Beyond Brooke Group: Bringing Reality to the Law of Predatory Pricing
22 Pages Posted: 5 Dec 2017 Last revised: 3 Jan 2018
Date Written: November 29, 2017
In Brooke Group, the Supreme Court set out two tests that a predatory pricing plaintiff must satisfy, and asserted in dicta that successful predation is implausible. In this essay, we offer both a critique of Brooke Group and a roadmap for adapting its framework to modern predation claims. We also make the case against extending this framework to more complex pricing strategies like loyalty discounts that lack the procompetitive potential of a simple price cut.
Under the Court’s framework, a predatory pricing plaintiff must show that the defendant both set a price below cost and had a sufficient likelihood of recouping its investment in predation. This approach, which was adopted by the Court without a contested presentation of its merits, suffers from multiple flaws. The dicta are limited by the particular factual setting of the case, nonconspiratorial oligopoly, and rooted in the unusual reweighing of the evidence undertaken in Justice Kennedy’s opinion for the Court. As we explain, drawing on the papers of Justice Harry Blackmun, this fact-bound approach was not the Court’s initial plan, but Justice Kennedy switched his vote.
Our main point is that the Brooke Group framework is adaptable to real-world predation cases. The price-cost test accommodates the use of incremental cost measures (instead of average variable cost) and, to a lesser extent, incremental revenue. A court may evaluate recoupment, without accepting the Court’s skeptical dicta, where the plaintiff presents facts (such as monopoly) or an economic theory of recoupment (such as the development of a reputation for predation) that differ from those considered in Brooke Group. We illustrate these sources of flexibility by reference to recent airline predation cases.
Keywords: average variable cost, incremental cost, monopoly, oligopoly, opportunity cost, predatory pricing, price-cost test, recoupment
JEL Classification: K21, L12, L13, L41, L93
Suggested Citation: Suggested Citation