Lecture 7.

Abuse of Dominance

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Thin Dividing Line Between Abuse and Aggressive Competition

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).

Focus should be on harm to competitive process.

Types of Abusive Behaviour

Predatory Pricing

Mogul Steamships Case

Definition of Predatory Pricing

'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.

3 Essential Elements for Price Cutting to be Predatory

'Deep Pockets' Theory

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).

Criticism of Deep Pocket Theory

Reputation Model

Dominant firm operating in several markets may have strong incentive to establish reputation for predation.

Chain Store Paradox

Reputation Matters

'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.

US Courts Sceptical on Predation

Criticism of US Courts views on predation.

Various Forms of Predatory Pricing

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