Other state laws focus on specific markets, e. Some have both. Construction and enforcement of state law is also diverse. Some states, like their federal counterparts, require proof of sales below an economically informed measure of costs and proof of probable recoupment.
Others have adopted a more "populist" view reminiscent of the federal treatment in an earlier age and focus on injury to competitors rather than injury to competition. In yet other states, there has been little activity. Studies of gasoline markets demonstrate that consumers pay higher prices in markets with gasoline below costs sales laws.
More interestingly, however, these studies also show that independent dealers are not better off as a result of the laws. Thus consumers pay higher prices, but independent dealers obtain no greater returns.
Perhaps for these reasons, efforts to secure similar legislation at the federal level in the U. Federal antitrust law has matured and today seeks to protect competition and not competitors. The new learning has not fully embraced state law as yet, but there is evidence that state legislatures and judiciaries are becoming more sophisticated. United States federal law Footnote 4 like the federal law of Canada Footnote 5 proscribes predatory pricing.
Footnote 6 In general, "predatory pricing" occurs "where a dominant firm charges low prices over a long enough period of time so as to drive a competitor from the market or deter others from entering and then raises prices to recoup its losses. Footnote 7 Although predatory pricing was once thought commonplace, claims of predation have produced few recent federal cases in the United States.
Footnote 8 Today there is a consensus, led by the United States Supreme Court, that claims of predatory pricing ought to be approached with a very healthy skepticism. Footnote 9 Careful consideration of the subject explains why this is so. Low prices are the object of competition policy and a boon to consumers. Footnote 10 It is only when low prices pose a serious problem that they become legitimate objects of concern. That is to say when they drive competitors from the market and subsequently enable the predator to raise and maintain anticompetitive prices to the injury of the consuming public.
Footnote 11 Separating the low competitive prices from real predation is the task—and a difficult one at that. As one distinguished jurist recently wrote:. Consumers, for whose benefit the antitrust laws are designed, welcome low prices but not monopoly prices. If a rival files suit during the "low price" period, how can a court tell whether the price is low because the defendant is an efficient producer driving down costs or just driving price down to cost as opposed to a predator?
A price "too low" for an inefficient rival may be just right from consumers' perspective, showing only that the defendant's costs of production are lower than those of the plaintiff—for which it should receive a reward in the market rather than a penalty in the courthouse. So the plaintiff's observation that it is losing business to a rival that has slashed prices is consistent with both aggressive competition and predatory pricing. How to tell them apart? Footnote The two look very much alike.
The inherent difficulty of separating predatory from tough competition cautions modesty by antitrust policy makers lest they unwittingly intervene to the detriment of consumers whose interest they seek to protect. The legal history of predatory pricing in the U. This history can be conveniently treated in three periods. During the first period following enactment of the Sherman Act Footnote 13 through the 's, claims of predatory pricing were taken quite seriously.
Footnote 14 Indeed, the allegedly predatory tactics employed by John D. Rockefeller and the "Standard Oil Trust" are part of American folklore. It was widely believed that "Robber Barons" were successfully able to drive competitors from the marketplace by temporarily selling below cost.
Once achieved, these firms would raise prices above a competitive level and use those monopoly profits to finance predation elsewhere until they had taken over the entire marketplace. This view reached its zenith in the U. Supreme Court's decision in Utah Pie Co. Continental Baking Co. Footnote 18 There plaintiff, the leading vendor of frozen pies in its market, brought suit against three national bakeries alleging that they had increased their market share by predatory pricing.
The Supreme Court reinstated the jury verdict for the plaintiff notwithstanding evidence that the plaintiff's sales volume had increased during the relevant period and that it had continued to make a profit.
While the Court did not address the specific definition of "below cost" sales, it suggested that average total cost was the appropriate standard. Suffice it to say that predatory pricing cases of the era were characterized by the relative large size of the alleged predator, geographic price discrimination, sales below average total costs, and predatory intent. The Utah Pie decision stood antitrust principles on their head.
Footnote 20 It remained profitable throughout the period; indeed, its sales volume increased. As the dissenting Justices observed: " I f we assume that the price discrimination proven against the respondents had any effect on competition, that effect must have been beneficent. T he Court has fallen into the error of reading the statute as protecting competitors, instead of competition. Footnote 21 Utah Pie and its progeny mark the high point in U.
The second period was inaugurated with the publication of a truly seminal article on predatory pricing by two eminent antitrust scholars in Footnote 27 Nonetheless, they concluded that predatory pricing is still a subject for legitimate concern to antitrust policy makers as long as great care is taken not to deter vigorous competition. That predatory pricing seems highly unlikely does not necessarily mean that there should be no antitrust rules against it.
Footnote 30 The mode of analysis used by the Canadian Competition Bureau is consistent. While it is difficult to fix with precision the start of the third and latest period, the decision of the Court of Appeals in A. Poultry Farms, Inc. Rose Acre Farms, Inc. Footnote 33 is an appropriate place to begin. The case involved a pricing battle between egg producers. The plaintiff's expert economist had testified at trial that the defendant's prices were below its average total costs and less than its average variable costs for a period of time.
Moreover, the cost data were accompanied by executive comments evidencing predatory intent. Some of the more colorful ones included: "We are going to run you out of Your days are numbered. Predatory prices are an investment in a future monopoly, a sacrifice of today's profits for tomorrow's. The investment must be recouped. If a monopoly price later is impossible, then the sequence is unprofitable and we may infer that the low price now is not predatory.
More importantly, if there can be no "later" in which recoupment could occur, then the consumer is an unambiguous beneficiary even if the current price is less than the cost of production. Price less than cost today, followed by the competitive price tomorrow, bestows a gift on consumers. Because antitrust laws are designed for the benefit of consumers, not competitors Market structure offers a way to cut the inquiry off at the pass, to avoid the imponderable questions that have made antitrust cases among the most drawnout and expensive types of litigation.
Only if market structure makes recoupment feasible need a court inquire into the relation between prices and cost. Recoupment is a necessary, but insufficient, element of the plaintiff's case. The court went on to state that intent ought play no role in assessing whether conduct is predatory. This approach was embraced by the U.
Supreme Court in Brooke Group Ltd. Footnote 41 The case is important for several reasons. First, the Court noted that predatory pricing was generally implausible. Footnote 42 Justice Kennedy, writing for the Court, noted earlier authority that concluded "predatory pricing schemes are rarely tried" citing Matsushita Electric Industrial Co.
Zenith Radio Corp. Footnote 43 In Matsushita, the Court had stated:. Moreover, it is not enough simply to achieve monopoly power, as monopoly pricing may breed quick entry by new competitors eager to share in the excess profits. The success of any predatory scheme depends on maintaining monopoly power for long enough both to recoup the predator's losses and to harvest some additional gain.
For this reason, there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful. Second, the Court stated that only truly below costs sales ought be treated as predatory. In that connection, the Court observed:. The antitrust laws require no such perverse result. Third, the Court held that plaintiff must prove the likelihood that the alleged predator will be able to later recoup the losses associated with its predatory pricing.
The Court reasoned that the unsuccessful predator the firm that prices predatorily but is unsuccessful thereafter raising prices above a competitive level does not present an antitrust issue. Footnote 46 While that firm may have made life miserable for firms within the market, consumers reap the benefit.
While predatory pricing remains actionable under U. On the one hand, there is the view that it is rarely tried and even more rarely successful. On the other, there is also the view that the costs of inappropriate intervention are particularly high since consumers are denied the benefits of tough competition.
Moreover, the recoupment requirement imposed by the Court in Brooke Group requires plaintiff to demonstrate that there is a likelihood of recoupment before going forward. The universe of actionable cases in U. Consumers are the beneficiaries of this change in the law. Unlike state law, U.
Efforts to secure special treatment have generally failed. Nonetheless the experience with retail sale of gasoline merits mention.
In , the U. Footnote 48 The study failed to find indications of predatory pricing and for a short time dampened any congressional enthusiasm for legislation. Throughout the 's, however, there were efforts to enact legislation that would require divorcement of retail operations by large integrated petroleum companies. Footnote 49 As its title would suggest, the legislation was promoted by organizations of independent gasoline retailers.
This and similar legislation never secured sufficient support in Congress. Footnote 51 In a federal system as diverse as the United States, it is difficult to generalize with precision.
Some statutes have been construed more or less consistently with the modern federal precedents described above. Footnote 52 Others have been interpreted in the more populist tradition now rejected by the federal courts. Footnote 53 Discussing these latter statutes, one. W hile the Supreme Court has justifiably increased the difficulty which plaintiffs face in succeeding on a predation claim under federal law, many states continue to encourage the use of lawsuits to thwart the competitive procompetitive conduct by making it easy to prove a violation of predatory pricing under a "sales below cost" statute.
Ostensibly designed with goals identical to their federal counterparts—to promote competition—these state statutes prohibiting "sales below costs" are usually poorly disguises attempts to protect small, local businesses from competition by larger, more national firms.
Such statutes, therefore, promote inefficiency at the expense of the consumer. Nonetheless, the U. Section 2 prohibits acquiring or maintaining and in some cases attempting to acquire monopoly power only through improper means.
Prohibiting the mere possession of monopoly power is inconsistent with harnessing the competitive process to achieve economic growth. Nearly a century ago, in Standard Oil , one of the Supreme Court's first monopolization cases, the Court observed that the Act does not include "any direct prohibition against monopoly in the concrete.
United States v. Aluminum Co. Where "[a] single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry," punishment of that producer would run counter to the spirit of the antitrust laws: "The successful competitor, having been urged to compete, must not be turned upon when he wins.
Twenty years after Alcoa , and more than fifty years after Standard Oil , the Supreme Court articulated in Grinnell 43 what remains the classic formulation of the section 2 prohibition. Drawing from Alcoa , the Court condemned "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.
Competition has long stood as the touchstone of the Sherman Act. Barnett emphasized at the commencement of the hearings, "individual firms with. A number of panelists stated that section 2 is essential to preserving competition. Private cases brought under section 2 by injured parties are also important to U. Equally important, the potential for significant injunctive relief and damages awards provides strong incentives for firms to refrain from engaging in the types of conduct prohibited by the statute.
Protection of Competition, Not Competitors. The focus on protecting the competitive process has special significance in distinguishing between lawful and unlawful unilateral conduct.
Competition produces injuries; an enterprising firm may negatively affect rivals' profits or drive them out of business. But competition also benefits consumers by spurring price reductions, better quality, and innovation. Accordingly, mere harm to competitors is not a basis for antitrust liability. The Supreme Court has underscored this basic principle repeatedly over the past several decades.
In , it observed in Copperweld that the type of "robust competition" encouraged by the Sherman Act could very well lead to injury to individual competitors. Pueblo Bowl-O-Mat, Inc. Aspen Highlands Skiing Corp. In a decision, the Court re-emphasized the importance of focusing on competition, rather than competitors. In Brooke Group Ltd. Absent the possibility of recoupment through supracompetitive pricing, there can be no injury to competition: "That below-cost pricing may impose painful losses on its target is of no moment to the antitrust laws if competition is not injured.
Again, in its decision in NYNEX , the Court reaffirmed that Sherman Act liability requires harm to the competitive process, not simply a competitor. While conceding that NYNEX's scheme "hurt consumers by raising telephone service rates," the Court found that any consumer injury "naturally flowed not so much from a less competitive market" for certain services as from "the exercise of market power that is lawfully in the hands of a monopolist.
Courts and commentators have long recognized the difficulty of determining what means of acquiring and maintaining monopoly power should be prohibited as improper.
Although many different kinds of conduct have been found to violate section 2, "[d]efining the contours of this element. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it.
The big problem lies in this: competitive and exclusionary conduct look alike. The problem is not simply one that demands drawing fine lines separating different categories of conduct; often the same conduct can both generate efficiencies and exclude competitors. Exclusive dealing, for example, may be used to encourage beneficial investment by the parties while also making it more difficult for competitors to distribute their products. When a competitor achieves or maintains monopoly power through conduct that serves no purpose other than to exclude competition, such conduct is clearly improper.
There also are examples of conduct that is clearly legitimate, as when a firm introduces a new product that is simply better than its competitors' offerings. The hard cases arise when conduct enhances economic efficiency or reflects the kind of dynamic and disruptive change that is the hallmark of competition, but at the same time excludes competitors through means other than simply attracting consumers.
In these situations, distinguishing between vigorous competition by a firm with substantial market power and illegitimate forms of conduct is one of the most challenging puzzles for courts, enforcers, and antitrust practitioners. Concern with Underdeterrence and Overdeterrence. Experience with section 2 enforcement teaches the importance of correctly distinguishing between aggressive competition and actions that exclude rivals and harm the competitive process.
Some basic boundaries are provided by the law's requirements that the conduct harm "competition itself," 73 that it be "willful," 74 and that it not be "competition on the merits," 75 but these maxims offer insufficient guidance to be of much use in many of the hard cases. Standards of section 2 liability that underdeter not only shelter a single firm's exclusionary conduct, but also "empower other dominant firms to adopt the same strategy.
Standards of section 2 liability that overdeter risk harmful disruption to the dynamic competitive process itself. Being able to reap the gains from a monopoly position attained through a hard-fought competitive battle, or to maintain that position through continued competitive vigor, may be crucial to motivating the firm to innovate in the first place. Rules that overdeter, therefore, undermine the incentive structure that competitive markets rely upon to produce innovation.
Importantly, rules that are overinclusive or unclear will sacrifice those benefits not only in markets in which enforcers or courts impose liability erroneously, but in other markets as well. Firms with substantial market power typically attempt to structure their affairs so as to avoid either section 2 liability or even having to litigate a section 2 case because the costs associated with antitrust litigation can be extraordinarily large.
These firms must base their business decisions on their understanding of the legal standards governing section 2, determining in advance whether a proposed course of action leaves their business open to antitrust liability or investigation and litigation. If the lines are in the wrong place, or if there is uncertainty about where those lines are, firms will pull their competitive punches unnecessarily, thereby depriving consumers of the benefits of their efforts.
The Court's concern about overly inclusive or unclear legal standards may well be driven in significant part by the particularly strong chilling effect created by the specter of treble damages and class-action cases. Courts and commentators increasingly have recognized that section 2 standards cannot "embody every economic complexity and qualification" 84 and have sought to craft legal tests that account for these limitations.
Then-Judge Breyer explained the need for simplifying rules more than two decades ago:. Frequently, courts and commentators dealing with antitrust have employed decision theory, 86 which articulates a process for making decisions when information is costly and imperfect. Decision theory identifies two types of error costs. First, there are "false positives" or Type I errors , meaning the wrongful condemnation of conduct that benefits competition and consumers.
The cost of false positives includes not just the costs associated with the parties before the court or agency , but also the loss of procompetitive conduct by other actors that, due to an overly inclusive or vague decision, are deterred from undertaking such conduct by a fear of litigation. Second, there are "false negatives" or Type II errors , meaning the mistaken exoneration of conduct that harms competition and consumers.
As with false positives, the cost of false negatives includes not just the failure to condemn a particular defendant's anti-competitive conduct but also the loss to competition and consumers inflicted by other firms' anticompetitive conduct that is not deterred.
It also is important to consider enforcement costs--the expenses of investigating and litigating section 2 claims including potential claims --when framing legal tests. Because agency resources are finite, it is important to exercise enforcement discretion to best promote consumer welfare. Enforcement costs include the judicial or agency resources devoted to antitrust litigation, the expenses of parties in litigation including time spent by management and employees on the litigation as opposed to producing products or services , and the legal fees and other expenses incurred by firms in complying with the law.
In structuring a legal regime, it is important to consider the practical consequences of the regime and the relative magnitude and frequency of the different types of errors. If, for example, the harm from erroneously exonerating anticompetitive conduct outweighs the harm from erroneously penalizing procompetitive conduct, then, all other things equal, the legal regime should seek to avoid false negatives.
Some believe as a general rule that, in the section 2 context, the cost of false positives is higher than the cost of false negatives. Any other firm that uses the condemned practice faces sanctions in the name of stare decisis, no matter the benefits. Monopoly prices eventually attract entry.
As a result, courts and enforcers should be sensitive to the potential that, once created, some monopolies may prove quite durable, especially if allowed to erect entry barriers and engage in other exclusionary conduct aimed at artificially prolonging their existence. One manifestation of decision theory in antitrust jurisprudence is the use of rules of per se illegality developed by courts.
As the Supreme Court has explained, these rules reduce the administrative costs of determining whether particular categories of conduct harm competition and consumer welfare. Equally important, if one or the other type of error is relatively rare and that error is unlikely to result in great harm , the most effective approach to enforcement may be an easy-to-administer bright-line test that reduces uncertainty and minimizes administrative costs. In the antitrust arena, such rules can take the form of safe harbors.
Court have long recognized the benefits of bright-line tests of legality also known as safe harbors when conduct is highly likely to bring consumer-welfare benefits and the threat of anticompetitive harm is remote. Building on Matsushita , the Court in Brooke Group laid out a two-pronged, objective test for evaluating predatory-pricing claims. In Matsushita, Brooke Group , and Weyerhaeuser , the Court stressed the importance, in crafting a rule of decision, of taking into account the risks of false positives, the risks of false negatives, and administrability.
The Court's decision in Trinko likewise applies decision-theory principles in crafting section 2 liability rules. The Court observed that it had been "very cautious" in limiting "the right to refuse to deal with other firms" because enforced sharing "may lessen the incentive for the monopolist, the rival, or both to invest in.
Section 2 enforcement is crucial to the U. It is a vexing area, however, given that competitive conduct and exclusionary conduct often look alike. Indeed, the same exact conduct can have procompetitive and exclusionary effects. An efficient legal regime will consider the effects of false positives, false negatives, and the costs of administration in determining the standards to be applied to single-firm conduct under section 2.
See, e. Bar Ass'n, Antitrust Law Developments , 6th ed. The conspiracy to monopolize offense addresses concerted action directed at the acquisition of monopoly power, see generally id. Grinnell Corp. Verizon Commc'ns Inc. Law Offices of Curtis V.
Trinko, LLP, U. Spectrum Sports, Inc. McQuillan, U. Lorain Journal Co. United States, U. Spectrum Sports , U. See Section of Antitrust Law, supra note 2, at "The same principles used in the monopolization context to distinguish aggressive competition from anticompetitive exclusion thus apply in attempt cases.
Olympia Equip. Leasing Co. Union Tel. Dentsply Int'l, Inc. To declare that intention unlawful would defeat the antitrust goal of encouraging competition. Times-Picayune Publ'g Co. Poultry Farms, Inc. Rose Acre Farms, Inc. Stripping intent away brings the real economic questions to the fore at the same time as it streamlines antitrust litigation.
Microsoft Corp. Richfield Co. Appalachian Coals, Inc. Nat'l Soc'y of Prof'l Eng'rs v. Pac Ry. See 2B Phillip E. Areeda et al. See generally William W. Ball Mem'l Hosp. Copperweld Corp. Independence Tube Corp. Verizon Commc'ns, Inc.
Goldwasser v. Ameritech Corp. Underscoring the degree of consensus on many antitrust matters today, the Justices of the Supreme Court have shown remarkable agreement in recent antitrust matters.
The aggregate voting totals for the twelve antitrust cases decided over the past decade show ninety-one votes in favor of the judgment and only thirteen in dissent. Even more striking, and directly relevant to this report, all three cases addressing claims under section 2 were decided without dissent.
See Weyerhaeuser Co. Ross-Simmons Hardwood Lumber Co. Discon, Inc. Competition J.
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