-accepted rarity
of
predatory pricing is fully
embraced (as in the June 1993 decision in Brooke Group Ltd. v.
Brown &Williamson Tobacco Corp.i). For much of this period,
the Court has ignored issues connected with predatory pricing and
during the last decade it has given mixed, and at best ambiguous,
directions for evaluating claims of predatory pricing. During the
past 30 years, predatory pricing has
been
treated by the lower
courts frequently under the rubric of attempted monopolization, in
many cases employing an approach to the attempt offense initially
developed in the Ninth Circuit during the 1960s and
which
in
other contexts is dangerously expansionary. After studiously refus-
ing to review this expansionary approach to attempted monopo-
lization for nearly 30 years, the Court has belatedly rejected it in a
Donald F. Turner, Predatory Pricing and Related Practices Under Sec-
tion 2
of
the Sherman Act, 88
HARv.
L.
REV.
697 (1975).
3The Court has dealt explicitly with predatory pricing in Brooke
Group Ltd. v. Brown &Williamson Tobacco Corp., 113 S. Ct. 2578
(1993); and Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475
U.S. 574 (1985). As argued in text, the decision in Utah Pie Co. v. Conti-
nental Baking Co., 386 U.S. 685 (1967) is best treated as a predatory
pricing decision. The Court seems to have viewed the pricing behavior of
the defendant as predatory in Aspen Skiing Company v. Aspen Highlands
Skiing Corp., 472 U.S. 585 (1985). The presence or absence of predatory
pricing was critical to the Court's disposition of Cargill, Inc. v. Monfort
of Colorado, Inc., 479 U.S. 104 (1986); and Atlantic Richfield Co. v.
USA Petroleum Co., 495 U.S. 328 (1990).
4386 U.S. 685 (1967).
Predatory pricing :433
decision whose ramifications extend to the proof of predatory
pricing.
During
this
same
period
predatory
pricing
analysis in
the
lower federal courts has undergone arevolution in two senses.
First, the lower federal courts have largely embraced the preda-
tory
pricing
analysis initially proposed by Donald Turner
and
Phillip Areeda in 1975,6an analysis under which marginal cost (or
its practical surrogate, average variable cost) is employed to dif-
ferentiate predatory from nonpredatory pricing. In accepting the
Areeda/Turner approach, the lower courts have substituted auni-
form and relatively precise analysis for the earlier eclectic and
equivocal judicial approaches to the problem." Second, by adopt-
6
Areeda
&
Turner,
supra
note
2; 3 P.
AREEDA
&D.
TURNER,
ANTITRUST
LAW
150-94
(1978). On the Areeda/Turner analysis, see text at
section III, infra.
Prior to 1975, predatory pricing was understood to involve pricing at
levels below that required to maximize short-run profits but beyond that
basic requirement there was no universally accepted definition. In 1971
Professor Koller took the view that predatory pricing involved prices at
levels below the average total cost of the predator. Roland H. Koller II,
The Myth
of
Predatory Pricing: An Empirical Study, 4
ANTITRUST
L. &
ECON.
REV.
105,
106-07
(Summer 1971). Koller argued in 1975 that "the
relevant cost in a predation case is a fully distributed accounting cost,
that is, costs that ordinarily appear in accounting records as either direct
or overhead costs." Roland H. Koller II, On the Definition
of
Predatory
Pricing, 20
ANTITRUST
BULL.
329, 332 (1975). Professor Yamey took the
position that pricing could be predatory whether or not it fell below any
measure of the predator's costs. B.S. Yamey, Predatory Price Cutting:
Notes and Comments, 15 J.
LAW
&
ECON.
129,
133-34
(1972). Many
commentators believed that subjective intent was an essential component
of predatory pricing. Koller, supra,
ANTITRUST
L. &
ECON.
REV.
at 107;
Yamey, supra, at 134. See Daniel J. Gifford, Promotional Price-Cutting
and Section 2(a)
of
the Robinson-Patman Act, 1976
WIS.
L.
REV.
1045,
1048.
7Neither the Supreme Court nor the lower federal courts followed a
consistent or well-defined approach to predatory pricing prior to the late
1970s. In
FfC
v. Anheuser-Busch, Inc.,
363
U.S. 536, 552 (1960), the
Supreme
Court
suggested
that
price
reductions
"below
cost"
tend
to
establish predatory intent, but without providing adefinition
of
"cost."
Accord, Cornwell Quality Tools Co. v. C.T.S. Co.,
446
F.2d 825, 831

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