Brooke Group Research Articles

What <i>Brooke Group</i> Joined Let None Put Asunder: The Need for the Price-Cost and Recoupment Prongs in Analyzing Digital Predation

This chapter proceeds in five parts. The first provides a brief history of the law and economics of predatory pricing doctrine in the United States, and how a revolution in economic and legal thinking spurred by Areeda and Turner’s seminal work led to Brooke Group and replaced the regime typified by the Supreme Court’s troubled decision in Utah Pie Co. v. Continental Baking Co. The second surveys the basic objections to the current consensus on predatory pricing that the two groups of reactionaries have articulated, while the following two parts defend both the recoupment and price-cost prongs as requirements to win predatory pricing claims against digital firms. At bottom, efforts to divorce one prong from the other fail to overcome the powerful and lasting insights not just of Areeda and Turner, but of the very nature of antitrust as a legal regime “passed for the ‘protection of competition, not competitors.’” The last part contains concluding remarks.

The Legal Life of the Areeda-Turner Test

Few works of legal scholarship have had the impact enjoyed by Areeda and Turner's 1975 article on predatory pricing. Proof of predatory pricing under the Areeda-Turner test requires two things. The plaintiff must show a market structure such that the predator could rationally foresee "recouping the losses through higher profits earned in the absence of competition." This requirement, typically called "recoupment," requires the plaintiff to show that, looking from the beginning of the predation campaign, the predator can reasonably anticipate that the costs of predation will be more than offset by the present value of a future period of monopoly profits, making the strategy a sound investment. Second, the plaintiff must show that the defendant's prices over substantial sales were below a relevant measure of cost, presumptively average variable cost (AVC) or, in some cases, marginal costs over a relatively short run.The effects of Areeda and Turner's predation test occurred in two waves, both devastating for plaintiffs. For the first fifteen years the courts focused overwhelmingly on price-cost relationship, and it quickly became clear that proving predatory pricing under an AVC test is extremely difficult. The second wave occurred after the Supreme Court's formulation of the recoupment requirement in the Brooke Group case. Few plaintiffs have won a case, and the incidence of classical predatory pricing claims has declined dramatically.That so many courts embraced the Areeda-Turner AVC test might seem surprising, given that contemporary assessments from economists were quite negative. The criticisms can be grouped into three categories. Even assuming that short run marginal cost is a useful legal test for predatory pricing, AVC is a reasonable surrogate for marginal cost only in equilibrium. "Classic" predatory pricing is not an equilibrium strategy, however, but rather a nonsustainable high output strategy. In this range AVC and MC diverge, making the Areeda-Turner test a "defendant's paradise."The AVC test is particularly underdeterrent in markets characterized by high fixed costs, which are also the markets that are most conducive to predation. Because strictly defined AVC excludes fixed costs, many nonsustainable pricing strategies are identified as legal, even though many of these might be considered anticompetitive under a more holistic approach.The most fundamental critique of the Areeda-Turner test is that, whether or not AVC is a workable surrogate for short run marginal cost, short-run measures are deficient because they exclude other types of strategic pricing behavior. Longer run strategies may involve fully sustainable pricing.Most recent antitrust complaints about exclusionary pricing have sought to avoid Areeda-Turner by focusing on more complex pricing strategies, such as market share or bundled discounts. Plaintiffs have had some but limited success in convincing courts to analogize these practices to exclusive dealing or tying rather than pricing as such. This permits condemnation even on prices above cost. But these cases also present serious problems of complexity that the courts have not yet addressed, particularly when more than two goods are in a bundle or they can be used in varying proportions. What the Areeda-Turner test promised in exchange for its deficiencies was a query that narrowed the fact finder's focus and was easier to administer. While the test largely succeeded on the first of these, ease of administration has proven elusive. The test nonetheless survives. First, it tends to keep predatory pricing cases out of court and away from juries, two properties that make it attractive to judges. Second, no one has produced something better. A superior test would have to correct for Areeda-Turner’s false negatives without going too far in the other direction. Second, it would have to be administrable by the full range of tribunals authorized to hear predatory pricing cases, which today includes jury trials.

Hunting Unicorns? Experimental Evidence on Predatory Pricing Policies

We study the anti-competitive effects of predatory pricing and the efficacy of three policy responses. In a series of experiments where an incumbent and a potential entrant interact, we compare prices, market structures and welfare. Under a laissez-faire regime, the threat of post-entry price cuts discourages entry, and allows incumbents to charge monopoly prices. Current U.S. policy (Brooke Group) does not help. A policy suggested by Baumol (1979) lowers post-exit prices, while Edlin’s (2002) proposal reduces pre-entry prices and encourages entry. While both policies show outcomes after entry that are less competitive than under Laissez-Faire, they nevertheless increase consumer welfare.

Neoclassical Price Theory, Effects, or Judicial Narrowing in US Predation Law

Predation claims have become progressively more difficult for US plaintiffs to establish. I examine whether Neoclassical Price Theory (NPT) has caused this result. To identify the concept in the case law, I explain how market power, cost tests, and recoupment analysis derive from the NPT concepts of rationality, competition, and efficiency. Competition and efficiency refer to the state of the market in perfect competition relative to monopoly, and thus explicate how predation can harm consumers. Rationality refers to profitability, consumer harm, and the incentive to predate. The concepts create a conceptual framework through which the legal elements assist in predicting the effects of predation. I reviewed all published US federal appellate decisions considering predation from 1950 to 2014. I also examine on what effects judges have focused, whether such effects depart from NPT, and the relationship between effects and plaintiffs’ success rate. Brooke Group defined effects as recoupment, and plaintiffs subsequently have won a single published case. Because the Supreme Court viewed predation as rarely successful and the claim itself as systemically inhibiting pricecuts, lower courts have interpreted cost and market power evidence within the confines of NPT, but strictly. Only the Court can alter this spin on the claim.

Private Damage Actions Under the Robinson-Patman Act

Over the past four decades, there has been virtually no public enforcement of the Robinson-Patman Act. Neither the Department of Justice nor the Federal Trade Commission has pursued cases involving price discrimination. Consequently, private enforcement is all that is left. But private enforcement is fraught with difficulties. In this article, we examine the difficulties that private plaintiffs face in pursuing damages flowing from unlawful price discrimination. We trace these difficulties to the Supreme Court’s decisions in Brooke Group and J. Truett Payne.

Reconsidering Brooke Group: Predatory Pricing in Light of the Empirical Learning

Empirical research has found evidence of predatory pricing in a number of industries. Leading firms in airlines, coffee, oil, shipping, sugar, telecommunications, and tobacco have used deep, temporary price cuts to weaken their competitors and preserve or enhance their long-run market power. Even though studies dating back to the 1970s have shown that predatory pricing is a rational and not uncommon strategy, the Supreme Court has asserted that “predatory pricing is rarely tried, and even more rarely successful.” On this basis, the Court has established a pro-monopolist and anti-consumer test for predatory pricing claims.Incorporating the empirical findings, the proposed test for predation aims to strike a better balance between the two risks for all legal rules -- false positives (condemning innocent defendants for predatory pricing) and false negatives (acquitting defendants that engaged in predation). To establish a presumption of predation, plaintiffs would have to satisfy market structure and price-cost tests. Defendants would then have the opportunity to rebut this presumption through the showing of credible procompetitive justifications for their pricing practices. This test would create a wide safe harbor for vigorous price competition but also deter aggressive price discounting that reduces competition and harms consumers in the medium and long run.

Antitrust Predation and The Antitrust Paradox

The widely recognized influence that the Chicago school of law and economics had on the institution of antitrust is nowhere more apparent than in predatory-pricing law. Starting with Aaron Director, this movement had many distinguished contributors. But even in this company, Robert Bork stands out for his part in persuading the judiciary to refocus antitrust law on the interests of consumers rather than on the interests of competing firms. In The Antitrust Paradox and other writings, Bork advanced the Chicago school insight that the kind of aggressive price cutting that, at the time, passed for predatory pricing is instead an essential and, for consumers, beneficial attribute of competition. The resulting change in direction that antitrust has taken in predatory-pricing cases culminated in the Court’s Matsushita (Matsushita Electric Industrial Co. v. Zenith Ratio Corp., 475 U.S. 574 [1986]) and Brooke Group (Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 [1993]) opinions, both of which bear the marks of Bork’s influence.

Reconsidering Brooke Group: Predatory Pricing and the Empirical Learning

Empirical research has found evidence of predatory pricing in a number of industries. Leading firms in airlines, coffee, oil, shipping, sugar, telecommunications, and tobacco have used deep, temporary price cuts to weaken their competitors and preserve or enhance their long-run market power. Even though studies dating back to the 1970s have shown that predatory pricing is a rational and not uncommon strategy, the Supreme Court has asserted that “predatory pricing is rarely tried, and even more rarely successful.” On this basis, the Court has established a pro-monopolist and anti-consumer test for predatory pricing claims.Incorporating the empirical findings, the proposed test for predation aims to strike a better balance between the two risks for all legal rules -- false positives (condemning innocent defendants for predatory pricing) and false negatives (acquitting defendants that engaged in predation). To establish a presumption of predation, plaintiffs would have to satisfy market structure and price-cost tests. Defendants would then have the opportunity to rebut this presumption through the showing of credible procompetitive justifications for their pricing practices. This test would create a wide safe harbor for vigorous price competition but also deter aggressive price discounting that reduces competition and harms consumers in the medium and long run.

Resuscitation of Severely Burned Military Casualties: Fluid Begets More Fluid

In November 2005, institution of a military-wide burn resuscitation guideline requested the documentation of the initial 24-hour resuscitation of severely burned military casualties on a burn flow sheet to provide continuity of care. The guidelines instruct the providers to calculate predicted 24-hour fluid requirements and initial fluid rate based on the American Burn Association Consensus recommendation of 2 (modified Brooke) mL x kg(-1) x % total body surface area (TBSA)(-1) to 4 (Parkland) mL x kg(-1) x %TBSA(-1) burn. The objective of this study was to evaluate the relationship between the estimated fluid volumes calculated, either by the Modified Brooke or the Parkland formulas, and actual volumes received. From November 2005 to December 2008, 105 patients were globally evacuated with >20% TBSA burns, of whom 73 had burn flow sheets initiated. Of these, 58 had completed burn flow sheets. Total fluids administered in the first 24-hour period for each patient were recorded. Chart reviews were performed to extract demographic and clinical outcomes data. Of the 58, the modified Brooke formula was used in 31 patients (modified Brooke group) to estimate 24-hour fluid requirements and the Parkland formula was used in 21 (Parkland group). In six, 3 mL x kg(-1) x %TBSA(-1) was used and were excluded from analysis. No significant difference was detected between the two groups for age, %TBSA burned, inhalation injury, or Injury Severity Score. Actual 24-hour resuscitation in the modified Brooke group was significantly lower than in the Parkland group (16.9 L +/- 6.0 L vs. 25.0 L +/- 11.2 L, p = 0.003). A greater percentage of patients exceeded the Ivy index (250 mL/kg) in the Parkland group compared with the modified Brooke group (57% vs. 29%, p = 0.026). On average, those who had 24-hour fluid needs estimated by the modified Brooke formula received a 3.8 mL x kg(-1) x %TBSA(-1) +/- 1.2 mL x kg(-1) x %TBSA(-1) resuscitation, whereas the Parkland group received a 5.9 mL x kg(-1) x %TBSA(-1) +/- 1.1 mL x kg(-1) x %TBSA(-1) resuscitation (p < 0.0001). No differences in measured outcomes were detected between the two groups. On multivariate logistic regression, exceeding the Ivy index was an independent predictor of death (area under the curve [AUC], 0.807; CI, 0.66-0.95). In severely burned military casualties undergoing initial burn resuscitation, the modified Brooke formula resulted in significantly less 24-hour volumes without resulting in higher morbidity or mortality.

The Viability of Antitrust Price Squeeze Claims

A price squeeze occurs when a vertically integrated firm squeezes' a rival's margins between a high wholesale price for an essential input sold to the rival, and a low output price to consumers for whom the two firms compete. Price squeezes have been a recognized but controversial antitrust violation for two-thirds of a century. We examine the law and economics of the price squeeze, beginning with Judge Hand's famous discussion in the Alcoa case in 1945. While Alcoa has been widely portrayed as creating a fairness or fair profit test for unlawful price squeezes, Judge Hand actually adopted a cost-based test, although a somewhat different one than most courts and scholars would adopt today. We conclude that strictly cost-based predatory pricing tests such as the one the Supreme Court developed in its 1993 Brooke Group decision are not appropriate to the concerns being raised in a price squeeze. We also consider several efficiency explanations, the importance of joint costs, situations in which the dominant firm uses a squeeze to appropriate the fixed cost portion of the rival's investment, as well as those where the shared input is a fixed rather than variable cost for the rival. Ultimately, we find little room for antitrust liability except in one circumstance: where a squeeze is used to restrain the rival's vertical integration into the monopolized market.

Weyerhaeuser, Predatory Bidding, and Error Costs

In Weyerhaeuser v. Ross-Simmons the Supreme Court held that the predatory pricing standard adopted in Brooke Group also applies to predatory bidding claims, because the two types of predation are analytically similar. I argue that predatory bidding is likely to be more harmful to consumer welfare than is predatory pricing. Successful input market predation may lead to a dual market outcome in which the firm has market power in both the input and the output market. In spite of the analytical distinction, consideration of error costs leads me to conclude that Brooke Group remains the best standard to apply to predatory bidding claims.

'Twombly', 'Leegin' and the Reshaping of Antitrust

This paper considers the four antitrust decisions in the Supreme Court's 2006 Term. It offers brief discussions of Weyerhaeuser and Credit Suisse. Weyerhaeuser is a small, modest decision. The Court isn't likely to see another predatory bidding case soon and the Court chose to minimize doctrinal complexity by bringing predatory bidding analysis in sync with the Court's prior treatment of predatory pricing in Brooke Group. Credit Suisse too is minimally incremental. In concluding that federal securities law implicitly precluded claims asserting antitrust violations in the sale of new securities, the Court followed its prior decision in Gordon as well as the Court's more recent preference for regulatory schemes over antitrust as seen in Trinko. Pushing antitrust authority toward specialized regulators like the Securities and Exchange Commission broadens the trade-offs that can be made between antitrust concerns and other values and almost certainly expands the circumstances under which industry actors can act collectively. That matters, so Credit Suisse covers more of the economic landscape than Weyerhaeuser, but the decision itself is a small step from prior doctrine. Twombly and Leegin are each, in their own ways, blockbusters. Twombly will appear in case after case, as antitrust defendants try to rely on its new tougher rules for FRCP 12(b)(6) motions. Twombly represents a preference for blunt instruments over sharp edges. The central problem confronted by Twombly is discovery run amok. The Court has the tools in its hands to control that by rewriting the discovery rules and overturning lower court decisions implementing those rules. Twombly suggests that the Court believes that refinement of those rules will fail in controlling discovery and it is willing to pay the price that private plaintiffs will have no good way to get at the best-hidden antitrust conspiracies. Finally, Leegin brings to a close - for now or forever? - the 100-year saga of contractual minimum resale price maintenance. Since its decision in 1911 in Dr. Miles, the Court has confronted this issue again and again in the slightly-refined versions that make up the art of institutional design. Over time, the Court has chipped away at Dr. Miles, first in not finding a violation of Section 1 of the Sherman Act for the unilateral minimum RPM in Colgate in 1919 and in then broadly subjecting nonprice vertical restraints to rule-of-reason treatment in Sylvania in 1977. Given that, on what basis would Dr. Miles survive? That is a question of stare decisis and Leegin ends up in an all-out fight over stare decisis in antitrust. That is new: the Court has been overturning old decisions in antitrust for some time and has done so with little stare decisis fanfare. That suggests that the dispute over stare decisis in Leegin is just a convenient forum for the larger dispute over stare decisis that is percolating through a divided Court. I don't have a full-blown theory of stare decisis but I do suggest why the Court has been mistaken to treat stare decisis in statutory cases differently from that in constitutional cases. The Court has made too little of one of its critical tools in shaping statutes, namely, the power to set a default point for subsequent congressional action. Once we treat the Court's decisions as inputs in subsequent lawmaking, there is greater reason to think that the Court should have a uniform approach to stare decisis across the Constitution and statutes.

Supreme Court Amicus Brief of Professors and Scholars in Law and Economics in Support of Certiorari, Pacific Bell Telephone Co. v. linkLine Communications, Inc., No. 07-512 (filed Nov. 16, 2007)

The linkLine price squeeze case from the Ninth Circuit is the most important antitrust case that the Supreme Court could take during the Fall 2007 Term. Amici are professors and scholars in law and economics who have taught, or have conducted research on, antitrust law and the economics of industrial organization. They include William J. Baumol, Robert H. Bork, Robert W. Crandall, George Daly, Harold Demsetz, Jeffrey A. Eisenach, Kenneth G. Elzinga, Gerald Faulhaber, Franklin M. Fisher, Charles J. Goetz, Robert Hahn, Jerry A. Hausman, Thomas M. Jorde, Robert E. Litan, Paul W. MacAvoy, J. Gregory Sidak, Pablo T. Spiller, and Daniel F. Spulber. We agree with the petitioners that the Ninth Circuit has generated an inescapable conflict among circuits, and that the Ninth Circuit's opinion below is incompatible with this Court's reasoning in Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004), Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 127 S. Ct. 1069 (2007), and Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993). We agree with Judge Gould's dissent in linkLine that Trinko takes the issues of wholesale pricing out of the case, such that the plaintiffs' only possible remaining theory of harm would be predatory pricing at the retail level - which the plaintiffs did not allege. linkLine Commc'ns Inc. v. Pac. Bell Tel. Co. d/b/a/ ATT it also permits imposition of liability based on apparently subjective evaluation of disputed and hard-to-prove facts, which will lead to a substantial risk of false positives.

ABOLISHING THE PRICE SQUEEZE AS A THEORY OF ANTITRUST LIABILITY

A “price squeeze,” or “margin squeeze,” is a theory of antitrust liability under section 2 of the Sherman Act that concerns a vertically integrated monopolist that sells its upstream bottleneck input to firms that compete with the monopolist's production of a downstream product sold to end users. At issue is the size of the margin between the monopolist's input price and its retail price. Recent antitrust price-squeeze cases have split the U.S. Courts of Appeals. The D.C. Circuit has concluded that, because a vertically integrated monopolist may refuse to provide its upstream inputs to its downstream competitors, it may raise the price of its upstream inputs without incurring antitrust liability. On the other hand, the Ninth Circuit's 2007 linkLine decision rejected such reasoning, notwithstanding Trinko. Predicated on Judge Learned Hand's opinion in Alcoa, linkLine subordinates the protection of consumers to the protection of competitors. It requires access-pricing analysis that more resembles the work of a public utilities commission than that of a federal judge in an antitrust case. Further, the antitrust laws are concerned with the competitive process, not its end results. The inability of a single firm to stay in business is irrelevant as a matter of antitrust law unless the behavior inducing that firm to exit the market also harms the competitive process. The Supreme Court should reverse linkLine and resolve the circuit split. It should revisit Alcoa and explain why alleging a price squeeze neither states a claim in American antitrust law nor justifies deviation from the principles announced in Brooke Group and Trinko.

Twombly, Leegin, and the Reshaping of Antitrust

This paper considers the four antitrust decisions in the Supreme Court's 2006 Term. It offers brief discussions of Weyerhaeuser and Credit Suisse. Weyerhaeuser is a small, modest decision. The Court isn't likely to see another predatory bidding case soon and the Court chose to minimize doctrinal complexity by bringing predatory bidding analysis in sync with the Court's prior treatment of predatory pricing in Brooke Group. Credit Suisse too is minimally incremental. In concluding that federal securities law implicitly precluded claims asserting antitrust violations in the sale of new securities, the Court followed its prior decision in Gordon as well as the Court's more recent preference for regulatory schemes over antitrust as seen in Trinko. Pushing antitrust authority toward specialized regulators like the Securities and Exchange Commission broadens the trade-offs that can be made between antitrust concerns and other values and almost certainly expands the circumstances under which industry actors can act collectively. That matters, so Credit Suisse covers more of the economic landscape than Weyerhaeuser, but the decision itself is a small step from prior doctrine. Twombly and Leegin are each, in their own ways, blockbusters. Twombly will appear in case after case, as antitrust defendants try to rely on its new tougher rules for FRCP 12(b)(6) motions. Twombly represents a preference for blunt instruments over sharp edges. The central problem confronted by Twombly is discovery run amok. The Court has the tools in its hands to control that by rewriting the discovery rules and overturning lower court decisions implementing those rules. Twombly suggests that the Court believes that refinement of those rules will fail in controlling discovery and it is willing to pay the price that private plaintiffs will have no good way to get at the best-hidden antitrust conspiracies. Finally, Leegin brings to a close - for now or forever? - the 100-year saga of contractual minimum resale price maintenance. Since its decision in 1911 in Dr. Miles, the Court has confronted this issue again and again in the slightly-refined versions that make up the art of institutional design. Over time, the Court has chipped away at Dr. Miles, first in not finding a violation of Section 1 of the Sherman Act for the unilateral minimum RPM in Colgate in 1919 and in then broadly subjecting nonprice vertical restraints to rule-of-reason treatment in Sylvania in 1977. Given that, on what basis would Dr. Miles survive? That is a question of stare decisis and Leegin ends up in an all-out fight over stare decisis in antitrust. That is new: the Court has been overturning old decisions in antitrust for some time and has done so with little stare decisis fanfare. That suggests that the dispute over stare decisis in Leegin is just a convenient forum for the larger dispute over stare decisis that is percolating through a divided Court. I don't have a full-blown theory of stare decisis but I do suggest why the Court has been mistaken to treat stare decisis in statutory cases differently from that in constitutional cases. The Court has made too little of one of its critical tools in shaping statutes, namely, the power to set a default point for subsequent congressional action. Once we treat the Court's decisions as inputs in subsequent lawmaking, there is greater reason to think that the Court should have a uniform approach to stare decisis across the Constitution and statutes.

The Law of Exclusionary Pricing

The success of the Areeda-Turner test for predatory pricing and the Supreme Court's adoption of demanding proof requirements in its 1993 Brooke Group decision have made it very difficult for plaintiffs to win conventional predatory pricing claims. While many challenges to exclusionary pricing continue to be made, the legal theory has evolved away from classical predation to a variety of other theories. These include challenges to quantity and market share discounts, single item and package discounts, and various purchasing practices, including slotting fees, overinvestment in fixed cost assets, and overbuying of variable cost inputs. Plaintiffs have enjoyed somewhat greater success with these alternative theories, in large part because the practices are not as well understood as conventional price predation is. This essay examines the state of the law of both conventional predatory pricing and these more recent variants and offers some recommendations.

Does the Law of Predatory Pricing and Cross-Subsidisation Need a Radical Rethink?

Predatory pricing policy in Europe is at a crossroads: while the European Court of First Instance ("CFI") is set to rule on the Wanadoo case, the European Commission is currently reflecting on its enforcement policy in the field of Article 82. This article starts by setting out the characteristics of predatory pricing -- including certain controversial aspects. In Part II, it will be argued that the proper cost standard should take account of the allocation of common costs among several product lines, which would lead to a unified theory of predatory pricing and cross-subsidisation. Part III deals with possible defences to below-cost pricing. Part IV summarises the debate on the role of recoupment in predation analysis and proposes a systematic critique of the dominant consensus in the United States, namely that successful recoupment is a necessary element of any predatory pricing claim. This article questions the major premises on which the current dominant approach is based and challenges its compatibility with sound economic theory. In particular, it will be shown that unprofitable predation (a) may be rational anyway; and (b) is not necessarily "a boon to consumers" (Brooke Group). Therefore the European courts would be well advised not to adopt the American approach as regards recoupment.

Litigation exposure, capital structure and shareholder value: the case of Brooke Group

We examine value creation and destruction in the tobacco industry due to the radical litigation strategy of Brooke Group CEO Bennett LeBow. Brooke Group had tiny market share, low margins, high leverage and highly concentrated management ownership. Beginning in 1996, the firm reached settlements in lawsuits brought against all cigarette companies by class action plaintiffs and US state governments. Brooke Group's actions, which included promises to cooperate in litigation against its rivals, spurred other companies to reach settlements on less favorable terms. These events led to massive wealth destruction within the industry but impressive returns for shareholders of Brooke Group.

Stopping Above-Cost Predatory Pricing

Since 1993 when the Supreme Court decided Brooke Group, no predatory pricing plaintiff has prevailed in a final determination in the federal courts. This decision was the ultimate triumph of the Chicago School antitrust scholars and judges like Frank Easterbrook, who have argued that predation is like dragons and that there is no sufficient reason for antitrust law or the courts to take it seriously. This article argues, however, that the Court's reading of the law is unduly narrow and should be revisited. There is no compelling reason to restrict predation cases to below-cost pricing, as above-cost pricing can also hurt consumers by limiting competition. Consider, for example, the current DOJ case against American Airlines. Like other major air carriers, American has tremendous cost and other advantages at flying passengers into and out of its hub. Under existing interpretations of the Sherman Act, American can price very high, so high that entry would be attractive to even higher cost firms, except that once they do enter, American can use its advantages to make sure that entrants lose money without American losing money. Firms that anticipate this behavior will not enter, and so if such behavior is not deemed predatory, consumers may suffer very high prices without entry. This article proposes an interpretation of Sherman Act section 2 that would give monopolies the incentive to price low in the first place, before entry, because under this interpretation they are not allowed to drive firms from the market after entry.

Stopping Above-Cost Predatory Pricing

Since 1993 when the Supreme Court decided Brooke Group, no predatory pricing plaintiff has prevailed in a final determination in the federal courts. This decision was the ultimate triumph of the Chicago School antitrust scholars and judges like Frank Easterbrook, who have argued that predation is like dragons and that there is no sufficient reason for antitrust law or the courts to take it seriously. This article argues, however, that the Court's reading of the law is unduly narrow and should be revisited. There is no compelling reason to restrict predation cases to below-cost pricing, as above-cost pricing can also hurt consumers by limiting competition. Consider, for example, the current DOJ case against American Airlines. Like other major air carriers, American has tremendous cost and other advantages at flying passengers into and out of its hub. Under existing interpretations of the Sherman Act, American can price very high, so high that entry would be attractive to even higher cost firms, except that once they do enter, American can use its advantages to make sure that entrants lose money without American losing money. Firms that anticipate this behavior will not enter, and so if such behavior is not deemed predatory, consumers may suffer very high prices without entry. This article proposes an interpretation of Sherman Act section 2 that would give monopolies the incentive to price low in the first place, before entry, because under this interpretation they are not allowed to drive firms from the market after entry.