The Ambiguity of Predatory pricing: Strategy as a Clarifier

University essay from Lunds universitet/Företagsekonomiska institutionen

Abstract: Ever since the phenomenon of predatory pricing came under the antitrust radar in the Standard Oil case it has spurred debate, which was accentuated after McGee’s seminal article in 1958 where he reexamined the Standard Oil case and claimed that no predatory pricing had taken place. He was supported by a number of scholars (the Chicago school) and legal commentators who stated that predatory pricing was an irrational strategy and therefore its existence was questioned. Other researchers focused on the economic side and came up with cost analysis approaches like the Areeda-Turner test. This cost based approach was adopted by US courts and later on, EC courts. The past 20 years have seen the introduction of game theory concepts and some researchers even desire more advanced approaches where historical, structural and performance tests are applied. At the same time the US Supreme Court has taken the view that predatory pricing is very rare while the ECJ has taken a more analytical approach, mainly because of the different competition policy goals that are enshrined in the Treaty, namely the concern about single market integration, protection of competitors and the viability of smaller businesses, as opposed to the US where efficiency is the main criterion. There is little agreement on the details on how to deal with predatory pricing, the debate centers around what cost measure to use, if recoupment should be used as a prerequisite, what kind of structural test can be used and if the negatives outweigh the benefits of lower prices. What has become clear despite the transatlantic rift is that a purely cost-based approach will not be enough as it doesn’t recognize the complexity of predatory pricing business strategies, for example the use of cross-subsidization. This thesis is a mix between a traditional research paper and a research synthesis. To confer a comprehensive and unbiased view of the ongoing controversy the author has collected data from reports, newspapers, Internet journals and websites, research papers, academic journals and statements from actors involved in the ongoing development. The intent and purpose of this thesis is to give a wide overview of the phenomenon of predatory pricing from a three sided approach using economics, business law and business strategy. The underlying questions in the thesis detail if predatory pricing is rare or common and if there is a trade-off between efficiency and competition when applying business law. The proposed strategic analysis incorporates the elements suggested by the scholars who introduced the structural test approach and then furthers the analysis by use of additional strategic concepts. This kind of test can be useful for both acquittal and conviction of predatory pricing conduct given the legal parameters in existence. The business strategy section will entail concepts like game theory, industry analysis, resource & capabilities, competitive advantage, strategic pricing and corporate strategy. A workable model to predatory pricing assessment should combine a first test of industry analysis and strategic considerations to decide whether predatory pricing is indeed possible and probable and a second test should if needed include price cost analysis, tailored to the industry characteristics which often is hard to establish but with the detailed industry analysis from the first test it should be considerably easier to find the right cost measure. Judgments should be based on a combination of measures applied to the facts of a particular case. The assessment should consider; industry structure, predatory intent, cost issues, the likelihood of recoupment, and possible business justification. The complexity of economic analysis and application of business law can therefore be saved for the most rampant cases of predatory pricing.

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