The Application of Raising Rivals' Costs Theory to Antitrust

• Author: David T. Scheffman
• DOI: 10.1177/0003603X9203700109
• Published date: 01 March 1992
• Date: 01 March 1992

The Antitrust Bulletin/Spring 1992

The application

of

raising rivals'

costs theory to antitrust

BY DAVID T. SCHEFFMAN*

I.

Introduction

187

"Raising rivals' costs" (RRC) theories recognizethat an effective

anticompetitive strategy that can be used by one or a group

of

firms againstrivals is to engagein actions that raise thoserivals'

costs.lThe purpose

of

this articleis to summarize some

of

the

*Justin PotterProfessor of American Competitive Enterprise,Owen

Graduate School of Management, Vanderbilt University, and Special

Consultant toNational Economic Research Associates, Inc.

AUTHOR'S NOTE: An earlierversion

of

this article was presented at the

36th Annual Antitrust Section Spring Meeting.The authorthanks Joe

Simons and Susan DeSantifor many helpful comments.

The main references in this literature are Salop, Introduction, in

STRATEGY,

PREDATION

AND

ANTITRUST

(Salop 00. 1981); Salop &Scheff-

man, Raising Rivals' Costs, 73

AM.

ECON.

REV.

267 (1983); Salop,

Scheffman, &Schwartz, A Bidding Analysis

of

Special Interest Regula-

tion: Raising Rivals'Costsin a Rent Seeking Society,in

THE

POLITICAL

ECONOMY

OF

REGULATION:

PRIVATE

INTERESTS

IN

THE

REGULATORY

PROCESS

(Yandle &Rogowsky eds. 1984); Salop &Scheffman, Cost-Raising

Strategies, 36 J.

INDUS.

ECON.

19 (1987); Krattenmaker &Salop, Anti-

competitive Exclusion:Raising Rivals'Coststo Achieve Market Power

e1992 by Federal Legal Publications. Inc.

188: The antitrust bulletin

implications ofRRC theoriesfor antitrust. Some of thoseimplica-

tions havebeen recentlyexploredby Krattenmaker and Salop,"

whose primary concern is with situations in which the RRC

predator enhances its marketpower by takingactions thatraise

the costs of its rivals."

This articledemonstrates that RRC analysis isapplicable to a

much richer menuof fact situations. In particular,there are many

situationsin which RRC may beprofitableand anticompetitive,

even though the predator does not possessmarket power in the

traditional

sense

of

being able to raise the

market

price by

restricting its own output toa level at whichits marginal costis

below the marketprice. Rather,an RRC strategy typicallyraises

price by causing the predator's rivals to reduce their output.

Although RRC is similar in some respects to predatorypric-

ing, there are important differences. In predatory pricing, the

predator reduces the victim's revenues to unprofitable levelsby

price cuts,causing the victim to exit.When the victim exits,the

predator thenexercisesmarketpower by restrictingits own output

to raise the marketprice above competitive levels.In a predatory

pricing scenario,the victim's revenues are reduced only when the

predator maintains pricesthat are below itsshort-runprofit-maxi-

mizing

levels. By

contrast,

in RRC

predation,

the

predator

increases the victim's costs by raising the priceof some scarce

Over Price, 96

YALE

LJ.

209 (1986); and Krattenmaker &Salop, Compe-

tition and Collusioninthe Market/or Exclusionary Rights,76 AM.

ECON.

REV.

109 (1986). See also Holt &Scheffman, Strategic BusinessBehav-

ior and Antitrust, in

ECONOMICS

AND

ANTITRUST

POLICY

(Lamer &Meehan

eds. 1989); Shapiro, Theories 0/ Oligopoly Behavior, in

HANDBOOK

OF

INDUSTRIAL

ORGANIZATION

329 (Schmalensee &Willig eds. 1989); and

Ordover

&

Saloner,

Predation.

Monopolization

and

Antitrust,

in

Schmalensee &Willig at 537. Articles thathave appeared since thiswas

written include Brennan, Understanding

Raising

Rivals'

Costs, 33

ANTITRUST

BULL.

95 (1988).

2Supra note1, Anticompetitive Exclusion. . . .

3Later in this article, following Krattenmaker and Salop, I will use

the term "power over price"to refer to situations in which the predator

has market power inthe market forits output.