Changing Antitrust Standards, with Special Reference to Predation

changing antitrust

Irwin M. Stelzer

When Tom Campbell invited me to participate in this program, I hesitated. Antitrust economics is, after all, a subject that is less well regarded now than it has been — practiced by economists who, it is charged, would stifle the upward progress of the economy, prevent American firms from combining to compete against Japan, and encourage greedy plaintiffs’ lawyers to seek damages as reimbursement for their clients’ inefficiency. Besides, this view continues, since all markets are in the end “contestable”, antitrust enforcement efforts are unnecessary, at best, and counterproductive, at worst. Since I want neither to oppose progress, nor to support the anti – antitrusters, I thought it best to decline.

But Tom is persuasive: he argued, desperately, that I was the only economist he knew who could say everything he knew about market power, predation and capital markets in 15 minutes. Let me try.

Given the wide acceptance of the view that predation is not a serious problem — indeed, that rational businessmen operating in contestable markets (and most markets are so characterized, these days) would never employ predatory competitive tactics — it is perhaps most instructive to begin by adopting a rebuttal posture, the thesis of which is that the “there – is

Clearly we are not devoted to a competitive system only for “economic” reasons. It is also associated with such social and political ideals as the diffusion of private power and maximum, opportunities for individual self – expression. If the economy will run itself, governmental interference in our daily life is held to a minimum.

This social purpose includes not only the promotion of efficiency, but of a system perceived to be fair, a concept that embodies values other than the maximization of economic welfare. A competitor disadvantaged by some act of a larger rival may indeed seek a solution, at law, that is unrelated to consumer interests in more output at lower prices, Judge Easterbrook to the contrary notwithstanding. Why not? Economists — once proud of the fact that their discipline was known as “political economy” — should be willing to concede both that they cannot with certainty predict that this or that inefficiency will flow from a given kind of antitrust enforcement, and that, since equity is a goal at least equal in importance to efficiency, a wrongful injury to a competitor is itself an evil to be avoided.

Just as we cannot be indifferent to theft of property because it merely represents a redistribution of income, a dispute between private parties, so we cannot be indifferent to the “theft” of business opportunities by powerful from less powerful firms. The wide acceptance accorded to antitrust policy in the United States — described as “so astonishing” to outsiders — is due to the fact that “Antitrust has a broader base than the findings of economists equal marginal cost — although we quite properly want to, know the cost of deviating from optimally efficient solutions.

I recognize, of course, that this notion that efficiency uber alles is not the goal of antitrust policy is unfashionable, certainly to many Chicago economists and their adherents on the bench. Judge Posner, for example, speaks approvingly of the shift in emphasis of antitrust policy “from the protection of competition as a process of rivalry to the protection of competition as a means of promoting economic efficiency…” (Olympia Equipment Leasing Co. et al v. Western Union Telegraph Co. ,797 F.2d 370 (7th Cir. 1986)). If that statement means anything — I am unsure of its meaning because I am uncertain that Judge Posner’s sharp distinction between process and result is realistic — it means that efficiency has, by some process of intellectual historical evolution, displaced the once – multiple objectives of antitrust policy, and become the sole goal of antitrust policy. I hope not.

Those who feel that predation is a non – problem err for another reason:
even if we assume, with the Chicago school, that preservation of efficient competition is the sole goal of antitrust policy, predation can be a threat to the achievement of that goal. This is so for several reasons:

1. Predation is said to be irrational because, in the end, most markets discussion of the airline industry, that “Once an incumbent predator
attempted to raise its price to make up for an earlier loss, entrants would
into the market to take advantage of the opportunity.” (Baumol, “The
Apollo Reservation System and the Public Interest,” Before the Civil
Aeronautics Board, Docket No. 41686, November, 1983, p.14.) Would they?
Only if this swarm of entrants, and their bac
kers, were unaffected by the
previous practices of the incumbent firm. As I have said before, a hiker
might not pay much attention to a no trespassing sign, standing alone; but if
the field behind it is littered with the corpses of previous trespassers, he
would most likely decide the poster of the sign means business. And it
would matter very little whether the poster of the sign had clear legal title to
the field.2. Predation is said to be irrational because it is not profit

behavior. As I ha
ve noted above, predation may, indeed, maximize long

profits. But assume, for the moment, that it does not. It is not necessary to
assume that the business managers who run most modern corporations are
irrational or stupid, to accept the possibility th
at they will find non


maximizing, predatory pricing to be very much in their own interest.This is so partly because, as Professor Baumol has pointed out,
managers will at times prefer to maximize gross sales rather than net Indeed, as Alfred Kahn has pointed out, it
is the Chicagoans who

correctly, in my view

that corporate raiders perform a valuable
economic function because managements so often fail to adopt that mix of
pricing and other practices that would maximize the current discounted
values of fut
ure revenue streams. It seems to me impossible to argue both (a) that corporate managers are driven to maximize profits and are aware
that most markets are sufficiently contestable to make predation irrational,
and hence will not engage in predatory pricin
g; and (b) that corporate
managers so often fail to maximize profits that the securities of the
companies they run are undervalued, requiring hostile take

overs and the
booting of the managers to get these companies back on the profit

maximizing track.In
short, predation may not maximize profits. But it may nevertheless
be a rational, far from unthinkable policy for business managers seeking to
maximize their own career opportunities.3. Finally, predation is a realistic danger because businessmen don’t
have in a manner consistent with the simplistic descriptions of the
Chicago school. The world does not consist of businessmen concentrating
on pricing policy to the exclusion of’ other competitive weapons, or cooly
comparing profitabilty with and without a
price cut. Rather, it consists of preempting markets by expanding capacity, or by developing and exploiting
bottlenecks, or by buying competing or, in the case of airlines, business

feeding firms.Once we accept this

that business strategy is a rich mixture of
tactics and policies, some aimed at profit

maximizing in the static, narrow
sense, others at longer

run, dynamic objectives

we begin to understand
why economic analysis in antitrust cases most often
cannot usefully employ
“bright line” tests: this price is predatory because it falls below some
conception of cost, that price is a legitimate competitive response because it
does not. Rather, economic analysis, in the context of antitrust cases,
a detailed understanding of the particular facts in each case: a

practice can properly be characterized as anticompetitive only
after studying it in the entire context of the firm’s activities.

This analysis is made more difficult by the complicating need to determine the presence or absence of market power. As our distinguished chairman, Tom Campbell, has pointed out (Texas Law Review , October 1985), “Antitrust law now divides the business world into two types of firms: those with market power and those without.” In short, whether a given business practice is anticompetitive, a given price cut predatory, depends on the market power of the firm engaging in that tactic. A small, conduct, informed by an examination of intent.1 Does this mean that there should be a double standard, one by which to judge competitive practices of small firms, and another by which to judge those of firms with market power? Let me answer that question with a question: if, in the course of a minor street altercation, Muhammad Ali punched someone, would the law treat him the same as it would treat you if you did the punching? I think not: his hands are lethal weapons, yours can barely grip a tennis racquet properly.

must confess, in the end, to a feeling of dissatisfaction with this talk.
Most economists would be more comfortable telling you that price cuts to a
certain level, relative to some conception of cost, are competitive, while
others should be proscribed. Ve
ry precise, very professional. But they would
also have to tell you that they would have great difficulty measuring cost,
however defined

goodbye, precision

and that they would have to see if
the cuts “deliberately” (to use Professor Baumol’s term) d
rove firms from
business, or were “calculated to” (Judge Posner’s phrase) make consumers
worse off in the long run.So I suppose that I can give you only this vague guidance: significant
market power, although far from pervasive in our world of internation
competition and dynamic technology, can exist

not all markets are incumbents, potential entrants and providers o
f capital are capable of
learning from experience. Where a firm with market power engages in price
cutting or other competitive tactics, those practices should be examined
against evidence of intent, market power and the entire pattern of conduct of
that f
irm in the market. Then and only then can one reach a judgment as to
whether the broad goals of antitrust policy would best be served by
proscrioing the practices under review. If the vagueness of my conclusion inclines you to prefer the apparent
of Baumol



Posner, I will certainly
understand. But I would, in that case, urge you to review your position from
time to time, keeping in mind the following injunction:Recent antitrust jurisprudence teaches that rules of law incorporating
prevailing economic doctrines have often required revision, and
sometimes reversal, after experience reveals the shortcomings of the
theory upon which those rules were based. In short, harsh legal rules
predicated on economic policy are dygerous
because the economic
policy may simply be wrong.2