Unlocking Antitrust: When do low prices become predatory?

FILL ME IN:
This fallstaffers on the House Judiciary Antitrust Subcommittee released a long-anticipated report outlining a series of recommendations intended to rewrite our country’s antitrust laws. The staff report, while initially intended to focus on four tech companies, makes a series of erroneous policy conclusions that if implemented would wield government control over the entire U.S. economy, hampering growth and innovation to the determinate of consumers.

As part of the staff report’s recommendations, it proposed changing the relationship between antitrust and predatory pricing.

WELL, WHAT IS THE RELATIONSHIP BETWEEN ANTITRUST AND PREDATORY PRICING?
Predatory pricing is the notion that one competitor slashes prices so low that its competitors can’t compete and eventually go out of business. Antitrust laws aren’t concerned with what happens to the competitor but are only concerned with what happens to the consumer. Therefore, it’s important to examine how predatory pricing impacts the consumer.

HOW DOES PREDATORY PRICING IMPACT CONSUMERS?
Where one competitor is more efficient at producing a good or service, they can sell it at a lower price than their competition, and lower prices are GOOD for consumers. No antitrust problem here. But what happens if a producer sells below what it costs them to produce, wouldn’t that be a problem?

This is where it’s important for antitrust law to consider longer-term considerations. When stores liquidate merchandise to sell off excessive inventory it might be below the price that they paid for it. Companies may also run a promotion for a limited time that offers a product or service below cost in order to attract new customers or entice them to buy additional offerings. In these instances, the consumer is again the winner, consumers love a good deal, there should be no antitrust concern.

WHEN DOES ANTITRUST LAW STEP IN?
Let’s suppose a company sells below costs and does so for a sustained period that results in their competitors going out of business. Wouldn’t this potentially leave the surviving company in a position to jack up its prices given they no longer face competition? In this scenario, antitrust could become concerned.

That said, it’s tough to predict the future, its tough to suspect a company will be willing to lose money for a prolonged period hoping to one day in the future raise prices once its competitors have exited the market. It is also tough to assume that if this future scenario were to come true and prices were to rise, that new competitors wouldn’t enter the market to take advantage of healthy profit margins, ultimately driving prices back down. For these reasons, predatory pricing claims are tough to prove as an antitrust violation, as they should be.

Antitrust is never concerned with price when it is above cost. Antitrust is also not concerned with prices that are below cost for short periods of times. Antitrust is only concerned when prices are below cost AND when there is evidence to suggest the firm can recoup its losses later once it faces diminished competition.

Antitrust law thinks about predatory pricing the right way. In a market economy where companies need to make a profit, they can’t sell below costs for prolonged periods of time. They too have bills to pay. In the short term, a price war between companies is GOOD for the consumer.

WHY IT MATTERS:
The staff report doesn’t like the fact that recoupment is part of the way we think about predatory pricing because it’s often hard to prove. It recommends:

…. clarifying that proof of recoupment is not necessary to prove predatory pricing or predatory buying, overriding the Supreme Court’s decisions in Matsushita v. Zenith Ratio Corp., Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., and Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Company.

OUR TAKE:
Without the need to show a likelihood of recoupment of losses, consumer friendly price wars would routinely run afoul with the antitrust law. Such a fatally flawed recommendation only serves to protect competitor’s interest but fails to serve the interest of consumers.

For more on antitrust, check out other posts here.

About the authors

Sean Heather

Sean Heather is Senior Vice President for International Regulatory Affairs and Antitrust.

Read more