INTRODUCTION 330 I. THE SUPREME COURT'S PREDATORY PRICING JURISPRUDENCE 335 A. The Pre-Chicago Era 335 B. The Ascendancy of Theory 338 1. Matsushita 338 2. Cargill 342 3. Brooke Group 343 II. THE FLAWED PREMISES OF PREDATORY PRICING JURISPRUDENCE 347 A. Predatory Pricing Does Occur 347 B. Predatory Pricing is Anticompetitive Even Without 352 Recoupment C. Courts Misapply the Recoupment Requirement 354 III. MATSUSHITA: FROM PREDATORY PRICING CONSPIRACIES TO ALL 356 CONSPIRACIES A. Horizontal Conspiracies 357 1. Price-Fixing Conspiracies 357 2. Output Restraints 365 3. Market Division 367 4. Conspiracies to Impose Arbitration Clauses 369 5. Matsushita and Per Se Illegal Agreements 372 B. Vertical Restraints 373 IV. THE EXPANSION OF PREDATORY PRICING JURISPRUDENCE TO OTHER 377 MONOPOLY CONDUCT A. Predatory Bidding and Predatory Overbuying 377 B. Refusals to Deal 385 C. Price Squeezes 387 D. Conditional PricingPolicies 391 CONCLUSION 395
"We are living in the age of the false, and often shameless, analogy .... [Analogies'] weakness is that they rely on the dubious principle that, as one logic textbook puts it, 'because two things are similar in some respects they are similar in some other respects."' (1)
- Adam Cohen
"[A]nalogies prove nothing, that is quite true, but they can make one feel more at home." (2)
- Sigmund Freud
INTRODUCTION
Philosophers and policymakers have long cautioned against comparing incomparable objects or concepts. Scores of judicial opinions caution judges and litigants against comparing apples to oranges. (3) The original idiom, as recited by such sixteenth-century luminaries as Sir Thomas More and William Shakespeare, admonished against equating apples and oysters, (4) two items unlikely to be mistaken for each other given their obvious dissimilarities in color, texture, smell, and immediate edibility. over time, oysters were replaced by oranges and the expression evolved to caution against confusing two types of fruit, (5) which do in fact share some similar qualities but are quite distinct and, thus, incomparable. (6)
The danger of false analogies goes beyond the risk of an apple lover biting into an oyster's shell or even an orange's peel. In common law fields, such as antitrust law, (7) when judicial opinions create a false equivalence between disparate forms of conduct, courts risk condemning benign conduct or exonerating dangerous misconduct--denominated as false positives and false negatives, respectively. Despite the frequency and cost of false negatives, many antitrust scholars and federal judges have overemphasized the risk of false positives in antitrust jurisprudence. (8) In so doing, they have relied on false analogies to exonerate all manner of anticompetitive behavior. This Article explores how antitrust jurisprudence has equated apples and oysters in a way that inappropriately immunizes harmful conduct from antitrust liability. The apple is predatory pricing, the use of below-cost pricing to destroy business rivals. The oysters are antitrust claims that do not involve below-cost pricing.
Predatory pricing involves two distinct phases: predation and recoupment. During the predation phase, the predator charges a price below its own costs, based on the belief that its competitors will not be able to match this low price. Rivals will exit the market to avoid losing money. After the rivals have exited the market, the recoupment phase begins. Here, the predator charges a monopoly price because there are no other sellers to discipline its price. The monopolist's goal is to charge a price high enough and for long enough to be able to recoup its losses from the predation phase and to reap monopoly profits for the foreseeable future. (9)
Although the Supreme Court first condemned predatory pricing as violating antitrust laws over a century ago, (10) the Court has since changed course. In Matsushita Electric Industrial Co. v. Zenith Radio Corp., a bare majority of the Court announced that predatory pricing is seldom attempted and would be unlikely to succeed even if it were. (11) It announced that predatory pricing conspiracy claims are implausible (12) and false positives could deter price cutting, which generally benefits consumers. (13) Consequently, the Court decided that plaintiffs bringing such claims must satisfy a heightened evidentiary standard in order to survive summary judgment. (14) Seven years later in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., the Court held that plaintiffs bringing predatory pricing claims under Section Two of the Sherman Act, which condemns illegal monopolization and attempted monopolization, (15) must prove that the alleged monopolist had "a dangerous probability[] of recouping its investment in below-cost prices." (16) As in Matsushita, the Court in Brooke Group asserted that predatory pricing rarely occurs and that such claims should be relatively more difficult to prove because the initial stages of predatory pricing benefit consumers through lower prices. (17) By labeling predatory pricing claims as both implausible and dangerous, the one-two punch of Matsushita and Brooke Group made such claims virtually impossible to prove. (18)
The Court's premises and reasoning in these cases were incorrect; predatory pricing does occur and can be profitable. (19) In the long run, predatory pricing injures both consumers and efficient rivals, and the anticompetitive harms of predatory pricing can exist independently of whether the monopolist actually succeeds in recouping its investment in below-cost pricing. (20) Mistakes confined to predatory pricing jurisprudence are troubling on their own. Unfortunately, subsequent courts have significantly magnified the errors of the Matsushita and Brooke Group opinions by applying the holdings and heightened legal burdens of these predatory pricing cases to all manner of antitrust violations. (21)
This Article explains how federal judges have undermined substantive antitrust law by analogizing non-predatory pricing claims to predatory pricing even though price predation is unique among forms of anticompetitive conduct in that it starts with an unconditional price decrease. Because a predatory pricing scheme begins with low prices, which benefit consumers, the Supreme Court has constructed pro-defendant rules for predatory pricing claims. But courts are bootstrapping these pro-defendant rules to antitrust claims that are distinguishable. Indeed, judges use predatory pricing precedent to impose additional--sometimes insurmountable--burdens on all antitrust plaintiffs. Both the Supreme Court and lower federal courts have used false analogies to predatory pricing to exonerate all manner of collusive and monopolistic conduct. As a result, courts are effectively dismantling antitrust law one false analogy at a time.
Part One of this Article reviews the Supreme Court's predatory pricing jurisprudence from its beginning. The Supreme Court first recognized predatory pricing as an antitrust violation in 1911 when it considered a pair of high-profile cases, one against Standard Oil Company and the other against American Tobacco Company. Both cases involved monopolistic empires engaged in a variety of anticompetitive conduct, predatory pricing being but one stratagem in a larger market-controlling scheme. Both cases condemned predatory pricing as violating antitrust laws. Beginning in the mid-1980s, however, the Supreme Court fundamentally rolled back predatory pricing law, rendering it decidedly more pro-defendant. Part One traces this legal evolution.
Part Two diagnoses several problems with the Supreme Court's predatory pricing jurisprudence, which assumes that predatory pricing is irrational, does not occur, and is beneficial to consumers when the monopolist does not recoup its losses. These assumptions, however, are flawed. First, economic theory explains how predatory pricing can be rational behavior, and empirical studies show that the Court's claims that predatory pricing is implausible and does not occur are incorrect. Second, predatory pricing is anticompetitive--and can injure consumers and efficient rivals--even if the predator never recoups its investment in below-cost pricing. Third, courts, including the Supreme Court, have applied the recoupment requirement in a manner that can make it impossible for plaintiffs to prove that element, even when recoupment in fact takes place.
Part Three explains how the mistakes of the Supreme Court's predatory pricing jurisprudence have distorted the common law interpreting Section One of the Sherman Act, which condemns anticompetitive agreements. Most Section one violations bear little or no resemblance to predatory pricing claims. Nevertheless, courts routinely invoke the heightened evidentiary requirements of Matsushita to grant summary judgment against antitrust plaintiffs bringing claims of price fixing, output restrictions, market division, and conspiracies to impose mandatory arbitration clauses. unlike predatory pricing claims, though, none of these categories of claims are implausible and none involve conduct that can be plausibly described as either pro-consumer or procompetitive. By importing predatory pricing law into Section one law more broadly, courts provide succor to anticompetitive conspirators.
Part Four demonstrates how false analogies to predatory pricing have also weakened Section Two of the Sherman Act, which prohibits a single firm's illegal monopolization and attempt to monopolize markets. Courts have applied the pro-defendant legal standards from predatory pricing cases to antitrust litigation involving predatory bidding, the hoarding of inputs, anticompetitive refusals to deal, price squeezes, and conditional pricing policies. All of these forms of anticompetitive conduct are distinguishable from predatory pricing; for example, they lack the pro-consumer features of unconditional low prices. None of these...
