The Application of Raising Rivals' Costs Theory to Antitrust

Published date01 March 1992
AuthorDavid T. Scheffman
Date01 March 1992
DOI10.1177/0003603X9203700109
Subject MatterArticle
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 recognize that an effective
anticompetitive strategy that can be used by one or a group
of
firms against rivals is to engage in actions that raise those rivals'
costs.lThe purpose
of
this article is to summarize some
of
the
* Justin Potter Professor of American Competitive Enterprise, Owen
Graduate School of Management, Vanderbilt University, and Special
Consultant to National Economic Research Associates, Inc.
AUTHOR'S NOTE: An earlier version
of
this article was presented at the
36th Annual Antitrust Section Spring Meeting. The author thanks 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' Costs in 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' Costs to Achieve Market Power
e1992 by Federal Legal Publications. Inc.
188 : The antitrust bulletin
implications of RRC theories for antitrust. Some of those implica-
tions have been recently explored by Krattenmaker and Salop,"
whose primary concern is with situations in which the RRC
predator enhances its market power by taking actions that raise
the costs of its rivals."
This article demonstrates that RRC analysis is applicable to a
much richer menu of fact situations. In particular, there are many
situations in which RRC may be profitable and anticompetitive,
even though the predator does not possess market power in the
traditional
sense
of
being able to raise the
market
price by
restricting its own output to a level at which its marginal cost is
below the market price. Rather, an RRC strategy typically raises
price by causing the predator's rivals to reduce their output.
Although RRC is similar in some respects to predatory pric-
ing, there are important differences. In predatory pricing, the
predator reduces the victim's revenues to unprofitable levels by
price cuts, causing the victim to exit. When the victim exits, the
predator then exercises market power by restricting its own output
to raise the market price above competitive levels. In a predatory
pricing scenario, the victim's revenues are reduced only when the
predator maintains prices that are below its short-run profit-maxi-
mizing
levels. By
contrast,
in RRC
predation,
the
predator
increases the victim's costs by raising the price of some scarce
Over Price, 96
YALE
LJ.
209 (1986); and Krattenmaker &Salop, Compe-
tition and Collusion in the Market/or Exclusionary Rights, 76 AM.
ECON.
REV.
109 (1986). See also Holt &Scheffman, Strategic Business Behav-
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 that have appeared since this was
written include Brennan, Understanding
Raising
Rivals'
Costs, 33
ANTITRUST
BULL.
95 (1988).
2Supra note 1, 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 in the market for its output.

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