Predation

1
Predation

• Monopolization Predatory Behavior
• Predatory Pricing Economic Theory
• Legal Treatment of Alleged Predation

2
Monopolization Predatory Behavior

• Object
• enhance market power through predatory acts
• convince rivals to exit market, not enter or
  compete
• once clear, exploit market power

3
Means of Predation

• classic form predatory price cutting
• impose losses on rivals until they "cry uncle"
• modern extension raising rivals costs
• exclusion
• exclusive contracts to deny essential facilities
• upstream integration
• monopolize inputs to raise cost to downstream
  competitors
• advertising (allegedly) to raise entry costs
• "frivolous" legal challenges
• old but notable sabotage/espionage
• doubly illegal but part of some A-T cases

4
Recent Cases of Alleged Predation

• Classic American Airlines Fare Wars
• Entry followed by price cuts on specific routes
• A common feature of modern airline markets
• not limited to American Airlines
• Q were fare cuts limited to affected routes or
  was did they extend to other routes
• Also Matsushita vs. Zenith (1986)
• novel claim predation was collusive

5
Recent Cases of Alleged Predation

• Raising Rivals Costs
• Airline Computer Reservation Systems
• United American developed CRS that favored
  their flights over independents
• DOJ claimed this was upstream integration into an
  input market (CRSs) designed to preserve/expand
  market power

6
Recent Cases of Alleged Predation

• Sabotage
• 1 billion verdict in UST-Conwood (2003)
• case involved UST agents removing Conwood
  displays at tobacco retailers
• Sun Microsystems vs. Microsoft (ongoing)
• Sun owns Java licenses it to developers
• Java is/was a perceived threat to Windows OS
• MS development tools allegedly "pollute" Java
  code so it bombs on non Windows platforms

7
Predatory Price Cutting

• Forms Intent
• impose losses on firms
• as long as you stay you will make losses, so
  leave or
• merge or be doomed to making losses
• "discipline" rivals in a cartel
• "grim strategy" in pricing games
• make rival think you will resort to huge
  punishment if rival does not cooperate

8
Economics of Predatory Pricing

• Elements
• pricing below cost with intent to gain market
  power
• pricing designed to impose losses on rivals
• must ascertain costs which costs are relevant?
• common claim costs of rival (incorrect)
• to distinguish between normal competitive
  behavior P lt AVC may be predatory
• "Areeda-Turner rule" endorsed by current S. Court
  Justice Beyer (in prior case)
• But still must distinguish between predation
  promotion (free giveaways are common entry
  schemes)

9
Economics of Predatory Pricing

• Problems with the Strategy
• Predator is generally larger than the rival
• ? costs incurred exceed costs imposed
• easier to manage with locally targeted cuts, but
  disparity presumably remains
• rival's optimal strategy might be to shut down
  temporarily and not incur any operating losses

10
Economics of Predatory Pricing

• Problems with the Strategy (cont'd)
• Suppose aim is to induce firm to exit
• Exit likely if assets are highly mobile
• target firm sees losses in widgets so switches to
  making gadgets
• But if assets are mobile, easy entry occurs when
  the predator increases price
• Conclude asset mobility is a wash for predator

11
Economics of Predatory Pricing

• Problems with the Strategy (cont'd)
• Suppose assets are highly immobile
• P lt AVC ? rational rival shuts down
• Immobility ? assets can't be shifted elsewhere
• Problem assets remain in the market available
  to restart production when predator raises price

12
Economics of Predatory Pricing

• Potential Remedies for Predators
• Develop a reputation for irrationality
• Make rivals fear predator s.t. they believe
  predator will cut P even if it is not in own best
  interest
• ? lower likelihood of entry
• ? greater likelihood that merger offers accepted
• OK, but basing theories on irrationality
  hypotheses is not good economics

13
Legal Treatment of Predatory Pricing

• Predation often alleged and accepted by courts
• Economist's skepticism has altered court's
  practice in recent years
• Two Prong Test
• 1) What is likelihood that predation could be
  profitable?
• 2) Apply Areeda-Turner only if (1) is found
  likely
• Failure to establish that predation could be
  profitable (item 1) has stopped recent cases when
  in past court would have been confused

14
Matsushita v Zenith (1986)

• Fairly typical case of alleged predation...
• Typical in that economists think the allegation
  of predatory pricing was a howler
• Atypical in that
• Alleged predation was collusive
• Court accepted the expert economists claim that
  the alleged predation would have led to
  significant losses that could not be recouped

15
M v Z Zeniths Claims

• Main Allegation
• 7 Japanese TV manufacturers engaged in collusive
  predation
• Specific Claims
• 1. Over a 10 year period, prices were about 60
  of costs, predatory
• 2. Firms agreed to minimum export prices and
  restricted distribution channels, collusive
• 3. Losses in U.S. financed by War Chest from
  monopolistic pricing in Japan

16
M v Z Plaintiffs' Defense (1)

• 1. One can view the losses of below-cost pricing
  as an investment that yields future returns when
  competitors exit and price increases to monopoly
  levels.
• What is the rate of return on this investment?
  Negative! It is almost impossible to recoup a
  decade of losses at 40 cents on the dollar with
  future monopoly profits.
• Hence, the predation alleged by Zenith is not a
  rational investment.

17
M v Z Plaintiffs' Defense (2)

• 2. Cartel theory ? incentive to cheat
• Cheating occurred here, but the cheating was not
  consistent with a predatory agreement.
• P lt C ? cheaters want to reduce output
• let others suffer the losses from predation
• individual Japanese firms were undercutting the
  minimum prices to sell more TVs

18
M v Z Plaintiffs' Defense (3)

• 3. War Chest
• The existence of profits in one market is
  irrelevant to the strategy in other markets
• A "War Chest" would be employed only on project
  with have positive net present value
• Predation in this market was shown to be an
  unprofitable project
• Similarly, if predation were a positive net
  present value project, it could be financed
  independent of the profits earned elsewhere
• The "War Chest" is irrelevant.

19
M v Z The Court's Response

• 11 years of evidence at Fed District Court
• Then, case dismissed on summary judgment!
• --Judge ruled that the facts presented by Zenith,
  if true, were inconsistent with rational
  predation, and a full trial unnecessary
• --Economic theory implied claim of predation was
  false
• Ping-pong appeals to S. Court, which accepted the
  District Court's reliance on economics
• Cases can now be dismissed if it can be
  established that alleged predation had no chance
  of being profitable

20
Cartel Dumping Model

• PW world price (competitive)
• PDom domestic, cartelized price
• QT total production by domestic firms
• QDom production allocated to dom mkt
• (QT QDom) output dumped into export market

21
Cartel Dumping Model
22
Cartel Dumping Model

• Japanese TV firms were domestic cartel, supported
  by MITI and trade barriers
• Who was harmed by their strategy?
• How is this similar to Addyston Pipe?