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Matthew Perez
Matthew Perez

Prevail Legal Software Pricing

Notwithstanding the rapidity with which the appellate courts embraced the new Areeda-Turner test(29) and the increasing scholarly criticism of then-prevailing legal doctrine that predatory intent plus an unreasonably low price was sufficient to prove predatory pricing,(30) firms continued to face the risk of antitrust liability for price cutting that appeared to benefit consumers. For instance, in 1983, the Ninth Circuit rejected the notion, espoused by Areeda and Turner, that "prices above average total cost 'should be conclusively presumed legal.'"(31) The court reasoned that "we should hesitate to create a 'free zone' in which monopolists can exploit their power without fear of scrutiny by the law" and that a "rule based exclusively on cost forecloses consideration of other important factors, such as intent, market power, market structure, and long-run behavior in evaluating the predatory impact of a pricing decision."(32) The court accordingly held that "if the challenged prices exceed average total cost, the plaintiff must prove by clear and convincing evidence--i.e., that it is highly probably true--that the defendant's pricing policy was predatory."(33)

Prevail Legal Software Pricing

In 1993, Brooke Group presented the Supreme Court with a direct opportunity to consider the then-contemporary legal and economic scholarship on predatory pricing, including the already extant game theoretic literature.(47) The plaintiff in Brooke Group, Liggett, contended that a rival cigarette manufacturer had "cut prices on generic cigarettes below cost . . . to force Liggett to raise its own generic cigarette prices and introduce oligopoly pricing in the economy segment."(48) Viewing the evidence in the light most favorable to Liggett, the Court held that the rival cigarette manufacturer was entitled to judgment as a matter of law since "the evidence cannot support a finding that [the rival cigarette manufacturer]'s alleged scheme was likely to result in oligopolistic price coordination and sustained supracompetitive pricing in the generic segment of the national cigarette market."(49)

Six key issues animate the structuring of a rule under section 2 that provides clear and sound guidance regarding predatory pricing: (1) the frequency of predatory pricing, (2) treatment of above-cost pricing, (3) cost measures, (4) recoupment, (5) potential defenses, and (6) equitable remedies. This part of the chapter describes the legal and economic analysis pertinent to each of these issues.

Although theoretically a rational strategy, actual evidence on the frequency of predatory pricing, nonetheless, is limited. "Since Brooke Group was decided in 1993, at least fifty-seven federal antitrust lawsuits alleging predatory pricing have been filed."(88) Because publicly available data about all predatory-pricing claims or allegations are limited, it is impossible to determine whether this number either supports or refutes the conclusion that "evidence regarding predation does not suggest it is either rare or unsuccessful."(89) In addition, as one antitrust scholar notes, "[I]t is impossible to be certain how pervasive predation would be or how long its effects would endure" because "[a]ny studies of business behavior today are affected by the fact that predatory pricing is illegal."(90)

The Department concurs with the panelists and the vast majority of commentators that, absent legal proscription, predatory pricing can occur in certain circumstances. Accordingly, it is necessary to develop rules for distinguishing between legitimate discounting and unlawful predation.

Moreover, even if beneficial above-cost price cutting and deleterious predatory pricing could be distinguished after the fact, the Department does not believe that there is a practical, readily applicable test businesses can use to determine whether their above-cost prices are legal at the time they are making pricing decisions.(112) For example, under the approach one commentator describes, the legality of above-cost price cuts could depend, in part, on whether the price cut permits an entrant "reasonable time" to recover its "entry costs" or "become viable," or capture sufficient market share so that the price-cutting firm "loses its dominance."(113) However, an incumbent firm is unlikely to be able to make this determination with any confidence, even assuming it has all relevant data about its rivals, which it usually will not.

The Department believes that above-cost pricing should remain per se legal. Aggressive price cutting is central to a properly functioning market.(116) Consequently, it is critical that enforcement against predatory pricing avoids chilling procompetitive price discounting to the extent reasonably possible. The Department, therefore, will intervene only in those instances where prices are below an appropriate measure of cost, in addition to meeting the other elements of a price-predation claim.

Given the above factors, the Department agrees with the many courts and commentators concluding that pricing above average total cost--total cost divided by total output--should be per se legal.(127) Moreover, even pricing below average total cost frequently may be economically rational.(128) A price below average total cost would often be cash-flow positive for an equally efficient competitor. Such a rival would find it more advantageous in the short run to continue producing than to exit. Accordingly, since lower prices will always provide short-term benefits to consumers, the Department believes that merely showing that prices are below average total cost should not be sufficient to support a finding of liability.

Long-run average incremental cost has been suggested as the appropriate cost measure when predatory conduct involves intellectual property. The contention is that "the only tenable cost standard" for predatory pricing with regard to intellectual property "must be a long-run cost measure,"(148) because "after the product is developed and launched, [average avoidable cost] or [average variable cost] may approach or equal zero."(149) In computer software, for example, once the software product has been developed "the short-run incremental cost of a program downloaded from the Internet is nil."(150)

One panelist, although willing to use average avoidable cost to define a level below which price should be presumptively unlawful,(157) urged that prices above average avoidable cost but below long-run average incremental cost be treated as predatory in the absence of a plausible efficiency defense.(158) He argued that a long-run standard is necessary to provide meaningful protection against predatory pricing in contexts like computer software, where costs are minimal after the product has been developed and launched.(159) Another commentator, however, maintains that, although long-run average incremental cost would be relevant for testing whether a defendant's price is compensatory in the long run, that is not the appropriate question regarding predatory pricing. Rather, he concludes that defendant's average avoidable cost is the appropriate cost measure because it focuses on the threat to an efficient rival in the short run.(160)

The Supreme Court unanimously overruled the Ninth Circuit, holding that the Brooke Group test for predatory pricing--below-cost pricing and likelihood of recoupment--also applies to predatory bidding. The Court noted that "predatory bidding mirrors predatory pricing" in respects most significant to its analysis in Brooke Group.(235) Just as with predatory pricing, the Court found, predatory bidding involves a firm suffering short-term losses on the chance of recouping those losses through supracompetitive profits in the future. The Court reasoned that no rational business will incur such losses unless recoupment is feasible,(236) and recognized that recoupment could occur through lower input or higher output prices.(237) It noted that there are many benign or even procompetitive reasons why a buyer might bid up the price of inputs, ranging from merely miscalculating its input needs to attempting to increase its market share in the output or downstream market. The Court stressed that there is "nothing illicit about these bidding decisions;" indeed, they are "the very essence of competition."(238) Thus: "Given the multitude of procompetitive ends served by higher bidding for inputs, the risk of chilling procompetitive behavior with too lax a liability standard is as serious here as it was in Brooke Group."(239) Accordingly, to prevail on a predatory-bidding claim, plaintiff must show that defendant (1) suffered (or expected to suffer) a short-term loss as a result of its higher bidding and (2) had a dangerous probability of recouping its loss.(240)

29. See, e.g., Bolton et al., supra note 14, at 225 ("The Areeda-Turner rule had an immediate impact on the courts."); William E. Kovacic, The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix, 2007 Colum. Bus. L. Rev. 1, 46 ("In 1975, Areeda and Turner published a proposal that courts use the relationship of the dominant firm's prices to its variable costs to determine the legality of a challenged pricing strategy. Within months of the article's publication, two courts of appeals relied heavily on the paper to dismiss predatory pricing allegations.").

59. Crane, supra note 8, at 1; see also id. at 45 (noting that "although it is accepted wisdom that no predatory pricing plaintiff has won a verdict since Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., plaintiffs have recently won some predatory pricing cases and procured substantial settlements in others. Additionally, regardless of their low probability of success, plaintiffs continue to file a significant number of federal predatory pricing cases, suggesting that predatory pricing complaints may afford plaintiffs strategic advantages whether or not they ultimately prevail.") (footnote omitted).

90. Crane, supra note 8, at 39; see also id. at 3839 ("The incidence of costs of predatory pricing in a regime without any predatory pricing prohibition . . . remains highly speculative" and "is unlikely to be ascertained empirically except by reference to historical case studies of particular firms from the time period before the adoption of the Sherman Act, since predatory pricing has long been illegal . . . ." (footnote omitted)). Accord Posner, supra note 2, at 214; Bolton et al., supra note 14, at 2247. 041b061a72


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