Predatory Pricing: A Proposed Structured Rule of Reason

Abstract:     
Exclusionary practices are at the heart of abuses of dominance or monopolization. Predatory pricing is one of the most important exclusionary practices, because it lays the foundations of the most important foreclosure theories. Post-Chicago theories of predatory pricing are based on asymmetric imperfect information, imperfections in the capital markets or a race down the learning curve. However, these theories have not yet trickle down to tests in competition law analysis. This paper presents a new structured rule of reason for identifying predatory pricing largely based on finance theory. These are methods currently used in management for deciding investment and market strategies. We show that the Brooke-Akzo tests are a special case of our test. We also define rigorous criteria to judge cases of weakening competitors that could reduce substantially social welfare. Our test carries over trivially to cases of margin squeeze. We thus shed some light on some of the problems confronted by the European Commission and European Courts in the analysis of these cases and how the proposed rule would solve most of them.

Number of Pages in PDF File: 22

Accepted Paper Series