The American Airlines Case: A Chance to Clarify Predation Policy

Abstract

Predation occurs when a firm offers consumers favorable deals, usually in the short run, that get rid of competition and thereby harm consumers in the long run. Modern economic theory has shown how commitment or collective-action problems among consumers can lead to such paradoxical effects.

But the paradox does signal danger. Too hawkish a policy might ban favorable deals that are not predatory. "It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high." Predation policy must therefore diagnose the unusual cases where favorable deals harm competition. To this end, courts and commentators have largely defined predation as "sacrifice" followed, at least plausibly, by "recoupment" at consumers' expense. The American Airlines case raises difficult questions about this approach.

Keywords: antitrust, predation, airlines, entry, competition

JEL Classification: K21, L12, L41, L93, D42, D43