Is predation rational? Is it profitable? ? A reply

Abstract

We appreciate the respondents' encomiums to our theoretical expertise. But we beg to differ from our critics' interpretation of the facts in the Liggett case. First, the evidence of predatory intent, predatory conduct, and predatory impact in strewn throughout the extensive court records. Commenting on this evidence, the District Court found Liggett's complaint "buttressed by numerous Brown & Williamson (B&W) documents written by top executives. These documents, indicating B&W's anticompetitive intent, are more voluminous and detailed than any other reported case. This evidence not only indicates B&W wanted to injure Liggett, it also details an extensive plan to slow the growth of the generic cigarette segment" (District Court, p. 354). These documents - prepared by high-ranking B&W officials, including a vice-president for finance, a senior financial analyst, and a special company-wide 'task force' - reveal a systematically organized, brilliantly articulated plan for containing competition in low-priced generics, and for preventing this product innovation from disturbing the oligopolistic stability of the cigarette industry generally. The B&W documents were so explicit, and emphasized the predation campaign so frequently, that the District judge "later called the documents 'smoking guns' and mused that 'I don't think [Liggett] would have imagined some of this stuff that's been written down'."1 The Supreme Court agreed, acknowledging the existence of "sufficient evidence in the record from which a reasonable jury could conclude that for a period of approximately 18 months, B&W's prices on its generic cigarettes were below its costs . . . and that this below-cost pricing imposed losses on Liggett that Liggett was unwilling to sustain ..." (Supreme Court, p. 2592). Second, when it came to assessing the predation charge, however, the courts ignored the evidence that rendered predatory "recoupment" feasible. The courts disregarded what they earlier had explicitly acknowledged: persistently high concentration, high barriers to entry, and decades of tacitly collusive, noncompetitive oligopolistic behavior. Neither the decision of the District Court, nor the Court of Appeals, nor the Supreme Court rested on contextual evidence of predation and recoupment. Instead, all relied upon an unproved theoretical assertion that preda