The baseline for testing predatory pricing in the Section 2 Report is average avoidable cost (AAC), together with recoupment as a structural test (Report, p. 65). The AAC test or reasonably close variations, such as average variable cost or short-run marginal cost, seems about right. However, differences among them can become very technical and fine. The Report correctly includes in AAC those fixed costs that “were incurred only because of the predatory strategy, for example, as a result of expanding capacity to enable the predatory sales.” (Report, pp. xiv, 64-65) Such a strategy would make some sense for a predator if the fixed costs in question are easily re-deployed once the predation has succeeded – for example, in the case of an airline whose planes can be shifted to a different route. The test virtually guarantees that in industries that require heavy investment in production capacity that cannot be redployed the test will approach strict average variable cost. In cases where fixed costs are relatively high, an investment of this nature that lasted only through the predatory period and became excess capacity thereafter would not be worth it. Further, if fixed costs are low the market is almost certainly not prone to monopoly to begin with. AVC is probably underdeterrent, but it is also probably the best we can do without chilling procompetitive behavior.

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Dimming the Court’s Brooke Group Bright Line Administrable Rule?

As noted in my earlier post, the Supreme Court’s Brooke Group rule is held out as the primary example of an administrable bright line rule aimed at controlling the costs of type I error. In practice, the Brooke Group above cost rule is not as bright as one might wish. The Achilles heel of the Brooke Group cost based rule is the failure to clarify what the relevant cost is.

Read the full piece here.

There’s a fundamental problem with Section 2 of the Sherman Act: nobody really knows what it means. More specifically, we don’t have a very precise definition for “exclusionary conduct,” the second element of a Section 2 claim. The classic definition from the Supreme Court’s Grinnell decision — “the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident” — provides little guidance. The same goes for vacuous statements that exclusionary conduct is something besides “competition on the merits.” Accordingly, a generalized test for exclusionary conduct has become a sort of Holy Grail for antitrust scholars and regulators.

Read the full piece here. 

The “error cost” or “decision theory” approach to Section 2 legal standards emphasizes the probabilities and costs of errors in monopolization decisions.  Two types of error, and two associated types of cost are examined.  One type of error is that of a false acquittal, or false negative.  The other type of error is that of a false conviction, or false positive.  Under the error cost approach to legal standards, a legal standard should be chosen that minimizes the total expected costs of errors.

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One of the most important changes in the antitrust laws over the past 40 years has been the diminished reliance of rules of per se illegality in favor of a rule of reason analysis. With the Court’s recent rulings in Leegin (eliminating per se rule for minimum RPM) and Independent Ink (eliminating the per se rule against intellectual property tying), the evolution of the antitrust laws has left only tying (under a “modified” per se rule) and horizontal price fixing under per se rules of illegality. This movement reflects advances in law and economics that recognize that vertical restraints, once condemned as per se illegal when used by firms with antitrust market power, can be procompetitive. It also reflects the judgment that declaring such practices pre se illegal produced high type I error costs (the false condemnation and deterrence of pro competitive practices).

Read the full piece here.

The DOJ’s § 2 Report offers two recommendations under the heading of “General Standards for Exclusionary Conduct.” First, for evaluating alleged acts of exclusion, the Report endorses the burden-shifting framework of the D.C. Circuit’s 2001 Microsoft decision. Second, after canvassing various standards of anticompetitive effect, the Report settles on the “disproportionality test,” under which “conduct that potentially has both procompetitive and anticompetitive effects is anticompetitive under section 2 if its likely anticompetitive harms substantially outweigh its likely procompetitive benefits.”

Read the full piece here.

The source of much of the disagreement between the Antitrust Division and the FTC is based on chapter 3, which discusses general standards for Section 2 liability.

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The most controversial part of the Justice Department’s Single Firm Conduct Report is the Department’s proposed use of what it terms a “substantial disproportionality” test for exclusionary conduct. Under this test, the Justice Department would bring a case only if the harm to consumers and competition caused by a dominant or near-dominant firm’s conduct is “substantially disproportionate” to any legitimate benefits the firm might realize. The Department argues that this test is superior to the three alternative tests it considers—an effects-balancing test, a no-economic-sense test, and an equally-efficient-competitor test—because it is more administrable and because it reduces the risk of false positives (i.e., finding conduct unlawful that does not harm competition ), which the Department views as more serious than that of false negatives (i.e., finding conduct lawful that does harm competition).

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The treatment of unilateral conduct remains an intellectual and policy mess as we finish out the first decade of the 21^st century. There were signs of hope a few years ago. The European Commission embarked on an effort to adopt an effects-based approach to unilateral conduct and to move away from the analytically-empty, object-based approach developed by the European Courts.  Meanwhile the Federal Trade Commission and the U.S. Department of Justice embarked on a series of hearings on unilateral conduct that brought the best thinkers together and hoped to achieve some consensus.  Hopes were dashed in 2008.  The Justice Department and the FTC splintered. The DOJ issued a lengthy report that for all intents and purposes argued for significantly limiting the circumstances under which a business practice could be found to constitute anticompetitive unilateral conduct. Three of the four sitting Federal Trade Commissioners quickly asserted their fundamental disagreement. Towards the end of the year the European Commission finally issued a document that adopted an effects-based approach, sort of, but only for guidance for its prosecutorial discretion over which cases it would focus its resources on.  I say “sort of” because although much of the framework it adopts is quite sensible, the Commission places virtually insurmountable obstacles to considering efficiencies. (For a comparative review of the EC and DOJ reports see my article here.)

Read the full piece here.