Abstract
The tools used to identify whether firms have reached a competitive tipping point in the United States come from regulatory frameworks established in the 1970s. Antitrust laws that were enacted to regulate an industrial economy continue to emphasize narrow inquiries that fail to appreciate the sophistication of the high-technology markets of the twenty-first century. Predatory pricing claims arising under Section 2 of the Sherman Antitrust Act bring this point into sharp focus. U.S. courts recognize predatory pricing as generally implausible, a view that is preserved in the recoupment requirement. Nevertheless, developments in economic theory over the last 20 years contravene this view. Amazon’s spectacular growth has brought the tension between current antitrust jurisprudence and modern economic insights to the fore, and offers an opportunity to re-examine the viability of the recoupment requirement. This paper attempts such an examination, using Amazon’s acquisition of Whole Foods to anchor the discussion. It proposes that the recoupment requirement should be augmented to permit predatory pricing to be demonstrated by proof that a predatory scheme recognized in modern economic teachings—in this instance, reputation effects—is afoot.
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Notes
- 1.
Turner et al. (2017).
- 2.
Thompson (2017), p. 2 (“The purchase holds implications for the future of groceries, the entire food industry, and—as hyperbolic as this might sound—the future of shopping for just about anything.”).
- 3.
Valinsky and Chang (2017).
- 4.
Kaplan and Boyle (2017).
- 5.
Valinsky (2017).
- 6.
- 7.
Leslie (2013), pp. 1697–1698.
- 8.
15 U.S.C. § 2 (2012) (“Every person who shall monopolize, or attempt to monopolize, … any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony….”).
- 9.
15 U.S.C. § 2 (2012).
- 10.
Brodley et al. (2000), p. 37 (“Proof of a disciplining effect requires the plaintiff to show three elements: (1) the victim is a rival firm whose competition threatens or potentially threatens the profits of the predator; (2) following the period of below-cost pricing, the victim raised its prices, became less aggressive, or otherwise restrained its competitive conduct—or the below-cost pricing was capable of producing this result; and (3) the below-cost pricing was a substantial factor in causing these exclusionary effects.”).
- 11.
Brooke GroupLtd.v.Brown&WilliamsonTobaccoCorp., 509 U.S. 209, 226 (1993).
- 12.
Brodley et al. (2000), p. 3 (“The courts adhere to a static, non-strategic view of predatory pricing, believing it to be an economic consensus.”).
- 13.
Brooke group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 209 (1993).
- 14.
Supra-competitive pricing occurs when a firm sets prices above what can be sustained in a competitive market. E.g., Easterbrook (1981).
- 15.
Brooke Group, 509 U.S. at 210.
- 16.
Brooke Group, 509 U.S. at 210.
- 17.
Brooke Group, 509 U.S. at 209.
- 18.
Transamerica Computer Co. v. IBM, 698 F.2d 1377, 1384 (9th Cir. 1983) (“Predatory pricing occurs when a company that controls a substantial market share lowers its prices to drive out competition so that it can charge monopoly prices, and reap monopoly profits, at a later time.”).
- 19.
Hemphill (2001), p. 1584.
- 20.
Standard Oil Co. of New Jersey v. United States, 221 U.S. 1 (1911). The Standard Oil decision is recognized as the classic example of predatory pricing in the United States.
- 21.
E.g., Leslie (2012), p. 573 (explaining the U.S. Supreme Court’s rebuke of Standard Oil’s anticompetitive behaviour, including predation).
- 22.
Koller II (1971), p. 110.
- 23.
Areeda and Turner (1975).
- 24.
- 25.
Baumol (1996), p. 57 (Average variable cost refers to “the variable portion of the total cost of production of the entire quantity of a commodity supplied by a firm divided by that output quantity.”).
- 26.
Hurwitz and Kovacic (1982), p. 145.
- 27.
E.g., Hurwitz and Kovacic (1982), pp. 140–145.
- 28.
Matsushita Elec.Indus.Co.v.ZenithRadioCorp., 475 U.S. 574 (1986).
- 29.
15 U.S.C. § 1 (“Every contract, combination …, or conspiracy, in restraint of trade… is declared to be illegal.”).
- 30.
Matsushita, 475 U.S. at 580.
- 31.
Matsushita, 475 U.S. at 582.
- 32.
Matsushita, 475 U.S. at 589.
- 33.
Matsushita, 475 U.S. at 589.
- 34.
Matsushita, 475 U.S. at 590–592. There are two related explanations why cartels are inherently volatile. First, each conspirator has an incentive to cheat by pricing below the cartel price and robbing sales from other members of the cartel. Leslie (2008), pp. 1629–1630. Second, there are typically substantial coordination issues in cartels as cartel members negotiate terms of cartel membership. E.g., Hovenkamp and Leslie (2011).
- 35.
Matsushita, 475 U.S. at 594.
- 36.
Matsushita, 475 U.S. at 597.
- 37.
Matsushita, 475 U.S. at 588 (citing Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752, 764 (1984)).
- 38.
Lopatka and Page (2005), p. 652 (explaining the evidentiary standards established in Matsushita: “[w]here the claim alleges a type of conduct, such as predatory pricing, that is intrinsically implausible in light of the relevant economic authority, the plaintiff must offer more concrete evidence that the conduct is monopolistic”) (emphasis in original).
- 39.
A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396 (7th Cir. 1989). Plaintiffs also alleged that defendant violated the Robinson-Patman Act, which prohibits certain forms of price discrimination. 15 U.S.C. § 13(a) (“It shall be unlawful for any person engaged in commerce … to discriminate in price between different purchasers of such discrimination may be substantially to lessen competition…”).
- 40.
A.A. Poultry Farms, 881 F.2d at 1401.
- 41.
A.A. Poultry Farms, 881 F.2d at 1402.
- 42.
Brooke Group, 509 U.S. at 214.
- 43.
Brooke Group, 509 U.S. at 214.
- 44.
Brooke Group, 509 U.S. at 215.
- 45.
Brooke Group, 509 U.S. at 231.
- 46.
Brooke Group, 509 U.S. at 249–250.
- 47.
Brooke Group, 509 U.S. at 216.
- 48.
Brooke Group, 509 U.S. at 217.
- 49.
Brooke Group, 509 U.S. at 216.
- 50.
Oligopoly pricing occurs when rivals in a concentrated industry tacitly increase their prices to supra-competitive levels without explicitly coordinating to fix prices. For a full discussion on oligopoly pricing, see, e.g., Posner (1968).
- 51.
Brooke Group, 509 U.S. at 221.
- 52.
Brooke Group, 509 U.S. at 222.
- 53.
Brooke Group, 509 U.S. at 243.
- 54.
Brooke Group, 509 U.S. at 222. The Court also established the requirements for proving an antitrust violation brought under the Robinson-Patman Act. The essence of predation claim brought under the Robinson-Patman Act is the same as that brought under Section 2 of the Sherman Act, but the standard of proof is different. Robinson-Patman requires a “reasonable possibility” that competition will be substantially harmed, while the Sherman Act requires a “dangerous possibility.”
- 55.
Brooke Group, 509 U.S. at 222.
- 56.
Brodley et al. (2000), p. 14.
- 57.
Brooke Group, 509 U.S. at 222.
- 58.
Brooke Group, 509 U.S. at 225 (“The inquiry is whether, given the aggregate losses caused by the below-cost pricing, the intended target would likely succumb.”).
- 59.
Brooke Group, 509 U.S. at 222–226.
- 60.
Leslie (2013), p. 1706.
- 61.
For more on the Chicago School approach to antitrust law, see Hovenkamp (2010).
- 62.
Posner (1979).
- 63.
Lopatka and Page (2005), p. 620.
- 64.
Bork (1978).
- 65.
Bork (1978), p. 77.
- 66.
Galston and Hendrickson (2018), p. 21.
- 67.
E.g., Joskow and Klevorick (1979).
- 68.
Leslie (2013), p. 1706.
- 69.
Stearns Airport Equip. Co. v. FMC Corp., 170 F.3d 518, 528 (5th Cir. 1999).
- 70.
Stearns Airport Equip. Co., 170 F.3d at 528.
- 71.
Leslie (2013), p. 1708.
- 72.
Leslie (2013), p. 1707.
- 73.
Tri-state Rubbish, Inc. v. Waste Mgmt., Inc. 998 F.2d 1073, 1080 (1st Cir.1993).
- 74.
Leslie (2013), p. 1708.
- 75.
Posner (1981), p. 23 (“The same considerations of judicial economy and legal certainty that justify the use of per se rules of illegality in some cases justify the use of rules of per se legality in others.”).
- 76.
Leslie (2013), p. 1710.
- 77.
Leslie (2013), pp. 1710–1711.
- 78.
A.A. Poultry Farms, 881 F.2d at 1401.
- 79.
Foer (2014), p. 4.
- 80.
Packer (2014), p. 2 (“The vast selection [of books] made possible by the Internet gave Amazon its initial advantage, and a wedge into selling everything else. For Bezos to have seen a bookstore as a means to world domination at the beginning of the Internet age, when there was already a crisis of confidence in the publishing world, in a country not known for its book-crazy public, was a stroke of business genius.”).
- 81.
Packer (2014), p. 3 (“Amazon sells a bewildering array of products: lawnmowers, iPods, art work, toys, diapers, dildos, shoes, bike racks, gun safes, 3-D printers.”).
- 82.
Packer (2014), p. 1. George Packer’s insights from 2014 are illuminating and prescient. In February 2018, Amazon announced the rollout of a delivery service to compete with UPS and FedEx.
- 83.
Lina (2017), p. 748.
- 84.
Lina (2017), p. 748.
- 85.
Lina (2017), p. 748 (“Just as striking as Amazon’s lack of interest in generating profit has been investors’ willingness to back the company. With the exception of a few quarters in 2014, Amazon’s shareholders have poured money in despite the company’s penchant for losses.”).
- 86.
Packer (2014), p. 5 (“As long as Amazon kept growing like mad, investors would pour in money and Wall Street wouldn’t pay much attention to profits.”).
- 87.
White (2018).
- 88.
Gross (2007).
- 89.
Packer (2014), p. 12.
- 90.
Packer (2014), p. 12.
- 91.
Packer (2014).
- 92.
Phillips (2010).
- 93.
Packer (2014), pp. 12–13.
- 94.
Catan et al. (2012), p. 2 (“The government’s suit describes the shift from traditional wholesale pricing—where retailers set the price of both digital and physical books—to a so-called agency model that has publishers setting e-book prices and retailers paid by commission.”).
- 95.
Packer (2014), p. 13.
- 96.
Catan et al. (2012), p. 1.
- 97.
Packer (2014), p. 13.
- 98.
Catan et al. (2012).
- 99.
Catan et al. (2012), p. 2.
- 100.
Catan et al. (2012), p. 3.
- 101.
Packer (2014), p. 14.
- 102.
Sherr et al. (2013), p. 1.
- 103.
Sherr et al. (2013), pp. 1–2.
- 104.
US v. Apple, Inc., 952 F.Supp.2d 638, 709 (2013).
- 105.
US v. Apple, Inc., 952 F.Supp.2d at 700.
- 106.
Then-judge (now Justice) Stephen Breyer explained that courts “should be cautious—reluctant to condemn too speedily—an arrangement that, on its face, appears to bring low price benefits to the consumer.” Kartell v. Blue Shield of Mass., Inc., 749 F.2d 922, 931 (1st Cir. 1984).
- 107.
Trachtenberg (2015).
- 108.
Leslie (2013), p. 1720.
- 109.
E.g., Clark v. Flow Measurement, Inc., 948 F. Supp. 519, 526 (D.S.C. 1996) (noting that the pertinent industry for Section 2 analysis is the monopolized industry); see e.g., McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1498 (11th Cir. 1988) (explaining that a firm “must … recoup its losses in the particular communities where their commodities are sold below cost…by raising the price of the same class of commodities”).
- 110.
United States v. Microsoft Corp., 84 F.Supp.2d 9 (D.C.Cir.2001).
- 111.
Gilbert and Katz (2001), p. 27. The case against Microsoft, by number of plaintiffs involved, was one of the largest antitrust cases in U.S. history. The U.S. Department of Justice, the Attorney General of the District of Columbia, and 19 state attorneys general sued Microsoft.
- 112.
Gilbert and Katz (2001), p. 27.
- 113.
Gifford (1999), p. 74.
- 114.
Gifford (1999), p. 74.
- 115.
Gilbert and Katz (2001), p. 38.
- 116.
Microsoft’s bundle meant that consumer’s would receive Internet Explorer for free.
- 117.
Gilbert and Katz 2001, p. 35.
- 118.
Lina (2017), p. 765.
- 119.
Lina (2017), p. 765.
- 120.
Lina (2017), p. 765.
- 121.
Lina (2017), p. 765.
- 122.
Lina (2017), p. 765.
- 123.
Lina (2017), p. 765.
- 124.
Lina (2017), p. 765.
- 125.
Lina (2017), p. 765.
- 126.
Lina (2017), p. 765.
- 127.
Lina (2017), p. 767.
- 128.
Berk (2017).
- 129.
Berk (2017).
- 130.
Brodley et al. (2000).
- 131.
Cheng (2017).
- 132.
Stevens (2018).
- 133.
Kim (2018).
- 134.
Thompson (2017), p. 5.
- 135.
At $99 per subscription, any appreciable increase in subscription would generate significant revenue.
- 136.
Brodley et al. (2000), p. 2241.
- 137.
E.g., Brodley et al. (2000).
- 138.
Hemphill (2001), p. 1603.
- 139.
Brodley et al. (2000), p. 78.
- 140.
Advo, Inc. v. Philadelphia Newspapers, Inc., 51 F.3d 1191 (3d Cir.(1995)).
- 141.
Traffic Scan Network, Inc. v. Winston, (E.D.La. 1993).
- 142.
Brodley et al. (2000), p. 28.
- 143.
Hemphill (2001), p. 1605.
- 144.
Lao (2004), p. 157.
- 145.
- 146.
- 147.
Brodley et al. (2000), p. 24 (“In Brooke the Court omitted from its analysis any consideration of strategic factors such as possible gains from deterring aggressive pricing in future time periods or in other cigarette markets, for example, branded cigarettes. Nor did the Court consider the counterfactual event of what might have happened in the absence of the price war—the diminished profits the predator would have earned had it not forced the prey to stop cutting prices. By contrast under a strategic approach counsel might have attempted to show that a reputation effect or other predatory theory, such as financial market predation, enabled recoupment.”).
- 148.
Brodley et al. (2000), p. 2 (“[M]odern economic analysis has developed coherent theories of predation that contravene earlier economic writing claiming that predatory pricing conduct is rare and implausible. More than that, it is now the consensus view in modern economics that predatory pricing can be a successful and fully rational business strategy.”).
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Kartell v. Blue Shield of Massachusetts, Inc., 749 F.2d 922 (1st Cir.1984)
MatsushitaElec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986)
McGahee v. Northern Propane Gas Co., 858 F.2d 1487 (11th Cir.1988)
Monsanto Co. v. Spray-Rite Serv. Corp., 465 U.S. 752 (1984)
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Transamerica Computer Co. v. International Business Maching Co., 698 F.2d 1377 (9th Cir. 1983)
Tri-State Rubbish, Inc. v. Waste Management, Inc., 998 F.2d 1073 (1st Cir.1993)
United States v. Apple, Inc., 952 F.Supp.2d 638 (S.D.N.Y. 2013)
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Acknowledgement
This project could not have been completed without the assistance of many readers who provided generous input on several drafts. Particularly, I am grateful to Professor Klaus Mathis and the participants at the University of Lucerne School of Law’s 7th annual Law and Economics conference for their insights. I am also grateful to the editors and publisher for their feedback. Lastly, I thank Sarah Schultes for her valuable guidance and support throughout the process.
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MehChu, N. (2019). Whole Foods, Fresh Concerns?. In: Mathis, K., Tor, A. (eds) New Developments in Competition Law and Economics. Economic Analysis of Law in European Legal Scholarship, vol 7. Springer, Cham. https://doi.org/10.1007/978-3-030-11611-8_7
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