Weyerhaeuser, Predatory Bidding, and Error Costs
| Date | 01 March 2008 |
| DOI | 10.1177/0003603X0805300105 |
| Author | Keith N. Hylton |
| Published date | 01 March 2008 |
| Subject Matter | Symposium: The Economics of the Roberts Court |
THE
ANTITRUST
BULLETIN:
Vol. 53, No. l/Spring 2008 51
Wyerhaeuser,
predatory
bidding, and
error
costs
BY
KEITH
N.
HYLTON*
I. INTRODUCTION
In
Brooke
Group
Ltd. v. Brown &Williamson
Tobacco
Corp., the
Supreme
Court
held
that
the
plaintiff in a
predatory
pricing
lawsuit
must
show
that
the price
during
the
predatory
campaign
was
cut
below
some
rel-
evant
measure
of cost
and
that
there
was
a
dangerous
probability
that
the
predatory
firm
would
recoup
the
losses from its
predation
cam-
paign.'
Weyerhaeuser
v. Ross-Simmons
Hardwood
Lumber
Co.
3
held
that
the
standard
adopted
in
Brooke
Group
also
applies
to
predatory
bid-
ding
claims.
A
predatory
bidding
campaign
is a
lot
like a
predatory
pricing
campaign. Both involve a
predation
period,
in
which
the
predator
suf-
fers a loss in
an
effort to
drive
arival
from
the market,
and
arecoup-
ment
period,
in
which
the
predator
reaps
monopoly
rewards
from
excluding competition.
The
key
difference is
that
in the
predatory
bid-
ding
scenario,
the
predator
bids
up
the
price of
an
input,
while in
the
predatory
pricing
scenario,
the
predator
cuts the price of its
output.
*Professor of
Law
and
Paul
J.
Liacos Scholar, Boston University.
509 U.S. 209 (1993).
ld. at 222-24.
127 S. Ct. 1069 (2007).
©2008by
Federal
LegalPublications, Inc.
52 : THE ANTITRUST BULLETIN:
Vol.
53, No. l/Spring 2008
The
Ninth
Circuit refused to
apply
the
Brooke
Group
standard
to
the
input
market
predation
alleged
in Weyerhaeuser
on
the
ground
that
predatory
bidding
was
more
harmful
to
consumers
than
preda-
tory pricing.' The
Supreme
Court
reversed
the
Ninth
Circuit
and
held
that
the
two
types of
predation
are "analytically similar."?
Iwill
argue
here
that
predatory
pricing
and
predatory
bidding
are
analytically distinct in
important
respects."
In
particular,
preda-
tory
bidding
is likely to be
more
harmful
to
consumer
welfare
than
is
predatory
pricing. Successful
input
market
predation
may
lead
to
a
"dual
market
power"
outcome
in
which
the
firm
has
market
power
in
both
the
input
and
the
output
market.
This
potential
reward
lends
a
stronger
push
to
the
incentive
to
engage
in
input
market
predation.
In
spite
of the analytical
distinction,
I
conclude
that
the
Brooke
Group
test remains the
best
standard
to
apply
to
predatory
bidding
claims.
The
justification for the
Brooke
Group
standard
is
based
on
a
balancing of expected false acquittal
and
false conviction costs.' The
economic incentive
arguments
that
indicate
dissimilarities
between
predatory
pricing
and
predatory
bidding
do
not
imply
that
the bal-
ance of
error
costs
should
be substantially different in the
two
preda-
tion
scenarios.
In
other
words,
the
incentive
arguments
are
not
Id. at 1973.
The
Ninth
Circuit
said
that
predatory
bidding
and
preda-
tory
selling
"are
materially
different in
that
predatory
bidding
does
not
nec-
essarily
benefit
consumers
or
stimulate
competition
in
the
way
that
predatory
pricing
does."
Id.
Id.at 1076.
For
earlier
analyses
of
predatory
pricing
and
predatory
bidding,
see
Roger D. Blair &
John
E. Lopatka,
Predatory
Buying and theAntitrust
Laws,
2008
UTAH
L. REv. (forthcoming 2008);
John
B.
Kirkwood,
Buyer
Power
and
Exclusion-
ary
Conduct:
Should
Brooke
Croup
Set the
Standards
for
Buyer-Induced
Price
Dis-
crimination
and
Predatory
Pricing],
72
ANTITRUST
L.J. 625 (2005);
Steven
C. Salop,
Anticompetitive Overbuying by
Power
Buyers,
72
ANTITRUST
L.J. 669 (2005).
For
a
discussion
of
error
costs
and
predation,
see, e.g.,
KEITH
N.
HYL-
TON,
ANTITRUST
LAW:
ECONOMIC
THEORY
AND
COMMON
LAW
EVOLUTION
214-19
(2003).
For
criticism of
the
error-cost
approach
adopted
in
Brooke
Group,
see
Patrick Bolton et al.,
Predatory
Pricing:
Strategic
Theory
and
Legal
Policy,
88
CEO.
L.
J.
2239, 2242-62 (2000).
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