Revitalizing Antitrust in Its Second Century: Essays on Legal, Economic, and Political Policy

By Harry First; Eleanor M. Fox et al. | Go to book overview

Predation, Exclusion, and Efficiency

INTRODUCTION

Case law supporting strong enforcement against monopoly was at its zenith in the third quarter of the century. Firms that increased their dominance by acts that set back their smaller competitors were at risk. "Unreasonably exclusionary" acts by dominant firms were prohibited under Section 2 of the Sherman Act, as Judge Wyzanski held in United Shoe Machinery, 1 for such acts chilled the competition of the would-be challengers and thus deprived buyers of effective and progressive alternatives. 2 Until the monopolization litigation that began in the late 1970s, courts were quick to find that dominant firms' acts fell in the unreasonably exclusionary category.

Influential scholars, jurists, and business people expressed the fear that zealous application of Section 2 threatened to handicap America's most progressive firms, such as IBM; and some individuals offered antitrust as a scapegoat for the ills of the economy. An enormous outpouring of academic literature, especially from Chicago, criticized the Wyzanski model and insisted that even dominant firms normally have the incentive to act in the interests of consumers and that judicial concern for exclusion of competitors produces protectionism and harm to consumers. Critics urged confinement of Section 2 to predation that would produce output limitation. Then they proceeded to "prove" that predation does not exist. For example, they argued: Predation requires an enormous investment by the predator, for the predator must "pay" to sell each unit of output at a predatory price (below its cost); and since the dominant firm by definition accounts for most of the output in the market, the cost of predation to it usually is much higher than the cost to its prey. Bearing this enormous cost, the predator must be able to drive all significant competitors out of the market. Then it must be able to raise price to a supracompetitive level such that it is high enough and is maintained long enough to recover its past investment (with an appropriate return) without attracting entry that would beat the price back down. This is a near impossibility, say the Chicago scholars. The market will not provide an adequate return on predatory investment. 3 Moreover, big firms cannot deter entry, even by selective tactics that develop the firm's reputation for predation, because entrants know the high costs of predation and will not be fooled by a dominant firm's bravado. Thus, predatory strategies do not work; the country should sit back and enjoy the low prices of wishful predation. The danger, said Judge Robert Bork, is not that predation will be undiscovered, but rather that courts will discover and punish it when it does not exist. 4

A corollary is this: When a small firm asserts that its dominant competitor is violating the law by predatory low pricing, or when it asserts

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