Proposed Standards for Identifying Predation: Williamson's Perspective and the Court
| Author | Christine Piette Durrance |
| DOI | 10.1177/0003603X1205700306 |
| Published date | 01 September 2012 |
| Date | 01 September 2012 |
| Subject Matter | Article |
Proposed standards for identifying
predation: Williamson’s perspective
and the Court
BY CHRISTINE PIETTE DURRANCE*
Predatory pricing is the act of pricing below a rival’s costs in order to
drive the rival out of the market. Predatory behavior and competitive
behavior often look alike, and as such, require appropriate standards
to detect truly anticompetitive conduct. A number of standards to
identify predation have been offered in the antitrust literature since
the 1970s. Oliver Williamson offered an output-based test to detect
predation. In this article, I discuss the contribution of Williamson’s
proposal, relative to the other prominent offerings in the literature. I
examine these tests relative to existing Supreme Court precedent,
which has adopted a standard resembling the ideas of Areeda &
Turner. I provide some analysis of the differences between theoretical
predatory pricing and the alleged predatory behavior that has been
examined by the Court.
* Department of Public Policy, University of North Carolina at Chapel
Hill.
AUTHOR’S NOTE: I appreciate the financial support of UNC-Chapel Hill, and I thank
Roger Blair for inviting to participate in this special issue. Any errors are my own.
© 2010 by Federal Legal Publications, Inc.
664 : T H E A N T I T R U S T B U L L E T I N : Vol. 55, No. 3/Fall 2010
I.
INTRODUCTION
Exclusive practices can often resemble competitive behavior and as
such can be dangerous tools in a firm’s arsenal. Predatory pricing
behavior has been alleged by competitors since Standard Oil.1 While
many economists and legal scholars have questioned the use of
predatory pricing as rational business behavior,2 this has not kept
plaintiffs from bringing cases alleging predation. Predatory pricing
has been historically defined as the act of pricing below an existing or
potential rival’s costs in order to drive the rival out of the market. The
predator must necessarily have market power. Regardless of the like-
lihood of such behavior, we require well-defined and thoughtful rules
for distinguishing between predatory and competitive behavior.
Without such rules, it is easy to accuse and perhaps easy to wrongly
punish competitive behavior. We require a balance of procompetitive
needs (e.g., deterring or punishing actual predation) with potential
anticompetitive consequences (e.g., hindering competition by
wrongly condemning competitive behavior). Moreover, we must rec-
ognize that firms will adapt to the rule of law, and in the case of an
inappropriate rule of predation, firms may fail to cut prices as low as
they might otherwise, for fear of antitrust scrutiny. This is certainly
undesirable on competitive grounds.
The concept of predatory pricing generated much discussion in
the literature by a number of scholars including Phillip Areeda,3 Don-
ald Turner,4 Oliver Williamson,5 William Baumol,6 Richard Posner,7
1
Standard Oil Co. of N.J. v. United States, 221 U.S. 1 (1911).
2
John S. McGee, Predatory Pricing Revisited, 23 J.L. & ECON. 289 (1980).
3
Phillip Areeda & Donald F. Turner, Predatory Pricing and Related Prac-
tices under Section 2 of the Sherman Act, 88 HARV. L. REV. 697 (1975).
4
Id.
5
Oliver Williamson, Predatory Pricing: A Strategic and Welfare Analysis,
87 YALE L.J. 284 (1977).
6
William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for
Prevention of Predatory Pricing, 89 YALE L.J. 1 (1979).
7
RICHARD POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 184–96 (1976).
S TA N D A R D S F O R P R E D AT I O N : 665
Robert Bork,8 F.M. Scherer,9 and many others beginning in the 1970s.
These antitrust law and economics scholars have proposed a number
of standards for distinguishing between predatory and nonpredatory
behavior, and the courts have since provided additional guidance.
The primary test in the literature that has been adopted (in part)
involves the Areeda-Turner cost-based test.10 In contrast to this,
Oliver Williamson, a 2009 Nobel Laureate, offered his own guidance
on identifying predatory pricing as distinct from legitimate competi-
tive behavior. His article was, in part, a response to the cost-based
standards suggested by others, including Areeda and Turner in par-
ticular, arguing that an output-based test was easier to implement in
practice. Williamson primarily argued for an output-based test over
a cost-based test. His guidance, along with that of others, has been
recognized by the Supreme Court in several predatory pricing cases
and continues to have an impact on current theories of exclusionary
practices.
In his work, Williamson supported a more strategic analysis and
framework for identifying predation. A primary distinction between
the Areeda-Turner rule and Williamson’s position is the distinction
between static versus strategic behavior on the part of firms. While
recent Court precedent has indeed developed a cost-based compo-
nent in the determination of predatory pricing, the Court has in a fun-
damental way also adopted some of Williamson’s views. The
requirement to consider two periods (both the predation phase as
well as the recoupment phase) is an acknowledgment of a need to
move beyond traditional static analysis. The recoupment phase is
based on the strategic nature of the firm: incur losses now in order to
obtain profits later. Without this strategic framing, predatory pricing
is economically irrational.
In this article, I describe the economics of predatory pricing as an
exclusive practice, including under what circumstances predatory pric-
8
ROBERT BORK, THE ANTITRUST PARADOX 149–55 (1978).
9
F.M. Scherer, Predatory Pricing and the Sherman Act: A Comment, 89
HARV. L. REV. 869 (1976).
10
Areeda & Turner, supra note 3.
666 : T H E A N T I T R U S T B U L L E T I N : Vol. 55, No. 3/Fall 2010
ing makes economic sense, as well as the welfare consequences of such
behavior. I then discuss the main standards that have been offered by
scholars in the field to distinguish predatory pricing from true competi-
tive behavior, focusing mainly on the Areeda-Turner and Williamson
standards. I offer a review of the Court’s history in predatory pricing
cases, including Matsushita11 and Brooke Group,12 and how the literature
on identifying predation has been incorporated into antitrust policy
and practice. I also briefly comment on recent discussion surrounding
above-cost predation. Finally, I identify important differences between
the kind of predation Williamson presented and what the Supreme
Court has actually encountered. While it may appear that the Supreme
Court has favored Areeda and Turner over other propositions, includ-
ing that of Williamson, I argue that the Court has not been faced with
the same form of predation with which Williamson was concerned.
Additionally, in these instances, the primary reason for failure to prove
predation rested on the lack of evidence with respect to the recoupment
period and not whether prices were indeed predatory.
II.
ECONOMICS OF PREDATION AND RECOUPMENT
Section 2 of the Sherman Act forbids monopolization, attempts to
monopolize, and conspiracies to monopolize. This section holds that
“[e]very person who shall monopolize, or attempt to monopolize, or
combine or conspire with any other person or persons, to monopolize
any part of the trade or commerce among the several States, or with
foreign nations, shall be deemed guilty of a felony, and on conviction,
thereof, shall be punished by fine not exceeding one million dollars if
a corporation, or, if any person, one hundred thousand dollars or by
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