CEU eTD Collection P ER SE VERSUS ER SE A In partial fulfilment ofthe requirements for the degree of NALYSIS OF P Master of Arts in Legal and Economic Studies REDATORY Central European University Department ofLegal Studes Department ofEconomics R Professor Torok Adam Professor Tajti Tibor ULE OF Budapest, Hungary Sanjana Krnjak Submitted to: US Supervisors: June 2012 P By S RICING UPREME R EASON C ASES C : E OURT CONOMIC CEU eTD Collection CONCLUSION 38 ______3.8 3.7 3.6 3.5 3.4 3.3 3. 2.7 2.6 2.5 3.2 2.4 2.3 2. 1.3 T 1.2.2 1.2.3 T 1.2.3 M 1.2.1 1.2 REFERENCES ______40 3.1 2.2 2.1 1.1 1. INTRODUCTION 1 ______ABSTRACT II ______CASE 27 ANALYSIS______PREDATORY 15 PRICING ______THE IDEA 4 OF RULE OF REASON AND ______PER SE RULE L F C M A B D H P W P R D R P A S P ESSONS FROM EDERAL TRATEGIC THEORY PRICING PREDATORYTRATEGIC OF ALIFORNIA REDATORY PRICING COUNTERSTRATEGIES PRICING REDATORY REDATORY PRICING STRATEGIES PRICING REDATORY ACIFIC ER SE RULE ROOKE ECOUPMENT ULE OFREASON APPROACH TLANTIC SSESSING PREDATORY PRICING IFFERENCES BETWEEN ISTORY OFPREDATORY PRICING JUDICIAL CASES INTHE ECIDING BETWEEN THE PER SE AND RULE OF REASON APPROACH ATSUSHITA EYERHAEUSER HE PROCEDURE FOR RULE OF REASON IN LOWER COURTS HE NOTION OF REASONABLENESS AKING OF THE RULE OF REASON APPROACH OF REASON RULE THE OF AKING B G T ELL R RADE ROUP ICHFIELD 5 ______R T E ETAIL 19 ______ELEPHONE LECTRICAL C C L C ASES OMMISSION V TD OMPANY V L . C IQUOR V A O . US . NALYZED B V C I ROWN AND NDUSTRIAL . AND OMPANY V USA D 7 ______. EALERS R 17 ______. OSS EU 21 ______36 ______P P ROCTER AND ETROLEUM 11 ______APPROACH -S A . IMMONS C W L SSN O INKLINE ILLIAMSON ., 24 ______. 16 ______L V TD . 8 ______C 26 ______M . H O ET AL G C . ARDWOOD IDCAL AMBLE OMMUNICATIONS (1990)32 ______i T OBACCO . V A US 25 ______. C LUMINUM Z ______10 O ENITH . L (1967.)35 ______UMBER C ORPORATION 12 ______R ADIO I (2009) 28 ______NC C OMPANY ., C ETAL ORP (1993) 30 ______., . ETAL (1980)______34 , I NC . 20)_____ 29 (2007) ______(1986) ______33 (1986) ______CEU eTD Collection should beused to form a new act that deals specifically with predation. should be kept narrow and have a clearly defined benchmark and exceptions. These implications that per se rule really is the better rule for predatory practices, but the scope of per se illegal cases be per se illegal and that the scope of predatory pricing cases should bewider. Research showed this case than the case analysis itself. The main assumptions were that predatory pricing should detailed study of already existing literature, which proved to be more useful in finding answers in a and cases pricing predatory Court Supreme US of analysis are cases used methods basic The processes should be, meaning the broadness of behaviors that are looked at as predatory pricing. se rule is better for predatoryand rule ofreason, within the scope of predatory pricing. The main problemspricing are whether the per cases se per and cases, judge anticompetitive to areused rules that at islooking paper This suffer. directly what the scope of predatory pricing in judicial Predatory pricing is a competition damaging act in which both the prey and customers Abstract ii CEU eTD Collection agreements) meanings of price fixing agreements under the Sherman Act (A/N Section 1 of the (1982) as Shermancases where there were misrepresentationsAct ofprevious cases dealsand different interpretations of with 1 predatory pricing cases fall, undertherule ofreason or theper serule needs to bedealt with.In of the heavy burden of proof, it frequently falls under the rule of reason. The topic ofwhere Price fixing is an area of antitrust law that is supposed to fall under theper se rule, but, because conducts. various other method in a less damaging way. The rule ofreason looks at theeconomic realities of it was made todistort competition and that the same goal could have been achieved by some reason. The per se says that an agreement or conduct is illegal just because it is very obvious that questions about the interpretation of the Sherman Act. Clayton Act, 1914). Even after the clarifications inthe Clayton Act, there were still unanswered power of enforcement is given tothe Federal Trade Commission and Department of Justice (The actions from happening and it lists exceptions from certain rules (The Clayton Act, 1914). The anticompetitive preventing for actively givesroom and anticompetitive are practices which more enforcement power tothe Sherman Act. The Clayton Act also goes into more detail about interpreted it differently throughout history businesses in thelate 1800s and early 1900s. The Sherman Act is very broad and US courts 1). p. 2001, emphasize that they are aimed toward protecting competition, not individual competitors (Rubin, to important Itis competition. protect to created both are which 1), p. 2001, (Rubin, (1914) Kimmel (2006) gives examples of It is possible for a conduct to be illegal per se and justifiable under the rule of reason. There are two basic ways in which antitrust cases can beinterpreted, per se and rule of between practices to anticompetitive response the Congress acts were two These US antitrust law is based on two main acts, the Sherman Act (1890) and the Clayton Act Appalacian Coals Introduction 1 (1933), . The main point of the Clayton Act was to give 1 Socony-Vacuum , (1940) BMI (1979) and Maricopa CEU eTD Collection incorporate them into the per se rule on predatory pricing. Up until now only cases of pricing price fixingthe actual scope of predatory pricing. Within thesecond question I willarrangements be looking at various on whether the perse rule is better for determining predatory pricing, and the second is to define that clearly distortand creating additional inefficiencies. competitionline between per se and rule ofreason because that would open up possibilities for circumvention andsome othermake means of determining suggestionswhere the line or cost for avoidable average cost, total predation average cost, variable it isaverage whether clear not is still is. It is difficult to clearly draw a on how to some sort of average cost(see interesting research topic. There were decisions that the benchmark for determining predation is and it is also notclear how to determine predatory pricing, these issues combined make a very attempts to drive out competitors. made up for in theperiod after predation) means that thecompany will lose money in its real dumping (lowering prices a lot below their cost of production so their damage cannot be deter new entrants (Elhauge, 2003, p.686). Predation can be justified as a strategic approach, but making profits, or evenPredatory pricing basically means that companieslosing lower their prices to a point where they are not money per unit sold in an attempt to drive out competition or (Dechert LLP, 2009, p.2). According to Black’s law dictionary predatory pricing is: practices, because they overlap in many cases. order to analyze predatory pricing cases, there alsoneeds to bean analysis of other price fixing In response to the problem this paper will have two objectives. Thefirst one is a question Since the exact line between when to use the rule of reason or the per se rule is not clear, the long run.” (Black’s Law Dictionary, 2009, online edition) purpose of eliminating competitors in the short run and reducing competitionfor the cost of in measure anappropriate below pricing competition; overall reduce “Unlawful below-cost pricing intended to eliminate specific competitors and It is still not clear what the exact benchmark in the US for determining predation is Brooke case; Areeda, Turner, 1975; McGee 1958; McGee 1975). It 1975). McGee 1958; McGee 1975; Turner, Areeda, case; 2 CEU eTD Collection the cases. the analyze will chapter third The caseanalysis. the understanding for necessary terms the introduce a short theoretical introduction to predatory pricing. The purpose of the first two chapters is to to the per se rule and the rule of reason in anticompetitive cases. The second chapter will provide because their comparison to US cases would be beyond the scope of this paper are bound to be most interesting.free market, fair competition and competitiveness are most developed and cases that appear there Cases fromspectrum of the Sherman Act. The US is stillEuropean perceived to bethecountry where the notions of Court of Justicerule of reason were invented by the US Supreme Court in an attempt tointerpret thevery broad will not be analyzed Court cases. determine predation. These questions will be answered through case analysis of US Supreme predatory pricing cases would pricing has,be and should therefore be illegaltreated like predation (Elhauge, 2003). In a case when all per se, there would proof that even lesserbe decreases in price insome industries canan create the same effect predatory even bigger issue on how to below a benchmark, which was defined as some sort of average cost, were punished. There is This paper consists of three main chapters. The first chapter will give a short introduction The reason why only US Supreme Court cases will beanalyzed is thefact that per se and 3 CEU eTD Collection both sides hiring economic experts that give thejury their theory about the conduct inquestion should beset guidelines on how exactly of rule reason should beimplemented.Now it mostly comes down to not completely clear who should prove what and to what extent. Stucke (2009, p.4-5) proposesthat there 2 issue at hand becomes illegal per se (Klitzke, 1980, p. 258). 1980, p. se (Klitzke, per illegal becomes hand at issue substantial amount ofcases that are ruled the same way using the rule of reason approach, the the rule of reason is the rule of law (Winrow and Johnson, 2008), because after there is a reason more structured in all levels of proceedings and stop using the rule of reason in certain cases (Stucke, 2009, p. 1) tomaking the use of rule of and in what extent should each of the rules be used. Opinions vary from completely disregarding use ofper se and rule ofreason is that even today there are different views on how, when, why the Sherman Act are of most importance. An especially interesting part with regard to the actual Sherman Act (Loevinger, 1964, p.25). For thepurposes of this paper Section 1 and Section 2 of They have developed as an attempt ofUS courts in interpreting what the Congress meant by the Oil Standard to be more exact in the 1897 on how courts are really deciding between the rules. discussion a brief with finishes chapter This separately. discussed be willalso that reasonableness and theprocedures in lower courts. Animportant element of the rule of reason is the notion of about the per se rule and the rule of reason. The rule of reasonreason approach. It starts by saying why the isrules developed,explained and continues with going into detail through its creation ruleof and perse the will define chapter analysis. This case do aproper ableto tobe order judged. Since predatory pricing is a part of anticompetitive litigation, they need to be clear in Currentlythere are somewhat set rules that deal with the burden of proof inthe rule ofreason, but it isstill Per se rule and rule of reason developed after the adoption ofthe Sherman Act in 1890, Rule of reason and per se rule are two rules under which anticompetitive cases can be case, and that is why literature still mistakenly says that it was developed in1911. was developed it that says mistakenly still literature iswhy that and case, 1. The idea of rule of reason perserule ofand Theidea of rule reason 1. Trans Missouri case, butrule of reason was notnamed till the 1911 4 2 (Stucke, 2009, p. 4-5). Some even argue that CEU eTD Collection main groups of types ofeconomic reality or setting of casesthe conduct in question (Loevinger, 1962, p.32). There are six that are illegalconduct and judges whether it is legal or illegalper based purely on facts, with no regard se.to the They are horizontal price fixing, vertical Sherman Act scope are. That iswhy the rule ofreasonand theper se rule weredeveloped, to seewhere thelimits ofthe but still there need to be It issome clear that the intention of the Congress waslimits to reach as far as the Constitution would allow, to the reach of the Sherman Act (Klitzke, 1980, p. 256). Section says that: raising pricesplace, above because the they efficient reasonablycompetition expect level thatis verythey andweakwillexpectations of monopoly profits in the long term, afterbe theby priceor war is over and able the non-existent.becoming to make up for importantthe in connectiona toThat predatory pricing.monopolylost The main purpose of predatory pricing is the isprofits why predators by in theSection 2 deals with monopolizationlower and attempts of monopolization.long This is especially their term. prices This in the first with trusts is provided and says that: and isprovided trusts with primarily in connection to the Section 1 of the Sherman Act, the exact text of the Act that deals . Per se 1.1 rule The per se rule does not look at the circumstances, but it looks at the pure facts of a guilty of a felony, …” (Sherman Act, Section 2, 1980) commerce among the several States, or with foreign nations, shall be deemed conspire with anyother person orpersons, to monopolize any part of the trade or “Every person who shall monopolize, orattempt to monopolize, or combine or is declared to be illegal...” (Sherman Act, Section 1, 1890) restraint of trade or commerce among the several States, orwith foreign nations, “Every contract, combination in the form oftrust or otherwise, orconspiracy, in Since per se and rule of reason developed as an interpretation ofthe Sherman Act, 5 CEU eTD Collection and the second one is that it provides consistency within thelaw (Winrow and Johnson, 2008, p. and avoids lengthy litigation onfacts that have a high probability of violating theSherman Act, standard use astrict to courts the allows it because efficiency judicial itpromotes isthat one first what the conduct that generated the per se rule was (Areeda, 1981, p.31). defined, and cases can bejudged using the rule of reason as soon as the conduct differs from deals with the fact that not all seconducts rule is notthat so falllimited within (Areeda, the scopenotion ofstare decisis, but should1981, notbe looked at purely from thatof standpoint becausethe the per p. per30). se Therule third are clearlyproblemspecific situations in which the conduct is allowed.of Inthis sense the per se ruledefining resembles the the conduct itselfcertain circumstances (Areeda, 1981, p.28). In this case there needs to be clear wording about the narrowness of this rule varies with the nature of the particular conduct (Areeda, 1981, p.28). these instances the interpretation of the wideness of the act and receptiveness toward the something is illegal per se based solely on the name of the act (Areeda, 1981, p.28). Ineach of illegal with noregard to whether there is a reasonable justification; it may also conclude that courts may require proof of actual harmful effects ina particular case, while others view actan as per se rule excludes consideration,varying intensity, express exceptions and defining the conduct. Varying intensity means that the completelymentioned in the guidelines written by Areeda (1981, p.28-37) for theFederal Judicial Centre are or to some degree (Areeda, 1981, p. the Sherman28). Act (Rubin, 2001, p. 10). Some analysis of cases. All of the above listed per se illegal conducts are in violation of the Section 1 on agreements. For the purposesprice fixing (“resale price maintenance”), bid rigging,of market division, boycottsthis and tying paper they will not be defined, only if there is a need in There are two main reasons why using the per se rule is good for everyone involved, the Express exceptions deals with conducts that are unlawful per se, but are lawful under The per se rule has many issues related to it in a majority of cases. The main three that are 6 CEU eTD Collection efficiency in markets. efficiency means that rule ofreason looks at the net effects on the society as a whole and looks for basically want satisfaction Customer supply. restricted due to as awhole society the for losses amount of product they would like. This agreement is inefficient because there are deadweight fewer products at a higher price, but it damages customers because they cannot purchase the it is not anticompetitivesubstitutes agree to limitbehavior the supply of the product in order to make the price higher. In this case if all manufacturersanticompetitive behavior if, for example, all providers of a certain product that has noclose in the industry agree to produce and sellcases. not take it into account, into butpractice very early. Only the first few itcases that were used to establishis the rule of reasona did very important satisfactionfactor should beone of the main pillars of making rule of reason based decisions, it cameto take into considerationwhole society. Even though in thebeginning it was notrecognized that customer want in all later efficiency of certain conductsThis part with regardof the totext the customer embodies and maximization the true nature of wealth of for rule the of reason. It is used to determine the always the best approach, as will be discussed in the third part of this chapter. 64). The majority of cases are still judged according to the rule of reason; however that is not . Rule of reason 1.2 approach The concept of customer want satisfaction in this sense means that it is seen as it isseen that means sense in this satisfaction want customer of concept The 375) and thereby increase output or, alternatively, to restrict output.” (Bork, 1966, p. thus todetermine whether theneteffect of theagreement isto create efficiency, employ as their primary criterion the impact ofany agreement upon output, and consumer “maximizationconsumerwealthsatisfaction…wantor of Acceptance of want satisfaction as the law's ultimate value requires the courts to The main tradition of the rule of reason is that the law is concerned with the: 7 CEU eTD Collection White with regard to the father of the rule ofreason (Bork, 1965, p.785). There was a big debate between Peckham and is the Peckham Justice reason. of rule the of creation and todevelopment regard with mentioned circumvention in a case that everything was clearly defined. need to be provided are not clear. There are also important considerations with regard to cases. Even to this day some details regarding burden of proof and the actual extent of proof that The real importance of Judge Whites reasoning in these cases can be seen when looking at later had are summarized in the following paragraph: should beinterpreted. He was misinterpreted by judges and academics, but the main findings he contribution is the fact that henamed the rule of reason and gave ideas and opinions on how it a chance to talk about law in general. He pointed out many important things, but the biggest cases (Bork, 1965, p.801). These were merger and monopolization cases, but White took them as 783). p. 1965, (Bork, reason” judgments as a court of appealswith price fixing and market division, Judge Taft, who wrote one of the most suggestivejudge and Chief Justicejudgments. They are Justice Peckham, who wrote the first US Supreme Court decisionWhite dealing who gave the name of “rule of .. Making of the rule of 1.2.1 reason approach Before Judge White made this decision, therewere two judges thatalso needtobe 387) agreement. The others are shortcuts to finding or inferring effect” (Bork, 1966, p. logically separate criteria.Inalarger sense,thereis onlyone test-the effect of the These threese concept; tests (2)and American Tobacco theare intention better“Chief of Justicetheviewed parties; White's as and guides statement(3) the effect forof the ofthe therule agreement.litigation of reason, set forth process in Standard than Oil as Judge White’s rule of reason was established in 1911 Essentially three judges thought of the rule of reason and introduced it through their Trans Missouri , contains threetests which may berenderedas (1) theper decision because they had different views on how flexible 8 Standard Oil and American Tobacco American CEU eTD Collection reason cases. Lower courts have aprocedure that is described in the next paragraph. per se rule) the US Supreme Court still does not have aprocedure on how to look at rule of went from ahint that there might be rule ofreason to anactual statement of rule ofreason and years ago, and the development of these rules began very rapidlytransaction and necessary to make the (betweentransaction effective (Bork, 1965, p.797-798). 1897 and 1911 theythat in order to belawful theconduct needs to besubordinate and collateral toanother legitimate the restrain on trade (Bork, 1965, p. 787). He offered a concept of ancillary restrains which means from apart purpose another had that those allowed but ontrade, restrain wasthe purpose only Sherman Act. His idea was that common law held void agreements in restraint of trade whose and Steel Pipe Addyson 796). p. 1965, (Bork, efficiency commercial and industrial their effects on efficiency and allowed the possibility ofsome price-fixing acts that promote gave a basis for the interpretation of the Sherman Act that allows judgment ofconducts based on as anticompetitive (Bork, 1965, p.790). The biggestcontribution of Justice Peckham was that he Judge White pointed out that this paragraph has a downside, and that every contract can be seen rule of reason: Judge Peckham thought that every restraint on trade is illegal, but hegave a brief indication of his the US Supreme Court to apply the Sherman Act to a price fixing agreement (Bork, 1965, p.785). the interpretation ofthe Act should be (Bork, 1965, p.785). This was the first case that required After Justice Peckham gave the basis for the rule of reason, Judge Taft in his decision on Even though these decision bythe US Supreme Court were made more than a hundred 1897) Freight, Trans-Missouri v. question.”(US suchby is accomplished contract whole the of purpose main the sale, where and sale, such enhancingmight the accompaniment of notthe pricesale of property, and thus entered into for the purpose of at bewhich of business for acertain time or withinincluded acertainthe territory] which is the mere vendor“A contract [by the vendor ofbusinesssells property not toenter into the same kind it, whichwithin in effect, isthe collateral letter to or spirit of the statute in made an attempt of making a workable formula for interpreting the 9 CEU eTD Collection information and presenting it as suitable. Even under the notion of reasonableness there still exists the problem of manipulating and legal issues by lookingnotion ofreasonableness gives thejury an advantage of being able tosolve complex economic at them only to people, and mostsay cases do notget to the Supreme Court and are decided at lower instances.whether The the conductlike seemsit is reasonable. reasonable It circumvent. Evenanon-expert ineconomicsorlawis can seewhetheraparticular seems conduct or especiallynot. important in the US and the jury system.in which they could convince non experts that a conduct is non Jurorspredatory when it actually is. are regular get away with predation because of better arguments and more “developed” economic approach without being punished. On the other hand, the rule of reason approach could allow predators to away get to allowpredators could and requirements proof strict very under it falls approach predatory pricing cases and the way they shouldjudicial procedures further and further from the per se rule (Stucke, 2009,be p.9). looked at. If their explanationa of the act in questioncase prevails, and their explanations and reasoning takes fallsthe under the(Stucke, 2009, p. 4). Both sidesper usually hire economic experts that try toconvincese the court that arguments, or show that the anti-competitive arguments outweigh the pro-competitive arguments pro-competitive their to react to right the have plaintiffs and justification, pro-competitive their competitiveness in asense of an impact on prices or the output, the defendants need to show must provethat there is an agreement does not use this exact procedure, but in the lower courts the rule of reason works. Plaintiffs 3 Unilateral agreements are also considered agreements under ruleof reason 1.2.2 The The procedure for rule of reason in 1.2.2 lower courts The notion of reasonableness in rule of reason is very important because it is very hard to That is one of the most important arguments to take into account while looking at There is a set of rules for using the rule of reason in lower courts. The Supreme Court 3 , theymust provedirect orindirect effect on 10 CEU eTD Collection conduct itself (Areeda, 1981, p. 11). Administrative convenience is a question about the of analysis the replaces sometimes intention isthat second is illegal, and aconduct whether reasons why intentionmain two are There law. antitrust in idea confusing is avery Intention 8). 1981, p. (Areeda, is important, onesame goal the toachieve used be could that and less restrictive are actthat to that isalternatives that the actors’ stategoal of mind that is key inwill determining(Areeda, 1981, p. 5). Less restrictive alternatives means that even in cases that there is a belegitimate achieveddamaging way and that the harm to society is less than the benefits that the agreement produces by a certaincompetitive acts is that they have a legitimate objection that cannot bereached in any other less conduct they stillguide the case further (Areeda, 1981, p. 3). need to proveconsequences, the evidence that needs to be presented and formulate the presumptions that thatanticompetitive the of magnitude likely the occurrence, of probability the of there analysis deeper are no important to courts because only after judging the possible competitive harms can they go into a are harms Competitive 2). 1981, p. (Areeda, less competition harm that goals legitimate achieve achieve and its legitimateness and significance), and the alternatives that could have been used to activities, thenature and magnitude of the redeeming virtues (the objects they are trying to vertical classification and common purpose or coerced agreement (Areeda, 1981, p. 2-18). horizontal- convenience, administrative intention, alternatives, restrictive less virtues, redeeming but I will not go “reasonableness”. The intonotion of reasonableness has a few basic features that will be listed here, them in too much detail. They are basic inquiries, competitive harm, 1.2.3 The The notion of 1.2.3 reasonableness Redeeming virtues are a part that deals with the fact that the only excuse for anti- Basic inquiries deal with harms to competition that come as a result of the collaborators One of the most important notions with regard to rule of reason is the notion of 11 CEU eTD Collection 27). The easier way of determining which acts fallunder per se orrule of reason scope is the will rather just conclude that it is illegal based on the initial facts presented (Loevinger, 1964, p. competition that the courts will not even go into the detailed economic analysis of the case, but scope. Intrinsically unreasonable means that the act is unreasonableso and so obviously distorts unreasonable extrinsically or intrinsically the under fall acts All them. between decide actually important to see how courts make decisions n which rule to use. offers can besubstituted with the freedom that the rule of reason allows. That is why it is issues withdecidingwhich cases to judgeusing rule which are.Certainty that the per serule 17). 1981,p. (Areeda, all acts that distort competitiveness can beviewed under it, even those that seem highly unilateral they have together, which is todistort competitiveness, and thereach ofthe act is very broad, so even thought thewording of the agreement might beambiguous, what matters is the goal that that, fact the deals with feature last The 17). 1981,p. (Areeda, agreements vertical or horizontal looked at in and customers (vertical agreements).cases This division isnot as important because the thing that is is competitiveagreements between competitors (horizontal agreements) oragreements between manufacturers effects and redeeming virtues, and not whether they are . Deciding between the per se and rule of 1.3 reason approach After defining what the rules of reason and per se are, it is important to see how courts After having explained the rule of reason and per se rule, it becomes clearer what the Horizontal-vertical classification places the agreements according towhether theyare excessive orerroneous control of such behavior” (Areeda, 1981, p.15) frequency, and the relative gravity and frequency of the antisocial consequences of consequences that might flow from uncontrolled behavior adjusted for its application on the parties’ market behavior, … the relative gravity of the antisocial administrability of each such rule, the consequences of uncertainty orerroneous “the relative wisdom of alternative approaches or rules, therelative 12 CEU eTD Collection positive and negative sides of both approaches which are listed in the following table rule of reason and per se rule will be looked at in thefuture. The things to keep in mind are the 3). The 2007 The 3). negative thing, and therefore decide the majority of cases can using the rule of reason (Kayne,and therefore judicialproduce p. inefficiencies. Courtssee thepredictability serule oftheper asa court. of law or the per se rulethe proper scope of the per sescope. rule. There is noclear division as to which cases fall under therule The main decidingclaims that agreements eliminating competition which have noefficiency-creating point potential are is the natureRedeeming virtues are in most cases ban ontheconduct and/or big offines. Bork (1966, p. 384) the case beforeRedeeming virtues theare ways tocompensate for the damage done bythe anticompetitive conduct. redeeming virtues ofthe observedagreement become veryimportant (Areeda, 1981, p.21). competition. Ifthecase distorts competition, regardless oftherule underwhich itis governed, whether togo into the detailed economic analysis based onhow obviously it distorts they fall under the per se category, and all other fall under the rule of reason category. unreasonable, intrinsically are agreements If test. act unreasonable extrinsically and intrinsically Currently, the main problem is the fact that too many cases fall under therule of reason The most important thing is tolook into the nature of the case and make a decision on Leegin Leather Products case presents a precedent that is expected to shape the way the shape to is expected that aprecedent presents case 13 CEU eTD Collection litigation over issues that are not as important as to not be decided in the first instance. reason for having a set procedure for deciding between the two rules would beto prevent lengthy main The explained. were process judicial the on implications their and rules both chapter this clear that there are many traps related to making a clear line on which rule is to be used when. In positives and the negatives in the context of a certain case. most cases fall under the uncertain category. That is why courts need to always keep in mind the There areexamples ofcases thatare veryclearly betterjudged ortheotherby one approach, but Negative Positive Deciding between per se and rule of reason is not easy. Even in defining the rules, it is Table1. Positive and negative sides of the rule of reason Per serule -unfairness to parties to -unfairness express intensity, - varying predictability -provides - (Bork, 1966, p. 387) p. 1966, (Bork, nonexistent probably and slight isvery intent, parties' the of regardless consumers, injuring whose actual capability of efficiency, cheaper to Law enforcement 1981, p. 27-37) p. 1981, conduct¸the (Areeda, exceptions and defining 64) p. 2008, (Winrow and Johnson, 386) p. 1966, (Bork, administer 14 386) p. 1966, (Bork, administer - lasts long and expensive to Rule ofreason -Limiting factual inquiries factual -Limiting - Allows competitors to act 1981, p. 37) and jury role (Areeda, (A/N) more freely on the market CEU eTD Collection unprofitable level in amarket in aneffort to weaken, eliminate orblock the entry of competition pricing is thebelow-cost pricing, price discrimination and price warring (Gundlach, 1990, p. 132). Belowlowering cost Riordan, 1999, p.3). There are three types of behavior that fallof under predatory pricing. They are price tobecause of the monopoly position that the predator is trying to getan (Bolton, Broadley and unreasonablymarket power that the predator reaches by it and the increase in prices that will be possible low (below some measure of cost) or predatory pricing will notbe punished and competition will be damaged. predatory pricing this means that when the overall predatory pricing enforcement is low, conducts that are 5 competition will bedamaged that way. predatory pricing enforcement is high, even conducts that arenot predatory pricing will be punished and more likely thanthe actual true result. In the case of predatorypricing it means that when the overall 4 kept at an optimal level are positive are level at anoptimal kept not abuse their rights of legal action against alleged predators. Other reasons why it needs to be the reasons why the scope ofpredatory pricing needs to bekept narrow, so that competitors do that way make their prices relatively lower (OECD, 1989, p.5). Non-pricing predation is one of all available administrative and judicial resources to drivepredatory pricing. the costs of their competitorspredatory pricing in the US and the differencesup between the EU andand the U.S approach to of recoupment. Itthen moves on to predatory pricing strategies and counterstrategies, history of theory of predatory pricing which is followed byassessment of predatory pricing and the notion definition ofpredatory pricing and the types of predatory pricing. It continues with the strategic a with begins It pricing. predatory of idea the will explain chapter This market. the entering from competitors new prevent to or market the of out competition drive to inorder benchmark The false negative is a statistical resultwhere results seem negative even when they are not. In the case of The false positive paradox (can also becalled positive false) is astatistical resultwhere the false true result is Predatory pricing is a price reduction that is profitable only because of the additional There has been talk about non-pricing predation that basically means that companies use Predatory pricing is the act in which the predator lowers their prices below a certain 4 andnegative falses 2. Predatory Predatory Pricing 2. 15 5 (OECD, 1989, p. 6). CEU eTD Collection proving a predatory pricingmonopoly power of financial power (Elzinga and Mills, 2001, p.4-5). case, andunderlying strategic theory that underlies the low-price period, theyand an unobvious proof of a are: introducing the strategica theory to a judicialfacilitating process there needs to bestrong proof of an on the market as to what the future holds for the prey (Elzinga and Mills, 2001, p.4-5). Before market structure,Mills, 2001, p.4-5). The basic of strategic theories of predatory pricing is to mislead other players that the a predator has all the informationscheme the prey has plus additional information (Elzinga and of financial resources (Elzinga and Mills, 2001, p. 4-5). Informational asymmetries in this case mean to access asymmetric or information asymmetric are on rely theories pricing predatory strategic that assumptions two main The 4-5). p. 2001, Mills, and (Elzinga rivals exclude and power more trying to find explanations that allow companies that already have some monopoly power to gain is theory Strategic 4-5). p. 2001, Mills, and (Elzinga credibility its prove that justifications find to no economic sense. make they otherwise goal; astrategic must have practices All predatory 1). 1992,p. (DiLorenzo, there was never a proved example of a company that became amonopoly using predatory tactics that deals with attempts of monopolization (Guandlach, 1990, P. 137). This is interesting because competitors who have less financial resources (Gundlach, 1990, p.132). lowering in price of a product below immediate orvariable costs in an effort toinjure temporary drastic isa warring Price 132). p. 1990, (Gundlach, competitors injure to attempt commodity at price (Gundlach, 1990,differentials p.132). Price discrimination is selling the or purchasing of units of the same not directly related to differences in the cost of supply in an . Strategic theory of predatory 2.1 pricing Bolton, Broadley and Riordan (1999, p. 30-45) have identified five elements necessary for necessary five elements identified have 30-45) p. (1999, Riordan and Broadley Bolton, Strategic theory of predatory pricing is a way of approaching predatory pricing that tries The main act that deals with predation in the US is the Sherman Act, especially Section 2 16 CEU eTD Collection in assessing predatory pricing in judicial procedures, and lists their advantages and disadvantages. 1975, p.699). Table 2lists and explains the academic proposals of approaches that could be used determining predation in cases when price is below thechosen level of cost (Areeda and Turner, used by the US courts are determining predation by comparing it to some sort of cost and how to assess predatory pricing. discussion about how to assess predatory pricing. The next subchapter presents suggestions on as a responsecome they if defensive are prices low Firms’ 14). p. 2001, Mills, and to (Elzinga effects competitive a rival’s low and Mills,prices 2001, p.13). The last element means that there must also bea discussion about the pro (Elzingameans that there must be a certain benchmark and prices must andbe below that benchmark (Elzinga Mills, 2001,than the profits after the period of predation (Elzinga and Mills, 2001, p.11). Price below cost p. 14). There2001, p.9). Probable recoupment is the proof that the loss during the period of predationhas is less been muchsecond element looks into whether the alleged predatory scheme is plausible (Elzinga and Mills, The 7). p. 2001, Mills, and (Elzinga high be must competitors existing of elasticities supply and high, be must toentry barriers share, market significant a have must predator the parts: essential three contains structure market A facilitating defense. efficiencies of justification business predation and supporting evidence, probable recoupment, price below cost and absence of a . Assessing predatory 2.2 pricing There are various ways of determining and proving predatory pricing. The most often 17 CEU eTD Collection No rule Rule Price Cost Rule - - - based rules of based rule - Predatory Strategies (Gundalch, 1990, p. 142) Table 2. Academic Proposals for Assessing theAnticompetitive Nature of reason rules reason Academic Proposals for and Turner,1975) (Areeda anticompetitive considered is cost-output) cost or marginal cost, long-run variable Short-run average measure of cost (e.g. some below set Price Description Easterbrook 1981) Easterbrook 1980; McGee 1978; (Bork pricing predatory against orrule No standard 1979) Klevorick and Joskow 1976; (Scherer of factors variety a into through inquiry assessed conduct predatory price of nature Anticompetitive anticompetitive considered lowering of price is through competitor of a the entry deterring market aftersuccessfully a in a price Increasing Assessing the Anticompetitive NatureofPredatory Strategies 18 effect Deterrent interaction after predatory topredator profits monopoly Forecloses endorsed Judicially Easy to apply appealing Conceptually Strengths competitor a against predator bya employed be could rule a that risk the Reduces predatory as strategy procompetitive falsely identifying a of risk the Reduces focused inquiry rules allow more "Industry specific" mechanism screening provides approach "Two-tier" inquiry of nature Inclusive procompetitive price cutsdue price procompetitive of occurrence May reduce accounted instandard for not period monitoring within changes) product line circumstances(e.g. Changed administer to difficult period Monitoring conduct predatory pricing of forms of some nature strategic the Overlooks strategies) orsignaling reputation (e.g. conduct predatory pricing of forms some evaluating for appropriate not be May upon agreed not cost" "below of measure Appropriate Weaknesses alike and competitors consumers injure may anticompetitive wh conduct Predatory rules "industry specific" across inequities Potential inquiry ranging wide from stemming Administrative difficulties evaluate to factors which of Choice the rule of nature restrictive to the ich is CEU eTD Collection Rode Acre Farms Acre Rode isthe this of example nice A 1587). p. 2001, (Hemphill, reaction likely their of a price cut and they also prevent the predator from increasing the price in the anticipation of case ofa predatory price. Barriers to entry prevent other entrepreneurs from entering as a result driving the price too low because hewill not be able tosupply as much as he would need to in constraints are a limiting factor in predation because, if they exist, they prevent the predator from 1587). Market share shows the benefits the allegedpredator might have had in power. Capacity share (and present concentration), capacity constrains and barriers to entry (Hemphill, 2001, p. elements that are especially helpful in determining likelihood of recoupment, and they are market does not look atelements of the economic environmentthe of the alleged predation (Hemphill, 2001, p.1587).actual It identifiable with deals recoupment to price approach structural A 1586). p. 2001, US (Hemphill, cuts, but rather the surrounding elements. There are three unidentifiedproblem related to this approach is that it happens that obvious cases of predation are by the courtsrecoupment, because and if theycalculating recoupment is conduct based arerecoupment. If gains are higher than losses, therenot is the there gains is no obtainedrecoupment after predation period was perceived to end (Hemphill, 2001,after p. 1590). This way of (Hemphill, predationcalculating recoupment is tosum up thelosses from predation2001, and compare them to the profits p. 1591). do Thenot main offset the losses from 6 is an essential part of any predatory scheme. point of predatory pricing is tomake monopoly profits in thelong term. That is why recoupment In all methods of assessment one of the most important presumptions to keep in mind is that the When the overall enforcement is low, the real predators will escape without attracting judicialnotice 2.3 Recoupment Recoupment is an especially interestingconcept since it caused “false negatives” The Brooke case. case suggests a simpler way of approaching the matter. Their idea of 19 A.A. Poultry Farmsv. A.A. Poultry 6 in the CEU eTD Collection incentive for non-pricing predation. Apart from non-pricing predation, there are many other so many predatory pricing cases end up with a settlement. high that the predation will not have made sense in the first place. That is partially the reason why costs will probably drive them to raise prices. If they are found guilty, the damages are usually so amount of money they need to spend in order to defend themselves from the allegations, their reputation is damaged and their pricing policies go under the spotlight. After spending the in cases of predatory pricing are much higher than the costs to plaintiffs. Apart from that, their produce and they need to hire good lawyers to defend them. The costs of litigation todefendants defendants need to provide many documents about their costs and pricing that cost a lot to consequences that we do not see immediately when looking into the procedure. First ofall, the the who won or lostpricing does. the judicialattempts are not treated as predatory, but they distort entrantscompetition procedure,that might want to join the market in the future. He also emphasizes in the fact thatthe those same way as predatory are, for example a 20% cut in price, still distort competition and have deterrent effects for any but interestingthat idea on how even attempts that are not below the benchmark set by certain courts but there an develops (2003) Elhauge 1607). p. 2001, (Hemphill, reputation their on predation of effects are far1606). Another important issue that is currently being avoided is the reputation of companies lessand p. 2001, (Hemphill, higher even become likely will analysis, the in implemented not visible if linkages, inefficiencies, deepenthe false negativitiesindirect andtheissue ofasymmetric information andmarket and insensitivity to high social costs of predation (Hemphill, 2001, p.1596). problems measurement are they and predation of assessment conduct-based to related problems predation (Hemphill, 2001, p. 1953), this is the paradox of deep price cuts. There are also When the burden of proof is high, and the costs for defendants are high, there is more Crane (2003, p.27) suggests that theeffects of predatory pricing litigation are not merely legalitysenotion The per of predatoryof pricing cases wouldcreatesubstantial 20 CEU eTD Collection higher. In this case the proof requires five conditions, namely that: there is a possibility that the creditor will break the line of credit completely, or makedown, the valuethe of interesttheir assets also goes down due totheir lower liquidity in case of default and change the conditions of these agreements and in a case ofa price war, the preys revenues go endanger the repayment plan. There are ways in which the creditor determines when and how towhen there is a change renegotiated are those and loans in rate interest variable or credit of line arunning the have companies value of assets, volumepredation (Bolton, Broadley andof Riordan, 1999, p. 56-64).sales It is basically about the fact that most or some other factorto be named strategic theory of predatory pricing need to be satisfied. Thefirst groupthat is financial could these strategies markets must have preconditions for predation and all five proofs that are going information that predators have about the industry (Bolton, Broadley and Riordan, 1999, p.77). Broadley and Riordan, 1999, p.77). Apart from that, the entrants usually donot have all the make their decisions on whether to enter an industry based on projected revenues (Bolton, (Bolton, Broadley and Riordan, 1999, p. 77). This is a good strategy because most companies the predator lowers their price to signal the others that market conditions are unfavorable proof for particular group of strategies. strategies were divided into six groups according to the underlying behavior and the burden of strategies that companies use. The real trick is to be able to prove predation. That is why . Predatory pricing 2.4 strategies There are various strategies that make predatory pricing work. Inorder to prove each of The second group is reputation effect and 56-64). 1999,p. signaling Riordan, and strategies,financing, and thepredator can finance predationwhich internally” (Bolton, Broadley work in a wayfurther financing, the predatorthat understands the prey’s reliance onexternal performance, predation reduces the initial performance enough toendanger its “the preydepends onexternal financing,financing the dependsits initial on 21 CEU eTD Collection informational asymmetries as the main feature of predation (Bolton, Brodley and Riordan, 1999, Riordan, and Brodley (Bolton, predation of feature main the as asymmetries informational jamming predation (Bolton, Brodley and Riordan, 1999, p.94). Bothof them rely on demand than the other. Two types of demand signaling are test market predation andsignal 1999, p.94). It is very unlikely that one company will have more information about aggregate demand is too low to justify both companies being in themarket (Bolton, Brodley and Riordan, 94). In demand signaling the predator reduces prices to convince the competition that thep. 81). In order to prove asignaling predation, the plaintiffs need to prove that: influences their repayment plans and approach to financing (Bolton, Broadley and Riordan, 1999, competitors because lack of new entrants makes the liquidation value ofassets lower, and that existing already the affects also policy This 79). 1999,p. Riordan, and Broadley (Bolton, predator also signals that he might have a cost advantage due to informational asymmetries predation, it emphasizes it (Bolton, Broadley and Riordan, 1999, p. 78). By lowering prices, the effects are not a good strategy to prove onits own, but if it is combined with a clearer proof of or in more markets at different times (Bolton, Broadleymarkets as well (Bolton, Brodaley and Riordan, 1999, p. 78). and Riordan, 1999,prices in one marketp. to make the entrants77). believe that he is willing to do the same in otherReputationcuts basically predator the effects reputation In 77). 1999,p. Riordan, and Broadley (Bolton, Signaling theories involve reputation effect, cost signaling, test market and signal jamming The third predation strategy is demand signaling (Bolton, Brodley and Riordan, 1999, p. Brodley and Riordan, 1999, p. 83-84) knowledge is tobepresumedif it is commonly known in theindustry“ (Bolton, experienced by the predator’s existing rival in thedemonstration market; and such (4). The potential entrantvictim observes the exit orother adverse effect predation...market test or signaling, cost predation, market as financial such predator, (3). Thereputation effect reinforces an identified predatory strategy pursuedpredator by the single market,the predator faces successivedeliberately entry over time… (2). The alleged a within operating oralternatively, competition; or potential competition limited pursuesproduct- or localized faces firm, multi-market dominant a predator, The “(1). a reputation effect strategy ... Reputation effects usually happen when the predator is in more markets at the same time 22 CEU eTD Collection that both strategies and counterstrategies are illegal in most cases. The prey also has room to defend using various counterstrategies. The problem with price wars is is: proof required The violation. Riordan, 1999, p. 105).cut prices before the breakthrough happens to driveProof thecompetitor out (Bolton, Brodley and of a cost they and advantage, real price a signaling have to them will allow that breakthrough toa close is company strategy wouldmarket (Bolton, Brodley and Riordan, 1999,not p.105). This can bedone in cases when one in itself formleave the them make way that and drastically prices cutting by advantage acost has predator an antitrust (Bolton, Brodley and Riordan, 1999, p.95) The proof of test market strategies requires: these circumstances the entrant cannot see what the demand would be in normal conditions. openly cuts prices in order predator the jamming signal In 94). 1999,p. Riordan, and Brodley to (Bolton, market the enter distort test results (Bolton,sales inBrodley the test market and that wayand makes themRiordan, believe that the demand is too1999, low for them to p. 94).p. In test market predation the predator94). secretly cutsprices in order to reduce the entrants’ In Brodley and Riordan, 1999, p. 109-110) require thevictim toexit orto limit its expansion into other markets.” (Bolton, to magnitude sufficient isof reduction cost possible The … (4) significantly. its costs,reduction thevictim could rationally believe the that predator may have lowered price such of aresult As ...(3). price. its reduces significantly predator the time same the about or At ...(2) costs. its variable reduce e.g.to significantly predator “(1). Some event has occurred, known by inthe victim, that could have enabled the the past the predator has reduced price when costs fellThe fourth predation strategy if cost signaling which makes the prey believes that the product in the test market.“ (Bolton, Brodley and Riordan, 1999, p.97-99) that the price cutting prevents it from effectively ascertaining demand for itsbelieve rationally could victim The (4). basis. a sustained on competition faces it cutting in the test market differsfollowing from its pricing or inconduct secretlyanticipation offers below cost pricesin on its otherown competing product or brand, marketseither where ofproduct or geographic marketthe with anew product or brand. (2). The predatorvictim’s “(1). The entry.predator observes that the victim is attempting to enter alimited (3). The predator’s secret price 23 CEU eTD Collection the price war (Easterbrook, 1981, p. 297). Seven counterstrategies are: and they damage the prey, especially if they have sufficient market power to defend themselves in use depend on themarket power and size of the prey. Most counterstrategies are notproductive approach. small competitor protection to the current free competition if recoupment cannot be proven can hardly be proven. in mostallegationsIt the defendant was provenis guilty, to contemporary approachinteresting where predation to throughoutnote its history. There were three basic eras that developedhere from avery loose period, when that they wentexplained, from a period of excessive it is time to sufficient. look at actualrelated to other counterstrategies, but for the scope of this paper judicialthe above named ones are issues other many also are There 111-112). 1999, p. Riordan, and Brodley (Bolton, unenforceable developmentsending in predatory for fines costly have that contracts by products competitors’ using start cannot customers his it practices andinformation asymmetries. Other issues involve thefact that the predator probably made sure thatthelitigation dealsEasterbrook’s interpretation) and most modern theories say that strategic predation comes from in least (at symmetries informational assume that they are counterstrategies between with problems The victims have anticompetitive features and might be . Predatory pricing 2.5 counterstrategies There are many counterstrategies available tofight predatory pricing. The effects of their Now that all the relevant theoretical, procedural and proof requirements have been victim fails.” (Bolton, Brodley and Riordan, 1999, p. 110-111) market conditions,customer stockpiling, (6) mutual ignorance of the predator and the prey about “chain store paradox” that assertedly makes andpredatory strategies non-credible, (5) (7) counter-threatssale by the victim toenter the predator’s other markets, (4) the classic (3) strategy, of adefensive coordinating victims among coalitions the (2) predator, victim’s“(1) coalitions between the predatory victim and its customers assetsbypassing the to a successor firm if the 24 CEU eTD Collection these two completely different systems have only slight differences in this perspective. Through (Bolton, Brodley and Riordan, 1999, p. 2). guidelines that say that the strategic dimension of predatory pricing should be taken into account pricing. Maybe the best example is the Department of Transportation proposed predatory pricing After the Brooke decision there have been some attempts of creating a new outlook on predatory could never be a plausible business strategy and judicial neglect of modern economic theories. main reasons for this are the exact proofs and pleading requirements, skepticism that predation predation, and it introduced the need for proof of recoupment. universal benchmark to determine predation, but there needs to be some line below which it is looked at by courts. Under the Brooke(Bolton, Brodley and rule,Riordan, 1999, p. 14-20). the averagepricing, italmost immediately changedthenumberofcourtcases the thatwerewon plaintiff by variable cost couldopposition to this rule, because it lacks the essential element of strategicnot behavior of predatory be used as a variable cost ofproducing each unit (average variable cost). Even though there was strong which they introduced the idea of asingle per se standard: the price needs to be higher that the was on protection of small companies. they were supposed to lose, there was no consideration ofconsumer welfare and the emphasis before the Areeda-Turner rule, the law protected small companies and plaintiffs won cases that Areeda-Turner rule, the Brooke decision and post Brooke era. Before the Brooke decision, and eras in thejudicial history of predatory pricing in the US: the pre-Brooke decision era with the . History of predatory pricing judicial cases in the 2.6 US European courts also meet predatory pricing cases, and it is very interesting to see how After the Brooke decision the great majority ofcases were won by the defendants. The Reasoning of the 1993 in an article published Turner and Areeda 1975. in this changed rule Areeda-Turner The three basically were there 14-29) p. (1999, Riordan and Broadley Bolton, to According Brooke case completely changed the way predatory pricing is 25 CEU eTD Collection of predatory pricing in theUS after the proven (Dechert LLP, 2009, p.2). It is interesting to notice that there have been no proven cases predatory pricing cases. Nosuch proof is needed in Europe, although it is considered useful if cut in order to establish predatory pricing. This part is not necessary, but is highly useful in Court Supreme the suit is brought. outcome of litigation is not always that unanimous or clear and it also depends on which ground probability of finding and proving predation in the conduct. As the next chapter will show, the monopolistic share of the market and charge monopolistic prices, then there should be a high main thing thatchapter it is obvious thatneeds predatory pricing cases are not easily visible oreasily enforceable. The to be kept in mind is therecoupment (Dechert LLP, 2009, p.3). end goal of the conduct. If it is to grab a costs avoidable average setabove are prices iftheir allegations from predation safe are companies predation, while in theaccording to the ECJ in Europe prices USmust be above average totalthere cost to avoid claims for is no consensus, but the US Department of Justice says that manufacturing the avoidable cost is the aluminium and the plastcs used in production 7 seems to be more effective, has the main features that the US system had from 1975 to 1993. the view of the first research goal, it is very interesting to see how the European approach, which Avoidable cost are cost that can be avoided by not producing a particular good. For example in car . Differences between US and EU 2.7 approach 7 (Dechert LLP, 2009, p.2). Another important difference has to do with recoupment. Inthe US, according to the US Various conducts that constitute predation can be interpreted in different ways. From this is that difference important Themost onpredation. tests differing use EU and US Brooke decision, there needs to be proof of higher prices after the predatory price Brooke 26 decision introduced the burden of proving CEU eTD Collection conclusions to be made in the end. The most important thing in this analysis is the point of view cases from all the three eras of predatory pricing litigation. That is important because of the to prove. most recent tothe eldestcase because newercases serve asbetterindicators of what Iam trying of predatory pricing escapes the judicial system using loopholes. They will be presented from the more detail, but some of them will be used to demonstrate how predation that has most features happened after 1967. Only those with somewhatlooked at individually etc. clear predatorydrive practices out will or be deterlookedindustries, at competition,in or the price are that pricesis used by the same company arenot not looked at as a single unit if they are in differentlow enoughdifferent to be provablecompetition cannot belitigated properly under thecurrent system. Some of the reasons for that asgeographical predation, but it is low enoughmarkets to allegations only to use it as a meansunder of increasing defendants cost. the the made clearly they case in litigation of all costs same for pay should plaintiffs and lower be should company aredisrupts competition. In acase of making it per se illegal, the burden of proof on defendants and cases, in most them it damages monopolists, become want to that share market a high that predatory pricing clearly disrupts competition. It is used by monopolists, orcompanies with for predatory pricing cases and that the scope of predatory pricing cases should be wider. questions within the facts of each case. My basic presumption is that the per se approach is better Cases presented are cases that happened after 1963 because that way there is example of isexample there way that 1963 because after happened that cases are presented Cases Cases used for this analysis are US Supreme Court cases on predatory disrupt clearly that cases because wider be should pricing predatory of scope The pricing that The main reasons why predatory pricing should belooked at using the per se approach is Case analysis will be done case bycase and the focus will be in answering the two posed 3. Case analysis 3. 27 CEU eTD Collection company has the power to make prices of an input it provides to other companies higher and, atsimple. It can beproven that this is anticompetitive behavior and should be punished. If a single prove that this is a case of predatory pricing. Using therule of reason approach this case is fairly prove predatory pricing because none of the prices are below a benchmark that could beused to under Section 2 of the Sherman Act, but not as predatory pricing. In this case it is impossible to (Justice Roberts, 2009). Justice Breyer(2009) says this case canbelooked atasa“pricesqueeze” charge monopolistic prices and there is no proof of predatory pricing under the Brooke rule Sherman Act was primarily made to protect competition. In thischeaper. case the monopolist is free is an act thatto this company made in order to disrupt competition and make its products relatively prices predatory, this conduct is completely legal. Even though economically it is obvious that it prey in this case would have roomfor action, but since the monopolist did notmake any of the separately. If either wholesale orretail prices were predatory, the smaller companies that were the Section 2 of the Sherman Act. under brought suitwas This market. the on staying of lesschance and margins profit lower prices, so smaller competitors that depended on them to provide them with an input had much customers. The main problem is that the monopolist raised wholesale prices and lowered retail them a part of essential equipment they needed in order to toprovide their services to end monopolist that raised prices to small companies that were depending on the monopolist to rent They are used to prove a point about the system itself, not the individual case. of courts on facts of the case and the schemes used, notthe decisions of the court themselves. . Pacific Bell Telephone Company v. Linkline 3.1 Communications (2009) Looking at this case using the per se approach would mean that it is legal per se. The According to the US Supreme Court this conduct is legal because prices are looked at a Itisabout behavior. anticompetitive of case clear avery iseconomically case first The 28 CEU eTD Collection hardwood lumber fell. This suit was brought under Section 2of the Sherman Act. The main of inputs for them, and they did this by overpaying for the lumber, while prices of finished Ross-Simons was that, due toits market power, Weyerhaeuser had the power to increase the cost of claim basic The counterstrategies. predatory to less vulnerable them made which market the lowered. Inthis case itis especially interesting because thealleged predatorhadalarge shareof input, while at the same time the prices of final products to the mutual customer pool were logs available inthe region, increased the price of saw logs toother competitors that used it as an predatory pricing and that it is not a predatory scheme. million to Ross-Simons. The Supremethe fact that lower courts recognized that it is a predatory practice and awardedCourt damages of $79 held thatis case this this of peculiarity Another market. the of out them drive case to order in level unsustainable should use the Brooke test forof other competitors at the market,means that alarge competitor on the market will drivegiven input prices up, so that the profit margins that they want to staypricing. Predatory bidding involvescompetitive, useof market power on the input side of the market. It are lowered that tothe test applicable an for predatory bidding is the same test as the one applicable for predatory for interpretation of economic impacts of certain conducts. of reason approach. Price squeezes can bedone in many ways, so it is important to leave room which there should be an exception and price squeeze claims should belooked at using the rule case of predatory behavior. the same time, lower prices of the a final product that uses identical inputs it is obvious that it is a . Weyerhaeuser Company v. Ross-Simmons 3.2 Hardwood Lumber In this case the large mill, that was at the time acquiring approximately 65% of the alder the 65% of approximately acquiring time the at was that mill, large the case this In This is a case of predatory bidding, but its connection to predatory pricing is in thefact As faras the scope of predatory pricing is concerned, this is one of the situations in Company, Inc (2007) 29 CEU eTD Collection due to lack of provable recoupment. because in mostcasespredatory pricing is disregarded and perceivednot toexistbythecourts historical point after which the predatory pricing litigation athigher instances became unlikely an oligopolythis case. Even the case itself is very peculiar. It is aboutof the tobacco industry, which was ruled by six on a verdict to companies come to evidence into looked Court Supreme US the unusual, it ishighly though that eventually got into a price war. This caseclear proof of predation. representsavoidable costs of competitors compared to predators avoidablea costs would probably serve as a time of the price war) and drove competitors out of business. A comparison between the new atthe aswell margins profit lower theyhad that was discussed (it themselves damaged clearly in this case clearly had the goal of the predator becoming the only buyer, and in doing that, they the issue ofone company having 65% of the market. What is important here is that the conduct example ofwhat should beaper seillegal predatory pricing case. Iamnot even going to address prevent defendants in cases that clearly involve anticompetitive behavior from appealing. Brooke test. In making the per se rule for predatory pricing there should bea solution that would that in the end led to Weyerhaeuser being freed from liability due toinability tosatisfy the is illegal, and this actually happened using the Brooke test. The appeal caused judicial processes is unlikely. case this action makes no economic sense and recoupment (an essential part of the Brooke test, see 2.3) in reason why the US Supreme Court found that Weyerhaeuser is not liable due to the fact that this . Brooke Group Ltd. v. Brown and Williamson3.3 Tobacco Corporation Brooke is the most important precedent for predatory pricing in recent history. Even is aclear This case pricing. ofpredatory scope isthe addressed issuebeing other The Per se rule in this case would allow the lower instances court to make the decision that it (1993) 30 CEU eTD Collection that the conduct in question was predatory pricing, but the main reason why it is not recognized company to take the anticompetitive behavior a step further. exception. If an industry is built onanticompetitive practices, it should not beunlawful for one Even if the per se when all six rulecompanies were making high profits and prevented entrants with their oligopoly. for predatoryin atime done been have should That point. at this procedures judicial through competition pricing wereto the specifics of theaccepted, industry it would be unfair to competition in general to start enforcing this type of cases shouldof them for turning to anticompetitive practices in a later period. be an are therefore very low. If they enjoyed very high profits before, it would be unjust to punishtheir one prices back to their previous level after the price war is over, and the chances of recoupment because companies that previously engaged in oligopolistic agreements are unlikely toincrease possible. In my opinion, the recoupment test was put in as an essential part of the test exactly are set below a certain measure of costs and whether recoupment after the predation period is Patman Act. war started. This suit claimed that the new pricing schemes were in violation ofthe Robinson- one company to be punished within the industry that worked as an oligopoly before this price but the specifics of the industry made, in my opinion, the court develop a test that will not allowwas asale of cigarettes below their average variable production cost for a period of 18 months, have beenprovenusing testspreviouslyusedby thecourts(Areeda-Turner rule) because there to take a bigger share of theoligopoly gone wrong, meaninggenerics that one of the six big companies that was in the industry wanted tobacco market.that the tobacco industry was ruled by an oligopolyIn and that the price war beganthis as a result ofan case the predatory pricing could As far as theissue withscope the of predatory pricing is concerned, itis clear inthis case As a per se rule, predatory pricing would have been determined in this case, however, due The US Supreme Court in this case developed a test that basically looks at whether prices fact the are case similar other any from casedifferent this make that features main The 31 CEU eTD Collection brought under the Clayton Act, and from the fact that it went to such a high instance it can be effects would not be as high as they probablyhave were lastedfor this suit. Frommuch the factshorter, case werejudged onlybased illegalitythat onthe ofthevertical price-fixing agreementthesuit would the suit was the expenseslitigation toAtlantic Richfield was probably very high,for but there is noground for the suit. If the the defendant would be lower andstanding under the Sherman Act, but there stillthe needs to be proof of competitive injury. reputation a have might it way That se. per unlawful are agreements price-fixing vertical that basis the matched to the prices of independents, such as USA Petroleum. The claim needs to be made on prices that the retailerscompetition were even allowed if it did limitto this suit.charge Also, the oilthe company did not have enough marketprices power to actually damage was at a verynot lowunreasonably level.of Butthe inClayton this lowcase Act. evenor There predatory;the islevel no gasolineantitrust industryof constitutes an antitrust injury for the purposes of a privateit suitunder Section 4 injurywas in this case, and therefore there is no cause for competitors that are in an otherwise fair and competitive market. not suitable for other industries where competition is clearly disrupted byonly one of more recoupment because of the high level of anticompetitive practices in this particular industry. It is Brooke test are not necessarily correctlyimplemented. In this case, theBrooke test looked at becomes perfectly clear why the Supreme Courttradition of anticompetitive practices within an industry. made it so strict.pricing Later thatinterpretations is clearly predatoryas such is thehigh unlikely of recoupment. This case serves as agood example onhow ofpredatory thepricing should not be punished because it is a result of a long . Atlantic Richfield Co. v. USA Petroleum Co. 3.4 (1990) This case seems to be a case ofvery successful non-pricing predation. The cost of this In this case there is a claim that a vertical, non predatory price-fixing agreement in the As far astheBrooketest is concerned, after getting familiar with thefacts of thecase, it 32 CEU eTD Collection applied at the time,the product is being sold below the average variable unit cost of productionthe (that was the test Areeda Turnermanufacturer with one product there could have been a comparison that would show whether rule) and case would have beenSupreme Court held the evidence insufficient for a summary judgment. solved. In a this casecase there was a claim for a summary judgment under Section 1 of the Shermanof Act, and the in America and thatway ruin existing USelectronics manufacturers and deternewentrants. In that they sell their products for a higher price in Japan so that they can sell their products at aloss claiming that there is a conspiracy between Japanese electronics manufacturers. The claim was to other factors. case the plaintiff did lose some of its market share but it was not due tothe decrease in price, but money because the burden of proof in predatory pricing cases is mostly onthe defendant. In this antitrust allegations with no ground can burden the judicial system and cost the defendant alot of how of example is aclear It pricing. predatory of acase not is clearly it because much analysis agreements immediately. room for appeals.the lowest instances that this is nota case of predatory pricing, and the plaintiff would have no He would have beenno predatory pricing. directedespecially after taking into account the fact that no antitrust injuryto can be proven and there was the perconcluded that the only goal the plaintiffse had was toincrease cost forAtlantic Richfield, rule on vertical price-fixing . Matsushita Electrical Industrial Co., Ltd. et al. v. Zenith Radio 3.5 Corp., In this case predatory pricing appeared in a strange way. If it were a claim against one against a claim it were If way. a strange in appeared pricing casepredatory this In This is a suit brought by American electronic companies, mainly television producers, As far asthe scope of predatory pricing is concerned, this case does not benefit the This case would benefit from the per se approach because perse rule would conclude at et al.(1986) 33 CEU eTD Collection that the challenged restraint must be one clearly articulated and affirmatively expressed as state as expressed affirmatively and articulated clearly one be must restraint challenged the that action” exemptions) it is allowed to pass laws that prohibit or limit competition. Conditions are this law and asked for an injunction against the state wine pricing plan. Beverages was in breach of Section 1 of the Sherman Actbecause it prohibited competition by responded byby statelicensed producersforthe prices other statedin than those thepricelists. Thedealers filing a writfiling offair trade contracts or the price schedule with thestate and prohibiting the sale of wine of mandateviolations were that there was a breach of California’s statutory plan for wine pricing requiring a saying and for having sold wines for thatwhich nofair trade contract orschedule has been filed. The alleged the list price in theproducers’ Californiawas stated that price theoriginal lessthan a price charged having for DepartmentDepartment of Alcoholic Beverage Control charged a wholesale distributor of wine in California of Alcoholic the difference in price levels in general. that price their products differently across geographical markets, even after taking into account predation. Ithink it is athing that needs to be taken into account because there are companies question ofcomparison ofprices of the same company across geographical markets to determine the raises it because is interesting case this isconcerned pricing ofpredatory scope as the As far only if werethere separateclaims against specific electronicmanufacturers for specific products. summary judgment was very unlikely from the beginning. party opposing the notion. Winning a claim against all Japanese electronics manufacturers as a summary judgments the benchmark for determining predation is the party most favorable to the . California Retail Liquor Dealers Assn. v. Midcal Aluminum Inc., et 3.6 al. There is a test that requires two conditions; and if astate satisfies those conditions (“state thisIn case the state itself isdisrupting competition. Itarose afterthe California As far as the per se rule for predation goes, it would have been better in this case, but (1980) 34 CEU eTD Collection 45%, and the whole industry was highly oligopolistic, so an appearance of a big producer with future. The bleach manufacturerto merge because of high possibility ofpredatory behavior anddisruption of competition on the that was supposedfuture. Procter and Gamble wantedto to acquire a largebe bleach producer and they acquiredwere not allowed had a market share of over predatory pricing as a single retailer with a small market share are very low. are many retailers because incentives for predation are higher, and the chances of being tried for require a list of products and their prices. Especially big problems arise in industries where there to set minimum or maximum percentage increase in price from the wholesale toretail level, orto way of controlling this particular market is good. There should be a federal statute allowing states pricing and below which the state takes the liquor license away and charges fines. Ithink that this more complementary products. monopolistic power, but to beable to stay onthe market and recoupment is achieved by selling who are all tryingand cases ofpredatory pricing for some products arelikelyhappen because to of many retailers to get a part of see howthesecases arise inbeveragethe the industry, where theretail network is highly diversified industry. to is interesting It competition. disrupts it that law and antitrust of Predatoryan exception not is rule price pricing112% the that decided also Court Supreme the case later this In liquor. of prices wholesale of in this case 112% of aminimum be must liquor of prices is resale the that said that a law had York New where not to gain constitutes resale price maintenance. Court held that California’spolicy and that the policywine must be activelypricing supervised by the state itself.system In this case the Supremeis in violation of the Sherman Act and that it . Federal Trade Commission v. Procter and Gamble 3.7 Co. (1967.) In this case a merger was prevented because of a high possibility of predation in the In this case there is a clearly defined price below which cases are treated as predatory There was a similar case in 1987, in case wasasimilar There 324 Liquor Corp., DBA Yorkshire Wine and Spirits v. Duffy, 35 CEU eTD Collection to circumvent current judicial practices without being punished, or they settle out of court if they any real predatory pricing cases that involve clear predatory practices because companies manage Some states have legislation onmaximum market shares allowed. should still beprohibited that one company reaches a monopoly position due to a breakthrough. though the lowering of costs can bedue to technical improvements or superiority in processes it costs and lowering prices as a result oflowering costs of production in a particular industry. Even Commission prevented the merger in the first place. But this case touches the issue oflowering below the levelNothing happened yet, but in expectationthat of a company being able to lower their costs and prices the competitionallowed to have within an isindustry. reasonably Thisto have a benchmark isset in terms of marketa power fornice how much market power is one companyexample of prevention expected of predatory behavior. to have costsFederal Trade Commission and in cases of a threat to competition the theCommission files a suit. Federalwhen brought on by competitors of companiesTrade that are merging. All mergers are reported to the especially claims, tocompetitive regard with claims private toward hostility its showed also Court The Supreme Court found that it is not a violation of thebeef packerClayton saying that their merger would cause severeAct. competition damage andIn a price squeeze.this case the Supreme beef packer sued the second largest beef packer that was planning to merge with the third largest the suit was brought under Section 7 of the Clayton Act. The acquisition was prohibited. competition. In this case the prevention part of the Clayton Act is showing its power because significant market power in this and other related industries would be a big threat for . Lessons from Cases 3.8 Analyzed All of the above mentioned cases involve predatory pricing in some way. There are rarely With regard to per se rule or rule of reason being better for this type of cases, it is useful Another case appeared later, in1986 Cargill v. Monfort of Colorado of Monfort v. Cargill 36 when the fifth largest CEU eTD Collection that happen in the market, and there needs to be a change in order to preserve competition. avoid theconfusion that is currently present. The current system is not suitable for predations to gatherall precedents and their decisions anddefine which ones can be used inwhich cases to important thing to look at while looking at predatory cases. Agreat solution for the US would be will be fined and suffers consequences. determining predation and companies knew that, if theyprice the product below that level, they not get totheSupreme Court. At that time there was a benchmark that courts used in started, is now being used in all other cases that could involve predatory pricing. particular case because of the oligopoly that was inthat particular industry before the price war make it to the highest beneficialinstance in theto US,determine whichdetermine predatory pricing and that, taking into account thethe current system, it would be Brookea benchmark test, pricing waswhich prevented formuch more effectively when there was a clear benchmarkpredation. on washow to suitable Infor thethat current systemlatest cases on predatory pricing to a timethere when predatory pricing was banned on lower instances. are cases arethat guilty and think they could be found guilty in court. The above mentioned cases go from The notion of recoupment is not easily provable and therefore should not be the most did predation of cases obvious case Brooke the before that it isvisible time same the At The most important conclusions that can be taken from these cases are that predatory 37 CEU eTD Collection and uncertainproblem is that many obvious cases of predation stay unpunished due toa high burden ofproof procedures at the Supremedumping would be avoided. Court. clear of waycases this and willhave, actions their theconsequences awareof were everybody Anotherrules on how to judge cases that would also list exemptions.issue It would benefit competition if is thatthe the scopeinterpretation of predatory pricing is too wide as it is. My ofinterpretationwould prevent conducts that drive innovationthe and development. asks for it a because setcompetition damage wouldseverely that and illegal, ofconsidered be would clearpractices competitive many it, with dealing se rule per strict was a there and wider, were pricing predatory many cases get settled out of court. The other assumption was not satisfied. If the scope of because it of examples case find to it isdifficult though even pricing, predatory for rule better jurisdictions. other only US Supreme Court decisions, and did not tackle decisions of lower courts orpractices in used, andthatthescope the of predatory pricing cases should bewider. Theresearchincluded exceptions would bea better rule for predatory pricing than the Brooke test that is currently per se and rule of reason, and to tackle the real scope of predatory pricing. pricing within thescope of the two rules that can be used in theUS tojudge competition cases, market share and many smaller competitors. The aims of this paper were to place predatory industries that have a few large competitors and in industries that have one leader with a high Discussion onpredatory pricing in the US revealed serious shortcomings. The biggest On the other hand, some might claim that predatory pricing already is illegal per se, or Research showed that the initial assumptions were partially correct. Per se seems to be the The initial assumptions were that a well worded per se rule with a set benchmark and in especially practices, competitive of terms in problem isamajor pricing Predatory Conclusion 38 CEU eTD Collection considered predatory. is essential, and that there needs to be a defined benchmark below which prices will be short term benefits that might be achieved. competitiveness that drives efficiency, and the long term consequences of that far outweigh any competitors in the industry and competition itself. The industry is losing variety and from anticompetitiveemployees, suppliers, distributors, practices,other businessbe compiled and there need to beclear guidelines on when to usepartners them. and end consumers.eventhis research. There are rules that already exist in various papers and precedents, they just need to All iflevels it suffer efficiency will be shouldis also beresearched. This probablyis the biggest lesson that comes out of not directly.precedents can most efficiently becompiled into an act and what its implications on overall Ways that it. dealingwith of makingaway and sense inageographical predation market cross The biggestand all cases of predatory pricing that were finished in lower instances. Also, ways of determining impact is on otheract. currently existing acts that can be avoided bysummarizing already existing precedents into one The main conclusion of this thesis is that a clearly defined per se rule onpredatory pricing Anticompetitive practices litigation is important to businesses within theindustry, all their As anoteforfutureresearch itwouldresearch bebeneficialout ofcourtsettlements to 39 CEU eTD Collection 2006, p.26-31.Available at; Crane, D. A., Crane, D. §§12-27 15 U.S.C. (1914.) Act Clayton Policy. Legal Bolton, P., Broadley,Black's Law Dictionary, 9thJ. Edition (2009), Online versionF. of the Standard Ninthand Edition Riordan, M.Atlantic Richfield Co. H.,V. Usa Petroleum Co., 495 U.S. 328, (1990)(1999) PredatorySection 2 of the Sherman Act , Pricing: StrategicAreeda, Theory Phillip and and Turner,Centre Donald F., (1975), Issues, General Analysis: inAntitrust Reason“ „Ruleof The Predatory (1981), Areeda, Pricing and RelatedAddyston Pipe & Steel Co. v. United States, 175 U.S. 211 (1899)Practices under A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1402 (7th Cir. 1989) 324 Liquor Corp., Dba Yorkshire Wine & Spirits V. Duffy Et Al. 479 U.S. 335, (1987) Cargill, Inc., et al. V. Monfort Of Colorado, Inc., 479 U.S. 104, (1986) California Retail Liquor Dealers Assn. V. Midcal Aluminum, Inc., et al., 445 U.S. 97, (1980) (1993) Brooke Group Ltd., Petitioner V. Brown & Williamson Tobacco Corporation, 509 U.S. 209, Division, Bork, R. H., (1966),Division, The Rule Bork,of Reason R. H., and(1965), theThe Free Press Per The SeRule Concept: of Reason 2nd York,N.Y.: at WarwithItself, ed.,New Paradox:APolicy R. 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