Anticompetitive Overbuying by Power Buyers
Steven C. Salop
Georgetown University Law Center
October 24, 2004
Georgetown Law and Economics Research Paper No. 614513
There is now a growing interest in antitrust in the anticompetitive conduct of buyers. This article (to be published in the Antitrust Law Journal) analyzes potentially anticompetitive "overbuying" conduct by power buyers. Overbuying involves increasing the purchases of a particular input with the purpose and effect of gaining either monopsony power in the input market or market power in the output market. Predatory overbuying is overbuying inputs as a predatory strategy to cause buyer-side competitors in the input market to exit from the market or permanently shrink their capacity, in order to gain monopsony power in the input market. Raising Rivals' Costs ("RRC") Overbuying is overbuying inputs in order to raise rivals' input costs and thereby gain market power in the output market. After briefly reviewing classical monopsony conduct, the article analyzes these two strategies in detail. It examines the impact of the conduct on the overbuying firm, its competitors, input suppliers and the consumers in the output market. It sets out the conditions under which these strategies are both profitable for the firm and harmful to consumers. This analysis suggests a four-part rule of reason legal standard. It then discusses short-cut tests and compares this conduct to classical predatory pricing, including the relevance of the price-cost test and the profit-sacrifice test. It also compares the relative competitive risks of the two overbuying strategies. It concludes that predatory overbuying raises less serious competitive concerns than RRC overbuying, and that plaintiffs alleging such predatory overbuying should be subject to a more demanding legal standard, including a requirement that plaintiffs show price less than cost.
Number of Pages in PDF File: 62
Date posted: November 15, 2004
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