1 ABA 50th Annual Antitrust Law Spring Meeting Beyond Predatory Pricing Mark C. Schechter April 24, 2002

2 I.Overview of the Law (The World According to Brooke Group) II.The Way Around Brooke Group A.Concord Boat v. Brunswick B.LePage’s v. 3M C.U.S. v. American Airlines III. The Dividing Line Between Competition and Predation

3 Overview of the Law (The World According to Brooke Group)

4 Elements of Predation Overview of the Law (The World According to Brooke Group) I.Alleged predator’s low prices are below an appropriate level of costs for a relevant product Rationale for Element I Exclusionary effect of prices above a relevant measure of costs “is beyond the practical ability of a judicial tribunal to control without courting intolerable risks of chilling legitimate price cutting” [at 223]

5 Elements of Predation Overview of the Law (The World According to Brooke Group) A.Whose costs? -- the alleged predator’s costs Rationale Above-cost prices below the costs of a firm’s competitors do not “inflict injury to competition cognizable under the antitrust laws” [at 223]

6 Elements of Predation Overview of the Law (The World According to Brooke Group) B.What measure of costs? -- some measure of incremental cost that does not interfere with “competition on the merits” The exclusionary effect of prices that reflect the lower cost structure of an alleged predator represents competition on the merits [at 223] –Competition on the merits should allow a firm to cut prices in order to increase market share [at 223] –Discouraging a price cut and forcing firms to maintain prices above cost does not constitute sound antitrust policy (“even if the effect of the cut is to induce or reestablish supracompetitive pricing”) [at 224] Rationale

7 Elements of Predation Overview of the Law (The World According to Brooke Group) II.Alleged predator can recoup its investment in below-cost prices Rationale for Element II “Without recoupment, predatory pricing produces lower aggregate prices in the market” [at 224]

8 Elements of Predation Overview of the Law (The World According to Brooke Group) A.Recoup where? -- in the market alleged to be predated Rationale Whether recoupment is likely requires an estimate of the cost of the alleged predation and “a close analysis of both the scheme alleged and structure and conditions of the relevant market” [at 226]

9 Elements of Predation Overview of the Law (The World According to Brooke Group) B.Why require recoupment in the relevant market? -- to ensure the market is, in fact, monopolized (and avoid costly errors) Predators “must obtain enough market power to set higher than competitive prices for a long enough period of time [at 225] We insisted that the plaintiff prove a dangerous probability that the defendant would monopolize “a particular market” [at 225] “Mistaken inferences are especially costly because they chill the very conduct the antitrust laws are designed to protect” [at 225] Rationale

10 The Way Around Brooke Group Concord Boat 3M American Airlines

11 Concord Boat v. Brunswick The Way Around Brooke Group (Beyond Predatory Pricing) – Loyalty discount program -- predation w/out proof of below-cost pricing –8 th Circuit -- prices above the firm’s average variable cost presumptively legal and the essence of competition – Loyalty discount program alleged to amount to de facto exclusive dealing -- “tax” on boat builders that purchase competitors’ engines

12 LePage’s v. 3M The Way Around Brooke Group (Beyond Predatory Pricing) –Bundled discount program -- predation w/out proof of below-cost pricing –LePage’s -- Linking of rebates on a competitive product with a monopoly product is anticompetitive because presumptively it excludes equally efficient competitors –3M -- So long as prices on an attributed basis were above cost, makes no difference whether discounts were offered directly on competitive product or involved bundled discounts on a range of products

13 U.S. v. American Airlines The Way Around Brooke Group (Beyond Predatory Pricing) –Predation at price levels above incremental cost –Failure to maximize profits –Response to changing competitive environment -- ex ante (network) versus ex post (point-to-point) – Predation by improving the defined relevant product –More flights to meet demand created by lowered prices –Frequency and availability -- problems in evaluating revenue attributable to components of the relevant product –Recoupment outside the relevant product market –Subjective standard -- distinguishing reputation for aggressive conduct from predatory conduct –What would be left of the recoupment standard?

14 The Dividing Line Between Competition and Predation

15 “It would be ironic indeed if the standard for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high” [Brooke Group at ] The Dividing Line Between Competition and Predation –Under vs. Over-Inclusion -- where should the bias be? –Successful predation is rare, whatever the intent Consumers benefit by failed predation –How aggressive is too aggressive? Mechanism of competition and predation is same –Complex standards invite litigation The regulatory trough -- the last resort for the unsuccessful competitor

16 The Dividing Line Between Competition and Predation –Simplicity is a Virtue –Enforceable standards -- how would an injunction read? A new era of price regulation? See GFC Office decision - LH/Germania (Frankfurt/Berlin Route) –Counseling effects What will lawyers tell their clients? The need for speed in a consultants’ world –Treble damage threat Risk averse umbrella pricing strategy