The Perverse Effects of Predatory Pricing Law: Even If Predation Is Possible, Does Intense Price Competition Harm Consumers?

Article excerpt

THE THEORY OF PREDATORY PRICING IS as old as the Sherman Act. Among the evils attributed to John D. Rockefeller and Standard Oil was underpricing rivals to maintain a monopoly in oil production. In the early years of the Sherman Act, courts frequently used conclusory epithets such as "ruinous competition," "predatory intent," and "below-cost pricing" to condemn price-cutting by dominant firms without undertaking any meaningful inquiry into whether the challenged behavior was beneficial or harmful to consumers.

During the 1970s, the law-and-economics movement revolutionized antitrust law, showing that many practices once condemned were in fact socially beneficial. Predatory pricing law received a thorough scrubbing, first at the hands of prominent academics and then in the federal courts. During the mid-1980s and early 1990s, the Supreme Court cast doubt on the viability of most predatory pricing claims, opining that predatory pricing happens rarely, if at all, and that recognizing a claim based on price-cutting threatens to chill vigorous competitive behavior by large firms.

Despite this attitudinal reversal in the academy and the courts, hundreds of predatory pricing cases have been filed in the past decade. Most of the cases are brought by competitors alleging that a rival's low prices threaten to put the plaintiff out of business.

Although very few plaintiffs succeed in winning a favorable judgment given the strict rules imposed by the Supreme Court, the tone in the academy is beginning to change. Drawing on advances in game theory and behavioral economics, recent scholarship argues that predatory pricing may be more common than the Supreme Court believed. Prominent economists and law professors have proposed new, more restrictive rules on price competition by dominant firms.

The new learning is finding its way into the courts as well. In a 2003 predatory pricing case, the U.S. Court of Appeals for the Tenth Circuit declared that, in light of the recent scholarship, it would no longer approach predation claims with the skepticism that once prevailed. Predatory pricing theories, once discredited, are regaining respectability.

Whether or not the new scholarship has made a convincing case that predatory pricing is a real monopolistic threat, one insight from the law-and-economics literature of the 1970s and 1980s remains unrebutted: punishing excessively low prices is paradoxical because the very objective of the antitrust laws is to secure low prices for consumers. As more and more cases of alleged predatory pricing are filed and new theories of liability based on price discounting gain popularity, the risk grows that predatory pricing law will result in higher prices to consumers--the very antithesis of what antitrust law is supposed to achieve.

WHY ALL OF THE PREDATION CLAIMS?

As noted, the Supreme Court has made it very difficult for plaintiffs to win predatory pricing claims. Yet hundreds of such claims have been filed since the restrictive Supreme Court decisions. Why would plaintiffs spend the significant time and money it takes to file predatory pricing claims if such claims are usually futile? A substantial part of the answer is that predatory pricing plaintiffs can "win without winning" if the mere fact of the lawsuit coerces the defendant to soften its price competition.

The predatory pricing cause of action is a most suggestive tool for an inefficient firm to forestall price cuts by a more efficient rival. For several reasons, a plaintiff can strategically misuse a predatory pricing lawsuit to force price increases by the defendant even if the lawsuit has very little chance of succeeding on the merits.

For instance, the plaintiff can raise the defendant's costs just by initiating expensive litigation. Defending against a predatory pricing lawsuit is often an extremely costly proposition. Frank Easterbrook once reported that, during the 1980s, AT&T spent $100 million per year just to defend against predation claims. …