Contributions to Books «Previous Next»

Predatory Pricing

Aaron S. Edlin, University of California, Berkeley

Abstract

Judge Breyer famously worried that aggressive prohibitions of predatory pricing throw away a bird in hand (low prices during the alleged predatory period) for a speculative bird in the bush (preventing higher prices thereafter). Here, I argue that there is no bird in hand because entry cannot be presumed. Moreover, it is plausibly commonplace that low prices or the threat of low prices produce anticompetitive results by reducing entry, inducing exit, and keeping prices high. I analyze three potential standards for identifying predatory pricing. Two are traditional but have been tangled together and must be distinguished. First, a price-cost test based on sacrifice theory requires that either price or cost be measured by what I describe as “inclusive” measures. A price-cost test to prevent the exclusion of equally efficient competitors, by contrast, requires that price and cost be measured by more traditional “exclusive” measures. Finally, I propose a consumer betterment standard for monopolization and consider its application to predatory pricing. I explain how these three standards would affect the outcome of and focus of arguments in the American Airlines case, and argue that the consumer betterment standard is a promising alternative to the more traditional tests as it can catch exclusionary behavior of firms like American Airlines, behavior that is likely to deny consumers better deals.

Suggested Citation

Aaron S. Edlin. "Predatory Pricing" Research Handbook on Economics of Antitrust. Ed. Einer Elhauge. Edward Elgar, 2012.
Available at: http://works.bepress.com/aaron_edlin/74