Beyond Brooke Group: Bringing Reality to the Law of Predatory Pricing

Abstract

This essay offers a roadmap for bringing and deciding predatory pricing cases under the Supreme Court’s restrictive Brooke Group decision. Brooke Group requires a plaintiff to show that the defendant set a price below cost and had a sufficient likelihood of recouping its investment in predation. This framework, which was adopted without any contested presentation of its merits, has endured despite its flaws. Beyond this framework, the Court opined in dicta that predation is implausible.

We identify points of flexibility within the Court’s framework that permit an empirically grounded evaluation of the predation claim. Under the price-cost test, a plaintiff has leeway to select an appropriate measure of cost, including incremental cost. In considering recoupment, Brooke Group’s skeptical dicta should be confined to the particular market structure and theory of recoupment analyzed in that case. The dicta do not apply, for example, to a monopolist who recoups by earning a reputation for predation. A further reason to confine Brooke Group’s dicta is the Court’s highly unusual reweighing of the evidence presented at trial. As we explain using new historical research, this was not the Court’s initial plan after oral argument, but Justice Kennedy switched his vote. We also make the case against extending the price-cost test to more complex pricing strategies, such as loyalty discounts, in which the motivation for a stringent rule—to avoid costly false positives—has little purchase.

Keywords: average variable cost, incremental cost, monopoly, oligopoly, opportunity cost, predatory pricing, price-cost test, recoupment

JEL Classification: K21, L12, L13, L41, L93