Bolton PPT Predatory Pricing.pdf

Predatory Pricing Professor Patrick Bolton Department of Economics and Graduate School of Business Columbia University DOJ/FTC Section 2 Hearings: Session on Predatory pricing June 22 2006 1 Definition ? General Agreement on what Predatory pricing is: ? A price reduction that is profitable only because of the added market power the predator gains from eliminating, disciplining or inhibiting the competitive conduct of a rival ? Predatory pricing involves two phases: ? Sacrifice ? Recoupment ? An investment in market power DOJ/FTC Section 2 Hearings: Session on Predatory pricing June 22 2006 2 Antitrust Policy ? Disagreements on: ? Basic Economic premise ? Is Predatory pricing an economically rational strategy? ? How prevalent are predatory pricing episodes? ? Legal standard ? Simple rules? ? Rules that err on the side of under-deterrence to reduce risk of false positives? DOJ/FTC Section 2 Hearings: Session on Predatory pricing June 22 2006 3 Brooke Decision (1993) ? Cost Test: ? Price below some measure of cost or even “some measure of incremental cost” (AVC, AAC, AIC, ATC, LAIC) ? Judicial Standard: presumptive illegality of Price below AVC ? Recoupment Test: ? Predation caused subsequent price increases above competitive level sufficient to recoup predatory investment; or ? Post-predation market structure (or other market conditions) makes recoupment likely DOJ/FTC Section 2 Hearings: Session on Predatory pricing June 22 2006 4 Brooke Decision (1993) ? Since Brooke plaintiffs have not prevailed in a single case ? Almost all cases decided by summary judgment ? Exacting proof and pleading requirements ? Recent exceptions: Spirit v. Northwest; LePage v. 3M? DOJ/FTC Section 2 Hearings: Session on Predatory pricing June 22 2006 5 Problems with present policy ? Unreliable Cost test: ? Difficulties in measuring cost ? Imperfect proxy for profit sacrifice ? Biased enforcement ? Recoupment test only applied to predat