Stopping Above-Cost Predatory Pricing

Yale Law Journal

Volumn 111, Issue 4, 2002, Pages 941-991

  Edlin, Aaron S ^a  

^a NONE

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[No Author keywords available]

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EID: 0346386076     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/797567     Document Type: Review

References (156)

1. 509 U.S. 209 (1993).
2. Patrick Bolton et al., Predatory Pricing: Strategic Theory and Legal Policy, 88 GEO. L.J. 2239, 2241 (2000).
3. Frank H. Easterbrook, Predatory Strategies and Counterstrategies, 48 U. CHI. L. REV. 263, 264 (1981).
4. Id.
5. In cases before Brooke Group, the Supreme Court strongly suggested that low-cost pricing was a necessary element in a predation case. However, as the Brooke Group opinion notes, in those two cases, the Court formally reserved the question "'whether recovery should ever be available . . . when the pricing in question is above some measure of incremental cost.'" Brooke Group, 509 U.S. at 223 (quoting Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574, 585 n.9 (1986)). Brooke Group comes the closest to holding that above-cost pricing is per se legal because it unequivocally states that below-cost pricing is a necessary element of predation, whether the predation case is a monopolization case brought under section 2 of the Sherman Act or a price discrimination case brought under the Robinson-Patman Act. Id. at 222-23. One could argue that this conclusion is only dictum because the Court actually ruled that the plaintiff lost its case not because price exceeded cost (the Court upheld the jury finding that price was less than cost), but because the plaintiff failed to prove the second necessary element of predation, the reasonable prospect of recoupment of losses. Such an argument falls flat, however, because saying that a prospect of recoupment is a necessary element presumes that there are losses to be recouped. In short, the entire reasoning of the Court is tied to the idea that predation requires below-cost pricing.
6. This proposition is quite radical in that even economists who believe that predatory pricing is relatively common have generally been content to follow the courts in thinking that the key element of predation is short-run sacrifice by the predator, or even extreme sacrifice (selling below cost). For example, Bolton, Brodley, and Riordan lament the courts' lenient treatment of predators and see the problem primarily as a lack of understanding by courts of the myriad plausible ways that losses can be recouped. Bolton et al., supra note 2, at 2263. They therefore outline a variety of proposed elements for predation cases based upon different theories of recoupment and cost measurement but stay within the standard Brooke Group paradigm in which predation entails selling at a loss and later recouping the loss because of reduced future competition. Id. at 2262-74. One recent paper by Spector also shows that above-cost pricing can injure consumers in a differentiated products model by excluding a rival and lowering product diversity. In his model it only lowers overall welfare, however, if the exclusionary pricing involves a short-run sacrifice made in the expectation of future profits. Spector speculates that the connection between "sacrifice" and lower overall welfare is a coincidence that would not generalize to other models. DAVID SPECTOR, DEFINITIONS AND CRITERIA OF PREDATORY PRICING (MIT Dep't of Econ., Working Paper No. 01-10, 2001), available at http://papers.ssrn.com/paper.taf?abstract_id=262027.
7. Brooke Group was an oligopoly price discrimination case brought under the Robinson-Patman Act. Lower courts have sometimes required a showing of pricing below cost in a monopolization case brought under section 2 of the Sherman Act, but the Supreme Court has never ruled on the matter explicitly in a Sherman Act case. See, e.g., Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983). The Court did nonetheless go out of its way in Brooke Group to assert in dictum that the basic standards of judging predation were the same under the monopolization ban as under the price discrimination ban. Brooke Group, 509 U.S. at 224.
8. United States v. AMR Corp., 140 F. Supp. 2d 1141 (D. Kan. 2001) (holding that the allegation of predatory expansion of flights amounted to nothing more than a predatory pricing case and that American defeated allegations of predatory pricing because it priced above its variable cost). The Department of Justice is currently appealing the case.
9. American carries seventy-seven percent of all passengers originating in Dallas-Fort Worth who travel nonstop between Dallas-Fort Worth and another airport, and seventy percent of all passengers who travel nonstop between Dallas-Fort Worth and another airport. Complaint ¶ 20, AMR Corp. (No. 99-1180), http://www.usdoj.gov/atr/cases/f2400/2438.htm.
10. This chain of events reflects a likely coordination failure by consumers. If most consumers flew Vanguard anyway, all might have benefited from low fares indefinitely. Because no single customer has any appreciable effect on Vanguard's long-term prospects, however, no one acts to keep Vanguard in business.
11. See Brooke Group, 509 U.S. at 222-24. The Court in Brooke Group did not address the question of which measure of cost is relevant. It "declin[ed] to resolve the conflict among the lower courts over the appropriate measure of cost" because both parties agreed that average variable cost was the appropriate measure. Id. at 222 n. 1.
12. American has many advantages over entrants like Vanguard. To begin with, it has a brand-name reputation that will draw customers at an equal price, or even a premium price, as long as the premium is not too large. Thus, American can fill more planes in a given day than Vanguard, which creates a positive feedback loop. By offering more flights per day, American has an even larger advantage because of the scheduling convenience for passengers. In addition, its extensive network of flights means that it can offer passengers free tickets to almost anywhere through its frequent flyer programs. These frequent flyer tickets are valuable to customers but inexpensive to American because they are restricted to American's least crowded flights. The advantages of brand name, a convenient flight schedule, and a valuable frequent flyer program mean that at an equal price to Vanguard, American's flights will be fuller. This in turn means that, holding other things equal, American will tend to have a lower per-passenger cost because its fixed costs will be shared over more passengers. American's hub in Dallas also provides American with substantial economies of scope in scheduling flights and combining passengers from various routes. For example, a substantial portion of the passengers on a flight leaving from Dallas to Kansas City (the route Vanguard entered) would be filled with passengers flying to Kansas City through Dallas, but originating in other locales such as Miami. Such "through" passengers make up over fifty percent of traffic in major hubs. See Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transportation Industry, 63 Fed. Reg. 17,919, 17,920 (Apr. 10, 1998) [hereinafter Enforcement Policy]. If American can justify flying most of its flights with its through passengers, then the cost to American of flying customers directly from Dallas to Kansas City may be quite low, perhaps even as low as the extra fuel cost and meals. American also enjoys substantial economies of scope and scale in its hub from scheduling airplanes and crews. If a plane or crew is needed to fly to Kansas City at a particular time, it can be scheduled to dovetail with any of hundreds of other incoming flights to Dallas. These various economies may imply that even if American has relatively high costs per airplane and flight crew, it may still enjoy low costs for the marginal or average flight, and very low costs for the marginal or average passenger.
13. A monopoly with a demand advantage (for example, an advantage arising from network effects, frequent flyer programs, or preferences for familiar products) may similarly price near enough to its own cost to force rivals to sell at a loss if they want to offer an equally attractive package of price and quality.
14. See Easterbrook, supra note 3, at 281 n.40 ("A plan to exclude competition by less efficient rivals is not anti-competitive, and a plan to exclude competition by more efficient rivals is doomed to failure."). Easterbrook's view that excluding higher-cost rivals cannot be anticompetitive is surprising. Even if one takes the total welfare perspective, the model in Part IV shows that excluding a higher-cost rival with the threat of predatory prices lowers total welfare compared with exclusion by low limit prices.
15. A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1401 (7th Cir. 1989).
16. Spector demonstrates a similar phenomenon in a one-period differentiated products market. See SPECTOR, supra note 6.
17. Barry Wright Co. v. ITT Grinnell Co., 724 F.2d 227, 234 (1st Cir. 1984). Barry Wright entered the market producing mechanical snubbers for nuclear power plants, but (after some delays) lost its only customer, ITT Grinnell, to Pacific, which offered Grinnell a steep discount.
18. According to the classification scheme of Craswell and Fratrik, this proposal would be a "dynamic" standard because it is focused on changes in conduct over time in response to entry and exit. Richard Craswell & Mark R. Fratrik, Predatory Pricing Theory Applied: The Case of Supermarkets vs. Warehouse Stores, 36 CASE W. RES. L. REV. 1, 6 (1985). The dynamic standards previously proposed by Williamson and Baumol are similar in spirit, but their specifics differ in important ways. This proposal is substantially stricter than Williamson's and has a better legal foundation and better economic consequences than Baumol's. See Oliver E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 87 YALE L.J. 284 (1977); William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 YALE L.J. 1 (1979). Baumol's and Williamson's proposals are discussed and compared to this Essay's proposal in Part VII.
19. According to the classification scheme of Craswell and Fratrik, this proposal would be a "dynamic" standard because it is focused on changes in conduct over time in response to entry and exit. Richard Craswell & Mark R. Fratrik, Predatory Pricing Theory Applied: The Case of Supermarkets vs. Warehouse Stores, 36 CASE W. RES. L. REV. 1, 6 (1985). The dynamic standards previously proposed by Williamson and Baumol are similar in spirit, but their specifics differ in important ways. This proposal is substantially stricter than Williamson's and has a better legal foundation and better economic consequences than Baumol's. See Oliver E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 87 YALE L.J. 284 (1977); William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 YALE L.J. 1 (1979). Baumol's and Williamson's proposals are discussed and compared to this Essay's proposal in Part VII.
20. According to the classification scheme of Craswell and Fratrik, this proposal would be a "dynamic" standard because it is focused on changes in conduct over time in response to entry and exit. Richard Craswell & Mark R. Fratrik, Predatory Pricing Theory Applied: The Case of Supermarkets vs. Warehouse Stores, 36 CASE W. RES. L. REV. 1, 6 (1985). The dynamic standards previously proposed by Williamson and Baumol are similar in spirit, but their specifics differ in important ways. This proposal is substantially stricter than Williamson's and has a better legal foundation and better economic consequences than Baumol's. See Oliver E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 87 YALE L.J. 284 (1977); William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 YALE L.J. 1 (1979). Baumol's and Williamson's proposals are discussed and compared to this Essay's proposal in Part VII.
21. The exact operationalization of the rule (twenty percent threshold and twelve to eighteen months duration) could vary by industry or be decided on a case-by-case basis. The price freeze might also be adjusted for inflation in periods of high inflation or for substantial industry-specific price trends.
22. Judges and commentators frequently justify restrictive tests for predatory pricing because they fear that more inclusive tests would ban such limit-pricing behavior. See Barry Wright, 724 F.2d at 231-32; Philip Areeda & Donald F. Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 HARV. L. REV. 697, 699-700 (1975).
23. Baumol, supra note 18.
24. For generally related arguments, see Aaron S. Edlin, Do Guaranteed-Low-Price Policies Guarantee High Prices, and Can Antitrust Rise to the Challenge?, 111 HARV. L. REV. 528 (1997), which argues that guaranteed-low-price policies are a good substitute for actually charging low prices because committing to match price cuts discourages rivals from cutting prices and preserves market share in the rare event that rivals do so nonetheless.
25. That is, when price exceeds marginal cost, a drop in price as part of limit pricing creates net benefits because extra output is produced and sold with a value in excess of cost.
26. Many antitrust cases stress the primacy of consumer welfare. For example, the Court has written that "the end sought was the prevention of restraints . . . which . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940). Although Professor Easterbrook's scholarship argues for a total welfare standard, Judge Easterbrook's opinion in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. asserts that a "[p]rice less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors, a gift of this kind is not actionable." 881 F.2d 1396, 1401 (7th Cir. 1989). The Supreme Court endorses this view in Brooke Group, arguing that prices below cost are not problematic from an antitrust perspective, even though they are allocatively inefficient, because such prices increase consumer welfare. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). Hence, these prices are only predatory, and only violate the antitrust laws, if there is the prospect of a later recoupment period when prices are high. Id. The Court wrote that "[a]lthough unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers," and for that reason does not violate the antitrust laws. Id. This reasoning in Brooke Group was later picked up by the Ninth Circuit. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995). These arguments in favor of adding a recoupment element to the "price less than cost" element implicitly presume that bans on predation seek to protect consumer welfare, not total welfare. Other antitrust cases and commentators also support consumer welfare as the primary goal of antitrust. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (dismissing efficiency gains that are not passed on to consumers); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 68 (1982) (finding the major goal of antitrust laws to be the prevention of unfair wealth redistribution "from consumers to firms with market power"). The claim here is not that low prices are, should be, or have been the exclusive goal of antitrust law. Historically, the second goal of antitrust has not, however, been to promote low costs, but rather to oppose concentration even where concentration might lower costs and prices. Justice Brandeis, for example, argued that one can either have great concentrations of power and wealth or democracy, but not both. See, e.g., JOSEPH R. CONLIN, THE MORROW BOOK OF QUOTATIONS IN AMERICAN HISTORY 48 (1984) (quoting Justice Brandeis's statement that "we can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both"). In Brown Shoe, the Supreme Court noted that "we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets." Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962). The Brown Shoe Court previously had observed that the illegal merger of Brown Shoe with Kinney would allow the integrated companies to "market their own brands at prices below those of competing independent retailers." Id. Lower costs by themselves have rarely, if ever, been the deciding factor in any case. Others have also seen noneconomic political goals as relevant. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. PA. L. REV. 1051 (1979); see also Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT'L REV. L. & ECON. 73, 74-76 (1985) (interpreting the Sherman Act as interest-group legislation designed to transfer wealth from big business to small merchants and farmers); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 220 (1979) (arguing that "[t]he primary objective of antitrust policy is to promote full and fair market competition and to reap the benefits that competition brings with it"); David Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219, 1287-92 (1988) (viewing the original purpose of the Sherman Act to be the protection of democratic institutions from concentrated economic power).
27. Many antitrust cases stress the primacy of consumer welfare. For example, the Court has written that "the end sought was the prevention of restraints . . . which . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940). Although Professor Easterbrook's scholarship argues for a total welfare standard, Judge Easterbrook's opinion in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. asserts that a "[p]rice less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors, a gift of this kind is not actionable." 881 F.2d 1396, 1401 (7th Cir. 1989). The Supreme Court endorses this view in Brooke Group, arguing that prices below cost are not problematic from an antitrust perspective, even though they are allocatively inefficient, because such prices increase consumer welfare. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). Hence, these prices are only predatory, and only violate the antitrust laws, if there is the prospect of a later recoupment period when prices are high. Id. The Court wrote that "[a]lthough unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers," and for that reason does not violate the antitrust laws. Id. This reasoning in Brooke Group was later picked up by the Ninth Circuit. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995). These arguments in favor of adding a recoupment element to the "price less than cost" element implicitly presume that bans on predation seek to protect consumer welfare, not total welfare. Other antitrust cases and commentators also support consumer welfare as the primary goal of antitrust. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (dismissing efficiency gains that are not passed on to consumers); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 68 (1982) (finding the major goal of antitrust laws to be the prevention of unfair wealth redistribution "from consumers to firms with market power"). The claim here is not that low prices are, should be, or have been the exclusive goal of antitrust law. Historically, the second goal of antitrust has not, however, been to promote low costs, but rather to oppose concentration even where concentration might lower costs and prices. Justice Brandeis, for example, argued that one can either have great concentrations of power and wealth or democracy, but not both. See, e.g., JOSEPH R. CONLIN, THE MORROW BOOK OF QUOTATIONS IN AMERICAN HISTORY 48 (1984) (quoting Justice Brandeis's statement that "we can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both"). In Brown Shoe, the Supreme Court noted that "we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets." Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962). The Brown Shoe Court previously had observed that the illegal merger of Brown Shoe with Kinney would allow the integrated companies to "market their own brands at prices below those of competing independent retailers." Id. Lower costs by themselves have rarely, if ever, been the deciding factor in any case. Others have also seen noneconomic political goals as relevant. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. PA. L. REV. 1051 (1979); see also Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT'L REV. L. & ECON. 73, 74-76 (1985) (interpreting the Sherman Act as interest-group legislation designed to transfer wealth from big business to small merchants and farmers); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 220 (1979) (arguing that "[t]he primary objective of antitrust policy is to promote full and fair market competition and to reap the benefits that competition brings with it"); David Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219, 1287-92 (1988) (viewing the original purpose of the Sherman Act to be the protection of democratic institutions from concentrated economic power).
28. Many antitrust cases stress the primacy of consumer welfare. For example, the Court has written that "the end sought was the prevention of restraints . . . which . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940). Although Professor Easterbrook's scholarship argues for a total welfare standard, Judge Easterbrook's opinion in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. asserts that a "[p]rice less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors, a gift of this kind is not actionable." 881 F.2d 1396, 1401 (7th Cir. 1989). The Supreme Court endorses this view in Brooke Group, arguing that prices below cost are not problematic from an antitrust perspective, even though they are allocatively inefficient, because such prices increase consumer welfare. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). Hence, these prices are only predatory, and only violate the antitrust laws, if there is the prospect of a later recoupment period when prices are high. Id. The Court wrote that "[a]lthough unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers," and for that reason does not violate the antitrust laws. Id. This reasoning in Brooke Group was later picked up by the Ninth Circuit. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995). These arguments in favor of adding a recoupment element to the "price less than cost" element implicitly presume that bans on predation seek to protect consumer welfare, not total welfare. Other antitrust cases and commentators also support consumer welfare as the primary goal of antitrust. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (dismissing efficiency gains that are not passed on to consumers); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 68 (1982) (finding the major goal of antitrust laws to be the prevention of unfair wealth redistribution "from consumers to firms with market power"). The claim here is not that low prices are, should be, or have been the exclusive goal of antitrust law. Historically, the second goal of antitrust has not, however, been to promote low costs, but rather to oppose concentration even where concentration might lower costs and prices. Justice Brandeis, for example, argued that one can either have great concentrations of power and wealth or democracy, but not both. See, e.g., JOSEPH R. CONLIN, THE MORROW BOOK OF QUOTATIONS IN AMERICAN HISTORY 48 (1984) (quoting Justice Brandeis's statement that "we can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both"). In Brown Shoe, the Supreme Court noted that "we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets." Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962). The Brown Shoe Court previously had observed that the illegal merger of Brown Shoe with Kinney would allow the integrated companies to "market their own brands at prices below those of competing independent retailers." Id. Lower costs by themselves have rarely, if ever, been the deciding factor in any case. Others have also seen noneconomic political goals as relevant. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. PA. L. REV. 1051 (1979); see also Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT'L REV. L. & ECON. 73, 74-76 (1985) (interpreting the Sherman Act as interest-group legislation designed to transfer wealth from big business to small merchants and farmers); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 220 (1979) (arguing that "[t]he primary objective of antitrust policy is to promote full and fair market competition and to reap the benefits that competition brings with it"); David Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219, 1287-92 (1988) (viewing the original purpose of the Sherman Act to be the protection of democratic institutions from concentrated economic power).
29. Many antitrust cases stress the primacy of consumer welfare. For example, the Court has written that "the end sought was the prevention of restraints . . . which . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940). Although Professor Easterbrook's scholarship argues for a total welfare standard, Judge Easterbrook's opinion in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. asserts that a "[p]rice less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors, a gift of this kind is not actionable." 881 F.2d 1396, 1401 (7th Cir. 1989). The Supreme Court endorses this view in Brooke Group, arguing that prices below cost are not problematic from an antitrust perspective, even though they are allocatively inefficient, because such prices increase consumer welfare. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). Hence, these prices are only predatory, and only violate the antitrust laws, if there is the prospect of a later recoupment period when prices are high. Id. The Court wrote that "[a]lthough unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers," and for that reason does not violate the antitrust laws. Id. This reasoning in Brooke Group was later picked up by the Ninth Circuit. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995). These arguments in favor of adding a recoupment element to the "price less than cost" element implicitly presume that bans on predation seek to protect consumer welfare, not total welfare. Other antitrust cases and commentators also support consumer welfare as the primary goal of antitrust. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (dismissing efficiency gains that are not passed on to consumers); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 68 (1982) (finding the major goal of antitrust laws to be the prevention of unfair wealth redistribution "from consumers to firms with market power"). The claim here is not that low prices are, should be, or have been the exclusive goal of antitrust law. Historically, the second goal of antitrust has not, however, been to promote low costs, but rather to oppose concentration even where concentration might lower costs and prices. Justice Brandeis, for example, argued that one can either have great concentrations of power and wealth or democracy, but not both. See, e.g., JOSEPH R. CONLIN, THE MORROW BOOK OF QUOTATIONS IN AMERICAN HISTORY 48 (1984) (quoting Justice Brandeis's statement that "we can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both"). In Brown Shoe, the Supreme Court noted that "we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets." Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962). The Brown Shoe Court previously had observed that the illegal merger of Brown Shoe with Kinney would allow the integrated companies to "market their own brands at prices below those of competing independent retailers." Id. Lower costs by themselves have rarely, if ever, been the deciding factor in any case. Others have also seen noneconomic political goals as relevant. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. PA. L. REV. 1051 (1979); see also Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT'L REV. L. & ECON. 73, 74-76 (1985) (interpreting the Sherman Act as interest-group legislation designed to transfer wealth from big business to small merchants and farmers); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 220 (1979) (arguing that "[t]he primary objective of antitrust policy is to promote full and fair market competition and to reap the benefits that competition brings with it"); David Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219, 1287-92 (1988) (viewing the original purpose of the Sherman Act to be the protection of democratic institutions from concentrated economic power).
30. Many antitrust cases stress the primacy of consumer welfare. For example, the Court has written that "the end sought was the prevention of restraints . . . which . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940). Although Professor Easterbrook's scholarship argues for a total welfare standard, Judge Easterbrook's opinion in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. asserts that a "[p]rice less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors, a gift of this kind is not actionable." 881 F.2d 1396, 1401 (7th Cir. 1989). The Supreme Court endorses this view in Brooke Group, arguing that prices below cost are not problematic from an antitrust perspective, even though they are allocatively inefficient, because such prices increase consumer welfare. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). Hence, these prices are only predatory, and only violate the antitrust laws, if there is the prospect of a later recoupment period when prices are high. Id. The Court wrote that "[a]lthough unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers," and for that reason does not violate the antitrust laws. Id. This reasoning in Brooke Group was later picked up by the Ninth Circuit. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995). These arguments in favor of adding a recoupment element to the "price less than cost" element implicitly presume that bans on predation seek to protect consumer welfare, not total welfare. Other antitrust cases and commentators also support consumer welfare as the primary goal of antitrust. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (dismissing efficiency gains that are not passed on to consumers); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 68 (1982) (finding the major goal of antitrust laws to be the prevention of unfair wealth redistribution "from consumers to firms with market power"). The claim here is not that low prices are, should be, or have been the exclusive goal of antitrust law. Historically, the second goal of antitrust has not, however, been to promote low costs, but rather to oppose concentration even where concentration might lower costs and prices. Justice Brandeis, for example, argued that one can either have great concentrations of power and wealth or democracy, but not both. See, e.g., JOSEPH R. CONLIN, THE MORROW BOOK OF QUOTATIONS IN AMERICAN HISTORY 48 (1984) (quoting Justice Brandeis's statement that "we can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both"). In Brown Shoe, the Supreme Court noted that "we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets." Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962). The Brown Shoe Court previously had observed that the illegal merger of Brown Shoe with Kinney would allow the integrated companies to "market their own brands at prices below those of competing independent retailers." Id. Lower costs by themselves have rarely, if ever, been the deciding factor in any case. Others have also seen noneconomic political goals as relevant. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. PA. L. REV. 1051 (1979); see also Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT'L REV. L. & ECON. 73, 74-76 (1985) (interpreting the Sherman Act as interest-group legislation designed to transfer wealth from big business to small merchants and farmers); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 220 (1979) (arguing that "[t]he primary objective of antitrust policy is to promote full and fair market competition and to reap the benefits that competition brings with it"); David Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219, 1287-92 (1988) (viewing the original purpose of the Sherman Act to be the protection of democratic institutions from concentrated economic power).
31. Many antitrust cases stress the primacy of consumer welfare. For example, the Court has written that "the end sought was the prevention of restraints . . . which . . . raise prices or otherwise control the market to the detriment of purchasers or consumers of goods and services." Apex Hosiery Co. v. Leader, 310 U.S. 469, 493 (1940). Although Professor Easterbrook's scholarship argues for a total welfare standard, Judge Easterbrook's opinion in A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc. asserts that a "[p]rice less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors, a gift of this kind is not actionable." 881 F.2d 1396, 1401 (7th Cir. 1989). The Supreme Court endorses this view in Brooke Group, arguing that prices below cost are not problematic from an antitrust perspective, even though they are allocatively inefficient, because such prices increase consumer welfare. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 224 (1993). Hence, these prices are only predatory, and only violate the antitrust laws, if there is the prospect of a later recoupment period when prices are high. Id. The Court wrote that "[a]lthough unsuccessful predatory pricing may encourage some inefficient substitution toward the product being sold at less than its cost, unsuccessful predation is in general a boon to consumers," and for that reason does not violate the antitrust laws. Id. This reasoning in Brooke Group was later picked up by the Ninth Circuit. Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1433-34 (9th Cir. 1995). These arguments in favor of adding a recoupment element to the "price less than cost" element implicitly presume that bans on predation seek to protect consumer welfare, not total welfare. Other antitrust cases and commentators also support consumer welfare as the primary goal of antitrust. See FTC v. Staples, Inc., 970 F. Supp. 1066 (D.D.C. 1997) (dismissing efficiency gains that are not passed on to consumers); Robert H. Lande, Wealth Transfers as the Original and Primary Concern of Antitrust: The Efficiency Interpretation Challenged, 34 HASTINGS L.J. 65, 68 (1982) (finding the major goal of antitrust laws to be the prevention of unfair wealth redistribution "from consumers to firms with market power"). The claim here is not that low prices are, should be, or have been the exclusive goal of antitrust law. Historically, the second goal of antitrust has not, however, been to promote low costs, but rather to oppose concentration even where concentration might lower costs and prices. Justice Brandeis, for example, argued that one can either have great concentrations of power and wealth or democracy, but not both. See, e.g., JOSEPH R. CONLIN, THE MORROW BOOK OF QUOTATIONS IN AMERICAN HISTORY 48 (1984) (quoting Justice Brandeis's statement that "we can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can't have both"). In Brown Shoe, the Supreme Court noted that "we cannot fail to recognize Congress's desire to promote competition through the protection of viable, small, locally owned businesses. Congress appreciated that occasional higher costs and prices might result from the maintenance of fragmented industries and markets." Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962). The Brown Shoe Court previously had observed that the illegal merger of Brown Shoe with Kinney would allow the integrated companies to "market their own brands at prices below those of competing independent retailers." Id. Lower costs by themselves have rarely, if ever, been the deciding factor in any case. Others have also seen noneconomic political goals as relevant. See, e.g., Robert Pitofsky, The Political Content of Antitrust, 127 U. PA. L. REV. 1051 (1979); see also Thomas J. DiLorenzo, The Origins of Antitrust: An Interest-Group Perspective, 5 INT'L REV. L. & ECON. 73, 74-76 (1985) (interpreting the Sherman Act as interest-group legislation designed to transfer wealth from big business to small merchants and farmers); Paul L. Joskow & Alvin K. Klevorick, A Framework for Analyzing Predatory Pricing Policy, 89 YALE L.J. 213, 220 (1979) (arguing that "[t]he primary objective of antitrust policy is to promote full and fair market competition and to reap the benefits that competition brings with it"); David Millon, The Sherman Act and the Balance of Power, 61 S. CAL. L. REV. 1219, 1287-92 (1988) (viewing the original purpose of the Sherman Act to be the protection of democratic institutions from concentrated economic power).
32. Then-Professor Robert Bork, for example, championed total wealth maximization (the sum of producer and consumer surplus) as the goal of antitrust, although he confusingly labeled this goal "consumer welfare" on the ground that every producer is ultimately owned by consumers. ROBERT H. BORK, THE ANTITRUST PARADOX 107-15 (The Free Press 1993) (1978). Bork writes, "A consideration of the virtues appropriate to law as law demonstrates that the only legitimate goal of antitrust is the maximization of consumer welfare." Id. at 7; see also id. at 51 ("The only legitimate goal of American antitrust is the maximization of consumer welfare."). Richard Posner also embraces a total-wealth-maximization goal. See RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 8-22 (1976). Kaplow and Shavell support the wealth-maximization goal for all law (other than tax law). See Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994). Despite the wish of economists and their fellow travelers that the goal of antitrust be to promote overall efficiency, neither case law nor legislative history stands for the proposition that overall economic welfare or wealth maximization trumps low prices. Despite the admittedly enormous recent influence of economics on the courts, cases that take a position on the issue stand for the contrary proposition. E.g., Staples, 970 F. Supp. 1066 (refusing to count efficiency gains not passed on to consumers). It may be fortunate in some ways that courts have not sought to maximize overall welfare because once one widens the scope of antitrust concerns beyond prices in order to evaluate overall social welfare, one confronts an impossible tangle of how to evaluate social welfare or societal wealth in a world rife with market failures. Cartels and other antitrust problems are by no means the only reasons, and not even the primary reasons, that prices deviate from marginal cost. Unions, government regulation, environmental externalities, accidents and other nonenvironmental externalities, search costs, agency costs and other cases of asymmetric or impacted information, opportunism, and irrational decisionmaking all cause prices to deviate from marginal cost. In such a world, even if one could be sure that a given antitrust rule would increase producer and consumer surplus in one market, it might lower overall welfare because true social costs do not determine supply in that market or one related to it.
33. Then-Professor Robert Bork, for example, championed total wealth maximization (the sum of producer and consumer surplus) as the goal of antitrust, although he confusingly labeled this goal "consumer welfare" on the ground that every producer is ultimately owned by consumers. ROBERT H. BORK, THE ANTITRUST PARADOX 107-15 (The Free Press 1993) (1978). Bork writes, "A consideration of the virtues appropriate to law as law demonstrates that the only legitimate goal of antitrust is the maximization of consumer welfare." Id. at 7; see also id. at 51 ("The only legitimate goal of American antitrust is the maximization of consumer welfare."). Richard Posner also embraces a total-wealth-maximization goal. See RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 8-22 (1976). Kaplow and Shavell support the wealth-maximization goal for all law (other than tax law). See Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994). Despite the wish of economists and their fellow travelers that the goal of antitrust be to promote overall efficiency, neither case law nor legislative history stands for the proposition that overall economic welfare or wealth maximization trumps low prices. Despite the admittedly enormous recent influence of economics on the courts, cases that take a position on the issue stand for the contrary proposition. E.g., Staples, 970 F. Supp. 1066 (refusing to count efficiency gains not passed on to consumers). It may be fortunate in some ways that courts have not sought to maximize overall welfare because once one widens the scope of antitrust concerns beyond prices in order to evaluate overall social welfare, one confronts an impossible tangle of how to evaluate social welfare or societal wealth in a world rife with market failures. Cartels and other antitrust problems are by no means the only reasons, and not even the primary reasons, that prices deviate from marginal cost. Unions, government regulation, environmental externalities, accidents and other nonenvironmental externalities, search costs, agency costs and other cases of asymmetric or impacted information, opportunism, and irrational decisionmaking all cause prices to deviate from marginal cost. In such a world, even if one could be sure that a given antitrust rule would increase producer and consumer surplus in one market, it might lower overall welfare because true social costs do not determine supply in that market or one related to it.
34. Then-Professor Robert Bork, for example, championed total wealth maximization (the sum of producer and consumer surplus) as the goal of antitrust, although he confusingly labeled this goal "consumer welfare" on the ground that every producer is ultimately owned by consumers. ROBERT H. BORK, THE ANTITRUST PARADOX 107-15 (The Free Press 1993) (1978). Bork writes, "A consideration of the virtues appropriate to law as law demonstrates that the only legitimate goal of antitrust is the maximization of consumer welfare." Id. at 7; see also id. at 51 ("The only legitimate goal of American antitrust is the maximization of consumer welfare."). Richard Posner also embraces a total-wealth-maximization goal. See RICHARD A. POSNER, ANTITRUST LAW: AN ECONOMIC PERSPECTIVE 8-22 (1976). Kaplow and Shavell support the wealth-maximization goal for all law (other than tax law). See Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994). Despite the wish of economists and their fellow travelers that the goal of antitrust be to promote overall efficiency, neither case law nor legislative history stands for the proposition that overall economic welfare or wealth maximization trumps low prices. Despite the admittedly enormous recent influence of economics on the courts, cases that take a position on the issue stand for the contrary proposition. E.g., Staples, 970 F. Supp. 1066 (refusing to count efficiency gains not passed on to consumers). It may be fortunate in some ways that courts have not sought to maximize overall welfare because once one widens the scope of antitrust concerns beyond prices in order to evaluate overall social welfare, one confronts an impossible tangle of how to evaluate social welfare or societal wealth in a world rife with market failures. Cartels and other antitrust problems are by no means the only reasons, and not even the primary reasons, that prices deviate from marginal cost. Unions, government regulation, environmental externalities, accidents and other nonenvironmental externalities, search costs, agency costs and other cases of asymmetric or impacted information, opportunism, and irrational decisionmaking all cause prices to deviate from marginal cost. In such a world, even if one could be sure that a given antitrust rule would increase producer and consumer surplus in one market, it might lower overall welfare because true social costs do not determine supply in that market or one related to it.
35. Proper determination of overall welfare consequences should consider cases where entry occurs because of this rule that would not otherwise occur. In such cases, overall welfare increases because prices are substantially lower than they would be otherwise. Prices are lower, first, by the amount that the incumbent lowered prices to limit entry, and second, by the entrant's discount, which needs to be at least twenty percent to secure the price freeze. The reduction in inefficiency from these low prices could exceed the social costs arising from inefficient production during the post-entry phase. Even if overall welfare is lowered after entry, however, this loss should be multiplied by the probability of entry and compared with the efficiency gains that arose before entry, because prices were lower during that phase.
36. For example, a more moderate approach would require the plaintiff in a predatory pricing case to prove that (1) it has sufficiently low cost and price to bring overall value to the market and (2) it would likely not have entered if it knew the incumbent would respond as the incumbent did. Such a standard allows the possibility of an above-cost predation case, but it only protects firms whose entry improves overall social welfare.
37. Areeda & Turner, supra note 20, at 707-08.
38. If consumers are heterogeneous, the concept is inherently ill-defined because matching for one buyer will entail beating for another.
39. Admittedly, the administrative gain from the restrictions being relatively easy to monitor may be somewhat illusory because the twenty percent discount threshold to trigger the price freeze should really be quality-adjusted.
40. Sherman Anti-Trust Act, 15 U.S.C. §§ 1-2 (1994); Clayton Act, 15 U.S.C. §§ 12-13. The Federal Trade Commission can also attack predatory pricing under section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45, provided the alleged violation concerns goods (not services) traded in interstate commerce. Pricing on such goods that would violate section 1 or section 2 of the Sherman Act or section 2(a) of the Clayton Act will necessarily violate section 5 of the FTC Act. Suits may also be brought under section 1 of the Sherman Act in cases of conspiracy. See Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574 (1986).
41. 221 U.S. 1 (1911).
42. United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945).
43. Some have, of course, proposed changing the law. For example, the late Senator Philip Hart introduced a bill in the 1970s that would have made it no defense in a civil monopolization action for a defendant to assert that its monopoly was "due to superior product, business acumen, or historic accident." BORK, supra note 25, at 6 n.*.
44. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
45. Competition on the merits is one of the touchstone goals of antitrust, as it is thought to enhance consumer welfare. See, e.g., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 223 (1993); see also United States v. United Shoe Mach. Corp., 110 F. Supp. 295 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954); Areeda & Turner, supra note 20.
46. Robert H. Bork, Separate Statement, Report of the White House Task Force on Antitrust Policy, ANTITRUST L. & ECON. REV., Winter 1968, at 54.
47. 3 PHILLIP AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 720a, at 254-55 (rev. ed. 1996).
48. 3 id. ¶ 720b, at 256-58.
49. See generally Brooke Group, 509 U.S. 209; Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421 (9th Cir. 1995); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1984).
50. See John S. McGee, Predatory Price Cutting: The Standard Oil (N.J.) Case, 1 J.L. & ECON. 137 (1958). Plaintiffs avoid arguing that the larger firm is able to charge low prices because it has low costs since this argument tends to favor the idea that the low prices simply reflect competition on the merits.
51. BORK, supra note 25, at 149.
52. Easterbrook, supra note 3, at 264; see also Gary S. Becker & Kevin M. Murphy, Rethinking Antitrust, WALL ST. J., Feb. 26, 2001, at A22.
53. See, e.g., Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967); Moore v. Mead's Fine Bread Co., 348 U.S. 115 (1954).
54. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 221 (1993); A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1404 (7th Cir. 1989).
55. See, e.g., Atlas Bldg. Prods. Co. v. Diamond Block & Gravel Co., 269 F.2d 950 (10th Cir. 1959); Md. Baking Co. v. FTC, 243 F.2d 716 (4th Cir. 1957). Even the decision in Brown Shoe Co. v. United States, 370 U.S. 294, 344 (1962), which famously asserted that "it is competition, not competitors, which the Act protects," was only paying lip service to that sentiment. In fact, the Court protected competitors in Brown Shoe. Even though the Court recognized that "[t]he retail outlets of integrated companies . . . can market their own brands at prices below those of competing independent retailers," the Court also acknowledged "Congress' desire to promote competition through the protection of viable, small, locally owned businesses," even at the expense of "occasional higher costs and prices [that] might result from the maintenance of fragmented industries and markets." Id. Hence, the Court banned the integration of Brown Shoe with Kinney. Id. at 346.
56. Before finding the technical "out" that Rose Acre's prices were not legally discriminatory, Easterbrook reasoned that the Robinson-Patman cases "drive[] us almost to the point of reversing the district court" and ruling in favor of the plaintiff. A.A. Poultry Farms, 881 F.2d at 1406.
57. Matsushita Elec. Indus. v. Zenith Radio Corp., 475 U.S. 574 (1986).
58. 509 U.S. 209.
59. Matsushita Elec. Indus., 475 U.S. at 589 (quoting Easterbrook, supra note 3, at 268).
60. Id.
61. Brooke Group, 509 U.S. at 223.
62. Id. 54. Id. (quoting Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104, 116 (1986)).
63. Of course, in a price discrimination case, the plaintiff must demonstrate price discrimination, and in a monopolization case, monopoly power.
64. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
65. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
66. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
67. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
68. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin
69. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
70. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
71. See, e.g., Janusz A. Ordover, Predatory Pricing, in THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 77, 79 (Peter Newman ed., 1998); Alvin Klevorick, The Current State of the Law and Economics of Predatory Pricing, 83 AM. ECON. REV. PAPERS & PROC. 162 (1993); Bolton et al., supra note 2. For examples from the literatures to which they refer that formally model rational predatory pricing strategies, see generally David M. Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. ECON. THEORY 253 (1981); Paul Milgrom & John Roberts, Limit Pricing and Entry Under Incomplete Information: An Equilibrium Analysis, 50 ECONOMETRICA 443 (1982) [hereinafter Milgrom & Roberts, Limit Pricing]; and Paul Milgrom & John Roberts, Predation, Reputation, and Entry Deterrence, 27 J. ECON. THEORY 280 (1982) [hereinafter Milgrom & Roberts, Predation]. See also David M. Kreps et al., Rational Cooperation in the Finitely Repeated Prisoners' Dilemma, 27 J. ECON. THEORY 245 (1982).
72. Klevorick demonstrates the utter lack of influence of modern economics on the courts by supplementing his considerable reading with a search of all predatory pricing cases for the names of prominent authors (Jean Tirole, David Kreps, Robert Wilson, Paul Milgrom, John Roberts, and Garth Saloner) and for key words from this literature (deep pocket, reputation, signaling, and asymmetric information), which came up empty. His search revealed no influence. Klevorick, supra note 56, at 162.
73. This model is consistent with the Chicago School's view of the rareness of predation, although it is worth noting that Bolton, Brodley, and Riordan have recently challenged the factual accuracy of that claim. Bolton et al., supra note 2, at 2249.
74. As with any formal model, I consider a stylized situation that ignores many of the complications inherent in any specific setting but that has the advantage of allowing us to focus attention on general issues.
75. See generally DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 272-76 (1990) (providing a background discussion of Bertrand competition).
76. See Int'l Air Indus. v. Am. Excelsior Co., 517 F.2d 714 (5th Cir. 1975) (finding an exception to the Areeda-Turner rule in which pricing above average variable cost can be illegal as predatory pricing if it is below the short-run profit-maximizing price and entry barriers are high enough to allow recoupment).
77. Kreps et al., supra note 56; Kreps & Wilson, supra note 56; Milgrom & Roberts, Limit Pricing, supra note 56; Milgrom & Roberts, New Theories of Predatory Pricing, in INDUSTRIAL STRUCTURE IN THE NEW INDUSTRIAL ECONOMICS 112 (Giacomo Bonnano & Dario Brandolini eds., 1990); Milgrom & Roberts, Predation, supra note 56; Janusz A. Ordover & Garth Saloner, Predation, Monopolization and Antitrust, in 1 HANDBOOK OF INDUSTRIAL ORGANIZATION 537 (Richard Schmalensee & Robert D. Willig eds., 1989).
78. Kreps et al., supra note 56; Kreps & Wilson, supra note 56; Milgrom & Roberts, Limit Pricing, supra note 56; Milgrom & Roberts, New Theories of Predatory Pricing, in INDUSTRIAL STRUCTURE IN THE NEW INDUSTRIAL ECONOMICS 112 (Giacomo Bonnano & Dario Brandolini eds., 1990); Milgrom & Roberts, Predation, supra note 56; Janusz A. Ordover & Garth Saloner, Predation, Monopolization and Antitrust, in 1 HANDBOOK OF INDUSTRIAL ORGANIZATION 537 (Richard Schmalensee & Robert D. Willig eds., 1989).
79. Contrast this result with the more traditional view of Joskow & Klevorick, supra note 24, at 255, which states that "no practical way exists to distinguish a predatory price cut to a point above average total cost from one that is a short-run profit-maximizing response to the growth of competition." If a predatory price cut is one that injures consumer welfare, then this model shows that this dichotomy - although standard in the predatory pricing literature - is a false one. It may be better policy to deny the incumbent a short-run profit-maximizing response to entry because such a response can be predatory and reduce consumer welfare.
80. Even the proposed enforcement policy of the Department of Transportation under 49 U.S.C. § 41712 (1994), which was an attempt to state a nonpermissive predation rule for airline competition, continues to focus on nonmaximizing behavior as the trigger for liability. See Enforcement Policy Regarding Unfair Exclusionary Conduct in the Air Transportation Industry, 63 Fed. Reg. 17,919 (Apr. 10, 1998).
81. See the discussion of Holland Sweetener and NutraSweet in BARRY J. NALEBUFF & ADAM M. BRANDENBURGER, CO-OPETITION 72-76 (1996).
82. For example, Microsoft Word is more valuable to most users at this point than WordPerfect, in part because it has a larger user base, which facilitates file exchange and collaboration, as well as formal and informal technical support.
83. Defensive low pricing is much more likely to be anticompetitive because it may substitute for aggressive low pricing in the first place and will tend to discourage others from aggressive pricing in anticipation of the response.
84. The low price might be a signal to potential entrants that the incumbent firm has low costs, so prices are apt to be low after entry. Alternatively, in a full information context, the low price might be set below the costs of most entrants so that they would not even consider entering. The incumbent might worry if it set a high price that a later dramatic price drop in reaction to entry could trigger a predatory pricing suit.
85. For example, most of Easterbrook's analysis explicitly concerns the case where rivals are equally or more efficient than incumbents, yet his conclusions are stated for the general case. Easterbrook, supra note 3, at 272-76.
86. Although this standard argument is reasonable, it is not thoroughly compelling in a repeated game. In principle, even if two firms have equal costs, almost any outcome is possible according to the "folk theorem." See DREW FUDENBERG & JEAN TiROLE, GAME THEORY 150-60 (1993). The profits and output of one firm can be held arbitrarily low (even with prices still high) if it expects that increases in its output will be met with a dramatic price war. The question becomes whether such expectations are reasonable and likely.
87. An incumbent and smaller rivals or potential entrants might produce using the same technology, and so have identical cost functions, yet very different average costs. Because production is subject to increasing returns to scale, as more output is produced, average costs fall. In that case, the incumbent may price above its average total cost but below its rival's average cost. The rival might take a long time to increase its demand to levels that would yield costs as low as the incumbent monopoly. For this reason, the monopoly might be able to engage successfully in predation with above-cost pricing. This situation is best understood as one where increasing returns lead to asymmetric costs (the low-cost monopoly scenario). The lower costs of the monopoly arise because the incumbent is well-established. In much the same way, the Stackelberg leader in Spector's model can be viewed as having lower costs that derive from a combination of increasing returns and its leadership role. See SPECTOR, supra note 6. Again, the possibility of above-cost predation can be seen as arising from cost asymmetries.
88. See BORK, supra note 25, at 149-54.
89. E.g., Rebel Oil Co. v. Atl. Richfield Co., 51 F.3d 1421 (9th Cir. 1995).
90. BORK, supra note 25, at 151.
91. Bork constructs an apparently convincing diagrammatic and numerical example to prove his point. In his example, before the predation, the monopoly and its rival both sell at a price of $40, with the monopoly supplying 8000 units and its victim supplying 2000 units. In order to drive the rival from the market, Bork assumes that the predatory monopoly cuts its price to $20, $10 per unit below the victim's minimum average variable cost of $30, and that the victim reduces its output to 1000 units per week at an average variable cost of $30 per unit in order to limit its losses. Because of the price fall, demand increases to 12,500 units per week, so the monopoly must increase output to 11,500 units per week. As Bork draws the diagram, at this output, the monopoly has average variable costs of $39.50, implying that it fails to recover $224,250 of its variable costs. The predator's losses per week exceed the victim's by a ratio of 22.4 to 1, or 11.2 to 1 after Bork accounts for fixed costs. Id. at 151-52. Despite Bork's assurances that the exact numbers do not matter, the numbers do matter, which makes this example more rhetoric than argument. Bork draws cost curves that assume that the incumbent monopoly firm has a cost advantage, but this advantage disappears when the predator produces a lot and the victim produces very little. This factor becomes relevant because the monopoly must increase production to effect its predator strategy. If we drew a slightly different cost curve for the monopoly in Bork's example, our conclusions about losses would be quite different. Suppose, for example, that the monopoly has a marginal cost of $5 per unit for all units less than 6000, and $40 per unit for all units produced in excess of 6000. Suppose also that the predator charges $25 per unit, where demand is 11,000 units. Now if the victim stays in the market as Bork suggests, producing 1000 units, instead of the predator suffering losses far in excess of the victim, the predator will have revenues of $250,000 (10,000 units multiplied by $25 per unit), exceeding its variable costs of $190,000 by $60,000. Since the victim of the predatory pricing is suffering losses, and it knows that the predator is not, it may exit quickly. Hence, if the predator has the cost advantage I suggest, then far from being implausible, the predatory strategy seems likely to be successful. Bork is only able to conclude that predation is implausible because he gives the predator a steeply increasing marginal cost curve, so that it has huge losses from the predation.
92. Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983).
93. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966).
94. Learned Hand is less than transparent about the particular act by Alcoa that was exclusionary. His clearest assertion is that Alcoa doubled and redoubled its production or capacity, precluding successful entry. United States v. Aluminum Co. of Am., 148 F.2d 416, 431 (2d Cir. 1945).
95. United Shoe's customers would likely not have agreed to such a wide variety of contractual restrictions if United Shoe's machinery had not been superior, as Judge Wyzanski granted. Furthermore, Wyzanski was convinced that these restrictions supported United Shoe's monopoly. Hence, in a strong sense United Shoe owed its monopoly to its superior products. This fact was no defense because consumers were not benefiting, or at least not benefiting as much as they would have, had United Shoe been denied these strategic contracts. United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 344-46 (D. Mass. 1953), aff'd per curiam, 347 U.S. 521 (1954).
96. Here, I adopt Bork's definition of competition: "'Competition' for purposes of antitrust analysis must be understood as a term of art signifying any state of affairs in which consumer welfare cannot be increased by judicial decree." BORK, supra note 25, at 51. In this Essay, however, consumer welfare is interpreted in the traditional way, as consumer surplus rather than producer plus consumer surplus.
97. The figure twenty percent is intended to balance the desire to encourage entry with the desire that an entrant provide substantial benefits to consumers before it is protected. Naturally, the exact figure involves some guesswork. The reader may wonder whether courts can create such numerical thresholds, or whether that would require a legislative act. There is precedent for introducing arbitrary but not unreasonable numerical thresholds without legislation in other areas of antitrust. See, e.g., United States v. Phila. Nat'l Bank, 374 U.S. 321 (1963) (holding that mergers leading to a greater than thirty percent market share create a presumption of substantial lessening of competition); 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41,552 (Sept. 10, 1992) (creating a variety of arbitrary numerical thresholds jointly promulgated by the FTC and the DOJ, which have been very influential with courts); CARL KAYSEN & DONALD F. TURNER, ANTITRUST POLICY (1959) (suggesting that twenty percent market share should be the line of prima facie unlawfulness for mergers); George J. Stigler, Mergers and Preventive Antitrust Policy, 104 U. PA. L. REV. 176, 182 (1955) (suggesting that shares exceeding twenty percent after a merger be presumptively unlawful).
98. The figure twenty percent is intended to balance the desire to encourage entry with the desire that an entrant provide substantial benefits to consumers before it is protected. Naturally, the exact figure involves some guesswork. The reader may wonder whether courts can create such numerical thresholds, or whether that would require a legislative act. There is precedent for introducing arbitrary but not unreasonable numerical thresholds without legislation in other areas of antitrust. See, e.g., United States v. Phila. Nat'l Bank, 374 U.S. 321 (1963) (holding that mergers leading to a greater than thirty percent market share create a presumption of substantial lessening of competition); 1992 Horizontal Merger Guidelines, 57 Fed. Reg. 41,552 (Sept. 10, 1992) (creating a variety of arbitrary numerical thresholds jointly promulgated by the FTC and the DOJ, which have been very influential with courts); CARL KAYSEN & DONALD F. TURNER, ANTITRUST POLICY (1959) (suggesting that twenty percent market share should be the line of prima facie unlawfulness for mergers); George J. Stigler, Mergers and Preventive Antitrust Policy, 104 U. PA. L. REV. 176, 182 (1955) (suggesting that shares exceeding twenty percent after a merger be presumptively unlawful).
99. See generally WILLIAM J. BAUMOL ET AL., CONTESTABLE MARKETS AND THE THEORY OF INDUSTRY STRUCTURE (1982) (giving assumptions under which the threat of hit-and-run entry forces incumbents to price low).
100. This "showing" is often not direct in practice. As Areeda and Kaplow note, "most judicial pronouncements on the proof of monopoly power embody little more than a vague perception that a very large market share sufficiently approximates total control to be fairly regarded as a monopoly." PHILLIP AREEDA & LOUIS KAPLOW, ANTITRUST ANALYSIS 574 (5th ed. 1997). The idea that a seventy percent or more market share would create a good prima facie case of significant advantages and power over price is plausible. The elasticity of a firm's demand, i.e., price sensitivity, is typically much smaller for a firm with high market share than for one with low market share. A firm's elasticity of demand equals the ratio of the percentage change in quantity demanded to the percentage change in price. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 98 n.7 (2d ed. 1994). A firm with a 70% market share that cuts its output by 10% cuts market output by 7%, ignoring the possibility of other firms increasing their output. If the market demand elasticity is 1, price will rise by 7%. In contrast, a firm with only a 5% market share could only raise price by 5% even if it stopped producing entirely.
101. This "showing" is often not direct in practice. As Areeda and Kaplow note, "most judicial pronouncements on the proof of monopoly power embody little more than a vague perception that a very large market share sufficiently approximates total control to be fairly regarded as a monopoly." PHILLIP AREEDA & LOUIS KAPLOW, ANTITRUST ANALYSIS 574 (5th ed. 1997). The idea that a seventy percent or more market share would create a good prima facie case of significant advantages and power over price is plausible. The elasticity of a firm's demand, i.e., price sensitivity, is typically much smaller for a firm with high market share than for one with low market share. A firm's elasticity of demand equals the ratio of the percentage change in quantity demanded to the percentage change in price. See DENNIS W. CARLTON & JEFFREY M. PERLOFF, MODERN INDUSTRIAL ORGANIZATION 98 n.7 (2d ed. 1994). A firm with a 70% market share that cuts its output by 10% cuts market output by 7%, ignoring the possibility of other firms increasing their output. If the market demand elasticity is 1, price will rise by 7%. In contrast, a firm with only a 5% market share could only raise price by 5% even if it stopped producing entirely.
102. Some would argue that asymmetric costs, at least at the margin, are the only explanation for why a firm with an eighty percent market share and a firm with a twenty percent market share in the same market can both simultaneously decide not to increase output. Given the likely difference in firm-specific demand elasticities for the same market demand, one should expect a firm with high market share to have substantially lower incremental costs than a firm with low market share. See, e.g., Joseph Farrell & Carl Shapiro, Optimal Contracts with Lock-In, 79 AM. ECON. REV. 51 (1989).
103. A famous economic maxim is that sunk costs do not matter. If a firm decides to enter, it is true that its sunk costs of entry will not matter thenceforth. But, if a firm will not recover these costs, then they will affect its decision before entry and prevent it from sinking them.
104. See the discussion in Joskow & Klevorick, supra note 24, at 228-29.
105. Areeda, who proposed this idea in Areeda & Turner, supra note 20, later conceded that it is notoriously difficult in application. Joseph F. Brodley, Proof of Efficiencies in Mergers and Joint Ventures, 64 ANTITRUST L.J. 575, 609 n.98 (1996) (citing 3 PHILIP AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW ¶ 715.2a (Supp. 1995)).
106. See Spectrum Sports v. McQuillan, 506 U.S. 447 (1993).
107. Observe that if there is no threat of the dominant firm reacting with increased output, the price elasticity of demand for a firm with a ten percent market share will typically be five times that of a firm with fifty percent market share. Since the markup of a profit-maximizing firm (i.e., (price - cost)/price) equals the inverse of the elasticity, if there is no threat of reaction, then the markup of the dominant firm would need to be five times as high as that of the small firm (p - c)lp, which would indicate that the large firm has dramatically lower costs than the small firm instead of moderately lower costs.
108. 15 U.S.C. § 13(b) (1994).
109. Edlin, supra note 22, at 563-65.
110. Standard Oil Co. v. FTC, 340 U.S. 231, 246-51 (1951).
111. United States v. Container Corp. of America, 393 U.S. 333 (1969), stands out for recognizing that a reaction of meeting-the-competition can be anticompetitive.
112. In practice, limit pricing might not occur only during stage 1. If we leave the two-stage case, then limit pricing, and its attendant benefits, might continue forever.
113. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
114. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
115. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
116. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
117. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
118. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
119. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
120. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
121. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
122. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
123. low. See THOMAS R. GULLEDGE & NORMAN K. WOMER, THE ECONOMICS OF MADE-TO-ORDER PRODUCTION (1986); Armen Alchian, Reliability of Progress Curves in Airframe Production, 31 ECONOMETRICA 679 (1963); Kenneth J. Arrow, The Economic Implications of Learning by Doing, 29 REV. ECON. STUD. 155 (1962); Partha Dasgupta & Joseph Stiglitz, Learning-by-Doing, Market Structure and Industrial and Trade Policies, 40 OXFORD ECON. PAPERS 246 (1988); M. Thérèse Flaherty, Industry Structure and Cost-Reducing Investment, 48 ECONOMETRICA 1187 (1980); Drew Fudenberg & Jean Tirole, Learning-by-Doing and Market Performance, 14 BELL J. ECON. 522 (1983); Pankaj Ghemawat & A. Michael Spence, Learning Curve Spillovers and Market Performance, 100 Q.J. ECON. 839 (1985); Douglas A. Irwin & Peter J. Klenow, Learning by Doing Spillovers in the Semiconductor Industry, 102 J. POL. ECON. 1201 (1994); Paul L. Joskow & Nancy L. Rose, The Effects of Technological Change, Experience, and Environmental Regulation on the Construction Cost of Coal-Burning Generating Units, 16 RAND J. ECON. 1 (1985); Marvin B. Lieberman, The Learning Curve and Pricing in the Chemical Processing Industries, 15 RAND J. ECON. 213 (1984); William W. Nye, Firm Specific Learning-by-Doing in Semiconductor Production: Some Evidence from the 1986 Trade Agreement, 11 REV. INDUS. ORG. 383 (1996).
124. The value today of a future payoff is called the present discounted value of that payoff. Since many economic problems require comparing amounts of money at different points in time, it is necessary to bring all future money figures to the present. For example, in a typical benefit/cost analysis of a construction project, one has to compare the current year's construction costs with future years' monetary benefits and maintenance costs. To address these comparisons, we ask the question: "How much is a dollar to be received in the future worth today?" Note that $1 received today can be put in a bank to earn interest, at rate r per period. Thus this period's $1 will become $1 × (1 + r) at the beginning of next period. Equivalently, $1 received at the beginning of the next period is worth only $1/(1 + r) today. By letting f = 1/(1 + r), we can see that a payoff of π to be received next period is worth only fπ now. In this terminology, fπ is the present discounted value today of a payoff of π next period. See ROBERT S. PINDYCK & DANIEL L. RUBINFELD, MICROECONOMICS 542-45 (5th ed. 2001).
125. Baumol, supra note 18.
126. See e.g., 3 AREEDA & HOVENKAMP, supra note 38, ¶ 720a, at 254-55; see also Chi. Prof'l Sports Ltd. P'ship v. NBA, 95 F.3d 593, 597 (7th Cir. 1996) (overturning a decision that the NBA's telecast fees were too high and noting that ¶the antitrust laws do not deputize district judges as one-man regulatory agencies").
127. Moreover, the comparison of post-entry competition is ambiguous, because this Essay's threshold for the price freeze encourages low post-entry pricing.
128. Williamson, supra note 18, at 294-96.
129. See Severin Borenstein, Presentation to the TRB Study Committee on Airline Competition tbl.2 (Jan. 21, 1999), reprinted in CLINTON V. OSTER, JR. & JOHN S. STRONG, PREDATORY PRACTICES IN THE US AIRLINE INDUSTRY 33 tbl.6 (2001), http://152.119.239.10/ docimages/pdf59/121516_web.pdf.
130. These incentives, called Travel Agent Commission Overrides, or TACOs, are typically not disclosed to passengers but give agents substantial incentives to steer passenger purchases. OSTER & STRONG, supra note 101, at 8 n.6. After objections from the Department of Transportation to the plan of a mini-hub in Reno, Northwest cancelled the continuing flights to the three West Coast cities from Reno. See Administration Warns Airlines It Will Enforce Federal Antitrust Laws, MINNEAPOLIS-ST. PAUL STAR TRIB., Apr. 5, 1993, at 7A.
131. See OSTER & STRONG, supra note 101, at 7-9.
132. Oster and Strong's hub premium calculations control for flight mileage and market density. Id. at 32.
133. It is unclear why Northwest's hub premium went up. Since it is a premium over other fares, general fare increases cannot explain it. Also, other hub premiums did not increase by similar amounts.
134. Enforcement Policy, supra note 12.
135. If Northwest's costs are sufficiently low, then presumably the $150 fares are short-run profit-maximizing.
136. It is an open question whether the relevant market would be the market for travel to and from Minneapolis or between particular city pairs. One reason to think that the relevant market is not city pairs is that it might not be possible for a hypothetical monopoly of a single city pair to raise price above the competitive level. Take, for example, the Reno-Minneapolis route. A monopolist over that route alone could probably not raise price above competitive levels without attracting swift entry and supply substitution from Northwest, which has a relatively easy time flying between Minneapolis and any other city.
137. Borenstein estimates that Northwest's hub premium in Minneapolis was 21% in 1993 and 42% in 1994. Borenstein, supra note 101, at tbl.2, reprinted in OSTER & STRONG, supra note 101, at 33 tbl.6. But see Michael E. Levine, Price Discrimination Without Market Power, 18 YALE J. ON REG. (forthcoming 2002), available at http://papers.ssrn.com/paper.taf? abstract_id=224947 (arguing that high prices in some segments may reflect inelastic market demand and the most efficient way to recover common costs, and should not be used to infer monopoly power).
138. The fare drops of 25-40% can be inferred from comparing the first and second quarters of 1993. OSTER & STRONG, supra note 101, at 9 fig. 1.
139. United States v. AMR Corp., 140 F. Supp. 2d 1141, 1155 (D. Kan. 2001).
140. See Complaint ¶ 32, AMR Corp. (No. 99-1180), http://www.usdoj.gov/atr/cases/f2400/ 2438.htm (explaining market share and pricing data).
141. AMR Corp., 140 F. Supp. 2d at 1155.
142. The Complaint alleges that American's one-way fare was $80 in April 1995. Complaint ¶ 32, AMR Corp. (No. 99-1180), http://www.usdoj.gov/atr/cases/f2400/2438.htm.
143. AMR Corp., 140 F. Supp. 2d at 1155.
144. Id.
145. See the discussion of American's advantages supra note 12.
146. AMR Corp., 140 F. Supp. 2d at 1156-57.
147. Id. at 1171.
148. The assumption that Vanguard could have filled its flights so as to be profitable seems reasonable because demand for air travel in this price range appears to be quite price responsive. The court noted that on the Dallas to Wichita route an average price drop from $105 to $70 was accompanied by a doubling of the number of people who flew the route. Id. at 1157.
149. Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983).
150. Pacific was the only manufacturer of mechanical snubbers sold in the United States. Because mechanical snubbers were so superior to hydraulic snubbers, Pacific's share of the overall snubber market grew rapidly from 47% in 1976, to 83% in 1977, to 94% in 1979. Id. at 229.
151. The actual discounts were 25% to 30% compared to the usual discounts of 20%. Id. 124. Thomas W. Hazlett, Predation in Local Cable TV Markets, 40 ANTITRUST BULL. 609 (1995).
152. 253 F.3d 34 (D.C. Cir. 2001).
153. A lower court risks being overturned on appeal because Brooke Group contains dicta stating that the predation standard under section 2 of the Sherman Act is the same as that under the Robinson-Patman Act. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 222 (1993).
154. See BAUMOL ET AL., supra note 82.
155. The lower prices improve overall welfare, but the higher cost of production lowers welfare. The net result can be ambiguous in general. When limit pricing is perfect and prevents all higher-cost rivals from entering, as in the model here, then overall welfare is improved by this Essay's rule.
156. Such courts might modify the standard of substantiality of entry that a plaintiff must demonstrate; instead of the entrant showing merely that its discount was substantial enough to bring consumers large benefits, the entrant might also be required to show that its costs were sufficiently low that its entry increased total welfare.