THE YALE LAW JOURNAL FORUM J UNE 4, 2018 Predatory Pricing: Limiting Brooke Group to Monopolies and Sound Implementation of Price-Cost Comparisons Aaron S. Edlin abstract. C. Scott Hemphill and Philip Weiser point out several infirmities of the Brooke Group predatory pricing decision, including the fact that the Supreme Court laid down the be- low-cost pricing and recoupment requirements without hearing either party present counterar- guments to them. In light of this fact and complex market realities, they argue for flexibility in satisfying these requirements. In this Response, I go further, arguing that in monopoly cases the greatest competitive danger likely results from above-cost pricing, so the Brooke Group safe har- bor for above-cost pricing should not have been extended to monopolies. When price-cost tests are implemented, I show that many cost measures other than average variable cost can be appro- priate to demonstrate profit sacrifice. introduction Twenty-five years a�er Brooke Group,1 it is a good time to take stock of its holding. I am pleased that C. Scott Hemphill and Philip Weiser have decided to do so in a terrific Feature.2 Brooke Group presented an oligopoly case among to- bacco companies in which the defendant was alleged to be guilty of predatory pricing. The Court held that to find a defendant guilty of predatory pricing, a plaintiff must prove two elements: first, that the defendant priced below its 1. Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). 2. C. Scott Hemphill & Philip J. Weiser, Beyond Brooke Group: Bringing Reality to the Law of Predatory Pricing, 127 YALE L.J. 2048 (2018). 996 predatory pricing: limiting brooke group to monopolies and sound implementation of price-cost comparisons own costs; and second, that it had a sufficient possibility of recovering the en- suing losses from higher prices a�er the predation lessened competition. Brooke Group’s reach and influence has expanded from the oligopoly setting where it originated to monopoly settings in Weyerhaueser and Linkline.3 Brooke Group has also expanded its influence from core predatory pricing cases to oth- er behavior, such as bundled discounts and price squeezes.4 As courts consider whether to extend the Brooke Group rule, and as other nations consider what constitutes predatory pricing,5 it is worth examining the situations and interpretations for which the rule makes most sense. Hemphill and Weiser argue for flexibility in interpreting the Brooke Group require- ments—below-cost pricing and recoupment—and against importing these re- quirements to cases with more complex pricing strategies, like loyalty dis- counts.6 I wholeheartedly agree, but would go further. In particular, I argue that Brooke Group should be pared back by restricting it to oligopoly markets and not applying it to monopoly markets. Giving a mo- nopoly a safe harbor from monopolization claims simply because its price ex- ceeds its cost results in allowing an incumbent monopoly with cost or quality advantages over potential rivals to charge high prices with little fear of compet- itor entry. The high price may not attract entry at all if potential rivals under- 3. See Pac. Bell Tel. Co. v. Linkline Commc’ns, Inc., 555 U.S. 438, 451-52 (2009) (finding that a price-squeeze case against a monopoly needs to show either pricing below cost or a duty to sell) (citing Brooke Group, 509 U.S. at 223); Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 315 (2007) (applying Brooke Group to monopoly buying, presum- ably implying that it applies to monopoly selling). 4. See, e.g., Cascade Health Sols. v. PeaceHealth, 515 F.3d 883, 903 (9th Cir. 2008) (applying the Brooke Group rule to bundled discounts); see also Linkline, 555 U.S. at 457 (applying the Brooke Group rule to price squeezes). 5. For example, the law in the European Union appears not to be completely settled. In Irish Sugar, the European Court of First Instance held illegal the price cuts of a dominant firm de- terring the entry of an importer even though prices remained above cost. Case T-228/97, Irish Sugar PLC v. Commission, 1999 E.C.R. II-2969 ¶¶ 173-193 (Ct. First Instance), aff ’d on other grounds, C-497/99 P, 2001 E.C.R. I-5333 (E.C.J.). On the other hand, the Europe- an Commission has suggested a near safe harbor for above-cost pricing at least from the standpoint of its prosecutorial discretion. Communication from the Commission — Guid- ance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, 2009 O.J. (C 45) 7, 11, http:// eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52009XC0224(01)&from=EN [http://perma.cc/832S-2LQQ] (“If the data clearly suggest that an equally efficient competi- tor can compete effectively with the pricing conduct of the dominant undertaking, the Commission will, in principle, infer that the dominant undertaking’s pricing conduct is not likely to have an adverse impact on effective competition, and thus on consumers, and will therefore be unlikely to intervene.”). 6. Hemphill & Weiser, supra note 2, at 2049-51, 2077. 997 the yale law journal forum June 4, 2018 stand that the monopoly can take advantage of the safe harbor to drive them from the market with prices that are above the incumbent monopoly’s cost, but below its rivals’ costs. Moreover, even if rivals are sometimes induced to enter, this need not worry the monopoly much if it can legally drive them from the market. Second, I address how best to implement Brooke Group’s price-cost compar- ison when it is used. Brooke Group famously punted on that question by stating only that the plaintiff needed to prove that price was less than an “appropriate measure” of the defendant’s cost without saying which measure is appropriate.7 In fact, I will argue that the Court’s indeterminacy was wise because there is no single appropriate measure of cost. The real point of the test is to ensure that the defendant has sacrificed profit, a necessary predicate to the second re- quirement of possibility of recoupment. I will outline a variety of possible price-cost tests from which the plaintiff should be able to choose, based upon data availability and context. Plaintiff choice is appropriate because satisfying any of these tests would demonstrate profit sacrifice. In this respect, I welcome Hemphill and Weiser’s appeal to take a flexible approach in implementing Brooke Group.8 However, while Hemphill and Weiser exclude the possibility of a plaintiff showing that the sacrifice from below-cost pricing involves loss of revenue on inframarginal units (the units sold prior to any allegedly predatory expansion), I argue in contrast that an inclusive notion of cost is appropriate and captures such lost revenues as one cost of output expansion, a position equivalent to that advanced by the Department of Justice (DOJ) in AMR.9 De- spite being open to a variety of price-cost comparisons in principle, the Tenth Circuit in AMR squarely rejected this particular comparison.10 But the Tenth Circuit’s reasoning is muddled, and I encourage other circuits to allow the plaintiffs to make any price-cost comparison which demonstrates profit sacri- fice. Part I comments on what Hemphill and Weiser call the “infirmities” of Brooke Group. Part II argues that the Brooke Group requirements (and specifical- ly the price-less-than-cost requirement) should not apply to monopolies. Part III of the Response takes the Brooke Group framework as given and asks what price-cost comparisons are “appropriate”—at least in the case of monopolies. 7. Brooke Grp., 509 U.S. at 222. 8. Hemphill & Weiser, supra note 2, at 2056. 9. United States v. AMR Corp., 335 F.3d 1109 (10th Cir. 2003). 10. Id. at 1119. 998 predatory pricing: limiting brooke group to monopolies and sound implementation of price-cost comparisons i. the infirmities of brooke group Hemphill and Weiser identify two “infirmities” in the Brooke Group deci- sion. I will add one more.11 First, they point out that the Court did not have the opportunity to hear and evaluate counterarguments to the requirement that plaintiff demonstrate below-cost pricing and a reasonable prospect of recoupment because the plain- tiff ’s counsel conceded these requirements.12 Moreover, the Court itself also did not debate the wisdom of the two requirements it created, instead choosing to focus on an unusually deep factual analysis of whether the requirements were satisfied in the case.13 Hemphill and Weiser conclude that “[n]otably, . the Court accepted the price-cost and recoupment tests with lit- tle analysis.”14 Hemphill and Weiser’s second critique centers on the Court’s attitude to- ward pricing. Foundational to the Court’s adoption of the Brooke Group re- quirements is the belief that anticompetitive price cuts are rare.15 This belief allows the Court to put low weight on the cost of failing to identify some anti- competitive predatory pricing relative to the costs of condemning legitimate price cuts. However, Hemphill and Weisner point out that this belief lacks sub- stantial empirical support.16 To these two critiques, I would add that the theoretical arguments suggest- ing that price cuts are rarely anticompetitive are not very convincing, particu- larly for cases of monopolies with advantages. Consider Robert Bork’s explana- tion of why he thought predatory pricing is rare: A firm contemplating predatory price warfare will perceive a series of obstacles that make the prospect of such a campaign exceedingly unat- tractive.