Recoupment, Market Power, and Predatory Pricing

• Author: Louis Kaplow
• Position: Harvard University and National Bureau of Economic Research
• Pages: 167-219

RECOUPMENT, MARKET POWER, AND

PREDATORY PRICING

L

OUIS

K

APLOW

*

Recoupment inquiries play an important role in predatory pricing

cases. Nevertheless, their place in antitrust analysis is unclear and

potentially problematic in ways that are not fully appreciated. Does

a recoupment requirement define, augment, or replace the preexist-

ing monopoly power requirement that involves similar analysis?

How can a recoupment test be inserted in sequential assessments of

alleged predatory pricing when all of the steps are intertwined with

the others, including those deemed to come later? Why is a plaintiff

permitted to show either that recoupment was ex ante plausible or

that sufficient ex post profit recovery occurred, rather than requir-

ing one in particular, or both? This article addresses these ques-

tions by examining the underlying purposes of recoupment

assessments and predatory pricing inquiries more broadly. As will

become evident, much of the analysis is relevant not just to preda-

tory pricing but to other forms of anticompetitive conduct as well.

The concept of recoupment is simple: if firms are presumed to undertake

predation to enhance their profits, then a firm that indeed engaged in preda-

tion must have expected that the short-run profit sacrifice (from dropping its

price to drive out or discipline rivals) would generate a sufficient long-run

* Harvard University and National Bureau of Economic Research. I am grateful to Richard

Gilbert, Scott Hemphill, Michael Katz, Douglas Melamed, Joseph Podwol, Daniel Rubinfeld,

Carl Shapiro, Steven Shavell, Glen Weyl, Abe Wickelgren, the editors and referees, and partici-

pants at Berkeley, Georgetown, Harvard, Stanford, the American Law and Economics Associa-

tion, and the Searle Center Conference on Antitrust Economics and Competition Policy for

helpful discussions and comments; Michael Atamas, Avi Grunfeld, Jesse Gurman, Jeffrey Harris,

Bradley Love, Clarissa Lu, William Millikan, Carsten Koenig, Kolja Ortmann, and Ethan Ste-

venson for research assistance; and Harvard’s John M. Olin Center for Law, Economics, and

Business for financial support. Disclaimer: I occasionally consult on antitrust cases, and my

spouse is in the legal department of a financial services firm.

167

82 Antitrust Law Journal No. 1 (2018). Copyright 2018 American Bar Association. Reproduced

by permission. All rights reserved. This information or any por tion thereof may not be copied

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Association.

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profit recovery (when it later became able to charge high prices) to render the

overall strategy profitable. Restated as the contrapositive: if the firm would

have expected its long-run profit enhancement to be insufficient, then it must

not have engaged in predation. This latter inference has become part of U.S.

antitrust law on predatory pricing and is most associated with the Supreme

Court’s decisions in Brooke Group and Matsushita.

1

It is not surprising that economic analysis of exclusionary strategies has

long examined their profitability through what is akin to a recoupment condi-

tion

2

and understood recoupment to be central to predatory pricing analysis in

particular.

3

And even without drawing explicitly on the economics literature,

long before any Supreme Court cases explicitly embraced recoupment it was

always open to parties to present evidence relating to whether an alleged ac-

tion could be expected to be profitable and hence plausible. One need not

master rocket science or game theory to argue: “Don’t believe their allegation

that we were trying to do X. That strategy would have lost us millions. We’re

not stupid!” It is not immediately obvious what announcement of the neces-

sity for recoupment adds, except to remind parties that common sense argu-

ments are welcome.

Yet the relationship between predation and recoupment raises many ques-

tions, some of which are occasionally noticed but have not been resolved and

others that have remained hidden. Even the simple recoupment logic is not so

simple. Granting the contrapositive—that the lack of a plausible expectation

1

Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993); Matsushita

Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986). On the doctrinal development in the

United States, see Subsection I.A.2. On the different state of the law in the European Union,

where recoupment analysis may be relevant but there is no recoupment requirement as such, see

note 8.

2

See, e.g., Janusz A. Ordover & Garth Saloner, Predation, Monopolization, and Antitrust, in

1 H

ANDBOOK OF

I

NDUSTRIAL

O

RGANIZATION

537, 552–53 (Richard Schmalensee & Robert Wil-

lig eds., 1989). It is generally referred to as an individual rationality constraint, meaning that, for

an act to be undertaken, it must be rational for the individual undertaking it—and the individual

actor is taken to be a profit-maximizer.

3

See, e.g., Kenneth G. Elzinga & David E. Mills, Testing for Predation: Is Recoupment

Feasible?, 34 A

NTITRUST

B

ULL

. 869, 870 (1989) (“This insight [that predatory pricing is attrac-

tive to a profit-seeking firm only where it expects to recoup] is familiar in the literature on

predation.”); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pric-

ing Policy, 89 Y

ALE

L.J. 213, 217 (1979) (“In designing a policy toward predatory pricing, . . .

an assessment [of long-run considerations] is required because the essence of predatory pricing is

the alleged predator’s sacrifice of short-run gains for greater long-run gains.”); Janusz A.

Ordover & Robert D. Willig, An Economic Definition of Predation: Pricing and Product Innova-

tion, 91 Y

ALE

L.J. 8, 13 (1981) (“Thus, the relevant structural test is whether the conceivable

gains from predation can outweigh the costs to the incumbent of the allegedly predatory conduct.

If not, there can be no motive for predation and it is unnecessary to scrutinize allegedly predatory

conduct for anticompetitive effect or intent.”); see also Joskow & Klevorick, supra, at 222–23

(“Since a profit-maximizing dominant firm will depart from short-run maximizing behavior only

if it expects that such a move will lead to larger long-run profits, the best way to assess whether

current behavior is predatory is to evaluate its expected effects on long-run market outcomes.”).

2018]

R

ECOUPMENT

, M

ARKET

P

OWER

,

AND

P

REDATORY

P

RICING

169

of recoupment negates an explanation that presupposes recoupment—the

original proposition remains: an affirmative demonstration of predation itself

implies a reasonable expectation of recoupment. And those alleging predatory

pricing have always had to prove their case. So why isn’t any recoupment

requirement automatically satisfied if a case is otherwise sufficient?

A further puzzle involves the relationship between the presence of signifi-

cant market power and the need for a recoupment inquiry. After all, antitrust

challenges under Sherman Act Section 2, where many predatory pricing cases

fall, require proof of monopoly power or a dangerous probability thereof. In

addition, inquiries into monopoly power and recoupment examine similar fac-

tors in similar ways. Furthermore, antitrust scrutiny in particular cases is con-

ventionally understood to begin with the monopoly power requirement, so one

might have thought that, if and when the predatory pricing inquiry was

reached, significant recoupment would in essence have already been estab-

lished. How do the monopoly power and recoupment requirements relate to

each other? Does the latter repeat, refine, augment, or replace the former? If it

supplants, did Brooke Group implicitly reverse decades of precedent, includ-

ing the Spectrum Sports case that the Court decided just months before and

cited in support of its decision?

4

These questions and others raised below suggest that recoupment—in par-

ticular, how it fits with the broader inference process and relates to other as-

pects of predatory pricing analysis—is underexplored. This article examines

such questions from the perspective of how liability assessments should be

made in order best to deter anticompetitive behavior while minimizing the

chilling of procompetitive behavior. As will be seen, we can only make sense

of recoupment by integrating it with the rest of the inquiry rather than examin-

ing it in isolation, as has often been done. (As a note to the reader before

proceeding, throughout this article “recoupment” is used to refer only to the

adequacy of expected

5

profit recovery conditional on a defendant’s strategy

otherwise being successful.

6

)

4

Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993).

5

As will be explored in Part III, there is a question of whether the recoupment requirement

should be understood to refer to an alleged predator’s (actual or imputed reasonable) expecta-

tions of sufficient profit recovery and/or whether recoupment (ex post) actually occurred. For

most purposes, it clarifies the exposition and thinking to focus on the former, ex ante perspective

(which directly relates to the logic of profit-maximizing behavior). But to avoid repetitive verbi-

age, sometimes the requisite reminders will be omitted.

6

Accordingly, the term as used here does not also encompass the requirement—stated in

Brooke Group, 509 U.S. at 224–26, and followed by some subsequent courts and commenta-

tors—that the predator’s strategy be one that would successfully eliminate or otherwise disci-

pline the target. Yet another ambiguity, “recoupment” is sometimes used to refer to the condition

as a whole (that the expected recovery exceed the expected sacrifice) and sometimes just to the

expected recovery (as in referring to the amount that will be “recouped,” suspending the question