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Competition law should not discourage large firms from competing aggressively.
'A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although, the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.'
Justice Learned Hand, United States v Aluminium Company of America, et. al., 148 F.2d 416 (2ndCir.1945).
- Neither Competition Act, nor EU Treaty, presume that possession of a dominant position offensive.
- Concern is with practices or conduct by dominant firms that is designed to reduce or even eliminate competition.
- Dominant firm 'has a special responsibility not to allow its conduct to impair undistorted competition…'
Case 322/81 Michelin v. Commission  ECR 3461, para 57.
- Predatory pricing;
- Limit Pricing;
- Monopoly Pricing;
- Price discrimination;
- Denying competitors access to essential facilities;
- Refusal to supply;
- Raising rivals' costs
- Strategy of deliberately reducing profits (incurring losses) in order to eliminate one or more rivals.
- Has been extremely controversial.
- Viewed with great suspicion by US Courts
- Very few cases proven
- ECS/AkZo main EU case
,  AC 25.
- Mogul Steamshipping Co. v. McGregor Gow & Co
Shipping cartel on routes to and from China. When rival companies attempted to introduce sailings, cartel slashed prices – 'fighting ships' Lord Esher; prices 'so low that if continued…they themselves could not carry on the trade'. For a detailed economic analysis see Yamey, B., (1972): Predatory Price Cutting: Notes and Comments, Journal of Law and Economics, 15: 129-42.
'In most general terms predatory pricing is defined in economic terms as a price reduction that is profitable only because of the added market power the predator gains from eliminating, disciplining or otherwise inhibiting the competitive conduct of a rival or potential rival. Stated more precisely a predatory price is a price that is profit maximising only because of its exclusionary or other anticompetitive effects.'
Bolton, P., Bradley, J. and Riordan, M. (1999): Predatory Pricing, Strategic Theory and Legal Policy. Available at http://www.princeton.edu/~pbolton/BBRPrincetonDP.pdf
Small firms have a clear incentive to allege predation by larger rivals:
‘so long as people in authority can be made to listen and perhaps persuaded to do something, it may pay competitors to complain that someone is preying on them. They have a natural interest in tying the hands of those who compete for consumers' favours.' J. McGee, (1980), Predatory Pricing Revisited, Journal of Law and Economics, Vol.23, 238-330 at 300.
- It must involve deliberately reducing profits (or even incurring a loss) for a period of time.
- It must have as its objective the elimination of one or more competitors, or at least be designed to weaken them to such a degree that they can no longer offer strong competition or otherwise discourage competition.
- It is essential that the predator be able to earn supra-normal profits in the future for predation to be worthwhile and this in turn requires the existence of barriers to entry, otherwise attempts to raise prices following predation will be undermined by new entry.
Claim that Standard Oil responded to localised entry by pricing well below cost, imposing losses on new entrants and forcing them to exit, financing such losses by virtue of its 'deep pockets'
Standard Oil Company of New Jersey et. al. v. US, 221 US 1 (1911).
- Predation irrational because merger or takeover less costly alternative.
- Costs of predation likely to be very high for the dominant firm as it would suffer losses on a much larger volume of sales than its prey.
- McGee, J.S., (1955): Predatory Price Cutting: The Standard Oil (N.J.) Case, Journal of Law and Economics, 1, 137-69 but see Granitz, E. and Klein, B., (1996): Monopolization by Raising Rivals' Costs: The Standard Oil Case, Journal of Law and Economics, 39(1) for an alternative explanation.
- 'Fighting brands' limit predator's losses.
- Matches in Canada and UK
- American Tobaccouse of 'bogus' independent firms.
- If predation possible would never be observed in practice, because it would never be necessary - Rational would-be entrant would recognise that dominant incumbent would respond to entry by predatory pricing and would not enter.
- Target's creditors could prevent predation by agreeing to provide it with whatever credit was required to see off a predatory attack, eliminating possibility of successful predation.
- Tirole, J., (1988): The Theory of Industrial Organisation, Cambridge, Ma: MIT Press.
- 'This makes for interesting theory but fails the reality test if one imagines how the discussion might go between a potential new entrant and its creditors when it attempts to explain that it will not fail as long as there is unlimited funding.'
- Blair, R., and Harrison, J., (1999): Airline Price Wars: Competition or Predation, Antitrust Bulletin, (Summer), 489-518.
Dominant firm operating in several markets may have strong incentive to establish reputation for predation.
- Dismissed reputation theory of predation.
- Considers responses of dominant incumbent firm operating in many different markets and facing potential entry in each one.
- entry occurs sequentially in different markets;
- in each individual market the dominant firm's profits pre-entry exceed profits from accommodating entry and these in turn exceed (short-term) profits from predation;
- Reputation for predation requires that response to entry in one market influences behaviour of other potential entrants.
- Selten, R., (1978): The Chain Store Paradox, Theory and Decision, 9, 127-59.
'when Stagecoach's reputation spread, operators facing an attack would simply withdraw at the mere hint that the Perth-based company was coming to town or threatening an attack.'
Woolmar, C., (1998): Stagecoach, London: Orion.
479 US 104, 122 (1986). Supreme Court warned that 'mistaken inferences' concerning alleged predatory prices 'are especially costly, because they chill the very conduct the antitrust laws are designed to protect'.
- Cargill, Inc. v. Monfort of Colorado, Inc.,
Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,509 US 209 (1993). Court referred to 'the general implausibility of predatory pricing' and concluded that 'predatory pricing schemes are rarely tried, and even more rarely successful, and the costs of an erroneous finding of liability are high.'
- 'At the same time modern economic analysis has developed coherent theories of predation, contravening earlier economic writing claiming that predatory pricing is irrational. More than that, it is now the consensus that predatory pricing can be a successful and fully rational business strategy; and we know of no major economic article in the last 30 years that has claimed otherwise.'
- 'But the courts have failed to incorporate the modern writing into judicial decisions, relying instead on earlier theories no longer generally accepted.'
- Bolton, P., Bradley, J. and Riordan, M.: Predatory Pricing, Strategic Theory and Legal Policy.
- Earlier analysis dismissing predation as irrational behaviour relies on assumptions of certainty and perfect information.
- Game theoretic models show that, with uncertainty and information asymmetry between incumbent and entrant, predatory strategy makes sense.
- Financial predation – Aims to cut off prey's funding.
- Signalling – Predator attempts to mislead
- 'Signal jamming'
- 'Cost signalling'
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