Specfic Forms of Monopolizing Conduct

• Pages: 105-206

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CHAPTER V

SPECIFIC FORMS OF

MONOPOLIZING CONDUCT

Chapter IV discussed the general conduct element of Section 2 and the

policies and tests that courts and commentators have considered in

identifying unlawful monopolizing conduct. This chapter reviews how the

courts have addressed discrete types of conduct such as unilateral refusals

to deal, exclusive dealing, and bundled discounts.

A. Predatory Behavior

1. Predatory Pricing

In the United States, a lawful monopolist is free to charge as high a

price as it wishes.1 Sometimes, however, a monopolist may choose, for

strategic reasons, to sell below the monopoly price. For example, a

monopolist with some competition may try to maximize its profits over the

medium or the long run by choosing to price lower than the short-run

monopoly price.2 Moreover, a monopolist faced with potential

competition might choose, for the sake of maximizing long-run profits, to

adopt a “limit pricing” strategy—picking a price above the competitive

price but less than the monopoly price, which is still profitable to the

monopolist yet low enough to deter potential competitors from entering

the market.3 Alternatively, a monopolist might choose to “invest” in a

predatory strategy, temporarily selling its products for less than it costs to

make them in order to drive competitors from the market, cripple them, or

punish them severely for aggressive competition. Because such a pricing

strategy involves deliberate losses, it is not sustainable in the long run, and

1. See Verizon Commc’ns v. Law Offices of Curtis V. Trinko, 540 U.S. 398,

407 (2004).

2. See 3A PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW

¶ 722 (4th ed. 2015).

3. See id. ¶ 736b1.

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makes economic sense only if the investment in predation can later be

recouped through future monopoly profits.4

It is, however, fundamental that “[c]utting prices in order to increase

business often is the very essence of competition.”5 How should the

courts—giving due consideration to the public policies discussed in

Chapter IV.C.2.a—decide when strategically low pricing is monopolizing

conduct and when it is not?

Brooke Group,6 decided by the Supreme Court in 1993, remains the

leading case.7 There the Court declared, “[t]hat below-cost pricing may

impose painful losses on its target is of no moment to the antitrust laws if

competition is not injured.”8 By contrast, the “essence” of predatory

pricing—strategically low pricing as a form of prohibited conduct—is that

“[a] business rival has priced its products in an unfair manner with an

object to eliminate or retard competition and thereby gain and exercise

control over prices in the relevant market,”9 that is to say, to exercise

monopoly power.

4. Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 588–89

(1986).

5. Id. at 594.

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

7. Brooke Group’s holding related to the standards of liability for

discriminatory predatory pricing in a case brought by a competitor of the

discriminating firm under the Robinson-Patman Act, 15 U.S.C. § 13(a).

But the Court observed that actionable injury to competitors under the

Robinson-Patman Act “is of the same general character as the injury

inflicted by predatory pricing schemes actionable under § 2 of the Sherman

Act.” Id. at 221. In LePage’s Inc. v. 3M Co., 324 F.3d 141, 151 (3d Cir.

2003), decided ten years after Brooke Group, the Third Circuit asserted

that “nothing in [Brooke Group] suggests that its discussion of the issue is

applicable to a monopolist with its unconstrained market power.” Four

years later, however, the Supreme Court noted that “[i]n Brooke Group, we

considered what a plaintiff must show in order to succeed on a claim of

predatory pricing under § 2 of the Sherman Act” and that, “the standard

adopted in Brooke Group applies to predatory-pricing claims under § 2 of

the Sherman Act.” Weyerhaeuser Co. v. Ross-Simmons Hardwood

Lumber Co., 549 U.S. 312, 319, n. 1 (2007); see also Pac. Bell Tel. Co. v.

linkLine Commc’ns, 555 U.S. 438, 451–52 (2009).

8. Brooke Grp., 509 U.S. at 224.

9. Id. at 221.

Specific Forms of Monopolizing Conduct 107

The Court might have left things there, simply letting the trier of fact

determine, on a case-by-case basis, whether each challenged case of

strategically low pricing was likely to lead to monopoly power. But the

Court was concerned that, without a more limited and specific standard,

legitimate price competition might be deterred by frequent allegations of

predatory pricing. It reiterated an earlier observation that “‘predatory

pricing schemes are rarely tried, and even more rarely successful,’”10

adding that “the costs of an erroneous finding of liability are high . . . It

would be ironic indeed if the standards for predatory pricing liability were

so low that antitrust suits themselves became a tool for keeping prices

high.”11

Accordingly, Brooke Group established two necessary elements for a

predatory pricing claim. Reasoning that “[a]s a general rule, the

exclusionary effect of prices above a relevant measure of cost either

reflects the lower cost structure of the alleged predator, and so represents

competition on the merits, or is beyond the practical ability of a judicial

tribunal to control without courting intolerable risks of chilling legitimate

price-cutting,”12 the Court held, “[f]irst, a plaintiff seeking to establish

competitive injury resulting from a rival's low prices must prove that the

prices complained of are below an appropriate measure of its rival’s

costs.”13 The “second prerequisite to holding a competitor liable under the

antitrust laws for charging low prices is a demonstration that the

competitor had a . . . dangerous probability, of recouping its investment in

below-cost prices.”14

Post-Brooke Group case law developments show that the Supreme

Court’s intent to limit predatory pricing litigation has proved to be

effective: such litigation is now relatively rare, and generally

10. Id. at 226 (quoting Matsushita, 475 U.S. at 589).

11. Id. at 226–27.

12. Id. at 223.

13. Id. at 222.

14. Id.