Rev Ind Organ (2015) 46:229–252 DOI 10.1007/s11151-015-9458-z

Areeda–Turner and the Treatment of Exclusionary Pricing under U.S. Antitrust and EU Competition Policy Stephen Martin1

Published online: 31 March 2015  Springer Science+Business Media New York 2015

Abstract The paper begins with a ‘‘readers’ guide’’ to Areeda and Turner (Harv Law Rev 88:697–733, 1975). It continues to explain the differing receptions of the price-unit cost approach to evaluating predatory pricing in U.S. antitrust policy and EU competition policy in terms of differing views on the likelihood that predation will occur and differing weights given to the probability of incorrectly condemning competition on the merits as predatory and incorrectly exonerating predatory behavior as competition on the merits. Keywords

Areeda–Turner rule
Predatory pricing
Antitrust
Competition policy

JEL Classification

L12
L41

1 Introduction Areeda and Turner (1975, p. 699) motivate their work with a critique of the received antitrust treatment of predation: ‘‘Courts in predatory pricing cases have generally turned to such empty formulae as ‘below cost’ pricing, ruinous competition, or predatory intent in adjudicating liability. These standards provide little, if any, basis for analyzing the predatory pricing offense.’’ Their purpose, then, is not to analyze predatory pricing as such. They aim to provide a logical structure for enforcement of the predatory pricing offense and to categorize types of exclusionary pricing that should be considered to violate

& Stephen Martin [email protected] 1

Purdue University, West Lafayette, IN, USA

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antitrust law and the types of exclusionary pricing that should not be considered to violate antitrust law. The Areeda–Turner rule has had great but differing impact on U.S. antitrust and EU competition policy. In this paper, I compare the way Areeda and Turner (1975) has fared in the two systems. This paper is organized as follows: Sect. 2 contains a brief review of U.S. antitrust and EU competition policy toward dominant firm conduct. In Sect. 3.1 I offer a ‘‘readers’ guide’’ to Areeda and Turner (1975), limiting myself for the most part to comments that might have been made at the time the paper appeared. Section 3.2 takes note of two developments in economics over the last 40 years that relate to the paper’s contribution. In Sect. 4, I turn to the reception of the Areeda– Turner rule on alternate sides of the Atlantic. Section 5 concludes.

2 Policy Background 2.1 United States The deterrence of predatory pricing was one of the founding principles of U.S. antitrust policy. For example, in his 1894 Presidential Address to the American Economic Association, John Bates Clark highlighted the force of predatory price discrimination as a source of market power (1894, p. 26):12 The peculiar power of the trust, however, consists in [the] ability to make discriminating prices to its own customers; and this power resides entirely in its own hands. It can sell its products in one place more cheaply than it sells them elsewhere. Where a competitor has secured a local trade, it can ruin him by flooding his market with goods sold below the cost of producing them. In the interim the trust can maintain itself from the returns that come from other localities. If the low prices had to be universal, the powerful corporation would ruin itself as rapidly as it would its rival. Low prices on one grade of goods produced by a rival whom it is desirable to crush act in a similar way. Discrimination, unequal commercial dealing, is the general name for the whole process. The aim of it is the suppression of normal competition. Clark did not object to dominant firms as such, or to the efficiency rents they might earn (1900, p. 195): 1

Clark similarly held that exclusionary manufacturer-distributor contracts (1904, p. 957)—‘‘the ‘factor’s agreement’—the refusal by the trust to sell goods to a dealer at a living price unless he will promise not to buy any similar articles from a competitor’’—were used to suppress normal competition.

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Neither Clark nor other economists had direct involvement in the legislative process that resulted in passage of the Sherman Act. In contrast, in 1911, Clark was one of four members of a committee, which was organized by the National Civic Federation, that prepared an early version of what became the Clayton Act. The provisions of Sect. 2 (on price discrimination) and Sect. 3 (restrictive contracts) of the Clayton Act reflect Clark’s views on exclusionary dominant firm behavior.

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Let the trust have the fullest benefit from all real economies. If it excels its competitor, it can afford to undersell him, not only in his limited territory but everywhere. It can give to the public a benefit from the economy that great size insures and can still make an adequate profit. ... Make the independent competitor safe and let prices be gauged by the cost of the goods that are made in his well-equipped establishment. Let him make a fair living; and if the trust, by real economy, makes a better living, no one will complain. At its origins, then, U.S. antitrust policy recognized that production efficiency meant that some industries would be supplied by dominant firms. The emergence of dominance was accepted if its basis was success with consumers. If dominance was based on preventing rivals from seeking success with consumers—monopolization—it was not accepted. In the words of an early application of Sect. 2 of the Sherman Act (Corn Products Refining, 234 F. 964 (1916) at 1015): The national will has not declared against elimination of competitors when they fail from their inherent industrial weakness. On the contrary, it has declared with great emphasis against any methods by which such weaknesses might be concealed; in so doing it has assumed a positive purpose toward industry, has established a norm to which competition must conform. This purpose the Corn Products Refining Company has persistently and ingeniously endeavored to thwart from the outset. Its constant effort has been to prevent competitors from that test which would in the long run discover whether they could manufacture as well and as cheaply as itself. The Sect. 2 prohibition of monopolization has been applied to a wide range of exclusionary conduct (Baker 2013). Predatory pricing played a role in the Standard Oil (1911), American Tobacco (1911), and Corn Products Refining decisions (1916).3 Collusive predatory bidding at tobacco auctions was an issue in American Tobacco II.4 In the wake of the Areeda–Turner article, however, the successful

3

On Standard Oil, see Bringhurst (1979), Dalton and Esposito (2007, 2011), Leslie (2012). On American Tobacco, see the decision (221 U.S. 106, 160 ‘‘There is no dispute that as early as 1893 the president of the American Tobacco Company, by authority of the corporation, approached leading manufacturers of plug tobacco and sought to bring about a combination of the plug tobacco interests, and upon the failure to accomplish this, ruinous competition, by lowering the price of plug below its cost, ensued’’) and Burns (1989). For Corn Products Refining, see the decision (234 F. 964, 983 ‘‘Meanwhile the Corn Products Refining Company was using its ownership of the Manierre-Yoe Syrup Company secretly to compete at cost or less; the proof is to be found in the correspondence’’).

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328 U.S. 781, 803–804 (1946): ‘‘At a time when the manufacturers of lower priced cigarettes were beginning to manufacture them in quantity, the petitioners commenced to make large purchases of the cheaper tobacco leaves used for the manufacture of such lower priced cigarettes. No explanation was offered as to how or where this tobacco was used by petitioners. The compositions of their respective brands of cigarettes calling for the use of more expensive tobaccos remained unchanged during this period of controversy and up to the end of the trial. The Government claimed that such purchases of cheaper tobacco evidenced a combination and a purpose among the petitioners to deprive the manufacturers of cheaper cigarettes of the tobacco necessary for their manufacture, as well as to raise the price of such tobacco to such a point that cigarettes made therefrom could not be sold at a sufficiently low price to compete with the petitioners’ more highly advertised brands.’’

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pursuit of predatory pricing under U.S. antitrust law has become the exception rather than the rule;5 this is discussed at greater length in Sect. 4. 2.2 European Union EU competition policy draws on at least three distinct sources (Martin 2008). The competition policy provisions of the 1951 European Coal and Steel Community (ECSC) Treaty were drafted by Robert Bowie, who was a Harvard Law School professor on leave with occupation forces in Germany, and were translated into French by Maurice Lagrange, who was later the first Advocate General of the European Court of Justice. They were an amalgam of U.S. antitrust and the traditional European abuse control approach.6 Article 65 of the ECSC Treaty forbade agreements that would ‘‘restrict or impede the normal operation of competition,’’ but allowed the ECSC’s High Authority to permit such agreements if they would ‘‘ contribute to a substantial improvement in ... production or marketing.’’ Article 66 of the ECSC Treaty established what was, for its time, the strictest merger control policy in the world. European Economic Community competition policy built upon the experience of ECSC competition policy, and to that extent was indirectly influenced by U.S. antitrust policy (circa mid-20th century) and by the abuse control approach. Further, in its formative years EEC competition policy was particularly influenced by postwar German antitrust policy,7 which in turn drew on both U.S. antitrust policy and by the Ordoliberal School, which arose in Germany between the wars and advocated constitutionalization of a limited role for government (Bo¨hm 1954; Mo¨schel 1989). This German influence was a second channel through which U.S. antitrust policy and the abuse control approach helped shape EEC competition policy. The limited role for government included the maintenance of markets that were open to competition. Competitive markets were sought, not for the sake of the economic efficiency they would bring (although that was anticipated), but because competitive markets were seen as essential to maintaining a free society. This Ordoliberal influence on German antitrust policy was passed along to EEC competition policy. Acknowledging that economic efficiency would dictate the rise of dominant firms in some markets, the Ordoliberal solution was to require dominant firms to act ‘‘as if’’ they did not have market power (Miksch 1949). Consequently, Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits abuse of a dominant position, but not possession of a dominant position. Abuse of a dominant position is exemplified by (but not limited to) (a) ‘‘imposing unfair purchase or selling prices or other unfair trading conditions,’’ (b) ‘‘limiting production ... to the prejudice of consumers,’’ (c) ‘‘applying dissimilar conditions to equivalent 5

See Hovenkamp (2015) and Comanor and Frech (2015), in this issue. But see Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917 (6th Cir. 2005).

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The abuse control approach permitted and monitored cartel agreements, and stepped in only if conduct was in some sense inappropriate. See Interparliamentary Union (1931).

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The Law against Limitations on Competition (Gesetz gegen Wettbewerbsbeschra¨nkungen) was adopted in July 1957.

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transactions with other trading parties, thereby placing them at a competitive disadvantage,’’ and (d) ‘‘making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which ... have no connection with the subject of such contracts.’’ (a) and (b) make the exercise of market power an abuse of a dominant position. This is a mantle that the European Commission has been cautious about taking up,8 but the exercise of market power is sometimes condemned as an abuse of a dominant position under Article 102.9 (c) and (d) target those same types of exclusionary behavior that concerned John Bates Clark in the early days of U.S. antitrust. The condemnation of the exercise of market power is a fundamental difference between the monopolization violation of Sect. 2 of the Sherman Act and the abuse of a dominant position under Article 102 TFEU.10 Just as the EU’s prohibition of abuse of a dominant position is different from the U.S. prohibition of monopolization, so the reception of the Areeda–Turner analysis has been less sweeping in the EU than in the U.S.; this too is discussed at greater length in Sect. 4.

3 Areeda and Turner (1975): A Reader’s Guide11 3.1 Introduction For Areeda and Turner, predatory pricing is an intrinsically dynamic phenomenon (1975, p. 698): ‘‘[T]he classically-feared case of predation has been the deliberate sacrifice of present revenues for the purpose of driving rivals out of the market and then recouping the losses through higher profits earned in the absence of competition.’’ This definition admits a role for intent; if the deliberate sacrifice of present revenues is for some purpose other than driving rivals out of the market, it is not the classically-feared case of predation. Their discussion of predation in this classic sense points to ‘‘ deep-pocket’’ models of predation12—predation makes little economic sense unless the predator has ‘‘greater financial staying power’’ than target firms. They note the importance of entry conditions for the possibility of earning economic profits in the post-predation 8

In a discussion of the efficacy of competition policy as an anti-inflation device, the European Commission writes (1976, p. 13) that it ‘‘has no doubt that competition policy is an essential part of the armoury to be deployed agacinst inflation, but there are limits to its effectiveness. For instance, measures to halt the abuse of dominant positions cannot be converted into systematic monitoring of prices. In proceedings against abuse consisting of charging excessively high prices, it is difficult to tell whether in any given case an abusive price has been set for there is no objective way of establishing exactly what price covers costs plus a reasonable profit margin.’’

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See, for example, British Leyland (1986). See Gal (2004).

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Areeda and Turner (1975) spawned a literature on the antitrust diagnosis of predatory pricing, for reviews of which see Ordover and Saloner (1989, pp. 579–590), Martin (1994, pp. 470–488), and Edlin (2012, Section 6). See also Phlips (1988, 1996). 12

See earlier Telser (1966) and later Poitevin (1989).

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period and so recouping the profits sacrificed while predation is underway. They anticipate reputational models of predation,13 and acknowledge that predation is as much a creature of oligopoly as of monopoly (1975, p. 698, fn. 5): ‘‘A large firm may also ‘‘sell at a loss’’ for the purpose of disciplining smaller rivals for undercutting its monopoly price. Although this practice may not drive rivals out of the market, it does enable the disciplining firm, if successful, to regain losses it incurred during the period of discipline.’’ They describe predation as ‘‘highly unlikely,’’ but acknowledge that it does occur (1975, fn. 6, with reference to Standard Oil (1911) and du Pont (1911)): ‘‘In the early years of the Sherman Act predatory pricing was used to coerce rivals into merger with the predator or into joining a price cartel.’’ In their view (1975, p. 699), 14 ‘‘proven cases of predatory pricing have been extremely rare.’’ I return to this point in Sect. 4.1. 3.1.1 Alternative Measures of Cost This section of the paper contains a brief review of basic cost concepts—fixed cost, variable cost, marginal cost. Fixed cost includes a normal rate of return investment, which is not a cost in an accounting sense. The normal rate of return on investment is therefore part of average cost. It is marginal cost that is pertinent for a firm’s output decision. The observation that ‘‘Marginal cost usually decreases over low levels of output and increases as production approaches plant capacity’’ may be thought to confuse the firm cost curves of Economics 101 with reality. Even at the level of theory, it was recognized in 1975 that the cost curves of multiplant firms are roughly horizontal once output rises above the threshold of minimum efficient scale (Patinkin 1947; Fellner 1949; Dewey 1969), continuing up to some high output level at which managerial diseconomies of scale set in. Areeda and Turner later acknowledge (in footnote 42) that ‘‘There is some evidence of relatively constant variable costs over wide ranges of intermediate outputs for many industries.’’ Support for this finding has continued to accumulate (Martin 2013). Neither the concept of cost sunkenness nor the role of sunk cost in entry and exit decisions are made explicit. Instead there is a discussion (p. 701), of a sort not atypical for the time, of the classification of costs as fixed or variable that changes, in a way that is left imprecise, depending on the length of the time period under consideration. There are occasional references to barriers to entry and durability of assets. There is little reference to welfare in the paper—no explicit mention of consumer surplus, deadweight welfare loss, or net social welfare. In the discussion of limit pricing (1975, p. 705), there is a remark that competition may reduce ‘‘ slack’’; this may be taken as a reference to X-inefficiency. 13 Areeda and Turner (1975, p. 699): ‘‘Admittedly, a demonstrated willingness to indulge in predatory pricing might itself deter some smaller potential entrants, but it is unlikely to inhibit firms with resources comparable to those of the predator.’’ 14

This is echoed in often-cited dictum in Matsushita 475 U.S. 574 (1986) at 589.

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In the last sentence of the introduction, there is the remark that ‘‘The monopolist’s price is ... higher, and its output lower, than the social optimum; any higher output and lower price would be an improvement in resource use up to the point where ... price equals marginal cost.’’ The perspective is thus both static and partial equilibrium, without reference to general equilibrium (Baumol and Bradford 1970) or second-best considerations. 3.1.2 Predatory Pricing in General This section is the heart of the article. The base case, with which conduct in a possibly predatory phase is to be compared, is unrelentingly static (1975, p. 703):15 We would normally expect a profit-maximizing firm, within the limits of data and convenience, to attempt to maximize profits or minimize losses in the short run—the competitive firm by producing where marginal cost equals price, and the monopolist by producing where marginal cost equals marginal revenue. No justification is given for the assumption that firms seek to maximize short-run profit. The usual assumption, in 1975 as today, would be that firms maximize expected present-discounted value (Scherer 1976, p. 880). But given this premise, (1975, p. 703) ‘‘ A necessary but ... not sufficient condition of predation is the sacrifice of shortrun profits.’’ For Areeda and Turner, it is departures from short-run profit maximization that define predation (1975, p. 704, footnote omitted): ‘‘When a monopolist sells at a price at or above average cost, but could earn higher shortrun profits at a higher price, the necessary element of predation is presumably present’’. They then classify exclusionary pricing into two categories: those that should incur antitrust liability and those that should not. They would not have antitrust policy condemn an exclusionary price that is greater than or equal to the limit-pricing firm’s average cost, since (1975, p. 706, footnote omitted) ‘‘only those potential entrants who cannot survive at the efficiency-related price are kept out.’’ Further (one of the explicit references to welfare in the paper), lower prices and higher output are beneficial. In the same way, Areeda and Turner would not have antitrust policy condemn exclusionary pricing by a dominant firm that lowers price to a level above average cost in the face of entry, and only in the face of entry, setting a higher price at other times. They acknowledge (1975, p. 706) that where entry is costly, responding to entry with lower prices can discourage future entry, and that for consumers ‘‘This result is certainly not a happy one.’’16

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Occasional exceptions take a dynamic view of firm behavior. Thus, in footnote 21, ‘‘The firm may also be keeping price down to reasonable levels during periods of high demand in order to preserve customer goodwill.’’ 16 The implication is that this aspect of their rule will remove conduct that reduces consumer welfare from the reach of U.S. antitrust.

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They reject the ‘‘as-if’’ approach of forbidding a dominant firm to set a monopoly price, partly on the ground of administrative unworkability: It would be difficult to determine a reasonable nonmonopoly price, and an attempt to do so would require antitrust courts to assume a regulatory role for which they are ill-suited (1975, p. 707). They also regard an ‘‘as-if’’ approach as bad policy: ‘‘denying monopoly profits to those whose power was obtained by superior skill, foresight, and industry could eliminate the primary incentive to develop such competitive skill.’’17 They describe the idea of forbidding an incumbent to reverse a price decrease as ‘‘perhaps the most feasible’’ approach to above-cost price cutting in the face of entry: If price cuts had to be continuing, a dominant incumbent might forgo a price cut, or it might elect to make a permanent price cut, in effect adopting antitrust-induced limit pricing. But such a rule would be attended with administrative difficulties, and might induce dynamic limit pricing (1975, p. 708): ‘‘forbidding reversal of a price decrease would greatly increase the likelihood that a monopolist would elect to forego (sic) the price reduction and maximize his monopoly profits until such time as entry or expansion of rivals eliminates them.’’ Areeda and Turner move on to the antitrust treatment of prices below average cost: prices that generate accounting losses. Once again they distinguish two cases, prices greater than or equal to marginal cost and prices less than marginal cost. They conclude this part of their discussion with an acknowledgement that a rule that permits above-average-cost exclusionary pricing suffers the handicap that there are difficulties in measuring average cost in an economic sense, since average cost includes a normal rate of return on investment. They reject the idea of condemning exclusionary prices that are greater than or equal to marginal cost, even if those prices do not maximize profit or minimize losses. Such pricing would inflict losses on less efficient or equally efficient firms and (1975, p. 711): ‘‘Admittedly, the destruction of an equally efficient rival, and the deterrence of entry of firms which are equally efficient, poses some threat to competition in the long run; if demand increases to its former level, only the monopolist will occupy the market which he formerly shared with the rival. However, we see no satisfactory method of eliminating this risk.’’ Once again they remark on the administrative difficulties that would attend a rule against exclusionary but above-marginal-cost prices. In footnote 35 they write that ‘‘It is possible that a firm may temporarily reduce its price to marginal cost in order to punish competitors for shading its higher price. If the firm’s marginal-cost price merely meets that of its competitors, we see no justification for finding a predatory offense. Meeting a rival’s price with a price above marginal cost is competition on the merits and prohibition of that practice would coerce a firm into giving up a portion of its market share whenever rivals 17

This view is echoed in Trinko, 540 U.S. 398, 407 (2004). It is not, in general, correct: formal models of investment in cost-reduction and quality improvement show that the profit to be lost if a rival innovates first is as much an incentive to develop competitive skill as the profit to be gained by being the first to innovate. See Martin (2002).

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choose to cut their prices.’’18 As they note earlier (on page 708), and as John Bates Clark pointed out, there is a third alternative: that a dominant firm would permanently set a low price.19 Further, the objection to a practice on the ground that it ‘‘ would coerce a firm into giving up a portion of its market share whenever rivals choose to cut their prices’’ points to the impact of a price cut on the dominant firm’s profit, not to consumer welfare or net social welfare. Their conclusion is different if a firm prices below marginal cost. In that case (p. 712):20 The monopolist is not only incurring private losses but wasting social resources when marginal costs exceed the value of what is produced. And pricing below marginal cost greatly increases the possibility that rivalry will be extinguished or prevented for reasons unrelated to the efficiency of the monopolist. Accordingly, a monopolist pricing below marginal cost should be presumed to have engaged in a predatory or exclusionary practice. They go on to suggest (in footnote 37 and Section 2.D) the use of average variable cost as a proxy for marginal cost. The reason is measurement difficulty (p. 716): ‘‘The incremental cost of making and selling the last unit cannot readily be inferred from conventional business accounts, which typically go no further than showing observed average variable cost.’’ They discuss two special cases: promotional pricing and pricing below marginal cost to meet a competitor’s lawful price. They do not object to promotional pricing ‘‘by new firms or firms without monopoly power.’’ This case seems off the topic of predatory pricing. With respect to promotional pricing by a dominant firm, they are skeptical of the argument that a below-marginal-cost pricing would be justified if it ‘‘attracts new customers to the market and thus generates a permanent increase in market demand.’’ This discussion does not clearly distinguish between a movement along a given demand curve and a shift of a demand curve. They are similarly skeptical toward the argument that pricing below marginal cost will ‘‘enable a firm with declining costs to move to a more efficient level of output.’’ This discussion would have been a logical point to take up the question of learning-bydoing: setting a price below current marginal cost to increase cumulative output, reduce future marginal cost, and maximize net present discounted value. But this dynamic question does not easily fit in their static framework, and learning by doing is not addressed in the paper. 18

As Scherer (1976, p. 873) notes, from the point of view of economics, ‘‘ competition on the merits’’ is an undefined term. There is an element of circular reasoning here: (a) antitrust policy should condemn exclusionary pricing that is not competition on the merits; (b) define a price that is above marginal cost as competition on the merits; (c) therefore, antitrust policy should condemn an exclusionary price that is below marginal cost because it is not competition on the merits.

19 In AKZO (1991 ECR I-3359 1993 5 CMLR 215), AKZO Chemie BV objected to the Commission order forbidding it from offering selective price cuts on the ground that ( }154) ‘‘this measure is unfair. If [Engineering and Chemical Supplies] approaches its customers, it is faced with a choice: either to align its prices and extend to all its customers of comparable size the prices that it has had to concede in order to retain the customer, which would be very expensive, or to lose the customer.’’ This is exactly the policy John Bates Clark advocated. 20

They would permit a price below marginal cost if it were also above average cost.

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Cutting price below marginal cost to meet the lawful lower price of a rival would not, in their view, be competition on the merits. They have some sympathy for allowing a dominant firm to set a price below marginal cost to meet the unlawful lower price of a rival, but reject making this exception to their general rule in view of the twofold administrative uncertainty of deciding whether or not the rival’s price was lawful and then deciding how low a ‘‘meeting competition’’ price could be. In the final part of this section, they take up an explicitly dynamic question: They reject the idea of ‘‘predatory investment’’ as a monopolization offense. They define predatory investment as (1975, pp. 718–719) ‘‘adding new facilities when [anticipated] revenue to be obtained from them over their useful life will not cover all costs, including a normal rate of return.’’ Construction of excess capacity would be costly, they write, and is thus extremely unlikely. It would also be difficult ‘‘to distinguish between innocent and predatory expansion,’’ and even a carefullytailored rule (pp. 719–720) ‘‘would subject an innocent firm to the threat of baseless but costly litigation.’’ In this context, as in others, a policy that does not make predatory action (here, investment) a monopolization offense means that an innocent target of predation would have no legal remedy, with adverse implications for consumer welfare. While Areeda and Turner state that predatory investment is extremely unlikely, they cite no evidence on the matter, and this would seem to be a question that will have different answers for different markets. More generally, this reason for not treating predatory investment as monopolization goes to the question of the weight that a legal system gives to the avoidance of false positives—subjecting an innocent dominant firm to baseless and costly litigation (and thereby discouraging aggressively competitive behavior)—and the avoidance of false negatives—denying an innocent target firm or enforcement agencies the possibility of legal remedy (and thereby encouraging truly predatory behavior). I compare the positions of U.S. antitrust and EU competition policy on this matter in Sect. 4.2. 3.1.3 Predation in Other Contexts In Sect. 3 of the paper, Areeda and Turner consider variations on their main theme (1975, p. 720):21 ‘‘Devices other than a general price-cut may, however, be the subject of suits for predation. A firm may cut its prices on only selected products or in a few geographical markets. Or a firm may engage in practices that force rivals to raise costs above price in order to maintain their market shares.’’ They first consider the case of a dominant firm that earns different rates of return on different products. Predation by tailoring a brand to match closely the brand of a target firm was a predatory tactic that was mentioned by John Bates Clark, and one

21 The second point might have provided an opportunity to discuss the kind of predatory buying that was an issue in American Tobacco II or Weyerhaeuser, or about raising rivals’ costs more generally (Director and Levi 1956; Krattenmaker and Salop 1986).

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that was employed in the U.S. chewing tobacco industry in the late nineteenthcentury (Burns 1986).22 After favoring of the price-unit cost test for the case of an identical product that is sold in more competitive and less competitive markets, they turn to a hypothetical case that is reminiscent of Brooke Group and AKZO (1975, pp. 721–722): The more difficult case of shortrun differential returns arises when the product earning a lower return is related to a product on which the firm has a monopoly. The products may be related in that they are produced with some common facilities, are sold to and used together by the same consumers, or both. In this situation marginal-cost pricing on the competitive product may adversely affect firms that are the most likely potential rivals in the monopolized-product market. By applying pressure through marginal-cost pricing on the firms in the competitive market, entry into the monopoly market may be deferred or completely discouraged. Here too they reject requiring the firm that sacrifices short-run profit to raise price (1975, p. 722): ‘‘If the firm has monopoly power in the related-product market, the question is the same as that raised by marginal-cost pricing by any monopolist — whether possible gains from an umbrella price are worth the shortrun economic costs of under-utilization of resources and the severe administrative difficulties of applying a test other than marginal (or average variable) cost.’’ Although recoupment is mentioned in the general definition of predation given at the start of the paper, the focus of the paper is on the first stage of the two-stage predation process. Thus they do not raise the issue of predation in one market in anticipation of the prospect of recoupment in a related market. Taking up the case of price discrimination, they consider price discrimination across markets and the prototype case envisaged by John Bates Clark: selective price cuts to customers of a target firm. In both cases, they hold to the price-unit cost standard for legality. Regarding selective price cutting, their view is that it (1975, p. 725) ‘‘cannot possibly be more harmful to small competitors than a general price reduction to the same level.’’ Selective price cuts would, of course, be more harmful to consumers than a general price cut to the same level. They acknowledge that ‘‘Selective price-cutting might, however, be more likely to occur than general pricecuts, since the monopolist’s losses on selective reductions would be smaller.’’ There is a discussion of the treatment of the price discrimination under the Robinson–Patman Act in this part of the paper. Their analysis seeks to harmonize the Robinson–Patman Act and the Sherman Act on this point (p. 727): ‘‘The basic substantive issues raised by the Robinson–Patman Act’s concern with primary-line 22 See also Yamey (1972, 136): ‘‘Other examples of temporary price cutting which may be predatory are provided by the use of ‘‘fighting brands’’ by a monopolist to meet the competition of a new entrant in those parts of the market where it is trying to become established or to extend its operations. A special brand is introduced for the purpose. Its sale is confined to the affected areas; the quantities offered are controlled so as not to make unnecessary sacrifices of profit; and it is withdrawn as soon as the objective has been attained, namely the acquisition of the independent by the monopolist, or the withdrawal of the independent, or its abandonment of plans for enlarging its share of the market. Good examples of the use of fighting brands are provided by the activities of the match monopoly in Canada from its creation, by merger, in 1927 to the outbreak of the Second World War.’’

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injury to competition and by the Sherman Act’s concern with predatory pricing are identical. If the Sherman Act is properly interpreted to permit a monopolist to discriminate in price so long as his lower price equals or exceeds marginal cost, such discrimination is a fortiori permissible for firms with lesser degrees of market power, and the Robinson–Patman Act should be interpreted no differently in primary-line cases unless the statutory language or compelling legislative history dictates otherwise.’’ When they consider predatory advertising, they again confront issues raised by the application of a static test—is price greater or less than unit cost?—to a dynamic phenomenon. Advertising, like predation, is dynamic—it is a current expenditure that creates a long-lived intangible asset, goodwill. How much of current investment in goodwill should be considered part of current variable cost, and factored into the average variable cost figure that is compared with price. Areeda and Turner favor treating all promotional spending as part of variable cost.23 Finally, they reject treating brand proliferation and product variation as exclusionary practices, arguing that antitrust should defer to consumer sovereignty. In summary, and subject to some qualifications, Areeda and Turner famously conclude (1975, p. 733) that (a) A price at or above reasonably anticipated average variable cost should be conclusively presumed lawful. (b) A price below reasonably anticipated average variable cost should be conclusively presumed unlawful. 3.2 Looking Back My primary purpose in this paper is to compare the reception of the Areeda–Turner rule by U.S. antitrust policy and EU competition policy. In this section, I briefly comment on two developments in industrial economics since 1975 that have implications for their work. The first is the issue of the measurement of cost. Areeda and Turner discuss this from the point of view of the correspondence between accounting data and economic concepts, for example (1975, p. 720): Since the offense is limited to predatory pricing, the relevant question is which costs were variable during the period of alleged predation. Normal accounting procedures will usually supply the answer: costs charged as a direct expense should be treated as variable; costs charged as an investment for depreciation and tax purposes should be treated as fixed. A firm is not likely to alter its accounting procedures in order to validate shortrun predatory pricing. And if it 23 While the amount of spending on promotional activity is a choice variable of the firm, and so a variable cost in that sense, it does not vary with output, and thus it would seem that all promotional spending should be treated as a fixed cost if the topic is the relation between average cost, average variable cost, marginal cost, and price. The question cries out for a model, and the answer to the question will depend on the half-life of the goodwill created by current promotional activities—meaning, again, that the question is a dynamic one and cannot properly be addressed in a static framework.

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does, or if it has unusual accounting procedures well before the period of alleged predation, it would have a heavy burden of explanation. This may have been a reasonable argument to make in 1975. From the early 1980s onward, empirical industrial economics has generally come to distrust all accounting data. There are some exceptions, where production processes are simple and well-documented.24 If it can be assumed that price and output data are noncooperative equilibrium values (as would be the case in a nonpredatory period), cost function parameters can be inferred by estimating the first-order conditions of a fully-specified oligopoly model. 25 If values of total cost, output, and input prices are available, a cost function could be estimated, producing not only estimates of variable and marginal cost but statistics describing the precision of the estimates. Subject to data availability, these approaches could be applied to the evaluation of allegations of predatory pricing. The second issue is the way industrial economists have come to think about entry. In Areeda and Turner (1975), entry and exit essentially play the equilibrating roles they play in the model of perfect competition. If price is above average cost, firms enter, and price falls. If price is below average variable cost, firms exit, and price rises. Honor is paid to the notion of barriers to entry, and to how long a time period it would take for fixed costs to become variable (Areeda and Turner 1975, footnote 15), but the assumed automaticity of entry bolsters the conclusion that predation is unlikely to be profitable. The modern view of entry and exit is quite different (Jovanovic 1982; Ericson and Pakes 1995). Entrants are seen as firms that know neither their costs nor the demand they will face with anything like the complete and perfect knowledge that characterizes a perfectly competitive market. Entry and exit are triage mechanisms, selecting in lower-cost firms that produce higher-quality products and selecting out higher-cost firms that produce lower-quality products. Exclusionary tactics—those that depart from noncooperative maximization of expected present discounted value—raise the cost of entry and hasten the rate of exit. Podolny and Scott Morton (1999)26 pursue the implications of this approach to entry and exit to analyze price wars in British shipping conferences over the period 1879–1929. In their analysis, the price wars that followed entry revealed entrant characteristics to entrants and incumbents alike. Some price wars are followed by exit, others not, depending on entrant as well as market characteristics. A result of pricing below unit cost, in this view, is (to repeat the words of Judge Learned Hand in the 1916 Corn Products Refining decision) ‘‘to prevent competitors from that test

24

For example, Genesove and Mullin (2006) infer the main component of the constant marginal cost of refined sugar as a markup over the price of raw sugar, for which there are reliable data. 25 Similarly, if data describing the number and size distribution of firms are assumed to refer to equilibrium market structure, estimates of first-order conditions imply gross (before fixed cost) profit estimates that place bounds on the value of fixed cost per time period (Bresnahan and Reiss 1987). 26

See also Scott Morton (1997).

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which would in the long run discover whether they could manufacture as well and as cheaply as [incumbents].’’

4 The Legal Reception27 4.1 Hurricanes Hardly Ever Happen Although, as noted above, Areeda and Turner recognize that predatory pricing happens, they are skeptical of its importance as a tactic against large rivals and in a legal regime that punishes exclusionary conduct (1975, p. 699,footnotes omitted): Admittedly, a demonstrated willingness to indulge in predatory pricing might itself deter some smaller potential entrants, but it is unlikely to inhibit firms with resources comparable to those of the predator. Repeated predation in the same market, moreover, is not only costly but is likely to be easily detectable and thus the occasion for severe antitrust sanctions. The prospects of an adequate future payoff, therefore, will seldom be sufficient to motivate predation. Indeed, proven cases of predatory pricing have been extremely rare. The U.S. Supreme Court is likewise skeptical toward the frequency of predatory pricing, writing in Matsushita (475 U.S. 574 at 589) the often-repeated ‘‘[T]here is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful.’’28 If predatory pricing is unlikely, this may suggest that claims of predatory pricing, in particular in private antitrust actions, are most likely to be attempts at anticompetitive manipulation of the antitrust laws. This in turn may be thought to justify setting a high bar for plaintiffs to prevail in predatory pricing actions: there will not be many (false negative) cases of failing to punish predation if predation does not happen very often. Business history, however, offers numerous examples of predatory pricing in the strict sense—price set below unit cost with the apparent purpose of driving a rival from the market—and related exclusionary practices.29 Some of these have already been mentioned.30 Yamey (1972, Section III) gives the facts of Mogul Steamship, where a shipping conference in the 1880s ChinaAustralia tea trade sent ships to ports visited by non-conference vessels ‘‘in order to underbid the freight which the independent shipowners might offer, without any 27 See Fox (1986, 1990) for discussions of the treatments of monopolization and dominance by U.S. antitrust and EU competition policy. Lang and O’Donoghue (2002, pp. 121–150) discuss EU treatment of predatory pricing. 28

Less often cited is dictum from Cargill (479 U.S. 104 at 121) (decided after Matsushita) that ‘‘[P]redatory pricing is an anticompetitive practice forbidden by the antitrust laws. While firms may engage in the practice only infrequently, there is ample evidence suggesting that the practice does occur.’’

29 For discussions of recent episodes of predatory pricing in the U.S. passenger airline industry, see Sagers (2009) and Elzinga and Mills (2014). 30

These are Burns (1986, 1989) on predatory pricing in the late-nineteenth-century U.S. chewing tobacco industry and Yamey (1972) on the use of fighting brands in the Canadian match industry.

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regard to whether the freight they should bid would be remunerative or not.’’31 Shipping rates fell to loss-making levels, and the target shipper was driven from the market (Yamey 1972, p. 141). Yamey’s policy conclusion is that (1972, p. 142) ‘‘[T]he Mogul story serves to illustrate a general point, namely, that predatory pricing, or the threat of its use, may itself operate as an effective hindrance to new entry even in situations where the conventional barriers to entry are weak or absent.’’ Genesove and Mullin (2006) describe price wars in the U.S. refined sugar industry that aimed to starve an entrant of funds that could have been used to expand the scale of operations. Weiman and Levin (1994) report price wars to starve local rivals of funds in the early U.S. telephone industry. Friedman (1998) describes a combination of industrial sabotage and selective price-cutting in the late nineteenthcentury U.S. cash register industry. Loescher (1959, p. 127) describes the use of a local basing-point price below unit cost in the 1926 U.S. cement industry, until a cement plant owned by the state of South Dakota abandoned the practice of undercutting oligopoly prices.32 It is open to question if there was ever ‘‘a consensus among commentators that predatory pricing schemes are rarely tried.’’ The bulk of the evidence is that exclusionary behavior will be tried, and in some market conditions can rationally be expected to be profitable, particularly if it is not ‘‘the occasion for severe antitrust sanctions.’’ 4.2 False Positives Versus False Negatives The difference in the receptions of the Areeda–Turner rule by U.S. antitrust policy and EU competition policy is in part explained by the near-absolute aversion of U.S. antitrust policy to false positive outcomes: those that would condemn nonpredatory conduct by a firm with an antitrust monopoly as predatory pricing in violation of the antitrust laws (Matsushita 475 U.S. 574, 593–594 (1986); footnote and internal citation omitted):33 In Monsanto, we emphasized that courts should not permit factfinders to infer conspiracies when such inferences are implausible, because the effect of such practices is often to deter procompetitive conduct. ...Respondents, petitioners’ competitors, seek to hold petitioners liable for damages caused by the alleged conspiracy to cut prices. ...But cutting prices in order to increase business often is the very essence of competition. Thus, mistaken inferences in cases such as this one are especially costly, because they chill the very conduct the antitrust laws are designed to protect.

31

Yamey 1972, p. 139, quoting Mogul Steamship Co. v. McGregor, Gow & Co. et al., 23 Q.B.D. 598 (C.A.) (1889), at 602.

32

For another example of local price cutting in this industry, see FTC v. Cement Institute, 333 U.S. 633, 714 (1948).

33

See in the same vein Brooke Group [509 U.S. 209, 226–227 (1993)].

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In Spectrum Sports [506 U.S. 447, 458–459 (1993), emphasis added, internal citations omitted], the Court writes [T]his Court and other courts have been careful to avoid constructions of § 2 which might chill competition, rather than foster it. It is sometimes difficult to distinguish robust competition from conduct with long-term anticompetitive effects; moreover, single-firm activity is unlike concerted activity covered by § 1, which ‘‘inherently is fraught with anticompetitive risk.’’ From this, a false negative outcome—incorrectly concluding that truly predatory pricing or other exclusionary activity is merely ‘‘robust competition’’—has longterm anticompetitive effects. A preference for avoiding false positives at almost all costs implies a willingness to tolerate a high frequency of false negatives, and the long-term anticompetitive effects that come with false negatives. The idea that the joint action covered by Sect. 1 of the Sherman Act is differentially fraught with anticompetitive risk, as compared with the monopolization by a firm with an antitrust monopoly covered by Sect. 2 of the Sherman Act, would have been found astonishing by legal experts at the time that the Sherman Act was passed. EU competition policy is also conscious of the thin line between exclusionary and nonexclusionary pricing (Opinion of Advocate General Fennelly in Compagnie Maritime Belge, } 117): It is the first time the Court has been asked to consider the ‘fighting ships’ practice, but also more particularly, the circumstances in which a pricing strategy not found to be below cost can, none the less, be found to be an abuse of a dominant position. It is natural to approach this latter problem with reserve. Price competition is the essence of the free and open competition which it is the objective of Community policy to establish on the internal market. It favours more efficient firms and it is for the benefit of consumers both in the short and the long run. Dominant firms not only have the right but should be encouraged to compete on price. At the same time, going back to the Ordoliberal ‘‘ as-if’’ approach to dominance, under EU competition policy a dominant firm (Michelin I, } 57) ‘‘has a special responsibility not to allow its conduct to impair genuine undistorted competition on the Common Market.’’ EU policy toward dominant firm behavior certainly seeks to avoid chilling nonexclusionary competition by dominant firms. It is equally committed to the deterrence of predatory abuse. 4.3 Intent U.S. courts have been of skeptical concerning intent as an independent element in predatory pricing claims [Barry Wright, 724 F.2d 227, 232 (1983), internal citations omitted]:34 34 See similarly A.A. Poultry Farms, Inc., et al. v. Rose Acre Farms, Inc. 881 F. 2d 1396 (1989), Liggett Group v. B & W Tobacco Corp. 748 F. Supp. 344, 351 (1990). For contrary views, see Comanor and Frech (1993), Sharpes (2012).

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‘‘[I]ntent to harm’’ without more offers too vague a standard in a world where executives may think no further than ‘‘Let’s get more business,’’ and longterm effects on consumers depend in large measure on competitors’ responses. Moreover, if the search for intent means a search for documents or statements specifically reciting the likelihood of anticompetitive consequences or of subsequent opportunities to inflate prices, the knowledgeable firm will simply refrain from overt description. If it is meant to refer to a set of objective economic conditions that allow the court to ‘‘infer’’ improper intent, then, using Occam’s razor, we can slice ‘‘ intent’’ away. Thus, most courts now find their standard, not in intent, but in the relation of the suspect price to the firm’s costs. The opposite view is taken in the EU. In AKZO (1991 ECR I-3359, } 71), the Court of Justice first endorsed the Areeda–Turner rule: Prices below average variable costs (that is to say, those which vary depending on the quantities produced) by means of which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. It went on (} 72) to characterize prices between average variable cost and average cost as abusive, if adopted for the purpose of eliminating a competitor:35 Moreover, prices below average total costs, that is to say, fixed costs plus variable costs, but above average variable costs, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Such prices can drive from the market undertakings which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them. The economic rationale points to ‘‘deep pocket’’ models of predatory pricing. Following the general precept of EU competition policy that abuse is an objective concept (Hoffman LaRoche, 1979 ECR 461, } 91), intent is seen as something that can be inferred on an objective basis (as opposed to ‘‘documents or statements specifically reciting the likelihood of anticompetitive consequences or of subsequent opportunities to inflate prices’’ ). In AKZO, the Court looked at the depth of price cuts (1991 ECR I-3359, } 102): A note prepared by one of AKZO’s representatives ... shows that AKZO established the prices offered to Allied Mills in January 1981 by calculating that they were well below those charged to Allied Mills by ECS. This shows that AKZO’s intention was not solely to win the order, which would have induced it to reduce its prices only to the extent necessary for this purpose.

35

See similarly the General Court in Wanadoo (T 340/03 France Te´le´com v Commission [2007] ECR II 107, } 185).

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4.4 ‘‘Above-Unit-Cost’’ Predation36 In the 1983 Transamerica decision (698 F.2d 1377, 1388), the U.S. Ninth Circuit rejected a mechanical price-unit cost comparison approach to defining predatory pricing and accepted that a price above average cost could be predatory for antitrust purposes if it tended (Inglis, 668 F.2d 1014, 1035) ‘‘to eliminate rivals and create a market structure enabling the seller to recoup his losses.’’ In Barry Wright (724 F.2d 227, 234) then-Judge Breyer cast doubt on this approach (which, he suggested, might classify a limit price as predatory). From the point of view of economics, a price reduction to a level above average cost would be a move toward ‘‘the level that would be set in a competitive marketplace.’’ In application, it would be ‘‘most difficult to distinguish in any particular case between a firm that is cutting price to ‘discipline’ or to displace a rival and one cutting price ‘better to compete.’’’ He expressed a reluctance to adopt a rule that might mistakenly punish competition on the merits (724 F.2d 227, 235): ‘‘Price cutting in concentrated industries seems sufficiently difficult to stimulate that we hesitate before embracing a rule that could, in practice, stabilize ‘‘tacit cartels’’ and further encourage interdependent pricing behavior.’’ In Hilti, the European Commission regarded selective price cuts aimed at the target firm’s important clients as abusive, even if above unit cost (OJ L 65 11 March 1988, } 81, emphasis added): An aggressive price rivalry is an essential competitive instrument. However, a selectively discriminatory pricing policy by a dominant firm designed purely to damage the business of, or deter market entry by, its competitors, whilst maintaining higher prices for the bulk of its other customers, is both exploitive of these other customers and destructive of competition. As such it constitutes abusive conduct by which a dominant firm can reinforce its already preponderant market position. The abuse in this case does not hinge on whether the prices were below costs (however defined — and in any case certain products were given away free). Rather it depends on the fact that, because of its dominance, Hilti was able to offer special discriminatory prices to its competitors’ customers with a view to damaging their business, whilst maintaining higher prices to its own equivalent customers. The italicized portion is entirely consistent with John Bates’ Clark’s views.37 The 2005 DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses recommends a consumer welfare standard (} 127, emphasis added): ‘‘Where it thus can be established that the price, also after the price cuts, remains above average total cost the pricing will not be assessed as predatory, unless exceptional circumstances indicate that such price cuts have led or

36

See Edlin (2002) and Elhauge (2003).

37

See similarly the Opinion of Advocate General Fennelly in Compagnie Maritime Belge, } 132 Compagnie Maritime Belge, } 109, } 113, } 117; Tetra Pak }}41–42.

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will lead to substantial harm to consumers.’’38 Application of this approach would require an assessment of equilibrium market performance in the post-predation market; this assessment that might be made with the use of an appropriatelyspecified oligopoly model or, less formally, a rule-of-reason analysis. 4.5 Recoupment Areeda and Turner (1975, p. 698) include recoupment in their definition of the classic case of predation (see above, p. 10). Their further remarks on recoupment are (1975, pp. 698–699): Even when an alleged predator has greater staying power, however, attention must also be given to [recoupment], which is less likely to occur. Although a predator may drive competitors into bankruptcy, their durable assets may remain in the market in the hands of others. Moreover, a firm can anticipate monopoly profits for only so long as its monopoly prices do not attract new entry. Losses incurred through predation could be regained in markets with very high barriers to entry. In many markets, however, and especially in those having a number of small rivals, entry barriers may be nonexistent or at least too low to preclude entry. As noted in Sect. 3.2, modern economics is likely to take a different view of the automaticity of entry as an antidote to the exercise of market power. Recoupment entered U.S. antitrust’s predation jurisprudence in Brooke Group (509 U.S. 209, 224): ‘‘The second prerequisite to holding a competitor liable under the antitrust laws for charging low prices is a demonstration that the competitor had a reasonable prospect, or, under § 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices,’’ and continuing (p. 225, internal citation omitted): For recoupment to occur, below-cost pricing must be capable, as a threshold matter, of producing the intended effects on the firm’s rivals, whether driving them from the market, or, as was alleged to be the goal here, causing them to raise their prices to supracompetitive levels within a disciplined oligopoly. This requires an understanding of the extent and duration of the alleged predation, the relative financial strength of the predator and its intended victim, and their respective incentives and will. ... The inquiry is whether, given the aggregate losses caused by the below-cost pricing, the intended target would likely succumb. So stated, one way to view the recoupment requirement is that it is a way of grafting a rule-of-reason inquiry and a dynamic perspective onto the per se inquiry and static perspective of the Areeda–Turner rule. 38

See similarly Ordover and Saloner (1989, p. 839): ‘‘[W]e shall term anticompetitive or predatory those aggressive and exclusionary business strategies that, when deployed, have the effect of lowering a properly evaluated measure of social welfare. This usage is not entirely consistent with the standard usage in antitrust case law and literature....’’

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When, as in Brooke Group, it was shown that a firm set prices below unit cost and it was not shown to the satisfaction of the Court that there was a reasonable prospect of recoupment, the implication is that the firm setting low prices was not acting to maximize its own profit. In other contexts, antitrust courts have been reluctant to place themselves in the position of having to say whether or not a firm has made a mistake.39 In Brooke Group, the conduct at issue was predation in the market for generic cigarettes to protect profit in the market for branded cigarettes. In Tetra Pak, Tetra Pak argued (1996 ECR I-5951 } 21) that its dominant position in one market (aseptic cartons) could not be the basis of abusive conduct in another market (nonaseptic cartons) on which it did not have a dominant position. The European Court of Justice rejected this argument, and wrote as well that (1996 ECR I-5951 } 44) ‘‘it would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated.’’

5 Conclusion Areeda and Turner (1975) has become part of the bedrock of U.S. antitrust treatment of exclusionary behavior by dominant firms; its welcome by EU competition policy has been more qualified. At the most general level, there is little difference in the economic models that underlie the two competition policies. Some explanation for the different receptions of the Areeda–Turner rule in the two systems may be found in the facts to which common economic models are applied. One might argue that the U.S. economy is more thoroughly integrated than the EU economy, so that the scope for exclusionary behavior by dominant firms is greater in the EU, and that rules toward exclusionary behavior are for that reason tougher in the EU than in the U.S. I do not find this argument convincing. There are many regional markets in the U.S., as there are in the EU, and such markets may be scenes of predatory behavior.40 Part of the explanation may be differences in the choices that the two systems make from a common library of economic models. Under the influence of the hardcore Chicago ‘‘good approximation’’ assumption, that most markets, most of the time, can be treated as if they were imperfectly competitive (Reder 1982), U.S. courts remain far more willing to treat as effectively competitive markets that

39 Trinko, 540 U.S. 398, 408: ‘‘Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing—a role for which they are ill-suited.’’ Fox (1986, p. 981) writes ‘‘[C]ontemporary U.S. decisions back away from the more intrusive antitrust surveillance of the 1960s and tend to defer to business discretion of even large firms.’’ 40 The passenger airline industry comes to mind; see Dodgson et al. (1990), Oster and Strong (2001), and Elzinga and Mills (2014).

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mainstream economics views as imperfectly competitive. This cannot be said of EU competition policy.41 For U.S. antitrust policy, predatory pricing is a vanishingly rare phenomenon. The evidence is against this view, which has not been expressed in EU competition policy decisions. In the trade-off between mistakenly classifying legitimate rivalry as monopolization and mistakenly classifying monopolization as legitimate rivalry, U.S. courts place most—if not all—weight on the former. The result, inevitably, is an openness to monopolization that blockades legitimate rivalry. EU competition policy aspires to reconcile both goals. This difference helps explain the differing views of the two systems on the role of intent in finding predatory pricing culpable, on the willingness to condemn prices that are above unit cost but exclude competitors and reduce consumer welfare, and on recoupment as an independent element of a proof of predation, over and above proof that price has been set below unit cost. It may also be that the differing approaches to strategic exclusionary behavior of U.S. antitrust and EU competition policy are rooted in law rather than economics or economic policy. In the words of Judge Breyer in Barry Wright (724 F.2d 227, 234) [U]nlike economics, law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve. In retrospect, the Areeda–Turner rule has been the thin edge of the wedge leading to a retreat of U.S. antitrust from a policy of protecting the opportunity for firms as or more efficient than incumbents to demonstrate their merit in the marketplace. For the European Union, so far at least, this is a path not taken. Acknowledgments I am grateful for comments received at a workshop on the Areeda–Turner rule held March 22, 2014 and sponsored by the Tinbergen Institute, from Daniel Miller at the November 2014 meetings of the Southern Economic Association, from a referee, and from the Editor. Responsibility for errors is my own.

References Publications Areeda, P., & Turner, D. F. (1975). Predatory pricing and related practices under Section 2 of the Sherman Act. Harvard Law Review, 88, 697–733. Baker, J. (2013). Exclusion as a core competition concern. Antitrust Law Journal, 78, 527–589. Baumol, W. J., & Bradford, D. F. (1970). Optimal departures from marginal cost pricing. American Economic Review, 60, 265–283. 41

This fact raises twin questions that are beyond the scope of this paper. The first question is why the Second Chicago School’s impact in Europe never mirrored its impact in the U.S. The second question is why the Second Chicago School’s impact on U.S. antitrust continues long after economics has moved on. On the latter question, see Giocoli (2012).

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