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Price Predation: Legal Limits and Antitrust Considerations

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Price Predation: Legal Limits and Antitrust Considerations Price Predation: Legal Limits and Antitrust Considerations Gregory T. Gundlach Competition centered strategies in the form of predatory pricing directed toward weakening or destroying a competitor are receiving increasing emphasis in the Courts and among antitrust theorists and policymakers. Recently, the Supreme Court found little evidence of antitrust injury e.xtending from price predation in the case fj/Brooke Group v. Brown & Williamson Tobacco Corporation (1993). The author examines the current legal .standard for predatory pricing and juxtaposes it against emerging insights on this competitive practice. n markeling. cotnpetition-centered strategies, including below-cost levels, discriminatory pricing, and temporary the manipulation of price, have received increasing em- price warring. I phasis (cf. Weitz 1985). According to Kotler and Singh A primary objective of the antitrust laws is to distinguish (1981, p. 30). "successful marketing ... require[s] devising competitive strategies (and more particularly, predatory competition-centered strategies, not just customer-centered strategies) that are welfare enhancing from those that reduce and distribution-centered strategies." Faced with declining the welfare of consumers. The difficulty of this task is made market growth, resource scarcities, and the proliferation of even more complicated when predatory pricing is involved. new technologies, companies are increasingly pursuing The Supreme Court states: profit gains at the expense of their rivals through market share rather than market growth. [TJhe mechanism by which a firm engages in predatory pric- ing—lowering prices—is the same mechanism by which a firm Strategies directed toward competitors can involve differ- stimulates competition; because cutting prices in order to in- ent objectives. On the one hand, a company may employ crease business often is the very essence of competition ...[;] competition-centered strategies to create a "better state of mistaken inferences ... are especially costly, because they chill peace" hetween rivals (Kotler and Singh 1981). Such an ap- the very conduct the antitrust laws are designed to protect proach involves a business entrenching itself in some part of {Brooke Group Ltd. v. Brown & Williamson Tobacco Corp. the market in which it has a natural and comparative advan- 1993. p. 4703). tage. This advantage discourages aggressive actions by ri- Because of the possibility of mistaking welfare enhancing vals and favors peaceful coexistence. Rivalrous behavior price competition and extant theory that suggests the irra- that does occur is usually the result of one firm poorly serv- tionality of predatory pricing, policymakers and the Courts ing its market niche, a new competitor attempting to bring have long held a skeptical view of this form of (anti)compe- new advantages to the market, or changes occurring in the tition. Their thesis is that a predator would lo.se so much environment. Strategies of this kind are welfare enhancing, money attempting to drive out a rival through lt)wering price because they facilitate efficient competition. below cost that it would never eam enough profits later to On the other hand, competitive strategies may also pos- recoup its losses. The argued irrationality toward predatory sess the objective of weakening or destroying a competitor pricing and resultant enforcement posture taken by the De- (i.e.. cutthroat competition). These strategies can be injuri- partment of Justice (DOJ) and the Federal Trade Commis- ous to competition and may potentially reduce consumer sion (FTC) (see Rule 1988) is summarized by a former di- welfare. Such strategies are commonly referred to as preda- rector of the Bureau of Competition: "Many argue that pre- tion OT predatory strategies and can involve both price and dation is impossible, and hence, enforcement of the antimo- nonprice tactics (cf. ZeithamI and ZeithamI 1984). Nonprice nopolization provisions of the Sherman Act should not be predation involves a competitor's attempt to increase a based on this empty concept" (Campbell 1987, p. 1625). rival's costs through such tactics as the acquisition and This perspective also underlies key decisions of the "sleeping on" of patents, predatory product preannounce- Supreme Court, which has stated, "predatory pricing ... is by ments, useless product modifications, exclusionary market nature speculative ... landl ... rarely tried, and even more channel arrangements, disparaging advertising, and sham rarely successful" (Matsushita Electric industrial Co. v. litigation (see Gundlach 1990). An aggressive firm may also Zenith Radio Corp. 1986. pp. 588-89). attempt to lower a rival's profits through price predation. In Recently, the Supreme Court again addressed predatory this case, a firm sets its prices low enough and for a suffi- pricing in Brooke Gmup v. Brown & Williamson Tobacco Cor- cient time period to disadvantage its rivals in some way poration (1993). In announcing a two-part standard, the Court (Sheffet 1994). Tactics can include sustained price cuts lo found little evidence of predation in a price war between two major tobacco companies. The Court's decision establishes a very difficult threshold for firms threatened by predatory pric- GREGORY T. GUNDLACH is an associate professor. Department of ing. Some commentators have even suggested that the impact Marketing. University of Notre Dame. The author thanks the edi- of the ca.se as a precedent may prove to be "fatal to all future tor, four JPP&M reviewers, the members of the Department of predatory pricing claims" (Glazer 1994. p. 606). Marketing at the University of Notre Dame, and especially Joseph P. Guiltinan and Debra J. Ringold for their helpful comments. In contrast to the Supreme Court's holding and those commentators espousing such a view, a number of theorists Vol. 14 (2) 278 Joumal of Public Policy & Marketing Fall 1995, 278-289 Journal of Public Policy & Marketing 279 have begun to reconsider the nature and occurrence of pre- predatory pricing, a firm is prohibited from selling at a low dation as an anticompetitive practice. Among these scholars, price when it encounters competition and at a high price oth- "il is now generally agreed that the argument that predation erwise if its purpose is to drive rivals out of the market. In is impossihle is incorrect at least as a matter of theory" (Hay addition, other discriminatory practices aimed at forcing a 1990. p. 913). These theorists propose numerous models of competitor to consolidate or disciplining a rival that reduced predation that rely on nonstatic notions of competition in- its prices or competed with the firm are forbidden. volving multiple markets, asymmetries of information, and Section 5 of the FTC Act (1914) autborizes ibe Commis- nonprofit maximizing strategies (see Schmalensee and sion to cballenge predatory practices deemed to be "unfair Willig 1989). According to this "new learning." in theory, metbods of competition." Tbe Act permits (I) challenges to even above-cost pricing can be employed to disadvantage predatory conduct violating the Sherman and Clayton Acts equally or more efficient rivals and result in injury to con- and (2) transgressions of the spirit of these Acts. sumer welfare (Hay 1990. p. 914). Of course, the desirabil- Besides the federal laws, many states have sales-below- ity of adopting and implementing such an antitrust standard cost statutes or constitutions prohibiting monopolies that is questionable. (For a discussion of this issue, see. for ex- can be employed to cballenge predatory pricing (see Haynes ample. Barry Wright Corp. v. ITT Grlnnel Corp. 1983.) 1990). Often, these statutes require evidence of below-cost However, tbe insight offered by scholars of this paradigm pricing and a specific intent to injure a competitor. For ex- bas prompted some to reconsider prior antitrust thinking. ample, in a recent well-publicized case. Wal-Mart. Ameri- I examine the current law and theory of predatory pricing, ca's leading discounter, was found guilty of violating an while emphasizing the Supreme Court's two-part standard Arkansas state unfair pricing statute: Its stated pricing strat- developed in Brooke Group (1993). This standard is juxta- egy was to "meet or beat tbe competition without regard to posed against recent advancements in industrial organiza- cost" (American Drugs. Inc. v. Wal-Mart Stores. Inc. 1993). tion theory and marketing that describe how predatory con- Courts have observed these unfair pricing laws to ease the duct involving price may be a rational strategy for tbe ag- hardships of cutthroat competition (Quinn 1990). gressive competitor and may be employed in a variety of ways to disadvantage rivals, some of which create antitrust Federal Standards injury. I then discuss implications for antitrust policy devel- At the Federal level, differences among the statutory lan- opment, marketing research, and the practice of markeling. guage of botb the Sherman and Clayton Acts bas led to dif- ferent standards for injury to competition and the nature of Background and Current Law conduct considered anticompetitive. Tbe Sbennan Act con- demns predatory pricing when it poses a "dangerous proba- Statutory Law bility of actual monopolization" (Spectrum Sports. Inc. v. Federal antitrust law attempts to control predation through McQuillan 1993. p. 8). In contrast, tbe Robinson-Patman Section 2 of the Sherman Act (1890). Section 2 of the Clay- Act requires only "a reasonable possibility" of substantial ton Act (1914)
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