Predatory Pricing and the Meaning of Intent

• Date: 01 June 1993
• Author: H.E. Frech,William S. Comanor
• DOI: 10.1177/0003603X9303800202
• Published date: 01 June 1993
• Subject Matter: Article

The Antitrust Bulletin/Summer 1993

Predatory pricing and the

meaning

of

intent

BY WILLIAM S. COMANOR· and H.E. FRECH

III·

I.

Introduction

293

In a recent decision,1Judge Frank Easterbrook boldly stated that

judges and juries should ignore questions

of

intent in antitrust

cases dealing with predatory conduct. Writing for a unanimous

three-judge panel, Easterbrook argued that a firm's intent to harm

its competitors is indistinguishable from its intent to compete. As

a result, looking only for the intent to harm competitors invites

juries to penalize hard competition. We agree, but his opinion

went further.

It

concluded: "we now hold that intent is not a basis

for liability (or a ground for inferring the existence

of

such a

basis) in a predatory pricing case under the Sherman Act.'? This is

•Professor, Department of Economics, University of California,

Santa Barbara.

AUTIIORS' NOTE: We are grateful to Frank Easterbrook, Clement Krouse,

M. Bruce Johnson and Steve De Canio for helpful comments on earlier

drafts

of

this article.

A.A. Poultry Farms, Inc. v, Rose Acre Farms, Inc., 881 F.2d 1396

(7th Cir. 1989).

2

Id.at61,717.

(/) 1993 by Federal Legal Publlcations, Inc.

294 : The antitrust bulletin

astriking position, and Easterbrook acknowledges that it conflicts

with decisions in other circuits.

While Easterbrook's views are unusual within the judiciary,

they are not so rare among antitrust scholars. For example, Harold

Demsetz3takes a similar position. In contrast, we argue that intent

is a critical factor in distinguishing between competitive and

predatory conduct. What firms intend by their actions is an essen-

tial element in the antitrust concept of predation.

II.

The

economics

of

predatory

conduct

In oligopolistic markets where only a few sellers compete,

firms necessarily behave

strategically.'

That is, they take into

account the reactions of their rivals before deciding on their own

actions. Sometimes, these indirect effects, working through the

reaction of their rivals, are more important than the direct effects

of their actions. Such conduct is designed primarily to affect the

behavior of a rival.

It

could hardly be otherwise in markets with

small numbers of firms.!

Predatory conduct is a particular type of strategic behavior.

Essentially, it requires an investment decision by the predator in

that actions are undertaken, at some current cost to itself, that are

designed specifically to influence arival's behavior in the future.

In the extreme, the rival is induced to leave the market. The

predator expects to earn higher profits in the future with a less

vigorous rival or, better still, with none at all. With less competi-

tion,

higher

prices

can

then be

set

and the

prior

investment

recouped.

3Demsetz, Barriers to Entry, 72 AM.

ECON.

REv. 45 (March 1982).

4Comanor &Frech III, Strategic Behavior and Antitrust Analysis,

74

AM.

ECON.

REv.

372

(May 1984).

SToday, the analysis is usually put in game theoretic terms, but the

ideas predate modern game theory. See Fisher, Games Economists Play:

ANon-cooperative View, 20

RAND

J.

ECON.

113 (Spring

1989);

and

W.

FELLNER,

COMPETITION

AMONG

THE

FEW:

OLIGOPOLY

AND

SIMILAR

MARKET

STRUCTIJRES (1965).