Author: Steven Cernak
Your much larger competitor sells the same products as you do but at a much lower price, so low you think that it must be losing money on each sale. Can such “predatory pricing” ever violate the antitrust laws? It is a very difficult monopolization case to make but, as Uber recently discovered, not all such claims are quickly dismissed.
Monopolization is illegal under Sherman Act Section 2 of the antitrust laws. Such claims can only be lodged against a “monopolist,” a competitor with monopoly power. Finding “monopoly power” is a difficult question this blog covered here. But even a monopolist is only liable for “monopolization,” actions that help it acquire or maintain that monopoly. There is no general test to judge a monopolist’s actions; instead, courts have developed different tests for different actions, including predatory pricing.
Predatory pricing has been defined by the U.S. Supreme Court as “pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run”.¹ The Court expressed skepticism toward such claims several times for two reasons. First, it noted that “there is a consensus among commentators that predatory pricing schemes are rarely tried, and even more rarely successful”.² Second, it can be difficult to distinguish pro-competitive low prices from predatorily low ones; after all, “cutting prices in order to increase business often is the very essence of competition”.³
Because of that skepticism, the Court has established a test that is difficult for plaintiffs to meet. In Brooke Group, the Court evaluated claims that a cigarette producer was using low prices to discipline a competitor.⁴ The Court held that predatory pricing allegations will be upheld only if ”the prices complained of are below an appropriate measure of its rival’s costs … [and the defendant] had a … dangerous probability of recouping its investment in below-cost prices.⁵
On the “below cost” element, the Court has declined to specifically define the “appropriate measure” of costs.⁶ While commentators have developed several potential measures, the most popular are variations on prices below a manufacturer’s reasonably anticipated marginal costs,⁷ such as average variable costs.⁸ The rationale is that no competitor would knowingly spend the incremental costs to make one more product if it did not plan to sell it for a price that covered at least those incremental costs unless such pricing was part of an anti-competitive scheme.
The “recoupment” element itself has two parts. First, the low prices must be capable of driving competitors from the market: “This requires an understanding of the extent and duration of the alleged predation, the relative financial strength of the predator and its intended victim, and their respective incentives and will.”⁹ Second, those expelled competitors and any other new entrants must stay out of the market and the market must have other attributes, such as high entry barriers, necessary to sustain high monopoly pricing so that the costs of the low prices can be recouped.¹⁰
The Brooke Group test has proven difficult for plaintiffs to meet. Despite those difficulties, plaintiffs continue to make predatory pricing claims, as illustrated by two 2019 opinions. But a May 2020 case involving Uber shows that some predatory pricing claims can survive a motion to dismiss.
In Clean Water Opportunities, Inc. v. Willamette Valley Co., plaintiff claimed that defendant put it out of business through various tactics, including predatory pricing.¹¹ In an unpublished opinion, the Fifth Circuit affirmed dismissal of this claim because plaintiff’s claims were both conclusory and implausible.¹² Plaintiff only alleged that defendant’s discounts to plaintiff’s customers “were substantial and represented a benefit below [defendant’s] cost to produce [product].” The court affirmed the lower court’s ruling that this allegation required “further factual enhancement” to rise above mere conclusory allegations that the court was not bound to accept as true under the motion.¹³
The remainder of the allegations in the complaint made the possibility of such “factual enhancement” unlikely. Plaintiff alleged that its and defendant’s original undiscounted price both were well above the alleged competitive price. The court found that this allegation left plenty of room for defendant to undercut plaintiff’s price while staying above the competitive price, let alone any potential measure of defendant’s average variable costs.¹⁴