Reconsidering Brooke Group: Predatory Pricing in Light of the Empirical Learning

Abstract

Empirical research has found evidence of predatory pricing in a number of industries. Leading firms in airlines, coffee, oil, shipping, sugar, telecommunications, and tobacco have used deep, temporary price cuts to weaken their competitors and preserve or enhance their long-run market power. Even though studies dating back to the 1970s have shown that predatory pricing is a rational and not uncommon strategy, the Supreme Court has asserted that “predatory pricing is rarely tried, and even more rarely successful.” On this basis, the Court has established a pro-monopolist and anti-consumer test for predatory pricing claims.

Incorporating the empirical findings, the proposed test for predation aims to strike a better balance between the two risks for all legal rules -- false positives (condemning innocent defendants for predatory pricing) and false negatives (acquitting defendants that engaged in predation). To establish a presumption of predation, plaintiffs would have to satisfy market structure and price-cost tests. Defendants would then have the opportunity to rebut this presumption through the showing of credible procompetitive justifications for their pricing practices. This test would create a wide safe harbor for vigorous price competition but also deter aggressive price discounting that reduces competition and harms consumers in the medium and long run.

Keywords: Antitrust, monopolization, predatory pricing

JEL Classification: K21, L12