Is It Predatory Pricing - or Not?

Article excerpt

If your competitors slash ad rates to gain marketshare, are they violating the Sherman Antitrust Act?

"What is this world coming to? I try to reduce costs, provide better service, and lower prices to secure more advertisers--and then some small-time competitor starts screaming about antitrust violations." Sound familiar? With the increasing aggressiveness of the Antitrust Division of the United States Department of Justice, more of your colleagues on the advertising end of the magazine business may begin worrying whether conduct traditionally viewed as hard-nosed competition is in violation of federal or state antitrust laws.

The concept of "predatory pricing" is of growing concern to publishers and their advertising directors. When do special arrangements and discount pricing, at or below cost, become antitrust violations, as opposed to merely intense competition? First, the primary federal antitrust law--the Sherman Act--has a provision that prohibits companies from improperly becoming "monopolists" or attempting (or conspiring) to become monopolists. Without becoming too legalistic, it is necessary to give some meaning to these terms.

A monopolist is a company that, in a particular "relevant market," can control prices for a product anti has a sizable share of that market for that product. A relevant market is the scope of suppliers in a particular geographic area whose products are reasonably interchangeable from the viewpoint of those products' consumers. In other words, if a particular advertiser chooses not to place an ad in your magazine because of your steep ad rates, what other vehicles are available for his advertisement?

For example, a manufacturer of specialty motorcycles may feel that the only economical way to advertise is to place his ads in magazines directed to motorcycle enthusiasts. There may be only two or three in that "niche market." Consequently, those three magazines comprise the relevant market for national advertising for specialty motorcycles. Continuing this analogy, if one of the three magazines has more than, say, 40 percent of that relevant market (in terms of advertising and/or circulation revenue), that publisher could be considered a monopolist in that market.

Once a magazine becomes a monopolist in a particular relevant market, it is subject to greater scrutiny by the Justice Department and the courts. Certain acts that, in a market with numerous small competitors, might be ignored by antitrust regulators become magnified in a monopoly arena. One of those acts is known as "predatory pricing."

In an advertising market where the size of ad rates is important (which of course would be most ad markets), an ad director will usually want to undercut his or her competitor in order to close the sale. When does that lower price in a monopoly market become predatory?

Courts have repeatedly emphasized that the antitrust laws are designed to protect competition--not competitors. The theory is that increased competition makes the market more efficient and directly benefits the ultimate consumer. One court has written, "Rivalry is harsh, and consumers gain the most when firms slash costs to the bone and pare prices down to cost, all in pursuit of more business."

Therefore, if a magazine dominates a market through hard work, efficiency and a superior editorial product, it is unlikely that it has committed an antitrust violation. However, if that dominant magazine undercuts its competitors by setting prices or providing special discounts that come out below its average marginal costs, a court may very well find a violation of the Sherman Antitrust Act.

Fortunately for those magazines that have gained substantial market share, courts have been extremely reluctant to upset the natural forces of the marketplace by finding a monopolization violation or an attempt to monopolize through predatory pricing. Again, aggressive price cutting does not automatically translate into predatory pricing. …