Exclusionary Conduct, Effect on Consumers, and the Flawed Profit-Sacrifice Standard

Abstract

There is currently great intellectual ferment over the proper antitrust liability standard governing allegedly exclusionary conduct under Section 2. This article (which is forthcoming in the Antitrust Law Journal) focuses on the two main competing liability standards: the profit-sacrifice standard (and the no economic sense variant of the test) and the consumer welfare effect standard. The central thesis of this article is that the use of the profit-sacrifice test as the sole liability standard for exclusionary conduct, or as a required prong of a multi-pronged liability standard is fundamentally flawed. The profit-sacrifice test may be useful, for example, as one type of evidence of anticompetitive purpose. In unilateral refusal to deal cases, it can be useful in determining the non-exclusionary benchmark. However, the test is not generally a reliable indicator of the impact of allegedly exclusionary conduct on consumer welfare - the primary focus of the antitrust laws. The profit-sacrifice test also is prone to several significant pitfalls and often would be complex and subjective to implement in practice. As a result, relying on the profit-sacrifice test as the legal standard would lead to significant legal errors. Instead, a better standard to govern exclusionary conduct is the consumer welfare effect test which is focused directly on the anticompetitive effect of exclusionary conduct on price and consumer welfare. This standard can be described in various ways: for example, as conduct that is "unreasonably exclusionary" or "unnecessarily restrictive", or simply as conduct that causes "consumer harm on balance". This can be implemented without causing excessive false positives that might lead to over-deterrence or a welfare-reducing diminution in innovation incentives. Many of the criticisms of the consumer welfare standard are based on a misunderstanding of the workings of the standard relative to the profit-sacrifice test. In fact, the consumer welfare standard exhibits fewer potential over-deterrence and under-deterrence errors in implementation.

Keywords: competition, antitrust, exclusion, monopolization, consumer harm