Monopolization Predatory or Exclusionary (Entry Deterring) Acts or Practices

Legal Requirements Sherman Act Sherman Act To “monopolize or attempt to monopolize” a market is illegal, not just having a monopoly To “monopolize or attempt to monopolize” a market is illegal, not just having a monopoly Courts’ current approach requires Courts’ current approach requires One or more exclusionary acts One or more exclusionary acts Intent to monopolize Intent to monopolize “Dangerous probability of success” “Dangerous probability of success”

Difficulties Distinguishing predatory pricing behavior from honest pro-competitive conduct by large firms Distinguishing predatory pricing behavior from honest pro-competitive conduct by large firms When is P < MC? When is P < MC? Areeda-Turner Rule: P < AVC Areeda-Turner Rule: P < AVC Market Definition Market Definition Merger guidelines approach won’t work Merger guidelines approach won’t work The Cellophane Fallacy The Cellophane Fallacy Harm to competitors vs. Harm to competition Harm to competitors vs. Harm to competition U.S. Steel compared to Alcoa U.S. Steel compared to Alcoa Utah Pie Utah Pie

Is Predatory Pricing Rational? Economists skeptical of classic predation Economists skeptical of classic predation P profits later P profits later Requires barriers to entry when P > MC Requires barriers to entry when P > MC Other forms may make sense Other forms may make sense Reputation building: Price low in one market to deter entry/competitors elsewhere or in the future Reputation building: Price low in one market to deter entry/competitors elsewhere or in the future “Deep Pockets”: large firms have better financial resources due to differential access to capital markets “Deep Pockets”: large firms have better financial resources due to differential access to capital markets Signaling: low pricing used as a signal of the dominant firm’s low costs to rivals/entrants Signaling: low pricing used as a signal of the dominant firm’s low costs to rivals/entrants

Other Predatory, Exclusionary, or Entry Deterring Strategies Predation by a non-dominant firm (differentiated products) Predation by a non-dominant firm (differentiated products) Price cuts or advertising aimed at specific niches or rivals Price cuts or advertising aimed at specific niches or rivals Strategic product innovation or placement Strategic product innovation or placement Product proliferation Product proliferation Long-term contracts, tie-ins or bundling Long-term contracts, tie-ins or bundling Raising rivals’ costs Raising rivals’ costs Threats must be credible to deter entry Threats must be credible to deter entry

Special Cases Capacity expansion to deter entry Capacity expansion to deter entry Du Pont in titanium dioxide, Alcoa Du Pont in titanium dioxide, Alcoa Deny access to “essential facilities” in networks Deny access to “essential facilities” in networks Microsoft, Airlines Microsoft, Airlines Price discrimination Price discrimination Identify and separate groups/markets Identify and separate groups/markets Prevent arbitrage Prevent arbitrage May improve social welfare May improve social welfare