SSRN Id724166

Benjamin N.
Cardozo School of Law

Jacob Burns Institute for Advanced Legal Studies
2005
Working Paper No. 115
The Paradox of Predatory Pricing

91 Cornell. L. Rev. (forthcoming)
Dan Crane
Assistant Professor of Law
Benjamin N Cardozo School of Law
55 Fifth Ave.
New York , NY 10003
United States
(212) 790-0379 (Phone)
(212) 790-0205 (Fax)
<dcrane@yu.edu >
This paper can be downloaded free of charge from the Social Science Research Network at
http://ssrn.com/abstract=724166
Predatory Pricing – Crane – April 2005 Draft
THE PARADOX OF PREDATORY PRICING
Daniel A. Crane*
ABSTRACT
Predatory pricing law attempts to keep prices low by harshly sanctioning

prices that are anticompetitively low. The paradox of predatory pricing
law is that even an analytically perfect specification of the line between
predatory and innocent price cuts would result in deviations from
optimal pricing because the very recognition of a predatory pricing
offense will induce some firms to forgo innocent price cuts. This occurs
for several reasons. Firms can strategically misuse predatory pricing
law to coerce more efficient rivals to forgo price cuts or to help organize
tacit collusion schemes. Even apart from strategic misuse, the remedial
structure of antitrust law – including treble damages, unilateral fee-
shifting, and ease in proof of damages – coupled with unavoidable ex
ante uncertainty over adjudicatory results and managerial risk aversion
will cause some firms to raise their prices to avoid predatory pricing
litigation. There is no complete solution to the paradox, since both the
absence and presence of a legal prohibition on predatory pricing would
induce upward deviations from optimal pricing. Courts, Congress, and
the antitrust agencies can attempt to minimize the costs of maintaining a
legal prohibition on predation by adopting decisional rules that mandate
deliberate underinclusion in establishing liability norms and in
adjudication. They can also adopt procedural and remedial rules – such
as detrebling damages in predation cases, bilateral fee-shifting, and
limiting information exchange in discovery – to minimize the costs of the
predatory pricing prohibition.
i
TABLE OF CONTENTS
Abstract ...................................................................................................................i
Table of Contents ...................................................................................................ii
Introduction............................................................................................................1
I. STRATEGIC USES OF PREDATORY PRICING THEORIES ......................4
A. The Availability of Strategic Predatory Pricing Claims......................7

1. Overcoming Rival’s Efficiency Advantages...........................8
a. Raising Rival’s Costs through Predatory Pricing
Litigation ..................................................................8
b. Exploiting the Magnitude of Recoverable
Damages.................................................................12
2. Facilitating Oligopolistic Pricing through Price Signaling,
Information Exchange, and Judicial Policing......................16
B. Do Firms Actually Engage in Strategic Predatory Pricing
Litigation? .........................................................................................27
II. THE SOCIAL COSTS OF CHILLING PRICE COMPETITION ................32
A. The Socially Optimal Pricing Point ..................................................33

B. The Tendency of Predatory Pricing Law to Induce Deviations from
Marginal Cost Pricing.......................................................................36
1. Likelihood of Detection, Gain/Loss Asymmetries, and the
Treble Damages Remedy........................................................39
2. Unpredictability, Risk Aversion, and Adjudicatory Error ....43
3. Summary of Directional Influences on Pricing Behavior .....48
C. Results of In-House Counsel Survey on Influence of Predatory
Pricing Law ...................................................................................... 49
III. OPTIMAL PREDATORY PRICING POLICY IN LIGHT OF MARKET

EFFECTS ...................................................................................................... 53
A. Decisional Rules ................................................................................54

1. Deliberate Underinclusion in Liability Rules .......................54
2. Deliberate Underinclusion in Adjudication ..........................56
3. Bright-Line Liability Rules...................................................57
B. Remedial Rules..................................................................................58
1. Eliminating the Treble Damages Remedy ............................58
2. Eliminating Competitor Standing .........................................60
3. Bilateral Fee-Shifting............................................................62
4. Prohibiting Discovery on Pricing and Costs Until Threshold
Showing of Market Screens.................................................63
Conclusion ........................................................................................................... 64
ii
INTRODUCTION
Predatory pricing is a paradoxical offense.1 Although antitrust law

values low prices and abhors high ones,2 the “predator” stands accused charging
too low a price – of doing too much of a good thing. Predation is said to be
socially harmful because the low prices of today drive out competitors and allow
the high prices of tomorrow. But proof of actual high prices in time two is not
required, since even attempts at predation that never succeed and never lead to
monopolistic recoupment are condemned.3 “Predators” can face treble damage
suits for pricing too low,4 even if they never do the thing the law worries about –
price too high.
The Supreme Court has repeatedly worried that the existence of the
predatory pricing offense may perversely chill vigorous price competition. It has
noted that “the mechanism by which a firm engages in predatory pricing –
lowering prices – is the same mechanism by which a firm stimulates
competition,” and that “mistaken inferences . . . are especially costly, because
they chill the very conduct the antitrust laws are designed to protect.”5 The Court
has commented that “[i]t would be ironic indeed if the standards for predatory
pricing liability were so low [that antitrust suits themselves] became a tool for
* Assistant Professor of Law, Benjamin N. Cardozo School of Law, Yeshiva

University; J.D., University of Chicago, B.A., Wheaton College. Funding for the survey
reported in this article was generously provided by the Samuel and Ronnie Heyman
Center on Corporate Governance.
1
One can, of course, believe that the entire antitrust enterprise is paradoxical. See
Robert H. Bork, THE ANTITRUST PARADOX: A POLICY AT WAR WITH ITSELF (1978).
Even so, the predatory pricing offense is a particularly acute paradox, since it condemns
as unlawful low prices which are the very object of the antitrust laws.
2
State Oil v. Kahn, 522 U.S. 3, 15 (1997) (explaining that charging lower prices is
beneficial to consumers and generally protected under antitrust laws); Illinois Brick Co. v.
Illinois, 431 U.S. 720, 756 (1977) (quoting Senate Report accompanying Hart-Scott-
Rodino Antitrust Improvements Act of 1976 for proposition that “(t)he economic burden
of most antitrust violations is borne by the consumer in the form of higher prices for
goods and services”).
3
Probabilistic harm in time two – to the degree of a “dangerous probability” –
suffices. See generally III Phillip E. Areeda & Herbert Hovenkamp, ANTITRUST LAW:
AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 726 (1996).
4
Such actions would need to be brought by competitors rather than consumers, since
consumers that enjoyed lower prices in time one without ever getting to the recoupment
era in time two would lack any viable claim of antitrust injury.
5
Brooke Group v. Brown & Williamson, 509 U.S. 209, 226 (1993) (quoting
Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986); see also
Cargill, Inc. v. Montfort of Colorado, Inc., 479 U.S. 104, 122 n.17 (1986) (same).
1
keeping prices high.”6 Seeking to avoid this irony, the Court has set high the bar
that predatory pricing plaintiffs must hurdle.
Too high, according to many. In the past decade, some commentators

and courts have wondered whether the Supreme Court has become too solicitous
of price competition and too skeptical about claims of predation.7 In a recent
decision, the Tenth Circuit offered that, in light of recent economic scholarship, it
would not approach predatory pricing cases with “the incredulity that once
prevailed.”8 But “incredulity” – skepticism that firms would ever attempt
predatory pricing or succeed in it – was only one prong of the Chicago School
attack on predatory pricing theories. The other prong was the one mentioned at
the outset – that error in the specification of the legal standard could chill
vigorous price competition, thus causing predatory pricing law to lead to a net
increase in prices. To this latter prong, the more credulous crowd has not yet
offered a convincing reply.
Perhaps that is because the “chilling price competition” claim was

posited but never established. Despite the claim that error in the legal standard
could chill vigorous price competition, no proof has yet been offered that price
competition has actually been chilled. The absence of rigorous proof that
“chilling” has occurred could be due to the fact that the Supreme Court has
gotten it right on the legal standard, thus avoiding the chilling it feared. But that
account does not seem wholly persuasive, since the Supreme Court did not begin
to reign in predatory pricing theories until the last two decades and still has not
resolved circuit splits in the lower courts over certain fundamental predatory
pricing issues, such as the appropriate measure for determining when a price is
“below cost.”9 Further, although it is accepted wisdom that no predatory pricing
6
Brooke Group, 509 U.S. at 226-27.
7
Avishalom Tor, Illustrating a Behaviorally Informed Approach to Antitrust Law:
The Case of Predatory Pricing, 18 Fall-Antitrust 52 (2003); Aaron S. Edlin, Stopping
Above-Cost Predatory Pricing, 111 Yale L. J. 941 (2002); Patrick Bolton, Joseph F.
Brodley & Michael H. Riordan, Predatory Pricing: Strategic Theory and Legal Policy,
88 Geo. L. J. 2239 (2000); Jonathan B. Baker, Predatory Pricing After Brooke Group:
An Economic Perspective, 62 Antitrust L. J. 585 (1994).
8
United States v. AMR Corp., 335 F.3d 1109, 1115 (10th Cir. 2003). Despite
approaching predatory pricing claims with less incredulity, the court affirmed the district
court’s grant of summary judgment against the United States finding that none of the four
alternative cost-revenue models advanced by government showed pricing below
incremental cost.
9
Three times, the Supreme Court has declined to decide what is the appropriate
measure of cost below which prices must be set in order to be condemned as predatory.
Brooke Group, 509 U.S. at 223 n. 24; Cargill, 479 U.S. at 117-118 n.12; Matsushita, 475
U.S. at 585 n.8.
2
plaintiff has won a jury verdict since Brooke Group,10 plaintiffs have recently
won some predatory pricing cases11 and procured substantial settlements in
others.12 Additionally, regardless of their low probability of success, plaintiffs
continue to file a significant number of federal predatory pricing cases,13
suggesting that predatory pricing complaints may afford plaintiffs strategic
advantages whether or not they ultimately prevail.
Given the importance of the “chilling price competition” assertion to the

development of predatory pricing doctrine, a closer examination of that claim is
warranted. In exactly what ways, and to what degree, does predatory pricing law
chill price competition? Is some chilling inevitable given that the law condemns
pricing too low as an offense, or are there structural means to minimize the
incidence of predatory pricing while also minimizing the collateral consequences
of recognizing a predation theory? The answers to these questions should play a
central role in the continuing debate over optimal structuring of the predatory
pricing offense, which appears poised to enter a new phase of development
stimulated by advances in behavioral economics and game theory. It is
insufficient to justify a particular standard of illegality for price cuts on the
ground that the class of prohibited price cuts are socially harmful. Rather, it is
necessary to consider whether the net effect of any legal rule prohibiting price
cuts is to induce higher or lower prices than those that would obtain in an
unregulated, or differently regulated, state given that any prohibition on
predatory pricing may also discourage some innocent price cuts.
10
See Edlin, supra n. ___ at 941; Herbert Hovenkamp, Post-Chicago Antitrust: A
Review and Critique, 2001 Colum. Bus. L. Rev. 257, 312 (2001); Bolton, Brodley &
Riordan, supra n. ___ at 2258-59; see also David Close, Don’t Fear the Reaper: Why
Transferable Assets and Avoidable Costs Should Not Resurrect Predatory Pricing, 88
Iowa L. Rev. 433, 447 (2003).
11
On September 27, 2002, a San Antonio jury awarded Kinetic Concepts, Inc. and
Medical Retro Design, Inc. $173.6 in damages, before trebling, in their federal predatory
pricing suit against Hillenbrand Industries and Hill-Rom, its subsidiary. Kinetic
Concepts, Inc. v. Hillenbrand Industries, Inc., 262 F.Supp.2d 722, 725-26 (W.D. Tex
2003). The case was subsequently settled before appeal. See infra n. ____. Further,
LePage’s won a $68,486,697 jury verdict against 3M in a monopolization case based on
3M’s bundled discounts and rebates to retailers. LePage's Inc. v. 3M, 324 F.3d 141 (3rd
Cir. 2003) (en banc). The original Third Circuit panel majority and the en banc
dissenting judges saw LePage’s claims as being essentially ones for predatory pricing.
Judge Sloviter’s en banc majority opinion rejected that characterization. See Daniel A.
Crane, Multiproduct Discounting: A Myth of Non-Price Predation, ___ U. Chi. L. Rev.
___ (2005).
12
See infra text accompany notes ___.
13
See infra n. ___ for cases.
3
Part I of this Article considers the most obvious way in which predatory
pricing law could adversely affect market pricing: If rival firms strategically
misuse predatory pricing law to discourage price-cutting behavior, then predatory
pricing law could have strong effects antithetical to its purposes. Firms may
strategically misuse predatory pricing law in several different ways. Less
efficient firms may use the threat of a predation lawsuit to raise their rivals’ costs
and thereby overcome efficiency deficits. Equally efficient firms may use
predatory pricing litigation to help organize or stabilize a tacit agreement on
pricing. Part I concludes by considering whether there is evidence that firms in
fact use predatory pricing litigation for strategic purposes, and concludes that
there is some evidence that suggests that they do.
Part II considers the incentives that predatory pricing law creates for
firms to deviate from socially optimal pricing, particularly in comparison to the
incentives that firms would face in an unregulated state. Since both the existence
of predatory pricing law and the absence of such a prohibition would induce or
permit deviations from optimal pricing, some comparison of the likely effects of
weak and strong predatory pricing regimes on pricing behavior is necessary in
formulating the optimal legal rules. I argue that a number of remedial features of
antitrust law – including the treble damages remedy, fee-shifting, and liberality in
proof of damages – coupled with behavioral influences on management decision
making – such as risk aversion under conditions of significant uncertainty –
suggest that predatory pricing law may induce a substantial amount of deviation
from optimal pricing. Part II concludes by reporting the results of an informal
study of in-house lawyers that I conducted to understand the extent to which
predatory pricing law influences firms’ pricing behavior in non-litigation
contexts.
Finally, Part III suggests some decisional and remedial approaches to

predatory pricing law that could help to minimize the costs of recognizing the
predation theory. The adoption of decisional rules mandating underinclusion in
liability standards and adjudication and a precommitment to the adoption of
predictable bright-line rules would help to stem overdeterrence. Some remedial
proposals that others have raised – such as detrebling damages and eliminating
competitor standing in predatory pricing cases – are revisited in light of a fuller
appreciation of the market effects of predatory pricing law. Several new
proposals are also presented, including making fee-shifting bilateral and limiting
discovery to facts concerning market screens until the plaintiff demonstrates that
predation could plausibly have occurred in the relevant market. In short, I argue
that, if a predation theory is to be recognized at all, it must be tightly contained
not only in terms of the specification of the relevant liability rule but also in
terms of the remedial structure of predatory pricing litigation.
I. STRATEGIC USES OF PREDATORY PRICING THEORIES
A mainline view among legal scholars today is that the Supreme Court’s
decisions in Matsushita and Brooke Group have made it virtually impossible for
4
plaintiffs to win predatory pricing cases.14 While this pessimism may be

somewhat overstated,15 it raises an interesting question: If predatory pricing
cases are doomed to failure in light of Matsushita and Brooke Group, why do so
many plaintiffs continue to assert them? Since Brooke Group was decided in
1993, at least 57 federal antitrust lawsuits alleging predatory pricing have been
filed, based on a survey of reported decisions alone.16 Many unreported federal
14
See Bolton, Brodley & Riordan, supra n. ___ at 2258-60; Hovenkamp, supra n.
___ at ___.
15
See supra n. ___.
16
The following are reported federal cases involving a complaint alleging
predatory pricing filed after 1993. The list including primary line price discrimination
under the Robinson-Patman Act, but does not include claims under state antitrust statutes
or anti-dumping statutes. Covad Commun. Co. v. BellSouth Corp., 374 F.3d 1044 (11th
Cir. 2004); Beech-Nut Nutrition Corp. v. Gerber Products Company, 69 Fed. Appx. 350
(9Th Cir. 2003); Michigan Paytel Joint Venture v. City of Detroit, 287 F.3d 527 (6th Cir.
2002); Bailey v. Allgas, Inc., 284 F.3d 1237 (11th Cir. 2002); Lycon, Inc. v. Juenke, 250
F.3d 285 (5th Cir. 2001); Taylor Pub. Co. v. Jostens, Inc. 216 F.3d 465 (5th Cir. 2000);
Acoustic Systems, Inc. v. Wenger Corp., 207 F.3d 287 (5th Cir. 2000); Western Parcel
Exp. v. United Parcel Service, 190 F.3d 974 (9th Cir. 1999); Stearns Airport Equipment
Co. v. FMC Corp., 170 F.3d 518 (5th Cir. Tex.); National Parcel Services, Inc. v. J.B.
Hunt Logistics, Inc.; 150 F.3d 970 (8th Cir. 1998); Kentmaster Mfg. Co. v. Jarvis Prods.
Corp., 146 F.3d 691 (9th Cir. 1998); C.B. Trucking, Inc. v. Waste Management, Inc., 137
F.3d 41 (1st Cir. 1998 ); Springfield Terminal Ry. Co. v. Canadian Pacific Ltd., 133 F.3d
103 (1st Cir. 1997); Queen City Pizza, Inc. v. Domino's Pizza, Inc., 124 F.3d 430 (3rd Cir.
1997); Creative Copier Servs. v. Xerox Corp., 2004 WL 2600436 (D. Conn., Nov. 15,
2004); Linens of Europe, Inc. v. Best Mfg., Inc., 2004-2 Trade Cases P 74,548 (S.D.N.Y.
2004); Alcorn v. BP Products North America, Inc., 2004-2 Trade Cases P 74,505 (D.
Minn. 2004); Nobody in Particular Presents, Inc. v. Clear Channel Communs., 311
F.Supp. 2d 1048 (D. Colo. 2004); Specialty Minerals, Inc. v. Pleuss-Stauffer AG, 2004
WL 42280 (S.D.N.Y. Jan 7, 2004); El Aguila Food Prods., Inc. v. Gruma Corp., 301 F.
Supp. 2d 612 (S.D.Tex. 2003); Leopoldo Fontanillas, Inc. v. Luis Ayala Colon Sucesores,
Inc., 283 F. Supp. 2d 579 (D. Puerto Rico 2003); E-Z Bowz, L.L.C. v. Professional Prod.
Research Co., 2003 WL 22068573 (S.D.N.Y. Sept. 5, 2003); Blanchard & Co, v. Barrick
Gold Corp., 2003-2 Trade Cases P 74,172 (E.D. La. 2003); Masco Contractor Servs.
East, Inc. v. Beals, 279 F. Supp. 2d 699 (E.D. Va. 2003); McKenzie-Willamette Hosp. v.
Peacehealth, 2003 WL 23537980 (D. Or. Aug. 15, 2003); Kinetic Concepts, Inc. v.
Hillenbrand Indus., Inc., 262 F.Supp.2d 722 (W.D. Tex. 2003); Kuligowska v. GNC
Franchising, Inc., 2002 WL 32131024 (W.D. Pa. Nov. 25, 2002); Berlyn, Inc. v. Gazette
Newspapers, Inc., 223 F. Supp. 2d 718 (D. Md. 2002); DJ Mfg. Corp. v. Tex-Shield, Inc.,
275 F.Supp.2d 109 (D. Puerto Rico 2002); Tate v. Pacific Gas & Elec. Co., 230
F.Supp.2d 1072 (N.D. Cal. 2002); Mathiowetz Const. Co. v. Minnesota Dept. of Transp.,
2002 WL 334394 (D. Minn. 2002); ASM America, Inc. v. Genus, Inc., 2002-1 Trade
5
suits have probably have been filed as well.17 Are all of these plaintiffs Don
Quixotes tilting at windmills? It is unlikely that they are litigating costly,
resource-intensive predatory pricing cases merely for sport. If an ultimate money
judgment is doubtful in light of Matsushita and Brooke Group, predatory pricing
plaintiffs may have objectives other than simply exacting money from a
________________________________________________________
Cases P 73,573 (N.D. Cal. 2002); Coventry Health Care of Kansas, Inc. v. Via Christi
Health Sys., Inc., 176 F. Supp. 2d 1207 (D. Kan. 2001); Lee v. General Nutrition Cos.,
Inc., 2002-2 Trade Cases P 73,777 (C.D. Ca. 2001); Yellow Page Solutions, Inc. v. Bell
Atlantic Yellow Pages Co., 2002-1 Trade Cases P 73,556 (S.D.N.Y. 2001); Eon Labs
Mfg. Inc. v. Watson Pharm., Inc., 164 F. Supp. 2d 350 (S.D.N.Y. 2001); Mathias v. Daily
News, L.P., 152 F. Supp. 2d 465 (S.D.N.Y. 2001); United Magazine Co. v. Murdoch
Magazines Dist., Inc.,146 F. Supp. 2d 385 (S.D.N.Y. 2001); Peerless Heater Co. v.
Mestek, Inc., 2000-1 Trade Cases P 72,917 (E.D. Pa. 2000); Act, Inc. v. Sylvan Learning
Systems, Inc., 2000 WL 34031484 (N.D. Iowa, May 8, 2000); J & S Oil, Inc. v. Irving Oil
Corp., 63 F.Supp.2d 62 (D. Me. 1999); Cohabaco Cigar Co. v. U.S. Tobacco Co., 1998
WL 773696 (N.D. Ill. Oct. 30, 1998); CSY Liquidating Corp. v. Harris Trust and Sav.
Bank, 1998 WL 157065 (N.D. Ill. March 31, 1998); Malek Wholesaler, Inc. v. First Film
Extruding, Ltd., 1998 WL 142385 (N.D. Ill. March 20, 1998); Bushnell Corp. v. ITT
Corp., 175 F.R.D. 584 (D. Kan. 1997); L&W/Lindco Products, Inc. v. Pure Asphalt Co.,
979 F.Supp. 632 (N.D. Ill. 1997); Anti-Monopoly, Inc. v. Hasbro, Inc., 958 F.Supp. 895
(S.D.N.Y. 1997); Cardinal Industries, Inc. v. Pressman Toy Corp., 1997-1 Trade Cases P
71,738 (S.D.N.Y. 1996); Clark v. Flow Measurement, Inc., 948 F.Supp. 519 (D.S.C.
1996); Hahn v. Rifkin/Narragansett, 941 F.Supp. 1196 (S.D. Fla. 1996); Aurora Gas Co.
v. Presque Isle Electric & Gas, 1996 WL 627399 (E.D. Mich. 1996); Barge v. Daily
Journal Corp., 1996-2 Trade Cases P 71,541 (S.D.N.Y. 1996); Westbank Yellow Pages v.
BRI, Inc., 1996-1 Trade Cases P 71,448 (E.D. La. 1996); AD/SAT, a Div. of Skylight, Inc.
v. Associated Press, 920 F.Supp. 1287 (S.D.N.Y. 1996); Keller's Radiator Warehouse,
Inc. v. Go/Dan Indus., 1996-1 Trade Cases P 71,318 (D. Kan. 1996); Storis, Inc. v. GERS
Retail Systems, Inc., 1995 WL 337100 (D.N.J. May 31, 1995); Bonollo Rubbish Removal,
Inc. v. Town of Franklin, 886 F.Supp. 955 (D. Mass. 1995); MCI Telecommunications
Corp. v. Graphnet, Inc., 881 F.Supp. 126 (D.N.J. 1995).
17
Only about ten to fifteen percent of federal district court decisions are
published in the Westlaw database, which was searched to generate these statistics.
William A. Hilyerd, Using the Law Library: A Guide for Educators—Part I: Untangling
the Legal System, 33 J. L. & Educ. 213, 221 (2004). But it would not be safe extrapolate
from the 58 reported decisions that there have been 387 to 580 federal predatory pricing
cases filed since 1993. Antitrust cases, which often involve large amounts in controversy
and sophisticated counsel, are likely to be reported disproportionately to many more
mundane matters, such as prisoner pro se filings and federally-backed student loan
foreclosure actions. Further, the ten to fifteen statistic concerns the number of decisions
that are published, not the total number of cases in which some written decision gets
reported. A particular case may involve multiple written decisions, some reported and
some not.
6
vulnerable adversary. As recognized by Ordover and Baumol, Snyder and

Kauper, Easterbrook, and McAfee and Vakkur, business rivals may use antitrust
law for a variety of strategic objectives.18
Predatory pricing law is perhaps the most suggestive of all antitrust

theories for strategic use because it involves an effort to punish the lowering of
prices – the very behavior that ordinarily counts as a virtue. To the extent that the
literature about strategic misuse of the antitrust laws has focused on predatory
pricing as a particular problem, it has largely addressed the tendency of less
efficient firms to seek from the courts the creation of liability rules that would
shelter them from competition by more efficient firms.19 While strategic capture
of legal rule-making by less efficient firms is a legitimate and serious concern, it
is one that can be addressed by ensuring transparency and careful deliberation in
the establishment of the relevant liability rules. But even assuming that the rules
are properly framed to distinguish between legitimate competition and
exclusionary behavior, there remains the possibility that plaintiffs will misuse
predatory pricing law to increase prices above competitive levels. Even if the
content of the law is optimally specified, the opportunity for abuse through
predatory pricing litigation does not vanish. This Part considers the ways in
which plaintiffs may use predatory pricing litigation – or the threat of litigation –
to diminish price competition even in cases where predation is unlikely to have
taken place and the courts are unlikely erroneously to conclude that it has.
A. The Availability of Strategic Predatory Pricing Claims
There are two distinct ways in which firms may strategically misuse
predatory pricing law. In the first model, a less efficient rival might use a
predation lawsuit to raise its rival’s costs or threaten the possibility of a large
money judgment in order to overcome an efficiency deficit. In the second model,
a firm might use a predation lawsuit to send price signals, conduct information
exchange, and otherwise facilitate the formation or maintenance of a consciously
18
R. Preston McAfee & Nicholas V. Vakkur, The Strategic Abuse of the Antitrust
Laws, Working Paper, on file with author (2004); Edward A. Synder & Thomas E.
Kauper, Misuses of the Antitrust Laws: The Competitor Plaintiff, 90 Mich. L. Rev. 551
(1991); William J. Baumol & Janusz A. Ordover, Use of Antitrust to Subvert Competition
, 28 J. L. & Econ. 247 (1985); Frank H. Easterbook, The Limits of Antitrust, 63 Tex. L.
Rev. 1 (1984). See also Edward D. Cavanagh, De-Trebling Antitrust Damages: An Idea
Whose Time Has Come?, 61 Tul. L. Rev. 777, 814 (1987). On the more general
proposition that antitrust law has been systematically misused for rent-seeking purposes,
see THE CAUSES AND CONSEQUENCES OF ANTITRUST: THE PUBLIC CHOICE PERSPECTIVE
(Fred S. McChesney & William F. Shughart II eds., 1995).
19
See Baumol & Ordover, supra n. ___ at 255 (noting that less efficient firms
“advocate their costing approach as a device to limit the price-cutting opportunities of
rivals rendered more efficient by economies of scale or scope, by superior management,
or by other legitimate sources of superiority”).
7
parallel pricing scheme. A strategically thinking firm need not adopt only one
model. Elements of both models could be used at the same time to discourage a
rival’s price competition.
1. Overcoming Rival’s Efficiency Advantages
If a predatory pricing lawsuit is so unlikely to succeed in light of the

substantial hurdles created by Matsushita and Brooke Group, then defendants
might not allow the threat of such litigation to affect their market behavior.
However, the mere fact that a lawsuit is unlikely to succeed is only one factor in
the defendant’s pricing calculus. Equally important are such factors as the cost
and aggravation of litigating and the magnitude of plaintiff’s recovery in the
unlikely event that the plaintiff does win a jury verdict or advances far enough in
the litigation to exact a favorable settlement.
a. Raising Rival’s Costs Through Predatory Pricing Litigation
A common focal point in predatory pricing litigation and scholarship is

the relative productive efficiencies of the alleged predator and prey. If the “prey”
is less efficient than the “predator,” the “predator” may be able to exclude the
“prey” by pricing above its own cost but below its rival’s. Most judicial opinions
and commentators hold that any competitor excluded from a market because of
its inferior efficiency has no complaint under the antitrust laws, 20 although that
view is not universal.21 The usual discussion on the comparative efficiency of
20
E.g., Morgan v. Ponder, 892 F.2d 1355, 1363 (8th Cir. 1989) (holding that
predatory pricing plaintiff must show that defendant’s price would have excluded an
equally efficient competitor); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227,
232 (9th Cir. 1983) (discussing effect of below-marginal-cost pricing on equally efficient
competitors); MCI Communications Corp. v. AT&T, 708 F.2d 1081, 1113 (7th Cir. 1983)
(defending price cuts by dominant firms as incapable of excluding equally efficient
firms); Einer Elhauge, Why Above-Cost Price Cuts to Drive Out Entrants Are Not
Predatory – And the Implications for Defining Costs and Market Power, 112 Yale L. J.
682, 711 (2003) (analyzing what sort of price cuts are capable of driving out equally
efficient firms); Edlin, supra n. ___ (proposing imposition of price-cut freeze on
dominant incumbent firms to enable less efficient new entrants to reach efficient scale);
Richard A. Posner, ANTITRUST LAW 215 (2d ed. 2001) (arguing that above-cost pricing
should not be unlawful because it cannot exclude an equally efficient competitor); Phillip
Areeda, Monopolization, Mergers, and Markets: A Century Past and the Future, 75 Cal.
L. Rev. 959, 968 (1987) (defending Areeda-Turner marginal cost test for predation on
ground that prices above marginal cost cannot exclude an equally efficient competitor).
21
But see Edlin, supra n. ___ (proposing imposition of price-cut freeze on
dominant incumbent firms to enable less efficient new entrants to reach efficient scale);
LePage’s v. 3M, 324 F.3d at 173 (Greenberg, J., dissenting) (discussing LePage’s
apparently successful argument that it did not need to show that it was as efficient in the
8
market rivals in predatory pricing cases assumes that each firm’s efficiency is
endogenously created – that each firm brings to the market whatever productive
capacity it has attained on its own. But firms can also affect one another’s
efficiency, incidentally22 or deliberately.23 When an efficiency gap exists
between rival firms, predatory pricing law may enable the less efficient firm to
coerce its rival to price in manner consistent with the less efficient firm’s
productive limitations.24
Suppose that a new entrant is less efficient than the dominant incumbent.
The incumbent may drop its price in response to the new entry, threatening the
new entrant’s survival. The new entrant may threaten to file a predatory pricing
suit – or actually file one – to force the incumbent to soften its price-cutting. The
incumbent firm might quite reasonably anticipate that whatever profits it would
forgo by yielding to the threatened predatory pricing suit and raising its price
(thus yielding market share to the new entrant) would be more than offset by
savings from not having to litigate a predatory pricing case. The incumbent
might therefore shade its prices in the market to appease the litigious rival.
Firms, of course, prefer not to face the cost of litigation. But it is not
sufficient that the aggressor firm threaten to raise its rival’s costs through
predatory pricing litigation. In order for the threat to be credible and force the
incumbent to cease its price discounting even if the incumbent believes the
predatory pricing claim would be highly unlikely to succeed, the incumbent must
believe that the predatory pricing lawsuit would cost it more than it would cost
the new entrant.25 Otherwise, there would be no obvious advantage to the new
entrant from filing the lawsuit since it would harm the new entrant as much as the
incumbent (putting aside the possibility that the new entrant would actually
prevail and recover a substantial judgment, which is discussed in the next
________________________________________________________
production of transparent tape as 3M in order to challenge 3M’s bundled discounts and
rebates as exclusionary).
22
Elhauge, supra n. ___ (explaining how new entrant can decrease incumbent’s
efficiency by creaming the most lucrative business and thereby undermining incumbent’s
price-discrimination scheme).
23
Tom Krattenmaker & Steven Salop, Anticompetitive Exclusion: Raising Rival’s
Costs to Achieve Power Over Price, 96 Y ale L. J. 209, 223 -24 (1986); Steven Salop &
David T. Scheffman, Raising Rival’s Costs, 73 AM. ECON. REV. 267 (1983). On
predatory litigation, see Gary Myers, Litigation as a Predatory Practice, 80 KY. L.J. 565
(1992).
24
See Oliver E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis,
87 Yale L. J. 284, 287 (1977) (noting possibility that predatory pricing law could be used
as a “shelter against inefficiency”).
25
See generally, Krattenmaker & Salop, supra n. ___.
9
section).26 In order for the threat of strategic predatory pricing litigation to be

credible and to affect its pricing decisions regardless of the expected outcome,
the incumbent firm generally must believe that its litigation costs and the new
entrant’s will be asymmetrical – that the incumbent will pay substantially more to
defend the lawsuit than the plaintiff will to prosecute it. For at least four reasons,
the incumbent might reasonably believe that this is so.
First, defendant’s loss-aversion may exceed plaintiff’s gain-preference

because of the “endowment effect” – the propensity of firms to disfavor losses
more than they favor equivalent gains.27 If so, defendant might be willing to
spend more to avoid an adverse judgment than plaintiff would to obtain a
favorable one. Facing the prospect of a predatory pricing lawsuit, defendant
might reasonably conclude that its own expenditures to mount a successful
defense would far exceed the plaintiff’s costs to prosecute the unsuccessful suit.
The defendant would therefore have reason to believe that the plaintiff would be
willing to prosecute a predatory pricing lawsuit as a means of increasing
defendant’s costs. To avoid such a nuisance suit, the incumbent firm might be
induced to soften its price competition, thus enabling the new entrant to
overcome the incumbent’s efficiency advantage.28
Second, and in a similar vein, defendants may have reputational reasons,

not shared by plaintiffs, that strengthen their aversion to losing antitrust lawsuits.
The management team responsible for conduct leading to an adverse judgment or
a substantial settlement may fear stigmatization or a loss of shareholder or
customer confidence. While reputational spillover effects in antitrust cases may
be weak compared to other categories of corporate crime,29 they are likely to
26
A threat by the new entrant to raise both firms’ costs by an equal amount could
potentially be credible if the new entrant had greater or cheaper access to capital than the
incumbent.
27
See Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, Experimental
Tests of the Endowment Effect and the Coase Theorem, in Cass R. Sunstein, ed.,
BEHAVIORAL LAW AND ECONOMICS (2000); Richard Thaler, Toward a Positive Theory of
Consumer Choice, 1 J. Econ. Behav. & Org. 3 (1979).
28
Differences between plaintiff and defendant’s preferences with respect to losses
and gains may not only affect the amount of each side’s litigation expenditures but also
the dynamics of settlement negotiations. If defendant’s aversion to large losses exceeds
plaintiff’s preference for large gains, the likelihood increases that defendant would be
willing to make a larger settlement payment to avoid the risk of a substantial adverse
judgment in a predatory pricing case. This could increase the attraction of predatory
pricing litigation as a strategic threat by plaintiffs to coerce defendants to lessen price
competition.
29
Cindy R. Alexander, On the Nature of Reputational Penalty for Corporate Crime:
Evidence, 42 J.L. & Econ. 489 (1999) (reporting that firms convicted of anticompetitive
10
stronger on the defendant’s side of the equation than on the plaintiff’s.

Management teams that instigate frivolous, costly, and ultimately unsuccessful
litigation may pay a reputational price, but probably a lower one than executives
tagged with violations of the antitrust laws which are, after all, criminal statutes.
The threat of a predatory pricing lawsuit may thus induce the incumbent firm to
forgo exploiting its efficiency advantage by under-pricing its competitors.
Instead, faced with an implicit or explicit litigation threat, the incumbent firm
may increase its price to appease the new entrant.
Third, plaintiffs may be able to hire lawyers on contingency, thus

shifting the risks of litigation failures onto a third party, whereas the defendant
must bear the litigation costs on hourly-fee basis regardless of the outcome.30
The contingency fee structure can induce the plaintiff to see only an upside to
initiating a predatory pricing lawsuit.31 Of course, to the extent that the
plaintiff’s objective in bringing such a lawsuit is to force an abatement of price
competition rather than to achieve a favorable money judgment or settlement, it
is less likely that plaintiff would be able to find a law firm agreeable to taking the
matter on contingency. Contingency-compensated lawyers must be convinced
that the lawsuit may bring a monetary benefit to them, and not merely a strategic
benefit to their clients. But, at least where plaintiff has some hope of exacting a
settlement payment from defendant, the defendant has reason to believe that its
own litigation expenses will be substantial regardless of the outcome whereas
plaintiff may pay no out-of-pocket fees at all. As discussed in Part IB, a survey
of plaintiffs’ lawyers in recent predatory pricing cases reveals that, despite
Brooke Group and other decisions hostile to predatory pricing cases, some firms
continue to take predatory pricing cases on contingency.
Finally, as Frank Easterbrook has argued, antitrust litigation may create

an “asymmetrical structure of incentives” favoring plaintiffs, because plaintiff’s
________________________________________________________
collusion paid a relatively small reputational price); see also Michael K. Block, Optimal
Penalties, Criminal Law and the Control of Corporate Behavior, 71 B.U. L. Rev. 395,
400, 409 (1991); William L. Silber & Lawrence J. White, Market Reaction to the Filing
of Antitrust Suits: An Aggregate and Cross-Sectional Analysis; Review of Econ. &
Statistics 64 (1982).
30
Keith N. Hylton, Welfare Implications of Costly Litigation Under Strict Liability,
4 Am. L. & Econ. Rev. 18, 37 (2002); Robert G. Bone & David S. Evans, Class
Certification and the Substantive Merits, 51 Duke L. J. 1251, 1299 n.182 (2002); Chris
Guthrie, Framing Frivolous Litigation: A Psychological Theory, 67 U. Chi. L. Rev. 163,
207 n. 203 (2000); Murray L. Schwartz and Daniel J.B. Mitchell, An Economic Analysis
of the Contingent Fee in Personal-Injury Litigation, 22 Stan L Rev 1125, 1125 (1970).
31
Eric Helland & Alexander Tabarrok, Contingency Fees, Settlement Delay, and
Low-Quality Litigation: Empirical Evidence from Two Datasets, 19 J. Law, Econ, &
Org. 517 (2003) (reporting that contingency fee structure tends to decrease the average
quality of lawsuits as compared to hourly fee structure).
11
discovery costs are likely to be less than the defendant’s.32 Since “defendant is
apt to be larger, with more files to search, and to have control of more pertinent
documents than plaintiff,”33 the incumbent may perceive the threatened lawsuit to
be a more costly enterprise to itself than to the new entrant.
A predatory pricing case need not be successful or even very likely to

succeed in order to teach price-cutters that pricing temperance, rather than price
aggression, is the more profitable route. Simply forcing the price-cutter to
endure a costly predatory pricing suit may be enough. Further, the new entrant
need not file a predatory pricing lawsuit to chill price competition by the
incumbent. A credible threat of such litigation may be sufficient to achieve the
desired result. If the incumbent anticipates that any predatory pricing lawsuit
filed by the new entrant would impose greater costs on the incumbent than on the
new entrant, the incumbent will believe that the new entrant has the power to
raise the incumbent’s costs by filing a predatory pricing lawsuit. If the new
entrant threatens litigation, the incumbent may understand that threat as one that
can realistically raise its costs and can be avoided by easing back on price
competition. So described, predatory pricing may be an effective strategic tool
for less efficient firms to erase a more efficient rival’s productive advantage.
And the threat of predatory pricing litigation, explicit or implicit, may work
whether or not the new entrant would actually be able to raise its rival’s costs
through litigation. What ultimately counts is not that the incumbent’s costs are
actually raised, but that the incumbent believes that its cost would be raised if it
continued to engage in vigorous price competition.
b. Exploiting the Magnitude of Recoverable Damages
In the wake of Brooke Group and Matsushita, plaintiffs find it difficult to

win predatory pricing lawsuits, but there remains a pot of gold awaiting any
plaintiff that does win. Evaluating the expected cost of a predatory pricing
lawsuit requires examining not only the ex ante probability of an adverse
judgment – which may be quite low – but also the magnitude of the recoverable
damages in the unlikely event of a plaintiff’s verdict. Whenever attained,
plaintiff’s damages in predatory pricing cases are likely to be quite high, which
creates a significant expected liability for defendants, even if a finding of liability
is unlikely.
Once a jury finds the defendant liable for predatory pricing, proving
damages is typically not that hard. The tendency of courts in antitrust cases is to
be strict with respect to proof of causation and antitrust injury, but much more
lenient in proof of the amount of damages once those elements are shown.34 This
32
Frank Easterbrook, The Limits of Antitrust, 63 Tex. L. Rev. 1, 34 (1984).
33
Id.
34
See generally Story Parchment Co. v. Paterson Parchment Paper Co., 282 U.S.
555, 562-63 (1931) (“It is true that there was uncertainty as to the extent of the damage,
but there was none as to the fact of damage; and there is a clear distinction between the
12
tendency has significant systemic effects in predatory pricing cases. A firm’s

aggressive price competition, whether predatory or innocent, almost inevitably
causes damage to competitors by lowering their market share and profitability
margins. While the antitrust laws presume that most such effects are damnum
absque injuria – harm without legal injury – when a plaintiff proves legal injury
in a predatory pricing case, proving damage resulting from the legal injury is
ordinarily feasible. Even new market entrants who have not yet established a
business and claim to have been excluded from the market by predatory pricing
may establish damages by relying on some reasonably equivalent benchmark.35
Proving the amount of damages in predatory pricing cases is, to put it mildly,
“not a straightforward matter.”36 Ascertaining the “but for” world requires
showing the but-for market price, plaintiff’s but-for market share, and plaintiff’s
profitability at the but-for price and market share.37 However, difficulties in proof
of damages often work to the benefit of plaintiffs, since the costs of any
uncertainty about the amount of profits that plaintiff would have earned are borne
by the guilty defendant rather than by the innocent plaintiff.38 Once predation is
proven, proving injury is ordinarily not difficult and the standards with respect to
proving the amount of damages are relaxed in the plaintiff’s favor.
________________________________________________________
measure of proof necessary to establish the fact that petitioner had sustained some
damage and the measure of proof necessary to enable the jury to fix the amount. . . .
Where the . . . [wrongful act] itself is of such a nature as to preclude the ascertainment of
the amount of damages with certainty, it would be a perversion of fundamental principles
of justice to deny all relief to the injured person, and thereby relieve the wrongdoer from
making any amend for his acts . . . . [T]he risk of the uncertainty should be thrown upon
the wrongdoer instead of upon the injured party”); J. Truett Payne v. Chrysler Motors
Corp., 451 U.S. 557, 566 (1981) (holding that some uncertainty in proving damages in
antitrust cases must be tolerated because the “vagaries of the marketplace usually deny us
sure knowledge of what plaintiff's situation would have been in the absence of the
defendant's antitrust violation”); Roger D. Blair & Jeffrey L. Harrison, Antitrust Policy
and Monopsony, 76 Cornell L. Rev. 297, 338 n.221 (1991) (“Traditionally, courts have
been lenient about the degree of certainty required to prove the amount of damage in an
antitrust case.”); Jeffrey L. Harrison, The Lost Profits Measure of Damages in Price
Enhancement Cases, 64 Minn. L . Rev. 751, 756-58 (1980) (discussing relaxed
requirements for proving amount of antitrust damages once antitrust injury is shown).
35
See II Phillip E. Areeda, Roger D. Blair & Herbert Hovenkamp, ANTITRUST LAW:
AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 396g (2000)
(discussing damages models in predatory pricing cases).
36
Id. at 580.
37
Id. at 580-81.
38
Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251, 265-66 (1946).
13
While the jury is considering what damages to award plaintiff in light of

the uncertainty created by defendant’s conduct, it is ignorant of the fact that the
damages are to be automatically trebled39 and that prevailing plaintiffs are
entitled to recover their attorney’s fees from defendants (while there is no
provision for prevailing defendants to recover their fees from plaintiffs).40 Juries
thus have little incentive to be conservative in awarding damages in order to
avoid overcompensating plaintiffs. Further, the conduct that gives rise to
predatory pricing claims – aggressive price competition – is easily misinterpreted
by naïve jurors as malicious and deserving of punishment. Defendant’s internal
documents are often laced with aggressive or violent metaphors that sound
shocking to jurors unfamiliar with the business world.41 Market competition is
often like the proverbial sausage factory – ugly when observed in intimate detail,
even if it produces desirable results. Seeing the inner workings of an aggressive
pricing campaign by a “big company” against a smaller new entrant may inflame
jurors into awarding large damages.42 Historically, jury awards in predatory
pricing cases have been disproportionately large, requiring remittitur by the
courts.43
Predatory pricing claims thus present a “perfect storm” of factors

favorable to plaintiffs in the event that liability is established – easy proof that
damages were suffered, leniency with respect to proving the amount of damages,
automatic trebling, automatic fee-shifting, and unsympathetic facts for
defendants. Unsurprisingly, plaintiff’s jury awards in predatory pricing cases are
often enormous.44 MCI won a jury verdict against AT&T that, with trebling,
39
15 U.S.C. § 15. Cases holding that juries are not to be informed that damages will
be trebled pursuant to statute include HBE Leasing Corp. v. Frank, 22 F.3d 41, 45-46 (2d
Cir. 1994); Copper Liquor, Inc. v. Adolph Coors Co., 506 F.2d 934, 955 (5th Cir. 1975);
Semke v. Enid Auto. Dealers Ass’n, 456 F.2d 1361, 1370 (10th Cir. 1972).
40
15 U.S.C. § 15.
41
See Posner, supra n. ___ at 214-15 (describing tendency of judges and juries to
misinterpret “metaphors of coercion that are compelling evidence of predatory intent to
the naïve”); A.A. Poulty Farms. Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396, 1402 (7th
Cir. 1989) (Easterbrook, J.) (describing tendency of plaintiff’s lawyers in predatory
pricing cases to “rummage through business records” for evidence of “greed-driven
desire to succeed and glee at a rival’s predicament” which influences juries “to penalize
hard competition”).
42
See infra text accompanying notes ___ - ____ .
43
See Bolton, Brodley & Riordan, supra n. ___ (noting that, before the current wave
of defendant-friendly predatory pricing precedents, juries often awarded
disproportionately large amounts in predatory pricing cases).
44
Bolton, Brodley, and Riordan, supra n. ___ at 2254-55.
14
would have amounted to a $1.8 billion judgment in 1980 dollars.45 Predation

jury verdicts can be large not only in absolute terms but, more importantly, in
relation to the defendant’s income stream. For example, the Kinetic Concepts
jury verdict of $173.646 would have amounted to a $520.8 million judgment after
trebling (before interest or attorney’s fees).47 To put that in perspective,
defendant Hillenbrand Industries’ net income in the year preceding the judgment
was $153 million – less than a third of the amount of the judgment.48 Largely
due to the $250 million settlement resulting from that judgment, Hillenbrand’s
net income fell to $44 million the following year.49
In light of the sheer magnitude of potential damages in predatory pricing

cases, it is not surprising that defendants continue to pay out substantial sums to
settle predatory pricing lawsuits, despite two decades of defendant-favorable
precedents. In recent years, settlements of $250 million,50 $65 million,51 $36
million,52 $6.5 million,53 have been reported in predatory pricing cases despite
the pro-defendant influence of Matsushita and Brooke Group. Many predatory
pricing lawsuits are “bet the company” events. Faced with such litigation, it
would not be surprising if many firms chose to retreat rather than to continue to
engage in aggressive price competition.
45
MCI Communications Corp. v. American Tel. and Tel. Co., 708 F.2d 1081, 1092
th
(7 Cir.1983).
46
See supra n. ____.
47
The case was settled before an appeal was taken. See note ___ infra.
48
Hillenbrand Industries’ 2002 SEC Form 10-K at 15.
49
Id.
50
Kinetic Concepts, 262 F. Supp. 2d at 725.
51
Brunswick to Settle Pricing Suits for $65 Million, N.Y. Times Dec. 23, 1999 at C4
(reporting that “[t]he Brunswick Corporation said Dec 22, 1999 that it had agreed to pay
$65 million to settle two class-action suits in which boat builders accused it of using
predatory pricing to drive competitors out of business”).
52
Harlan S. Byrne, In a Real Fix: The Corporate and Human Toll of Price-fixing
Cases an Be High, Barrons Oct. 2, 1995 at 16 (reporting that after state court awarded
Thermex Engergy $488 million in predatory pricing suit against Dyno Industries and ICI
Explosives, ICI settled with an offer of $36 million and Dyno settled on undisclosed
terms).
53
Vicki Vaughn, Family feud - Centeno heirs battle to control ruins of bankrupt
grocery chain, San Antonio Express-News June 2, 1996 (reporting that regional grocery
store H-E-B Co. paid Centeno Super Markets $6.5 million to settle predatory pricing
suit).
15
2. Facilitating Oligopolistic Pricing Through Price Signaling,

Information Exchange, and Judicial Policing
The previous section described the ways in which a firm might use the
threat of a predatory pricing suit to overcome an efficiency deficit and coerce
another firm to soften its price competition. To be successful, such a strategy
requires that one firm force a second firm to abandon an otherwise more
profitable pricing strategy in order to avoid costly litigation. There is another
strategic use to which threats of predatory pricing litigation could be put that
would not require that the threatening firm threaten to increase the other firm’s
costs or coerce the other firm to abandon a more profitable pricing scheme.
Threats of predatory pricing litigation, or litigation itself, may be an ideal tool to
create the necessary conditions for tacit price collusion among oligopolists, a
market condition that could increase the profits of both the threatening firm and
the threatened, to the detriment of consumers.
Tacit collusion among oligopolists, or even conscious parallelism – its

weaker form – is a perennial concern in antitrust law.54 Coordinated pricing
effects are the primary reason that the Government challenges mergers in
concentrated industries, particularly where goods are homogenous and barriers to
entry are high.55 But even in such markets there are often significant
impediments to parallel pricing that render “[t]his anticompetitive minuet most
difficult to compose and perform.”56 Uncertainty over competitors’ pricing and
output levels prevents multilateral price parallelism and cheating on the cartel –
or suspicion that others will cheat – foments a break-down of pricing discipline.57
54
See generally Donald F. Turner, The Definition of Agreement Under the Sherman
Act: Conscious Parallelism and Refusals to Deal, 75 Harv. L. Rev. 655 (1962).
55
See Department of Justice and Federal Trade Commission 1992 Horizontal
Merger Guidelines, 57 Fed. Reg. 41,552, 41,558, § 2.1 (Sept. 10, 1992) (discussing
theory of coordinated interaction among oligopolists resulting form increase in market
concentration); FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109, 131 (D.D.C. 2004) (noting
that “antitrust policy seeks particularly to inhibit ‘the creation or reinforcement by merger
of . . . oligopolistic market structures in which tacit coordination can occur”); Hospital
Corporation of America v. FTC, 807 F.2d 1381 (7th Cir. 1986) (Posner, J.) (“When an
economic approach is taken in a section 7 [Clayton Act] case, the ultimate issue is
whether the challenged acquisition is likely to facilitate collusion.”).
56
Brooke Group, 509 U.S. at 228.
57
Even overt cartels are known to face policing difficulties, as was shown in two
empirical studies of the Joint Executive Committee, an 1880s U.S. railroad cartel. See
Glenn Ellison, Theories of Cartel Stability and the Joint Executive Committee, 25 RAND
J. Econ. 37, 37-38 (1994) (noting that the cartel suffered occasional price wars); Robert
H. Porter, A Study of Cartel Stability: The Joint Executive Committee, 1880-1886, 14 Bell
16
Threats of predatory pricing litigation and actual predatory pricing litigation may
help to solve these collective action problems by signaling pricing levels,
facilitating information exchange, and providing state-sanctioned cartel policing.
The most immediate competitive effect of a predatory pricing complaint

may be to send price signals to competitors by providing a detailed specification
of the plaintiff’s objections to the defendant’s present pricing structure. Price
signaling is of concern in oligopolistic markets because information about a
competitor’s pricing intentions helps to eliminate the uncertainty that should
drive firms to price at cost.58 Although there are many cheaper ways of signaling
prices other than filing a predatory pricing complaint, some of them are illegal59
and some of them lack the specificity and detail of a predatory pricing complaint.
The predatory pricing complaint provides a vehicle for identifying specific
pricing decisions that were objectionable, itemizing customer contracts or
promotions that were allegedly anticompetitive, specifying what an appropriate
price would be, and even making allegations about defendant’s intentions with
respect to continuing or future pricing that permit inferences about plaintiff’s
own planning. For example, Beech-Nut’s 2001 predatory pricing complaint
against Gerber details allegedly predatory recent bids (within a few months
preceding the complaint), including allegations about Gerber and Beech-Nut’s
respective bids and Beech-Nut’s variable cost for infant cereal, and makes
allegations with respect to Gerber’s future planned pricing and promotional
activity.60
Discovery in litigation may also provide valuable information about

prices, costs, customers, contractual structures, output management, executive
compensation, and many other varieties of competitive data. Cost and revenue
data, in particular, play a prominent role in predatory pricing litigation since a
________________________________________________________
J. Econ. 301, 312- 13 (1983) (noting “reversions to noncooperative behavior . . . with a
significant decrease in market price in these periods”).
58
Joseph Katten, Beyond Facilitating Practices: Price Signaling and Price
Protection Clauses in the New Antitrust Environment, 63 Antitrust L. J. 133 (1994);
Michael D. Blechman, Conscious Parallelism, Signalling and Facilitating Devices: The
Problem of Tacit Collusion Under the Antitrust Laws, 24 N.Y.L. Sch. L. Rev. 881
(1979); Kestenbaum, What is “Price Signalling” and Does It Violate the Law?, 49
Antitrust L.J. 911 (1980).
59
See Thomas A. Piraino, Jr., Regulating Oligopoly Conduct Under the Antitrust
Laws, 89 Minn. L. Rev. 9, 59 n.203 (2004) (collecting cases where the Federal Trade
Commission charged that price signaling was an illegal facilitating practice under Section
5 of the FTC Act).
60
Beech-Nut Nutrition Corporation v. Gerber Products Company, Complaint for
Damages and Injunctive Relief, CIV-S 01-1920 (Oct. 16, 2001) (on file with author).
17
threshold question is whether defendant’s revenues exceeded its costs.61

Defendants are also entitled to data about the plaintiff’s costs and revenues, since
whether plaintiff is an “equally efficient competitor” rendered unable to compete
by defendant’s prices is a material question in the litigation.62 Predatory pricing
discovery thus becomes a clearinghouse for the very type of information sharing
that in other contexts is itself an antitrust violation because of its tendency to
facilitate parallel pricing.63
Admittedly, litigation is not the ideal tool for oligopolistic information-

sharing since the events at issue often involve past pricing and discovery may be
limited to prices set in the past and not include present prices or plans for future
prices.64 Information on present or future pricing plans is generally more useful
in facilitating parallel pricing than stale information about the past.65 However,
some predatory pricing plaintiffs allege ongoing violations and request injunctive
relief and discovery therefore involves exchanges of information about present
pricing and plans for future pricing.66 Further, even if the price information
61
Brooke Group, 509 U.S. at 222 (“First, a plaintiff seeking to establish competitive
injury resulting from a rival’s low prices must prove that the prices complained of are
below an appropriate measure of its rival’s costs.”).
62
Supra n. ___.
63
American Column & Lumber Co. v. United States, 257 U.S. 377 (1921) (finding
that American Hardwood Manufacturers’ Association information-sharing plan was an
unlawful restraint of trade that contributed to a significant increase in prices); United
States v. Container Corp., 393 U.S. 333 (1969) (finding that informal arrangement
among corrugated container manufacturers to share bid information on specific customer
contracts was an unlawful restraint of trade); Todd v. Exxon Corp., 275 F.2d 191 (2d Cir.
2001) (holding that employee stated a cause of action where employer-defendants
allegedly agreed to exchange information about employee compensation).
64
It is also the case, of course, that in litigation one party to the information
exchange is an unwilling party. Litigation involves coerced information exchange, but it
is not necessarily surprising that one party would need to coerce its rival to do something
that could ultimately accrue to the benefit of both firms. The dominant firm may have
disincentives to share information with a rival. See Amitai Aviram & Avishalom Tor,
Overcoming Impediments to Information Sharing, 55 Ala. L. Rev. 231 (2004).
65
United States v. Gypsum Co., 438 U.S. 422, 441 n.16 (1978) (“Exchanges of
current price information, of course, have the greatest potential for generating
anticompetitive effects and although not per se unlawful have consistently been held to
violate the Sherman Act.”).
66
E.g., T.W.A.R., Inc. v. Pacific Bell, 145 F.R.D. 105 (N.D. Cal. 1992)
(compelling defendant to produce contemporaneous business documents where plaintiff
argued that such documents were relevant to its claim for injunctive relief in predatory
18
exchanged is stale, simply exchanging reciprocal details about cost structures

may facilitate anticompetitive pricing decisions.67 Protective orders limiting
access to documents and deposition testimony to the lawyers representing the
parties may prevent information-sharing, but there is no guarantee that such
orders will be granted or adequately enforced.68 It is virtually impossible to
ensure that business executives involved in pricing decisions for the litigating
parties will not be kept informed of the key pricing issues in the litigation when
such matters are raised at summary judgment or at trial or ultimately disclosed in
judicial opinions. Thus, despite its limitations as an information-sharing device,
predatory pricing litigation virtually guarantees the flow of an unhealthy amount
of sensitive business information between horizontal competitors.
Predatory pricing plaintiffs may also hope to involve the courts in

policing a supracompetitive pricing structure. Predatory pricing suits often last
many years and trial judges become involved in scrutinizing the parties’ pricing
behavior during the pendency of the litigation. Preliminary injunctions ordering
the defendant not to price below certain levels pending trial are the strongest
form of judicial policing and have been ordered in predatory pricing cases.69
________________________________________________________
pricing case); but see Rebel Oil Co., Inc. v. Atlantic Richfield Co., 133 F.R.D. 41 (D.
Nev. 1990) (limiting discovery to facts concerning barriers to entry and not permitting
discovery as to pricing matter relevant to predatory pricing claims until plaintiff
established the existence of barriers to entry).
67
See Department of Justice and Federal Trade Commission Antitrust Guidelines
for Collaborations Among Competitors § 3.34(e) (April 2000) (expressing concern over
information sharing as to competitor’s “input requirements”).
68
See Daniel A. Crane, Exit Payments in Settlement of Patent Infringement
Lawsuits: Antitrust Rules and Economic Implications, 54 Fla. L. Rev. 747, 759 (2002)
(arguing that protective orders are insufficient to assure that competition will not be
harmed by information exchange in discovery between horizontal competitors); Alan
Lawrence, The Value of Copyright law as a Deterrent to Discovery Abuse, 138 U. Pa. L.
Rev. 549, 565 (1989) (arguing that protective orders are “highly unreliable” for the
protection of trade secrets because they may be subject to modification or complete
withdrawal by courts, and breaches are difficult to police and punish); Omri Ben-Sharar
& Lisa Bernstein, The Secrecy Interest in Contract Law, 109 Yale L. J. 1885, 1922
(2000) (arguing that protective orders do not ensure secrecy between contractual parties
because it is difficult to predict when such orders will be granted).
69
E.g., American Building Prods., L.L.C. v. Ashley Aluminum, Inc., 1997 WL
610877 (E.D. La. 1997) (ordering defendant to return its prices to August 1, 1997 levels,
with allowance only for fluctuation in raw materials markets, pending final adjudication
of case); Advantage Publications, Inc. v. Daily Press, Inc., 1993 WL 1829, at *9 (E.D.
Va. 1983) (ordering defendant to hold its advertising rates at specified levels, without
“discounts, bonuses, rebates, pick-ups, tie-ins, or any other arrangements with
advertisers” pending final adjudication).
19
Even if plaintiff ultimately loses the predatory pricing lawsuit at a full trial or on
appeal, the plaintiff may have realized significant pricing benefits in the interim.
Milder forms of policing short of direct judicial coercion are also possible.
Plaintiffs may raise defendant’s ongoing pricing behavior in motions, briefs, or
hearings hoping to elicit cautionary comments from the court.
To be sure, predatory pricing litigation is an expensive way of sending

pricing signals, collecting information on a competitor’s cost structure or
business plans, or organizing a cartel. As discussed further in Part IB, predatory
pricing litigation, even for the plaintiff, is extremely costly. But plaintiff need
not incur all of the costs to necessary to take a predatory pricing case through
trial and appeal to realize the market benefits of the suit. Price signaling,
information exchange, and judicial involvement in price-setting may all occur
fairly early in the litigation before the larger portion of the costs are incurred. If
the case survives summary judgment and heads for trial – the most costly portion
of the case – the likelihood of non-strategic benefits to the plaintiff (a settlement
or money judgment) increase significantly, thus justifying the expenditure of
more money on litigation expenses. The structure of predatory pricing litigation
permits plaintiffs to make an initial limited investment in the lawsuit which may
bring benefits in the market regardless of the ultimate outcome and then invest
greater sums if the litigation survives threshold motions and the likelihood of a
favorable monetary outcome increases.
In sum, predatory pricing litigation provides opportunities for

oligopolists to call a truce in a price war and exchange sufficient pricing signals
and information to facilitate consciously parallel pricing. Not surprisingly,
claims of predatory pricing and claims of oligopolistic collusion often arise
simultaneously in concentrated markets. The usual account in such situations is
that a dominant firm has used predatory pricing to discipline an unwilling
cartelist.70 An overlooked possibility is that the predatory pricing lawsuit is
being used to organize the cartel. Two examples of well-known predatory
pricing lawsuits illustrate how predation litigation could be used to facilitate
oligopoly pricing.
Airlines
Since deregulation in 1978,71 the airline industry has seen several high-
profile charges of oligopolistic collusion. A well-known episode of attempted
price-fixing involved a 1982 price-war between American Airlines and Braniff in
which the Justice Department obtained a tape recording of a conversation
between John Crandall, CEO of American, and Howard Putnam, CEO of Braniff,
70
Edlin, supra n. ___ at 962; Herbert Hovenkamp, Post-Chicago Antitrust: A
Review and Critique, 2001 Colum. Bus. L. Rev. 257, 316 (2001); Bolton, Brodley &
Riordan, supra n. ___ at 2267-68.
71
Airline Deregulation Act of 1978, 49 U.S.C. § 41713.
20
in which Crandall encouraged Putnam to raise prices by twenty percent.72 In

1992, the Justice Department sued American, Continental, Northwest, TWA,
United, and USAIR, alleging that they had engaged in price signaling by
disseminating future price information in a variety of ways.73 The case ended in
a consent decree whereby the airlines agreed to cease a number of the challenged
practices.74 In 2004, the Justice Department filed a show cause petition alleging
that American had violated the consent decree by publishing future first travel
dates, apparently in order to signal price increases to competitors.75
During the same period that the airline industry has ostensibly been a
hotbed of oligopolistic cooperation to price at supracompetitive levels, different
airlines have allegedly been engaged in predatory pricing.76 American has faced
predatory pricing claims by Continental and Northwest in 199277 and the Justice
Department in 1999.78 Virgin Atlantic sued British Airways on what amounted
to predatory pricing charges in 1993.79 Other post-deregulation predation suits
include Laker against Sabena and KLM in 198380 and Laker against PanAm in
1985.81 Further, several low-cost carriers have reportedly complained to the
72
United States v. American Airlines, Inc., 743 F.2d 1114, 1116 (5th Cir. 1984)
(reporting transcript of Crandall/Putnam call).
73
United States v. Airline Tariff Publ'g Co., 1994-2 Trade Cas. (CCH) P 70,687
(D.D.C. 1994).
74
Id.
75
Petition of the United States for an Order to Show Cause Why Respondent
American Airlines, Inc. Should Not Be Found in Civil Contempt, Supplemental to Civil
Action N. 92-2854 (D.D.C. Aug. 6, 2004), available at
www.usdoj.gov/atr/cases/f204900/204943.htm.
76
See generally Stephen P. Brady & William A. Cunningham, Exploring Predatory
Pricing in the Airline Industry, 41 Transp. J. 515 (2001).
77
Continental Airlines, Inc. v. American Airlines, Inc., 1993 WL 379396 (S.D. Tex.
Aug. 10, 1993).
78
AMR, 335 F.3d 1109.
79
Virgin Atlantic Airways Ltd. v. British Airways PLC, 257 F.3d 256 (2nd Cir.
2001).
80
Laker Airways Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909 (D.D.C.
1984).
81
Laker Airways Ltd. v. Pan American World Airways, 607 F.Supp. 324 (S.D.N.Y.
1985). It is unlikely that either of the Laker actions involved strategic use of predatory
21
Department of Transportation about predatory pricing by larger airlines,

including ValuJet against Delta, Frontier against United, and Reno Air against
Northwest.82
What is interesting about the airline cases is that at least one of the
alleged dates of predatory pricing corresponded with periods in which the
predator and prey were supposedly engaged in oligopolistic collusion. The
Government’s 1992 price signaling case against American, Continental, and
Northwest (and others) concerned the same time period as American’s alleged
predatory pricing campaign against Continental and Northwest.83 For both of
these allegations to be true, American would have to be predating against
Contintental and Northwest at the same time as it was colluding with them.
Although a predatory pricing campaign to discipline rivals into collusion may
plausible,84 the Justice Department charged that American, Continental, and
Northwest were already colluding at the time that Continental and Northwest
alleged that American launched its new, allegedly predatory, pricing scheme.
American cannot have been both predating against, and colluding with, the same
competitors at the same moment, since predation involves pricing below cost and
collusion involves pricing at supracompetitive levels.85
It is possible that one or both of the claims were mistaken – indeed, the
jury found that American was not predating.86 It is also possible that the
________________________________________________________
pricing law, since Laker was in liquidation in the United Kingdom at the time of the
actions.
82
James L. Gattuso, Don’t Outlaw Cheap Airfares, Wall St. J. S5 (4/8/98).
83
The Government’s complaint alleged that the “Coordination Facilitating Device”
that enabled oligopoly pricing began in April of 1988 and continued to the date of the
Complaint, December 21, 1992. See Complaint, United States v. Airline Publishing
Company, Civil Action No. 92-2854 (Dec. 21, 1992), available at
http://www.usdoj.gov/atr/cases/f4700/4796.pdf (¶ 31 p. 10). American’s alleged act of
predatory pricing was its Value Pricing plan, announced on April 9, 1992. Continental
Airlines, Inc. v. American Airlines, Inc., 824 F. Supp. 689, 692
(S.D. Tex. 1993).
84
See n. ___ supra.
85
It is theoretically possible that American was colluding with Northwest and
Continental on some routes and trying to drive them from other routes through predation
but that possibility seems to be factually foreclosed since American’s Value Pricing plan
was a general restructuring of its fare system across all routes. See Continental Airlines,
824 F. Supp. at 692-93.
86
Continental Airlines, Inc. v. American Airlines, Inc., 1993 WL 379396 (Aug. 10,
1993).
22
allegations of collusion were correct and that the predatory pricing case itself
reinforced a tacit collusive scheme. Northwest and Continental may have
facilitated a resumption of consciously parallel, lockstep pricing by using the
predatory pricing lawsuit as a price signal and information exchange device,
combined with a punitive raising of American’s costs through expensive
litigation.
If so, the strategy seems to have worked. American announced the

challenged pricing plan on April 9, 199287 and other major carriers quickly
matched or beat American’s price cut.88 Between April and June, fares remained
relatively flat. Then Continental filed its predatory pricing lawsuit on June 9,
1992 and Northwest filed its parallel suit on June 12.89 Two weeks after filing
suit, Northwest announced a ten percent price increase.90 Continental matched
Northwest’s increase and American followed shortly with its own 4.4% price
increase.91 Between July and the end of the year, while the predatory pricing
case progressed, the major airlines raised prices seven times,92 albeit with many
false starts, retreats, and delays as the oligopolistic discipline frayed by
American’s April price-cuts was restored. In December, while announcing
another round of price increases, Continental reported publicly that its “objective
[was] to get back to the fare levels that prevailed in early April, which are fair,
market-based competitive fares.”93 Such overt price-signaling through media
comments frequently accompanied the upward pricing movements following the
filing of the predatory pricing suits. A headline about the September fare
increases in Tour and Travel News reported (apparently without conscious
irony): “Airlines Agree on Fare-Increase Date.”94
87
Continental Airlines, Inc. v. American Airlines, Inc., 824 F. Supp. 689, 692
(S.D. Tex. 1993).
88
Lauren R. Rublin, The Trader, Barrons April 27, 1992 at 53.
89
Ron Hutcheson, Airlines Take Dogfight to Congress, Ft. Worth Star-Telegram
June 11, 1992; Northwest Sues American, Alleging Unfair Pricing Policy, Dallas
Morning News June 13, 1992 at 14F.
90
Northwest Air Plans to Raise U.S. Fares 10%, Wall St. J. June 17, 1992 at B1.
91
Air Fares Set to Increase 4.4 Percent, Associated Press July 7, 1992.
92
Id.
93
Continental, Other Major Airlines Ready to Increase Fares, Houston Chronicle
Dec. 24, 1992.
94
William Terdoslavich, Airlines Agree on Fare-Increase Date, Tour & Travel
News September 14, 1992 at 2.
23
There is little doubt that the airline fare war that began with American’s
price-cuts in April ended within weeks after Northwest and Continental filed
their predatory pricing suits. How significant a role the predatory pricing suit
played in deterring aggressive price competition and restoring lockstep price
increases is uncertain. The predatory pricing lawsuit was not the only strategic
tool available or utilized by competitor airlines. The competitors also took their
complaint to the Senate Transportation Committee95 and engaged in unabashed
price signaling through the media. The predatory pricing lawsuit, however, may
have offered a unique combination of coercive opportunities to complement other
strategic tools, including raising rival’s costs through litigation expense, the
threat of a substantial adverse judgment, and detailed information exchange in
discovery. And the predatory pricing case may have taught American a lesson.
After the jury returned a verdict for American in the predatory pricing case in the
summer of 1993, American CEO Robert Crandall – the same CEO caught on
tape encouraging Braniff to raise its prices – stated publicly that American
“probably won’t be attempting that type of leadership again.”96
Even in cases where no private predatory pricing lawsuit was filed but
one airline complained to the Department of Transportation or Justice
Department about another’s fares, the predatory pricing complaint may have
worked as a price signal. The complaint was bound to get back from the
government to the ostensible predator in short order. Complaining to the
government about a competitor’s low prices may be one of the cheapest and most
effective ways of organizing a tacit cartel, even if a government suit is relatively
unlikely.97 The complaint is privileged from antitrust scrutiny unless blatantly
fraudulent98 and is therefore a much safer way of sending a message than direct
communication, as American Airlines learned after the Crandall/Putnam debacle.
95
Ron Hutcheson, Airlines Take Dogfight to Congress, Ft. Worth Star-Telegram
June 11, 1992.
96
James L. Gattuso, Don’t Outlaw Cheap Airfares, Wall St. J. April 8, 1998 at S5.
Doubtlessly, the Department of Justice that sued American for predatory pricing in 1999
would disagree that American learned its lesson from the Continental/Northwest
litigation, although American prevailed in the Justice Department lawsuit as well. AMR
Corp., 335 F.3d at 1109.
97
See James C. Miller III, Comments on Baumol and Ordover, 28 J. L. & Econ. 267
(1985). Miller, Chairman of the Federal Trade Commission, commented in reference to
Baumol and Ordover’s article on the strategic misuse of antitrust law and particularly on
their comments about predatory pricing cases. Miller reported that he frequently saw
competitor firms engaging in rent-seeking at the FTC.
98
Eastern RR Presidents Conf. v. Noerr Motor Freight Co., 365 U.S. 127 (1961);
California Motor Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972).
24
Tobacco
Like the airline industry, the tobacco industry has seen repeated
allegations of both collusion and predatory pricing in the last twenty years.99 The
Brooke Group case, involving the generic cigarette market, turns on allegations
of both predation and collusion and provides useful factual detail to consider the
relationship between oligopolistic pricing and predation claims. Plaintiff Liggett
theorized that Brown & Williamson used predatory pricing to try to achieve
oligopoly pricing. It alleged that Brown & Williamson sought to punish
Liggett’s price-cutting in the generic cigarette segment through below-cost
volume rebates to Liggett wholesalers.100 Justice Kennedy’s Supreme Court
majority opinion rejected Liggett’s arguments on the grounds that Brown &
Williamson would have been unable to recoup its below-cost pricing through
subsequent supracompetitive pricing, since Brown & Williamson’s 11-12% share
of the cigarette market would have required its predation to generate around $9 in
supracompetitive profits for every dollar invested in the scheme, just for Brown
& Williamson to break even.101 The majority dismissed the arguments that actual
recoupment had taken place, finding that the claims of post-predation price
increases were either empirically unsupported or not causally linked to the
allegedly predatory scheme.102 The dissent – and the jury – believed that actual
recoupment had taken place in the form of semi-annual, lock-step price increases
following Brown & Williamson’s below-cost pricing.103
A third possibility is that the oligopolistic pricing did emerge from the
events at issue but that it was precipitated more by the predatory pricing lawsuit
than by the alleged predatory pricing. Consider the sequence of events. Brown
& Williamson started the price war in July of 1984 at the time it was introducing
its own black and white cigarettes.104 Liggett immediately sued alleging
trademark infringement and unfair competition.105 On February 5, 1985, Liggett
amended its complaint to add Robinson-Patman Act claims of predatory
pricing.106 In June of 1985, after it had been litigating its predatory pricing
99
See generally, Daniel A. Crane, Harmful Output in the Antitrust Domain: Lessons
From the Tobacco Industry, __ Ga. L. Rev. ___, ___ (2005).
100
509 U.S. at 217.
101
Id. at 228.
102
Id. at 235-37.
103
Id. at 249-50 (Stevens, J., dissenting).
104
Id. at 214-16.
105
Id. at 216.
106
1988 WL 161235.
25
claims for about four months, Liggett raised its prices.107 Brown & Williamson
followed suit in October of 1985.108 By the end of the year, the price war was
over.109 By the middle of 1986, the generic segment had settled into a
comfortable pattern of semi-annual lockstep price increases in line with patterns
in the branded cigarette market.110
Assuming that the lock-step pricing in the generic market reflects at least
non-competitive oligopoly pricing, who is to blame – Liggett or Brown &
Williamson? Perhaps the answer is neither, since oligopoly pricing in the generic
segment was inevitable given that the same four or five firms already marched in
lock-step in the branded cigarette segment.111 But tacit collusion takes some
subtle organizing. Who was the organizer? Liggett blamed Brown &
Williamson because it started the price war, but the evidence suggests that Brown
& Williamson’s price strategy was profit-maximizing without any expectation of
recoupment through oligopoly pricing. The amount of supracompetitive profits
the generic segment would have needed to have generated in order to offset the
costs of a predatory scheme were unattainable.112 Liggett, on the other hand,
could help to organize lock-step pricing by filing a predatory pricing lawsuit – an
expensive venture but far less so than pricing below cost across the substantial
generic cigarette market for 18 months.113 Having laid out its predation theory,
exchanged documents in discovery, and perhaps signaled a truce, Liggett then
took the lead in raising prices. The industry soon followed. The evidence in
Brooke Group is consistent with the proposition that Liggett used its predatory
pricing case to facilitate a pattern of oligopoly pricing. On balance, this
proposition seems far more plausible than the proposition that Brown &
107
509 U.S. at 217.
108
Liggett Group Inc. v. Brown & Williamson Tobacco Corp., 964 F.2d 335, 338 (4th
Cir. 1992).
109
509 U.S. at 243 (Stevens, J., dissenting) (characterizing price war as lasting for 18
months, from July of 1984 to end of 1985).
110
Id. at 218. The majority believed that these price increases may have been offset
by coupons, stickers, and give-aways, id. at 236, although at least one witness testified
that the consumer promotions did not nearly offset the price increases. Id. at 250 n.12
(Stevens, J., dissenting) (citing testimony by Liggett’s expert economist to the effect that
“the promotional activity has been far outstripped by the list price increases).
111
509 U.S. at 213.
112
Id. at 228.
113
Liggett, of course, hoped to gain from the predatory pricing lawsuit even if it did
not help to facilitate cartel pricing. It won an $148.8 judgment, although the district court
ultimately vacated it. 509 U.S. at 218.
26
Williamson used a predatory pricing scheme to try to discipline Liggett into tacit
collusion.
The airlines and tobacco case share a common pattern of events: One
firm initiated a price war; its rival(s) sued for predatory pricing; shortly after the
filing of the predatory pricing lawsuit the plaintiff raised its prices; shortly
thereafter the defendant followed suit; oligopoly pricing discipline was restored;
the court or jury ultimately found the predatory pricing lawsuit to be without
merit. In both of these examples, it is quite possible that predatory pricing law
facilitated the high prices predation law was meant to deter.
B. Do Firms Actually Engage in Strategic Predatory Pricing Litigation?
It is not hard to see how predatory pricing lawsuits could be used

strategically to chill price competition by a competitor, but is there evidence that
firms actually engage in strategic predatory pricing litigation? The question does
not admit of a ready answer. Firms’ true motivations for filing suit are not easily
discoverable and, even if good information were available, firms’ motivations are
rarely reducible to a simple dichotomy like strategic benefits in the marketplace
versus money judgment or settlement. The truth is likely to be more complex.
One approach to appraising the intentions of predatory pricing plaintiffs

is to examine market structural prerequisites for successful predation and
determine whether those structures are in place in cases of alleged predation. If
the structural prerequisites are absent, this may suggest frivolous litigation
animated by ulterior motives. Snyder and Kauper took this approach in their
1991 study, which concluded that competitor plaintiffs systematically misuse the
antitrust laws.114 Synder and Kauper evaluated antitrust litigation files collected
in the Georgetown Private Antitrust Litigation Project115 and determined whether
the market conditions necessary for anticompetitive exclusion were present in the
cases in which such exclusion was asserted.116 In particular, they contended that
a market must exhibit a high degree of concentration and substantial barriers to
entry in order for exclusionary conduct to be successful in achieving monopoly
profits.117 Snyder and Kauper studied ten predation cases and concluded that
only two out of the ten exhibited the necessary high degree of defendant market
114
Snyder & Kauper, 90 Mich. L. Rev. 551.
115
The Georgetown Private Antitrust Litigation Project was a 1983 study of private
antitrust litigation sponsored by Georgetown Law School. See Lawrence J. White, The
Georgetown Study of Private Antitrust Litigation, 54 Antitrust L. J. 59 (1985); PRIVATE
ANTITRUST LITIGATION: NEW EVIDENCE, NEW LEARNING (Lawrence J. White ed.,
1988); Symposium, Private Antitrust Litigation, 74 Geo. L. J. 999 (1986).
116
Snyder & Kauper, supra n. ___ at 563-67.
117
Id. at 564.
27
share and barriers to entry necessary to make the predation claim plausible.118
Although Snyder and Kauper did not articulate any separate conclusion on the
predatory pricing cases, their overall conclusion that few of the competitor cases
exhibited much merit and that many of the plaintiffs were “object[ing] to actions
that represent[ed] increases in competition”119 would appear to apply to the
predation cases also.
A similar analysis suggests that many of the post-Brooke Group

predatory pricing cases are also “misuses” of the antitrust laws. A large number
of them that were decided on the merits were thrown out based on the market
screens identified by Snyder and Kauper – insufficient market concentration or
low barriers to entry.120 This suggests that Matsushita and Brooke Group have
118
Id. at 572-73.
119
Id. at 576.
120
See Bailey v. Algas, Inc., 284 F.3d 1237, 1250 (11th Cir. 2002) (finding that
defendant’s market share of 35-40% was insufficient in predatory pricing case); Western
Parcel Express v. United Parcel Service, 190 F.3d 974, 975 (9th Cir. 1999) (rejecting
plaintiff’s predatory pricing theory on grounds that barriers to entry were not
demonstrated); Stearns Airport Equipment Co. v. FMC Corp., 170 F.3d 518, 530 (5th Cir.
2002) (same); Springfield Terminal Ry. Co. v. Canadian Pacific Ltd., 133 F.3d 103, 107-
8 (1st Cir. 1997) (rejecting predatory pricing theory where defendant’s market share was
about 10%); Queen City Pizza, Inc. v. Domino’s Pizza, Inc., 124 F.3d 430 (3rd Cir. 1997)
(rejecting predatory pricing theory on grounds that plaintiff failed to show defendant had
market power); El Aguila Food Prods., Inc. v. Gruma Corp., 301 F. Supp. 2d 612 (S.D.
Tex. 2003) (rejecting predatory pricing theory where defendant lacked market power);
Masco Contractor Servs. East Inc. v. Beals, 279 F. Supp. 2d 699 (E.D. Va. 2003)
(dismissing predatory pricing claim based on absence of barriers to entry); Berlyn, Inc. v.
Gazette Newspapers, Inc., 223 F. Supp. 2d 718, 734-35 (D. Md. 2002) (rejecting
predatory pricing case where defendant lacked market power); Coventry Health Care of
Kansas, Inc. v. Via Christi Health Sys., Inc., 176 F. Supp. 2d 1207, 1233 (D. Kan. 2001)
(denying preliminary injunction against predatory pricing partly on grounds defendant
lacked market power and barriers to entry were low); Yellow Page Solutions, Inc. v. Bell
Atlantic Yellow Pages Co., 2002-1 Trade Cases ¶ 73,556 (S.D.N.Y. 2001) (dismissing
predatory pricing claims because plaintiff failed to plead market power or high entry
barriers); United Magazine Co. v. Murdoch Magazines Dist., Inc., 146 F. Supp. 2d 385
(S.D.N.Y. 2001) (dismissing predatory pricing claim where plaintiff failed to show that
defendant had market power); Peerless Heater Co. v. Mestek, Inc., 2000-1 Trade Cases ¶
72,917 (E.D. Pa. 2000) (granting summary judgment against plaintiff on predatory
pricing claim where plaintiff’s growing market share precluded any inference that
plaintiff was in danger of being driven from the market); J & S Oil, Inc. v. Irving Oil
Corp., 63 F. Supp. 2d (D. Me. 1999) (granting defendant’s motion for summary judgment
where defendant had low market share and barriers to entry were low); Malek
Wholesaler, Inc. v. First Film Extruding, Ltd., 1998 WL 142385 (N.D. Ill. March 31,
28
not deterred continuation of some of the misuses of predatory pricing theory that
occurred during the 1973-1983 time-period of the Georgetown Study.121
But this does not necessarily demonstrate that predatory pricing plaintiffs
are using antitrust law strategically. Synder and Kauper’s market screen analysis
is useful in discovering whether the predation lawsuits had merit, but it is only
tangentially relevant in determining whether predatory pricing plaintiffs are
seeking to use antitrust law to chill price competition or invite a program of tacit
collusion. Frivolous lawsuits could be filed to extort a favorable settlement, out
of a misunderstanding of the governing legal rules, or even out of less efficient
firm’s misguided sense of injustice at being excluded from the market.122 All of
these motivations may induce socially costly and undesirable litigation and
provide a sufficient basis for curtailing the predatory pricing cause of action, but
they do not demonstrate that firms use predatory pricing law strategically to
increase prices.
One way to study the possibility that many predatory pricing plaintiffs
have strategic motivations independent of the ultimate success of the lawsuit is
to examine the compensation structure of the plaintiffs’ attorneys. The
compensation structure of plaintiffs’ attorneys in predatory pricing cases also
provides a relevant check on Bolton, Brodley, and Riordan’s assertion that
Brooke Group and Matsushita have created very high barriers for predatory
pricing plaintiffs.123 Plaintiff’s lawyers should only agree to a contingency fee
arrangement if they believe that there is a reasonable likelihood that the predatory
pricing lawsuit will result in a financial payment from defendant to plaintiff,
either through a money judgment or through a settlement. If a predatory pricing
case was very unlikely to result in a money judgment or settlement but might still
bring financial benefits to the plaintiff by chilling price competition, one would
________________________________________________________
1998) (dismissing predatory pricing claim where plaintiff failed to allege that defendant
had market power); Bushnell Corp. v. ITT Corp., 175 F.R.D. 584 (D. Kan. 1997)
(dismissing predatory pricing case where defendant’s market share was 30%); Anti-
Monopoly, Inc. v. Hasbro, Inc., 958 F. Supp. 895 (S.D.N.Y. 1997) (granting summary
judgment for defendant where plaintiff failed to show high barriers to entry); Clark v.
Flow Measurement, Inc., 948 F. Supp. 519 (D.S.C. 1996) (granting summary judgment
for defendant where defendant’s market share was small); AD/SAT v. Associated Press,
920 F. Supp. 1287 (S.D.N.Y. 1997) (granting summary judgment for defendant where
barriers to entry were low).
121
White, The Georgetown Study of Private Antitrust Litigation, 54 Antitrust L. J. at
60 (describing the time-period during which cases were examined).
122
See Russell Korobkin & Chris Guthrie, Psychology, Economics and Settlement:
A New Look at the Role of the Lawyer, 76 Tex. L. Rev. 77 (1997); J. Rachlinski, Gains,
Losses, and the Psychology of Litigation, 70 S. Cal. L. Rev. 113 (1996); Peter H. Huang,
Emotional Responses in Litigation, 12 Int'l. Rev. L. & Econ. 31 (1992).
123
Bolton, Brodley & Riordan, supra n. ___.
29
expect to see an hourly fee structure. Further, the predatory pricing theory
assumes that the plaintiff is financially constrained, indeed that its ability to
survive in the market is jeopardized by a lack of funds necessary to weather the
defendant’s below-cost pricing.124 Such firms are unlikely to be able to pay for
expensive predatory pricing litigation on an out-of-pocket basis. One plaintiff’s
attorney involved in at least three recent predatory pricing cases reported that
“antitrust litigation on an hourly basis is something that 99% of the injured
businesses in the U.S. cannot afford.”125
Consistent with these observations, the following hypotheses can be

drawn. If firms are using predatory pricing theories for strategic purposes even
in the absence of a significant possibility of obtaining a favorable judgment or
settlement, there should be a low incidence of contingency fee arrangements in
purely strategic predatory pricing cases. Conversely, if firms truly are capital-
constrained by predation, they would be likely to prefer a contingency fee
structure as opposed to an hourly rate. Firms driven by predatory pricing to the
verge of financial extinction should not be able to afford financing lengthy and
expensive predatory pricing litigation on an hourly, out-of-pocket basis. Finally,
rationally acting lawyers should only agree to take predatory pricing cases on
contingency if there is some reasonable prospect – Brooke Group and Matsushita
notwithstanding – of a favorable plaintiff’s judgment or settlement.
In order to evaluate these hypotheses, I attempted to contact the

plaintiffs’ attorneys involved in the predatory pricing cases filed after 1993, as
identified earlier,126 and inquire whether their fee structure was based on an
hourly rate, contingency, or some combination of the two. Out of the 57 cases,
some of the attorneys could not be located and some declined to respond, often
on grounds of confidentiality. The responding attorneys provided fee
information for 24 of the predatory pricing cases filed since Brooke Group.127 In
10 of the cases, the plaintiff’s attorney was compensated purely on an hourly fee
basis. In 8 of the cases, the plaintiff’s attorney was compensated on a pure
contingency basis. In 4 of the cases, the plaintiff’s attorney billed at an hourly
rate (on two occasions at a reduced rate) with a contingency fee “kicker” in the
event of a successful outcome. In 2 other cases, the plaintiff paid a small, up-
front fee and the remainder of the compensation was on contingency. Assuming
124
Bolton, Brodley & Riordan, supra n. ___ at 2286-87; Paul Milgrom & John
Roberts, New Theories of Predatory Pricing, in INDUSTRIAL STRUCTURES IN THE NEW
INDUSTRIAL ECONOMICS 112, 116-18 (Giacomo Bonanno & Dario Brandolini eds. 1990).
125
E-mail from Carl Person to Daniel Crane on January 6, 2004 (on file with author;
used with permission of Mr. Person).
126
Supra n. ___.
127
Several of the responding attorneys were or had been involved in more than one
of the predatory pricing cases listed in footnote ___.
30
that the “kicker” cases are largely hourly fee cases and the “up-front fee” cases
are largely contingency cases, this yields a 14-10 split in favor of hourly fees.
This is small sample from which to draw conclusions, and a wider

sample is unlikely to be attainable given the relatively small number of candidate
cases and the reluctance of many attorneys to disclose fee structure information.
Further, some of the cases involved claims other than predatory pricing, which
could have influenced the fee structure in either direction.128 Nonetheless, this
modest sample – with its limitations – permits a few conclusions.
First, despite Brooke Group and Matsushita, some predatory pricing

cases continue to attract contingency-fee lawyers. At least some predation claims
have a sufficient likelihood of succeeding on the merits that plaintiffs’ attorneys
are willing to invest in them. This implicit evaluation of the viability of
predation cases provides some indication that predation theories are not
moribund in practice. Some predation suits have a significant positive expected
value, even if they are unlikely to succeed most of the time. If defendants’
lawyers reach the same conclusion as plaintiffs’ lawyers, then threats of
predation claims may still affect the market behavior of potential defendants.
The risk that the predatory pricing offense may chill vigorous price competition
may persist despite two decades of defendant-friendly precedents.
Second, plaintiffs pay for a significant number of predatory pricing cases

– perhaps a majority129 – on an hourly fee basis. The hourly fee method of
lawsuit financing is somewhat inconsistent with the general theory of predation –
that a poorly financed firm is forced out of a market because it cannot afford to
compete with a better-financed rival.130 Predatory pricing litigation is an
expensive and speculative investment, much like engaging in a price war to
survive in a market.131 If a firm lacks the funds necessary to compete in a price
128
Very few cases in which predatory pricing is alleged involve solely a predatory
pricing case. Often, the predatory pricing claims appears to be the principal complaint
but the plaintiff pleads other antitrust wrongs as well, perhaps in an effort to avoid the
strictures on predatory pricing theories imposed by Chicago-school-era case law.
129
There is reason to believe that a full census of predatory pricing cases would
show that a higher percentage of cases are brought on an hourly rate basis than the 23
cases on which data were collected would suggest. Many of the attorneys who declined
to respond work for large, corporate law firms that are relatively unlikely to take matters
on contingency.
130
See supra text accompanying notes ____.
131
Estimates of the costs of predatory pricing lawsuits vary considerably. In 1981,
Joshua Greenberg estimated the mean litigation cost of a predation case to be $30 million
and, in the same conference, Frank Easterbrook estimated it at $3 million. Easterbrook,
supra n. ___ at 335 n. 157 (citing Joshua Greenberg in roundtable discussed, in
STRATEGIC PREDATION AND ANTITRUST ANALYSIS (Steven Salop, ed., 1981)).
31
war, it is unclear where the firm finds the funds to finance predatory pricing
litigation on an out-of-pocket basis. Conversely, the fact that many firms engage
in predatory pricing litigation on an hourly fee basis is consistent with the theory
that some firms use predatory pricing cases strategically to chill price
competition even in cases that have relatively little chance of resulting in a
plaintiff’s verdict or monetary settlement.
In sum, the available information on lawyer fee structures in post-Brooke

Group predatory pricing cases is consistent with the hypotheses that the Chicago-
School predatory pricing precedents leave open the potential for substantial
plaintiff’s verdicts in predatory pricing cases and that some firms use predatory
pricing complaints strategically to diminish price competition by competitors.
II. THE SOCIAL COSTS OF CHILLING PRICE COMPETITION
The courts have accepted as a given that predatory pricing law would be
socially costly if it elevated prices above competitive levels.132 Conversely, if it
were possible to detect and deter with precision those instances where a dominant
firm sought to cut prices to levels that could exclude or discipline equally
efficient competitors and facilitate supracompetitive pricing, social welfare
would be best served by detecting and deterring such behavior. Both of these
propositions share the common assumption that social welfare is optimized if
prices are established by competitive market forces and not by monopolistic
coercion by dominant firms or misguided invocation of governmental coercion in
predatory pricing litigation. Structuring predatory pricing law thus requires a
comparison of the likely costs of deviating from a competitive market model
through monopolistic coercion or through misguided state coercion.
In order to perform such a comparison, it is necessary to begin with a

conceptualization of ideal pricing in a competitive market. Part A establishes the
socially optimal pricing point against which deviations should be measured. Part
________________________________________________________
Easterbrook reported that AT&T spent $100 million to defend itself against charges of
predation every year, a large aggregate amount but distributed over multiple lawsuits.
Easterbrook, supra n. ___ at 334. Based on the Georgetown Study, Salop and White
concluded that private antitrust lawsuits cost, on average, $75,000 per party in 1984
dollars. Steven C. Salop & Lawrence J. White, Economic Analysis of Private Antitrust
Litigation, 74 Geo. L. J. 1001, 1015 (1986). That is about $135,000 in 2005 dollars. For
more complex cases, the average legal cost per party was $194,000, again in 1984
dollars. Id. at 1014. That is about $350,000 in 2005 dollars. These numbers seem
relatively low for predatory pricing litigation, which may be more resource-intensive than
average antitrust litigation. Other estimates of the costs of antitrust legal fees which may
be more in line with average costs in predatory pricing cases include Fisher and Lande’s
estimate of a total cost of $700,000 - $1.4 million for merger cases in 1983 dollars. Alan
A. Fisher & Robert H. Lande, Efficiency Considerations in Merger Enforcement, 71 Cal.
L. Rev. 1580, 1673 (1983).
132
32
B presents the theoretical model of deviation from the norm caused by the
existence of predatory pricing law and compares the likely costs of monopolistic
predation to the likely costs of diminished price competition resulting from the
threat of liability for predatory pricing. Part C reports the results of a survey of
in-house counsel that I conducted to explore the degree to which predatory
pricing law influences pricing behavior by business executives.
A. The Socially Optimal Pricing Point
Neoclassical price theory holds that, in perfect competition, firms price at

marginal cost, which leads to optimal deployment of social resources.133 This
assumption underlies the influential Areeda-Turner “average variable cost”
formulation for predatory pricing.134 Areeda and Turner assume that “pricing at
marginal cost is the competitive and socially optimal result”135 and therefore
organize their proposed predatory pricing rules around marginal cost normativity.
They choose average variable cost as the measuring legal criterion only as a
proxy for marginal cost, which is an economist’s construct that is difficult to
demonstrate from the records of businesses.136
There is a substantial literature rejecting or attempting to refine Areeda

and Turner’s proposed marginal cost rule, but it largely agrees with Areeda and
Turner’s normative assumption that marginal cost pricing is socially optimal in
static circumstances. This competing body of scholarship tends to stress the
dynamic effects of strategic pricing and the potential that a marginal cost legal
rule would be both underinclusive and overinclusive with respect to predatory
pricing. Scherer, Areeda and Turner’s most immediate critic, concurred that
marginal cost pricing was socially optimal but worried that Areeda and Turner’s
proposed legal rule ignored the long-run welfare effects of strategic short-run
pricing above marginal cost but below total cost.137 Williamson agreed that
“[m]arginal cost pricing on a continuing basis has the optimality properties to
133
F.M. Scherer & David Ross, INDUSTRIAL MARKET STRUCTURE AND ECONOMIC
PERFORMANCE 19-20 (3rd ed. 1990); Bork, supra n.1 at 97; Williamson, supra n. ___ at
290; Phillip Areeda & Donald F. Turner, Predatory Pricing and Related Practices Under
Section 2 of the Sherman Act, 88 Harv. L. Rev. 697, 711 (1975).
134
Areeda & Turner, supra n. ___ at 709-712.
135
Id. at 711.
136
Id. at 716.
137
F.M. Scherer, Predatory Pricing Under Section 2 of the Sherman Act, 89 Harv. L.
Rev. 868, 883-84 (1976). See also Areeda and Turner’s response to Scherer, Phillip
Areeda and Donald F. Turner, Scherer on Predatory Pricing: A Reply, 89 Harv. L. Rev.
891 (1976), and Scherer’s sur-reply to Areeda and Turner. F.M. Scherer, Some Last
Words on Predatory Pricing, 89 Harv. L. Rev. 901 (1976).
33
which Areeda and Turner refer,”138 but worried that Areeda and Turner’s
proposed legal rule would immunize short-term predatory price-cuts that would
lead to later supracompetitive pricing.139 Baumol similarly agreed with the
underlying premise that marginal cost pricing optimizes social welfare, but added
the further caveat that marginal cost pricing is “chimerical” in most real markets
since “pricing at marginal cost will not produce revenues equal to total
production costs.”140 Where marginal cost pricing is unsustainable in the long
run, Baumol would institute Ramsey pricing as the optimal deviation from
marginal cost that predatory pricing law should seek to attain.141 Under Ramsey
Pricing, prices deviate from marginal cost only so much as to make continued
production remunerative and deviations from marginal cost are distributed to
products with the least elastic demand so as to minimize deadweight losses.142
Thus, despite differences over the legal standards that should govern predatory
pricing claims, there is substantial agreement that more closely pricing
approximates marginal cost in a sustainable manner, the more that efficiency is
optimized.143
A related question is whether a non-predatory price can ever be sub-

optimally low because it induces overconsumption. This could occur if a firm
erroneously priced below marginal cost and therefore lost money on its sales but
did not threaten competition because it lacked a sufficiently large share of the
market, barriers to entry were very low, or other structural prerequisites to
excluding competition were absent. Or, a would-be predator might launch an
unsuccessful scheme to exclude a rival which resulted only in lower prices but
138
Williamson, supra n. ___ at 290.
139
Id. at 290, 340.
140
William J. Baumol, Quasi-Permanence of Price Reductions: A Policy for
Prevention of Predatory Pricing, 89 Yale L. J. 1, 21 (1979).
141
Id. at 20-22.
142
Frank Ramsey, A Contribution to the Theory of Taxation, 37 Econ. J. 47 (1927);
Baumol, supra n. ___ at 22; William J. Baumol, Ramsey Pricing, in 4 THE NEW
PALGRAVE: A DICTIONARY OF ECONOMICS 49, 49-51 (John Eatwell et al. eds., 1987); W.
Kip Viscusi, John M. Vernon & Joseph E. Harrington, Jr., ECONOMICS OF REGULATION
rd
AND ANTITRUST 350-53 (3 ed 2000).
143
See also Joskow & Klevorick, supra n. ___ at 223 (noting that any predatory
pricing standard that would forces prices to be kept above long-run marginal cost runs the
risk of preserving inefficient firms); Edlin, supra n. __ at 951 (“If the monopoly charges
a price in excess of its marginal cost, the monopoly creates an inefficiency compared to
an ideal world because output is restricted.”).
34
never created higher prices, nor a dangerous probability of higher prices.144 Such
non-predatory below-cost pricing is allocatively inefficient, even if it does not
lead to, or threaten, later supracompetitive pricing, because it induces the
consumption of goods by some consumers who value them at less than their cost
of production.145
It is not perfectly clear whether the subsidization of consumers by inept

or misguided producers should be of great concern under the antitrust laws. The
answer depends in part on whether allocative efficiency or consumer welfare is
the primary goal of antitrust enforcement.146 Below-cost non-exclusionary prices
may benefit consumers even if they are costly to producers. If consumer welfare
is the exclusive goal, then such mistaken below-cost pricing may simply be a
harmless fortuity. On the other hand, even if consumer welfare is the exclusive
focus, below-cost non-exclusionary prices may cause consumer harm by sending
false price signals that cause poor planning by consumers.147 Moreover, spillover
effects in other markets cannot be ignored. 148 If a firm begins selling at below-
cost prices it may increase its demand for raw inputs used for the production of
other goods and thereby increase the price of those other goods.
144
Attempted monopolization through unsuccessful predatory pricing is sanctioned
in order to deter such conduct. See supra text accompany note ___. The probabilistic
harm in such cases justifies the invocation of legal sanctions to deter it. A separate issue
arises when an attempt to monopolize through predatory pricing has no significant
likelihood of succeeding and leads to lower prices. Such instances of “stupid predation”
might still be thought to cause resource misallocation because they would lead to the
consumption of the goods by some consumers who valued the goods at less than their
cost of production.
145
Scherer, supra n. ___ at 883. (“Resource misallocation occurs when there is a
divergence between the cost of additional output and the value of that output to
consumers. Output is too low when production stops short of the level at which price
equals marginal cost; it is too high when marginal cost exceeds the price.”); Joskow &
Klevorick, supra n. __ at 224 n. 31 (“If price is less than short-run marginal cost, and if
demand is at all elastic, the price will not give consumers the proper signal about the
scarcity value of the good. Thus, consumers will purchase too much of the good and as a
result, resources will be devoted to producing the particular good in the short run.”).
146
See Joseph F. Brodley, The Economic Goals of Antitrust: Efficiency, Consumer
Welfare, and Technological Progress, 62 N.Y.U. L. Rev. 1020, 1032 (1987)
(differentiating between allocative efficiency and consumer welfare).
147
Williamson, supra n. ___ at 291.
148
See Richard G. Lipsey & Kevin L. Lancaster, The General Theory of the Second
Best, 24 Rev. Econ. Stud. 11 (1956).
35
From these considerations two assumptions, one stronger and one

weaker, can be drawn. The stronger assumption concerns prices above marginal
cost: Social welfare is optimized by competitive behavior that drives prices
down toward a long-run marginal cost equilibrium, given the constraint that
where long-run marginal cost pricing would be unremunerative, Ramsey Pricing
is the next best substitute. The weaker assumption concerns prices below
marginal cost: Even in the absence of a likelihood that below-marginal cost
pricing will exclude competitors and lead to supracompetitive pricing, below-
marginal cost pricing is allocatively inefficient and should be discouraged. It is
thus against marginal cost pricing as a presumptive baseline that the effects of
both predatory and the availability of a predatory pricing theory must be
assessed.
B. The Tendency of Predatory Pricing Law to Induce Deviations from Marginal

Cost Pricing
Part I described the possibility that firms would deliberately use

predatory pricing law to induce their rivals to deviate from competitive pricing.
Such strategic use of predatory pricing law has obvious adverse social welfare
effects since it induces upward deviation from marginal cost pricing. The only
remaining question is an empirical one – whether such strategic gamesmanship is
common and effective. If it is, then predatory pricing law has a significant strike
against it. Unfortunately, determining whether firms in fact engage in strategic
predatory pricing litigation or threats – litigation or threats in which the
likelihood of a successful judicial outcome is very small but price competition
can be chilled regardless of the judicial outcome – is difficult. As discussed in
the preceding Part, some available data are consistent with the hypothesis that
some firms use predatory pricing litigation strategically, but direct proof is hard
to come by.
Predatory pricing law may induce socially costly deviations from

marginal cost pricing even when predation theories are not strategically misused.
In order for predatory pricing law to induce a firm to deviate from optimal
competitive pricing, it is sufficient that the firm expect that the costs of any
further price reduction due to predatory pricing law will exceed the gains from
lowering its price and increasing its market share. Consider the profit-
maximizing firm faced with a choice between reducing its price to expand market
share and achieve economies of scale or maintaining its current price. The firm
will only reduce its price so long as its market share and efficiency gains exceed
its expected costs due to predatory pricing litigation expenses and a potential
adverse judgment. At the point where any further price reduction would create
greater expected losses than gains, predatory pricing law places a floor on the
firm’s movement toward marginal cost pricing. Thus, predatory pricing law may
keep prices above competitive levels even if it is not intentionally misused.
Although predatory pricing law’s creation of such a pricing floor appears

on its face to impose social costs, it is necessary to take into account the
possibility that the pricing floor is optimal because any further price cuts would
be unsustainable and therefore would result, in the long run, in monopoly pricing
even further distanced from the marginal cost optimum. Thus, if predatory
pricing law placed a pricing floor at the Ramsey pricing level, social welfare
36
might still be optimized, given the constraint that firms need to cover total costs.
Typically, however, it will be difficult to determine whether a particular firm
accused of predation has engaged in Ramsey pricing since the focus of the
predatory pricing litigation is the product competitive with the plaintiff’s product
and not demand elasticities for all products in the defendant’s product
portfolio.149 Any claim that predatory pricing law achieved the social optimum
by forcing a firm to price above marginal cost and therefore ensured that equally
efficient competitor firms, pricing at the same level, could cover a pro rata share
of joint and common costs is generally unverifiable in the context of predatory
pricing litigation.150
Even conceding that some pricing floor above marginal cost would be
optimal in some cases, there remains the fact that predatory pricing law may set
the price floor above the optimal level. Conversely, the absence of predatory
pricing law could result in prices falling temporarily below the Ramsey-optimal
level and even below marginal cost, creating an initial allocative inefficiency due
to overconsumption, and ultimately resulting in monopoly pricing after weaker
firms are excluded from the market, creating an even greater long-run allocative
inefficiency due to deadweight losses. The optimal pricing point is a generally
unknowable abstraction that can rarely be pinpointed in actual cases, but,
wherever that point resides, it is clear that both the presence of predatory pricing
law and the absence of predatory pricing law would exert an upward pull away
from the optimal pricing point.
The potential of predatory pricing law to induce deviations from optimal

pricing has been previously considered, but with more limited assumptions than
those postulated here. Joskow and Klevorick consider the social costs of
149
The process of adjudicating predatory pricing cases differs considerably from
establishing optimal prices for regulated industries. See Kenneth E. Train, OPTIMAL
REGULATION: THE ECONOMIC THEORY OF NATURAL MONOPOLY 115-40 (1991)
(discussing Ramsey Pricing solutions for regulated industries); Jerry Hausman & Howard
Shelanski, Economic Welfare and Telecommunications Regulation: The E-Rate Policy
for Universal-Service Subsidies, 16 Yale J. Reg. 19, 34-36 (1999) (discussing Ramsey
Pricing solutions for telecommunications regulation). In a predatory pricing case, the
court is not called upon to determine the optimal pricing in the relevant market given
elasticities of demand in all other affected markets, but only focuses on the single market
under consideration.
150
See Bolton, Brodley, & Riordan, supra n. ___ at 2272 (noting that allocating joint
and common costs is an “undertaking that lacks a precise methodology and is particularly
unsuited to jury resolution”). The difficulty of discovering the socially optimal pricing
point goes beyond merely finding out a rational way to allocate joint and common costs.
Ramsey pricing requires allocation of the joint and common costs by reference to the
demand elasticities of the various products in the firm’s portfolio.
37
predatory pricing law as a question of false positives and false negatives.151

Their discussion largely assumes that the social costs of predatory pricing rules
arise from error in the ultimate disposition of predation cases.152 Similarly,
Easterbrook considers the costs of legal action for predation to arise from false
positives which “choke off desirable price reductions.”153 While these
observations are correct, they do not describe all of predation law’s effects on
pricing behavior. The mere availability of a predatory pricing cause of action for
ostensibly injured competitors would create social costs even if the predation
offense were perfectly defined conceptually and adjudication turned out to be
accurate every time. As discussed in the previous section, a firm could make its
rival reluctant to engage in non-predatory price-cutting by threatening to raise the
rival’s costs through litigation or engage in strategic predatory pricing litigation
to organize a cartel. Further, whether or not a competitor strategically misused
predatory pricing law, the costs of predatory pricing litigation could induce a
firm to refrain from price-cutting because the litigation costs would exceed any
profitability gains from the price-cutting. Thus, even specification of the correct
substantive rule of predatory pricing and perfection in adjudicatory results would
entail social costs because the mere fact that courts are open to hear predation
suits will induce some firms to forgo procompetitive price cuts.
If predatory pricing law exists at all, it will inevitably exert a pull away
from optimal pricing. If the predation cause of action were abolished, the
absence of predatory pricing law would also induce a deviation from optimal
pricing. Ideally, one would like to know whether the existence of predatory
pricing law or the absence of predatory pricing law would exert a greater
deviation. To study that empirically, however, one would need to examine an
economy in which predation was perfectly legal and compare it to one in which it
was illegal. The incidence and costs of predatory pricing in a regime without any
predatory pricing prohibition has been the matter of considerable academic
controversy, but remains highly speculative.154 It is unlikely to be ascertained
empirically except by reference to historical case studies of particular firms from
151
Joskow & Klevorick, supra n. ___ at ___.
152
Joskow and Klevorick acknowledge the possibility of “harassing litigation” by
“competitors seeking to protect themselves” but believe that these costs would be
minimized by the types of per se rules they reject. Id. at 242
153
Easterbrook, supra n. ___ at 322.
154
Compare Bork, supra n. ___ at 144 (arguing that unsophisticated theories of
predation have to “drastic overestimations of its likelihood”) and Easterbrook, supra n.
___ at 264 (opining that predatory pricing strategies are as common – and fictional – as
theories about dragons) with Bolton, Brodley & Riordan, supra n. ___ at 2241 (arguing
that predatory pricing is significantly more common than Chicago School proponents
have argued).
38
the time period before the adoption of the Sherman Act155 since predatory pricing
has long been illegal in the United States and in most other countries with similar
economic cultures.156 Any studies of business behavior today are affected by the
fact that predatory pricing is illegal.157
Short of eliminating the predation theory to test Bork and Easterbrook’s

view that predation would rarely occur in an unregulated state, it is impossible to
be certain how pervasive predation would be, or how long its effects would
endure. Given that predation remains unlawful and the experiment suggested is
unlikely to be carried out, the most salient question is how predatory pricing
law’s pull away from marginal cost pricing can be minimized. Consideration of
various factors affecting the administration of the predatory pricing remedy and
the incentives they create with respect to pricing provides a framework for
assessing the optimality of predatory pricing law given its effects on firms’
incentives to engage in vigorous price competition and disincentives to engage in
predation. For convenience, these factors are addressed in two clusters. The first
concerns the incentives created by the likelihood of detection, the amount of gain
or loss resulting from both predatory and non-predatory price-cuts, and the
effects of the treble damages remedy. The second cluster concerns the effects on
pricing behavior of unpredictability in legal outcomes, risk aversion, and
systematic biases toward false positives or negatives.
1. Likelihood of Detection, Gain/Loss Asymmetries, and the

Treble Damages Remedy
Consider the perspective of a firm with a large market share that is

considering cutting its prices to meet competition from a new entrant. In
155
In particular, there has been a well-known debate over whether Standard Oil
engaged in predatory pricing in the pre-Sherman Act period. Compare John S. McGee,
Predatory Price Cutting: The Standard Oil (N.J.) Case, 1 J.L. & Econ. 137 (1958)
(arguing that Standard Oil did not engage in predatory pricing) with Elizabeth Granitz &
Benjamin Klein, Monopolization by “Raising Rivals’s Costs: The Standard Oil Case, 39
J.L. & Econ. 1 (1996) (arguing that Standard Oil’s conduct was predatory).
156
See Elhauge, supra n. ___ at 264 (discussing European Commission approach to
predatory pricing); Norman W. Hawker, Predatory Pricing Law in the United States and
Canada, 7 U. Miami Bus. L. Rev. 201 (1999) (discussing Canadian approach to
predatory pricing law); Ross Jones, An International Perspective on Anti-Competitive
Pricing Practices by Dominant Carriers & Regulatory Rules to Facilitate Competitive
Entry – Australia, 14 De Paul Bus. L. J. 243 (2002) (discussing Australian approach to
predatory pricing law).
157
See, for example, Roland H. Koller, The Myth of Predatory Pricing: An
Empirical Study, 4 Antitrust Law & Econ. Rev. 105 (1971) (examining litigated cases of
alleged predatory pricing and determining that they did not in fact involve predation);
Synder & Kauper, supra n. ___ at 572-73 (same).
39
Scenario A, the firm’s intentions are predatory and the price-cut will only be
profitable if it succeeds in excluding the new entrant and permitting the firm to
price above competitive levels. In Scenario B, the price-cut is not predatory and
is profit-maximizing simply as a response to new competition.
In Scenario A, whether the firm decides to cut its price is a function of

the (i) likelihood that its predation will be detected, (ii) the expected cost if it is
detected, (iii) and the profitability if it is not detected. As to factor (i), predatory
pricing is relatively likely to be detected if it occurs.158 Most of the behavioral
and game theoretic literature that has sought to rehabilitate predatory pricing’s
status has relied on reputational effects to bolster the plausibility of the
offense.159 Bolton, Brodley, and Riordan’s argument that predation is more
likely to occur than the Supreme Court and Chicago School theorists have
asserted is largely based on signaling strategies, reputation effects, and the
communication of information to financial markets.160 The silent, unobserved
predator is inconsistent with the most popular current theories of predation.
There is one possible exception. Under the “cost signaling” theory, “a

predator drastically reduces price to mislead the prey into believing that the
predator has lower costs, inducing the prey to exit the market.”161 Since this
theory of predation assumes deception by the predator, it is possible that the prey
will wrongly assume that its exclusion from the market was due to its own
inferior efficiency, never become aware of the predation, and consequently never
bring suit. However, even under the cost signaling theory, the deception is short-
lived because of the predator’s need to recoup the costs of the concealed
predation scheme. Once the predator begins to recoup, the prey and other firms
learn of the deception.162 However, by this time barriers to re-entry prevent the
deceived prey from challenging the predator’s hegemony.163 This “deceit
158
See Easterbrook, supra n. ___ at 330.
159
See Bolton, Brodley & Riordan, supra n. ___ at 2299-2320; Alvin K. Klevorick,
The Current State of the Law and Economics of Predatory Pricing, 83 Am. Econ. Rev.
162, 163 (1993); Yun Joo Jung, John H. Kagel & Dan Levin, On the Existence of
Predatory Pricing: An Experimental Study of Reputation and Entry Deterrence in the
Chain-Store Game, 25 RAND J. Econ. 72 (1994); John Roberts, A Signaling Model of
Predatory Pricing, 38 Oxford Econ. Papers 75 (1986); Paul Milgrom & John Roberts,
Predation, Reputation and Entry Deterrence, 27 J. Econ. Theory 280 (1982); David
Kreps & Robert Wilson, Reputation and Imperfect Information, 27 J. Econ. Theory 253
(1982).
160
Bolton, Brodley & Riordan, supra n. ___ at 2299-2320.
161
Id. at 2318.
162
Id. at 2320
163
Id.
40
followed by realization too late” story may account for the success of predation
schemes in some cases, but it does not provide a basis to believe that many
predation schemes ultimately go undetected. Once the prey learns of the
concealed predation scheme during the recoupment era, nothing prevents it from
acting on that knowledge and bringing a predatory pricing suit.
Predatory pricing is not like a back-room cartel agreement that will often
escape notice and therefore requires a heightened sanction to deter its
commission.164 In most cases, it will work only if rivals observe it and
understand it as a predatory commitment that the predator is willing to replicate
in the future. Predator firms should expect that their conduct will not go
unnoticed. And, if the conduct is observed, it is likely that a competitor will sue,
which will subject the predator to expensive predatory pricing litigation
regardless of the outcome. As to factor (i) in the predator’s calculus, then, the
likelihood of detection must be considered to be high.
As to factors (ii) and (iii), the probability of an adverse judgment is

dependent both on whether the Supreme Court and appellate courts have properly
calibrated the governing legal standards and whether the courts and jury applying
the law to this particular case make any mistakes. In the event of an adverse
judgment, the predator will have to pay treble damages and attorney’s fees. The
amount of any judgment and attorney’s fees is likely to be substantially larger
than any gain that the firm might make through monopoly pricing after
successfully excluding its competitor. The monopoly gain to the defendant
would be higher than the loss to the plaintiff from exclusion, since defendant
would obtain monopoly rents and the plaintiff only a share of the market at the
competitive price. But since the damages would be multiplied by three and
attorney’s fees added, it would take a very inelastic demand curve for the
predator to earn more monopoly profits than the damages and attorney’s fees for
which it would be responsible in the event of liability. Further, as discussed
above, if courts exhibit leniency toward plaintiffs in computing damages,165
defendants may expect to see inflated damages calculations.
164
See generally, Gary Becker, Crime and Punishment: An Economic Approach, 76
J. Pol. Econ. 169 (1968). On the reasons for the treble damages multiplier, see Richard
Craswell, Deterrence and Damages: The Multiplier Principle and its Alternatives, 97
Mich. L. Rev. 2185 (1999); Robert H. Lande, Are Antitrust “Treble” Damages Really
Single Damages?, 54 Ohio St. L. J. 115 (1993); A. Mitchell Polinsky, Detrebling Versus
Decoupling Antitrust Damages: Lessons from the Theory of Enforcement, 74 Geo. L. J.
1231 (1986); Steven C. Salop & Lawrence J. White, Treble Damages Reform:
Implications of the Georgetown Project, 55 Antitrust L. J. 73 (1986); TREBLE-DAMAGES
REMEDY, ABA Section of Antitrust Law Monograph 13 (1986); Edward D. Cavanagh,
Detrebling Antitrust Damages: An Idea Whose Time Has Come?, 61 Tul. L. Rev. 777
(1987); William M. Landes, Optimal Sanctions for Antitrust Violations, 50 U Chi. L.
Rev. 652 (1983);
165
See supra text accompanying notes ___.
41
Given the legal status quo, unless the substantive legal standards are
substantially off the mark or the adjudication system is systematically biased in
favor of false negatives, predatory pricing would seem to be generally
unprofitable conduct. It is thus not surprising that so few plaintiffs prevail in
predatory pricing cases.166 There probably are not very many cases of bona fide
predatory pricing given the structure of incentives created by the Sherman Act
and the courts. Even if Chicago School adherents like Bork, Easterbrook, and
McGee are wrong to suppose that predatory pricing would occur rarely if ever in
an unregulated state, predatory pricing is unlikely to occur frequently given the
likelihood of detection and suit and the treble damages remedy.
Now consider the firm’s incentives in Scenario B – an innocent price-cut

by a dominant firm in reaction to new entry. Whether the firm decides to cut its
price is a function of (i) the likelihood that it will be wrongly sued for predatory
pricing, (ii) the expected costs of the suit (including both costs that are
independent of the ultimate outcome and the possibility of an erroneous adverse
judgment), and (iii) the profits that the firm will earn if it cuts its price.
As to factor (i), many non-predatory price cuts by firms with a large

market share give rise to unmeritorious lawsuits, some of which are dismissed
early in the litigation but many of which are dismissed only at the summary
judgment stage after many litigation costs have already been incurred.167 This is
particularly likely to be case where the dominant firm has achieved economies of
scale or other efficiencies that a new entrant has not achieved and the price-cut
therefore threatens the profitability of the new entrant.168 The strategic benefits
of predatory litigation probably increase the incidence of predation suits that are
unlikely to succeed on the merits. Hence, the dominant but innocent firm that
considers cutting its price in response to new competition must take into account
the very real possibility of a meritless predation suit.
As to factors (ii) and (iii), the costs of false positives to the defendant are
high – treble damages after leniency in proof of damages and attorney’s fees.169
By lowering its price, the defendant will only obtain profits at a competitive rate
of return since the price-cut is not one that creates monopoly power. In order for
166
See Bolton, Brodley, & Riordan supra n. ___ at 2258 (discussing poor success
rate of predatory pricing cases in last decade).
167
Bolton, Brodley & Riordan, supra n. ___ at 2259-60.
168
Edlin sees the incumbent firm’s greater economies of scale as a reason to prohibit
price-cuts for 12 to 18 months following the new firm’s entry. See Edlin, supra n. ___ .
Elhauge responds that the incumbent’s price-cuts may be justified as a response to the
fact that the new entry disrupts optimal price-discrimination schemes and lowers the
incumbent firm’s efficiency. Elhauge, supra n. ___.
169
42
the price cut to create an expectation of profits, the expected profits from the
increase in sales must exceed the expected probability of the suit times the cost of
defending the suit plus the probability-adjusted costs of an adverse judgment.
Since defense of litigation costs and the costs of an adverse judgment are many
times larger than the profits from the price cut, even relatively small likelihoods
of suit and of an adverse judgment can give the price cut a negative expected
value.
These two scenarios suggest that, given the current legal status quo,
predatory pricing is highly unlikely to occur and predatory pricing law is likely to
chill procompetitive price cutting in many cases. It remains to be examined
whether firms’ preferences with respect to risk, the uncertainty of adjudication,
and the presence of systematic directional biases in the adjudication of predatory
pricing cases ameliorate or aggravate predatory pricing law’s tendency to create
deviations from socially optimal marginal cost pricing.
2. Unpredictability, Risk Aversion, and Adjudicatory Error
Predatory pricing litigation is an unpredictable enterprise. The legal

standards governing predation claims require examination of complex economic
facts, such as whether costs exceeded revenues and whether defendant would
have been able to recoup the costs of below-cost pricing.170 Even tests meant to
simplify the inquiry and provide clear guidance on permissible and impermissible
pricing behavior leave open significant space for adjudicatory ambiguity. For
example, Areeda and Turner’s average variable cost test171 is often thought to
meet Areeda’s admonition that antitrust rules should provide “clarity [that]
guides conduct, simplifies planning, minimizes conflict, [and] reduces resort to
the courts . . . .”172 But the meaning of the average variable cost test is not as
straight forward, either in concept or application, as Areeda and Turner might
have hoped. What does it mean for a cost to be “fixed” or “variable?” There is a
secondary literature by prominent economists on this question.173 Further,
determining which costs are fixed or variable in a particular case requires
complex expert testimony.174 Other proposed legal frameworks for adjudicating
170
Brooke Group, 509 U.S. at 222-23.
171
Areeda & Turner, supra n. ___.
172
Philip Areeda, Antitrust Law as Industrial Policy, in ANTITRUST, INNOVATION,
AND COMPETITIVENESS 29, 42 (Jorde & Teece, eds. 1992).
173
William J. Baumol, Predation and the Logic of the Average Variable Cost Test,
39 J. L. & Econ. 49 (1996) (affirming that the average variable cost test is optimal, if
variable costs are understood as avoidable costs).
174
McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1504 n. 38 (11th Cir.
1988) (“When average variable cost is appropriate to use, as well as determining what
costs are variable, is an issue of fact requiring expert testimony.”); Broadway Delivery
43
predatory pricing claims tend to be even more complex and create even greater
adjudicatory uncertainty.175
The structure of predatory pricing law does not provide business

executives a great degree of certainty about the legal reception of the price-cuts.
The social welfare effects of this uncertainty are not necessarily negative –
uncertainty could keep firms from straying too close to the line.176 But predatory
pricing is not like many forms of tortious conduct where discouraging activity at
the borders of illegality is socially beneficial because the borderline activity is of
low social value.177 Price-cuts that drive prices down toward marginal cost are of
high social value. They create ever-increasing gains until they reach the tipping
point where they exclude competitors and threaten to cause long-run price
increases. Uncertainty as to permissible price-cutting behavior therefore may
cause a considerable increase in the costs of predatory pricing law by inducing
firms to forbear socially beneficial price-cuts.
Risk-aversion also contributes to firm behavior with respect to price-cuts.

Even if the likelihood that the firm will be condemned as a predator is relatively
low, given the inherent uncertainty in the law of predation, this is a possibility
that relatively few dominant firms can rule out. Risk-aversion also should affect
the incidence of predatory price-cuts.178 Managers may be averse to predation
strategies both because the chances of successful recoupment are remote even if
________________________________________________________
Corp. v. United Parcel Service of America, Inc., 651 F.2d 122, 131 (2d Cir. 1981)
(rejecting plaintiff’s argument that defendant priced below average variable cost where
plaintiff failed to present expert testimony to this effect).
175
For example, Edlin defends his proposed test requiring the incumbent firm not to
cut its prices for 12 to 18 months following entry by a new firm that prices at least 20%
below the incumbent’s price on the grounds that it eliminates complex price/cost
comparisons and would be more easily administrable. Edlin, supra n. ___ at 949.
Elhauge shows that Edlin’s rule would create significant new complexities and
difficulties of administration. Elhauge, supra n. ___ at 808-21.
176
See generally, John E. Calfree & Richard Craswell, Some Effects of Uncertainty
on Compliance with Legal Standards, 70 Va. L. Rev. 965 (1984).
177
There may be circumstances where vagueness in liability rules or remedial
schemes are more efficient than predictable rules because of their superiority in deterring
undesirable conduct. Tom Baker, Alon Harel & Tamar Kugler, The Virtues of
Uncertainty in Law: An Experimental Approach, 89 Iowa L. Rev. 443 (2004). Predatory
pricing is not one of them, because the undesirable conduct is so intertwined with highly
desirable conduct. See generally Richard A. Posner, ECONOMIC ANALYSIS OF LAW 242-
50 (5th ed. 1998) (discussing optimal deterrence schemes).
178
See Harry S. Gerla, The Pyschology of Predatory Pricing: Why Predatory
Pricing Pays, 39 Southwestern L. J. 755, 760-65 (1985).
44
the competitor is excluded and because the probability of detection and an

adverse judgment is relatively high. That is to say, predation is a risky strategy
in an unregulated state and an even riskier strategy in a regulated state. If losing
money in a failed predation strategy and losing money in a large adverse
judgment are both psychologically perceived to be risks, then managers may
exhibit a bias against predation strategies that have a positive expected value.179
Risk aversion may thus increase the costs of predatory pricing law by increasing
the probability that managers will forgo non-predatory price cuts. At the same
time, risk aversion may decrease the probability that managers will engage in
predatory pricing. If managers are sufficiently risk averse, then heavy penalties
for predatory pricing may cause substantial social harm by reducing the need to
deter predatory pricing and increasing the chilling of innocent price cuts.
Are the corporate managers for dominant firms – the ones mostly likely
to engage in predatory pricing or be chilled by predatory pricing law from cutting
prices – likely to be significantly risk-averse? Dominant firms are generally
diversified and therefore unlikely to be institutionally risk-averse.180 But pricing
decisions for particular products are often made by managers with responsibility
for only the particular products at issue, not the firm’s overall portfolio. Those
managers are likely to be risk-averse with respect to pricing decisions that affect
their personal compensation and reputation within the firm. The firm may try to
overcome this agency cost by aligning the managers’ interests with those of the
firm by giving the managers stock options and long-term employment contracts.
Whether such compensation structuring occurs at a sufficient level to overcome
individual managers’ risk aversion is uncertain. John Lott’s empirical study
found no significant difference in the executive compensation structure of firms
accused of predation as compared to comparable firms not accused of
predation.181 Lott also found that firms do not structure compensation packages
to reward managers for predatory behavior.182 By the same token, there is no
179
Harry Gerla argues that managers facing new entry may see not engaging in
predatory pricing as a risky strategy because taking no action will result in a loss of
market share. Gerla, supra n. ____ at 760; see also Chris Guthrie, 97 Nw. U. L. Rev.
1115, 1154-55 (2003); Harry S. Gerla, A Micro-Microeconomic Approach to Antitrust
Law; Games Managers Play, 86 Mich. L. Rev. 892, 906 n.69 (1988). But, in analyzing
manager’s incentives in considering price-cuts, it is not sufficient to focus on gains or
losses in the market. Expected gains or losses arising by virtue of predatory pricing law
itself must also be considered in formulating an optimal legal regime with respect to
predatory pricing.
180
Robert S. Pindyck & Daniel L. Rubinfeld, MICROECONOMICS 558-59(6th ed.
2005) (discussing risk preferences and corporate diversification strategies).
181
John R. Lott, ARE PREDATORY COMMITMENTS CREDIBLE: WHO SHOULD THE
COURTS BELIEVE? 36-49 (1999).
182
Id. at 49.
45
reason to believe that dominant firms provide their executives with strong
incentives to engage in non-predatory, but nonetheless legally risky, price-cuts.
A final factor to be considered is whether there is a systematic bias in the

judicial structuring of predatory pricing law or in the adjudication of predatory
pricing cases toward either false positives or false negatives. Here, the biases of
the factfinders and lawgivers may tend in opposite direction.
It would surely be surprising to find that jurors actually understand the

substance of predatory pricing law, when the very definition of predation and its
elements have long been, and continue to be, debated by the brightest economic
and legal minds. Authur Auston’s interviews of the jurors in four antitrust trials,
including Brooke Group, revealed that “the jurors were overwhelmed, frustrated,
and confused by testimony well beyond their comprehension. . . . [A]t no time
did any juror grasp – even at the margins – the law, the economics, or any other
testimony related to the allegations or defense.”183 Austin reports: “At no time
have I encountered a juror who had the foggiest notion of what oligopoly, market
power, or average variable cost meant, much less how they applied to the case. . .
. Typical is the response I received when I asked a juror whether he remembered
average variable cost. The juror replied, ‘Yes, explain it to me. I still don’t know
what it means.’”184 Based on his study of the Brooke Group jury, Auston
concluded that their verdict for Liggett was based upon populist sentiments
inflamed by “smoking gun” documents from Brown & Williamson’s files “in
which B&W executives made comments like ‘bury them’ and ‘put a lid on
Liggett.’”185
If jurors are unable to understand the legal-economic requirements of

predatory pricing law, then they are largely left with a morality play between a
dominant firm, often with superior resources and files full of “smoking gun”
documents that Posner calls “compelling evidence of predatory intent to the
naïve,”186 and a smaller, often younger firm that has been damaged by the
dominant firm’s behavior. Although the “damage” may have resulted from
socially beneficial price competition or the new entrant’s comparative
inefficiency, all the jurors may understand, or care about, is that the defendant
was a large corporation that damaged a smaller corporation through a series of
tactical price-cuts.
183
Arthur Austin, The Jury System at Risk from Complexity, the New Media and
Deviancy, 73 Denv. U. L. Rev. 51, 52-59 (1995).
184
Id. at 54.
185
Id. at 56.
186
Posner, supra n. ___ at 215.
46
The Supreme Court’s Matsushita decision,187 which directs district courts

to play a strong gatekeeping role in antitrust cases in general, and predatory
pricing cases in particular, evidences a deep suspicion that antitrust juries will be
systematically biased against dominant firms and aggressive pricing behavior.
Matsushita invites district courts in the first instance, and courts of appeal in the
second, to scrutinize the economic logic of predatory pricing cases and only
permit theoretically sound cases to proceed to the jury.188 Several courts of
appeal have interpreted Matsushita and subsequent precedent as creating a
presumption against predatory pricing claims.189 Matsushita thus creates a
counterweight to populist, anti-corporate jury tendencies in the form of
heightened judicial scrutiny of plaintiff’s predatory pricing claims. This
gatekeeping function is separate from the specification of the liability rules
governing predation claims. Even if the courts have specified the optimal norms
as to what should be considered predatory and non-predatory behavior, the courts
may exhibit a systematic bias against predation claims in their role as arbiters of
the plausibility of predatory pricing when called to review the sufficiency of
evidence in particular records.
This leaves, finally, the question whether U.S. courts – the Supreme
Court in particular – exhibit any systematic, directional bias in the creation of the
liability rules governing predatory pricing. It is difficult to answer this question
without engaging the substance of the highly contested debate over what should
count as predatory or non-predatory, because one’s view of the Court’s
directional bias will be largely informed by whether one thinks that the Court’s
precedents have generally been correct or incorrect. Further, if there is a
directional bias toward underinclusion, this may be an artifact of judicial concern
that the predatory pricing cause of action could chill vigorous price competition
and be strategically misused by competitors.190 It is possible that the courts are
quite unbiased in their diagnosis of what conduct is predatory and non-predatory
but deliberately tend in the direction of underinclusion following crude intuitions
about the likely effects on price competition of more or less stringent predation
rules. If so, then the observed bias against predation claims should not count as
“error” but rather as a deliberate structuring of predatory pricing law to minimize
social costs by allowing some marginal cases of predation to go unremedied.
187
475 U.S. 574.
188
See generally Wesley J. Liebeler, Whither Predatory Pricing: From Areeda and
Turner to Matsushita, 61 Notre Dame L. Rev. 1052 (1986); James L. Warren & Mary B.
Cranston, Summary Judgment After Matsushita, 1 Sum-Antitrust 12 (1987).
189
Advo, Inc. v. Philadelphia Newspapers, Inc., 51 F.3d 1191, 1196 (3d Cir. 1995)
(Supreme Court precedent “creates a legal presumption, based on economic logic, that
predatory pricing is unlikely to threaten competition”); Stitt Spark Plug Co. v. Champion
Spark Plug Co., 840 F.2d 1253, 1255 (5th Cir. 1988) (Supreme Court creates “a
presumption that an allegation of such behavior is implausible”).
190
See supra text accompanying notes ___-____.
47
There is no reason to believe that the Supreme Court exhibits any

particular directional bias, of the kind that juries sometimes display in the
adjudication of predatory pricing cases and courts scrutinizing the facts of
particular predatory pricing cases display to compensate for jury bias, in the
creation of predatory pricing rules. The Court is certainly influenced by schools
of thought and evolving attitudes toward the robustness of markets – the Chicago
School has undoubtedly had a significant effect – but this does not equate to a
general predisposition to err in creating liability rules governing predatory
pricing. If an observable adjudicatory bias exists, it is at the level of fact-finding
and review of facts, not at the level of the creation of the governing legal norms.
3. Summary of Directional Influences on Pricing Behavior
How far from the socially optimal pricing point – marginal cost or
Ramsey pricing – does the existence of predatory pricing law induce market
pricing to stray? Taken together, the various factors discussed above suggest that
predatory pricing law induces a substantial deviation from optimal pricing. To
summarize, predation is likely to be detected if it occurs and antitrust law, with
the treble damages remedy, fee-shifting, and liberality in proving damages,
provides a heavy sanction if it is. The incentives to engage in predatory pricing –
monopoly profits – would have to be enormous to overcome these disincentives
to predate. On the other hand, the strategic benefits to plaintiffs of predatory
pricing litigation and the magnitude of recoverable damages induce many
plaintiffs to file meritless predation suits. Even if the plaintiff’s likelihood of
success is small, the defendant has strong incentives to forgo price-cutting
because the costs of defending a meritless suit are large and even a small
probability of an adverse judgment translates into a significant expected cost
given the magnitude of possible damages. Predicting the outcome of a predatory
pricing lawsuit is difficult given the inherent complexity in the legal standard and
adjudication. Adjudicatory uncertainty coupled with risk aversion may lead
potential predators to forgo predation and potential innocent price-cutters to
forgo price cuts. Finally, there is almost certainly a systematic jury bias against
dominant firms that engage in aggressive price-cutting, which may or many not
be sufficiently corrected by the Matsushita gatekeeping function of the courts.
Most of these factors point directionally toward the conclusion that if

predatory pricing liability rules drew the line at exactly the dividing point
between socially beneficial and socially harmful price discounting, they would
induce more deviation from optimal pricing than necessary in order to deter
predation and would chill many socially beneficial price cuts. In theory, at least,
even a very modest form of predatory pricing law could deter socially costly
behavior and a more robust form of predatory pricing law could backfire by
chilling aggressive, but beneficial, pricing behavior. However, before
considering normative conclusions about the optimal content and structure of
predatory pricing law, it is worth diverting for a moment from theory to fact and
considering the extent to which theoretical considerations track the infusion of
predatory pricing law into business culture and practice.
48
C. Results of In-House Counsel Survey on Influence of Predatory Pricing Law
The accumulated literature on predatory pricing law – whether

supportive of less or more governmental intervention – generally shares the
common assumption that the specification of legal norms with respect to
predatory pricing law will have effects on the ways in which firms set prices.
Those who believe that predatory pricing is relatively common and effective at
excluding competition assume that the specification of a more aggressive
regulatory norm will discourage firms from embarking on predatory campaigns.
Those who believe that predatory pricing is relatively uncommon and ineffective
believe that the existence of predatory pricing law will induce firms to forgo
beneficial price cuts out of fear of getting sued. But what if predatory pricing
law, as concretized in legal holdings by the courts, rarely works its way into the
decision-making processes of executives charged with pricing decisions and only
appears as an ex post revelation when a firm’s lawyers advise it to sue? Then
predatory pricing law would have neither a general deterrent effect on predators
nor a chilling effect on non-predators.
Business schools teach little, if anything, about antitrust law in

general,191 and probably particularly little about predatory pricing, which is a
specialized and often misunderstood field within antitrust. If business executives
are responsive to the incentives created by predatory pricing law, it will usually
be because those incentives are communicated by in-house lawyers. To gather
some data on the extent to which predatory pricing law affects business decisions
on the ground, I conducted a survey of in-house counsel asking a series of
questions about the extent to which predatory pricing law is communicated to
business executives responsible for pricing decisions. Although the response rate
was poor, the responses given provide some modestly useful information about
the infusion of predatory pricing law into executive decision-making.
In January of 2005, I sent a 25-question questionnaire to 919 in-house

lawyers selected from the Martindale Hubbell directory of corporate counsel.
Only one attorney per corporation was selected, and respondents were instructed
to restrict their response to matters that were true with respect to their current
employer. Corporations that were highly unlikely ever to encounter predatory
pricing issues, such as rate-regulated firms, non-profit corporations, industry
associations, and holding companies, were excluded. Where possible, the
addressee attorney was selected based on a description of the attorney’s job
functions that included antitrust matters. Since most in-house counsel rosters do
not list any individual with antitrust responsibility,192 the survey was sent to
many lawyers who might not have any antitrust responsibility and therefore were
unlikely to respond.
191
Lawrence J. White, Microeconomics and Antitrust in MBA Programs: What’s
Thought, and What’s Taught, 47 N.Y. L. School L. Rev. 87, 92-93 (2003).
192
Many smaller corporate law departments probably have no one with antitrust
expertise, particularly if the firm seldom faces antitrust matters.
49
Seventy in-house attorneys sent back the questionnaire. All but two
identified themselves as individuals responsible for antitrust matters and
provided useable responses. While this 8% response rate is low and places limits
on the conclusions that can be drawn from the responses, there is reason to
believe that the respondents represent a more significant proportion of the in-
house attorneys with exposure to predatory pricing matters than the general pool
of all in-house lawyers. The majority of the respondents work for manufacturing
(51%), wholesale (8%), or retail (4%) companies, which are generally more
likely than firms in other industries to face predatory pricing issues because of
their industry cost structures.193 Further, the majority of the respondents work for
large corporations – 59% had over $1 billion in annual revenues and 26% had
between $200 million and $1 billion in annual revenues. The attorneys who
responded were probably more willing than the general population of in-house
attorneys to fill out the questionnaire because their firms did face predatory
pricing matters. This probable response bias suggests that the survey results
provide little information on the effects of predatory pricing law on corporations
generally,194 but may more accurately reflect the situation in large corporations of
the kind that are likely to affected by predatory pricing law.
A principal series of questions was designed to uncover the extent to

which in-house lawyers communicate with business executives about predatory
pricing law in non-litigation circumstances.195 75% of the respondents reported
that their firms had formalized antitrust compliance manuals or policies. Of the
firms that had such policies, a substantial majority – 68% – contained policies
with respect to predatory pricing. A similarly large majority of respondents –
66% – reported that they or other lawyers acting on behalf of their companies had
provided advice to business executives about predatory pricing matters. Overall,
only 12% of the respondents’ firms had ever been involved in predatory pricing
litigation, which suggests that information about predatory pricing is frequently
communicated to business executives in non-litigation contexts.
A related series of questions sought information about the content of the

predatory pricing advice provided to business executives. In particular, I was
193
See Richard Craswell & Mark R. Fratrik, Predatory Pricing Theory Applied: The
Case of Supermarkets v. Warehouse Stores, 36 Case W. Res. L. Rev. 1, 47-48 (discussing
susceptibility of manufacturing and retail industries to predation).
194
Indeed, the vast majority of corporations are unlikely ever to confront a predatory
pricing issue because there is no dominant firm in the market or because the industry cost
structure does not lend itself to predation or predation claims.
195
Predatory pricing was defined in the questionnaire to include “any claim that a
price was too low and therefore exclusionary of competition.” International dumping
claims were excluded. In order to exclude responses concerning the pre-Matsushita and
Brooke Group era, respondents were instructed to limit their responses to matters that
were true within the past 15 years.
50
interested to learn the extent to which in-house lawyers provide advice on the
appropriate measure of cost below which prices should not be set. Of the firms
that have an antitrust compliance manual with a provision about predatory
pricing, only 27% contained information about what measure of cost should be
considered in setting prices. Of those, three firm policy manuals establish “cost”
without further description as the measure, three establish “average variable cost”
as the appropriate measure, and two adopt some other, unspecified measure of
cost. When the lawyers gave direct advice to business executives on predatory
pricing, as opposed to merely including it in a policy manual, the lawyers were
more likely to give instruction on the appropriate measure of cost. 79% of the
time they provided counsel on the appropriate measure of cost. 42% advised that
“cost” without further description was the appropriate measure, 29% advised that
“average variable cost” was appropriate, and the remainder advised that some
other measure of cost was appropriate.
Another line of questions elicited information relevant to the theoretical

claim made earlier in this paper – that firms can strategically misuse predatory
pricing law to force an abatement of price competition. The respondents were
asked: “Has your company ever received a communication (whether formal or
informal) from a competitor or other company to the effect that your company
was charging a predatory price?” 20% responded yes, 80% responded no.
Interestingly, litigation followed the predatory pricing complaint in only half of
the cases, which is consistent with the view (although it certainly does not prove
it) that firms may seek to stymie price competition by merely invoking predatory
pricing law in response to a competitor’s price cuts.196 The respondents were also
asked whether their own company had ever complained to a competitor that its
prices were predatory. A small percentage – 9% – stated affirmatively that they
had done so, 27% stated that they did not know whether or not others in their
company had made such a complaint, and 64% stated affirmatively that their
company had not. Only one respondent had ever received a predatory pricing
complaint from the government
A follow-up question asked the respondents who had received a

competitor complaint whether the complaint had resulted in their own company
charging a higher price. Only one out of ten respondents who had received a
competitor complaint believed that it had resulted in their company charging
higher prices. The entire group of respondents was also asked whether they
believed that the existence of a predatory pricing offense had any effect on the
manner in which their company set its prices. 18% answered yes, 64% answered
no, and 18% said they did not know. A follow-up question to those that believed
that predatory pricing law had affected the manner in which their company set
prices asked whether it had resulted in higher prices, lower prices, or simply
“differently” set prices. Only three out of ten respondents chose “higher;” the
196
A further series of questions sought information on the outcome of the litigation if
it did occur. In the six cases where private litigation occurred, defendant won summary
judgment four times, one case ended in a settlement, and the other case resulted in some
other, unspecified, outcome.
51
other seven chose “differently.”197 The respondents were also asked whether
they believed that predatory pricing law had any effect on the way in which their
competitors priced. Only two respondents said yes; the others split between “no”
(58%) and “don’t know” (38%).
Although the poor response rate and small response pool limits the
conclusions that can be drawn, the responses suggest the following tentative
observations: At least some rudiments of predatory pricing law are broadly
communicated to executives in large corporations involved in pricing decisions
in manufacturing, retail, and wholesale industries – industries in which predation
is likely to arise as an issue. Not surprisingly given the division among lower
courts on the appropriate measure of cost governing predation claims, the advice
given to corporate executives often does not include specification of a particular
cost threshold below which revenues must not fall. Although some firms have
adopted average variable cost as the presumptive standard, the advice usually
appears to be more general and non-specific. Competitor complaints about
aggressive pricing are not pervasive but occur with some regularity. They result
in litigation only about half of the time, but may occasionally have effects on
pricing even when litigation does not occur. Finally, it is difficult for in-house
lawyers to find a direct causal relationship between predatory pricing law and
higher prices. Pricing decisions are complex and multifaceted, and even when
predatory pricing law induces a firm to change its pricing structure, it will not
always be clear that a net price increase results.
Missing from this survey is one critical question that the respondents
would not have been in a position objectively to answer: whether their firms had
ever considered or actually engaged in predatory pricing. If so, the competitor
threats that never resulted in litigation may count as a virtue and the counseling
about predatory pricing may have beneficial effects. This question is hard to
answer so long as the very definition of predation remains murky and indistinct
and the economic attributes of exclusion and recoupment highly contested. The
most that surveys of this kind can tell us is that predatory pricing law has a high
or low degree of influence on business behavior. Whatever the answer to that
question, one must still determine what degree of influence on pricing behavior is
optimal given the constraints inherent in adjudication. To that question we turn
in the final Part.
197
The implications of the “differently” response are uncertain. Most likely,
respondents who chose this category were unwilling to commit to the view that their
firms had charged higher prices as a result of predatory pricing law, although they had
seen evidence that the firm had restructured some pricing scheme – for example, by
eliminating a price discrimination mechanism or a bundled rebate program – in response
to predatory pricing law.
52
III. OPTIMAL PREDATORY PRICING POLICY

IN LIGHT OF MARKET EFFECTS
Although much has been written about predatory pricing law and the
courts have developed a complex body of governing law, many of the hardest,
and most fundamental questions await conclusive answers. Are predation
theories available only to equally or more efficient competitors, or can less
efficient competitors whose efficiency development was stymied by predation
also assert claims?198 What is the appropriate measure of cost below which
prices cannot be set?199 Does predation necessarily entail the sacrifice of short-
run profits, or is predation without sacrifice possible?200 Do the same predation
rules apply to multi-product discounting as to single product discounting?201
These questions were largely unanswered in the first wave of predatory pricing
scholarship in the 1970s and early 1980s and the Supreme Court decisions of the
late 1980s and early 1990s that adopted the Chicago School perspective that
predation was rare and predation theory a threat to robust price competition.202
Answers to these questions are being, and will continue to be, given in the courts
and in legal scholarship in a second wave of predatory pricing conceptualization.
The second wave of scholarship and judicial development is likely to draw on
advances in economic theory, particularly in behavioral economics and game
198
See supra note ___.
199
See supra note ___.
200
In this regard, there appears to be an emerging divergence between the accepted
wisdom in the courts and the analytical perspective of commentators. Compare Barr
Laboratories, Inc. v. Abbott Laboratories, 978 F.2d 98, 109 (3d Cir. 1992) (holding that
“predatory intent reflects a competitor's willingness to sacrifice present revenues in order
to achieve monopoly profits in the future”); Northeastern Telephone Co. v. AT&T, 651
F.2d 76, 86 (2d Cir. 1981) (holding that predatory pricing is “the deliberate sacrifice of
present revenues for the purpose of driving rivals out of the market and then recouping
the losses through higher profits earned in the absence of competition.” ) and AD/SAT v.
Associated Press, 920 F. Supp. 1287, 1301 (S.D.N.Y. 1996)(citation omitted), aff'd, 181
F.3d 216 (2d Cir. 1999) (asserting that predatory pricing requires “the deliberate sacrifice
of present revenues for the purpose of driving rivals out of the market and then recouping
the losses through higher profits earned in the absence of competition”) with Edlin, supra
n. ___ at 945, (describing theory of predation without sacrifice of short-run profits); Einer
Elhauge, Defining Better Monopolization Standards, 56 Stan. L. Rev. 253, 272 (2003)
(criticizing reliance on sacrifice notions to define predation); Andrew I Gavil,
Exclusionary Distribution Strategies by Dominant Firms: Striking a Better Balance, 72
Antitrust L.J. 3, 56 (2004) (criticizing sacrifice theory of predation).
201
See Crane, supra n. ___.
202
See supra text accompanying notes ___.
53
theory,203 and these influences may push courts in a direction more receptive to
predation claims.
But even if evolving theoretic insights show predation to be a more

common and effective strategy than some had thought, that is an insufficient
ground to justify a more robust predatory pricing doctrine. In light of the
features of antitrust law and management decision-making that cause predatory
pricing law to induce deviations from socially optimal pricing, any movement
toward strengthening predation theory must be justified by the creation of net
efficiency gains and not merely deterrence of some additional instances of
predation. Indeed, even the anemic status quo may go too far if the innocent
price-cutting it deters coupled with the costs of predatory pricing counseling and
litigation exceed the costs of predatory price-cutting deterred by the existing
legal rules.
It is not my purpose here to propose an optimal legal test for predation.

Rather, this final Part addresses two different categories of rules that could be
applied or modified to alleviate the adverse market effects of predation law. The
first set of rules specify decisional criteria courts and antitrust agencies could
employ (and perhaps already do, to some extent) in framing predatory pricing
liability rules. The second set of rules are ancillary to the substance of predation
law and relate to the remedial aspects of predatory pricing litigation in the United
States.
A. Decisional Rules
When judges or antitrust regulators are called upon to determine liability

rules that may condemn prices as too low, or to determine that a particular firm’s
pricing behavior was predatory, they wander into a thicket of complex economic
theories and dense factual records. The likelihood that they will emerge from
that thicket with a pristine set of rules or adjudicatory results creating just the
right incentives to drive prices toward marginal cost is low. Before entering the
thicket, courts and regulatory agencies can chose decisional rules that serve as
precommitment strategies to minimize the costs of errors and unintended
effects.204 I suggest three such decisional rules for predatory pricing cases.
1. Deliberate Underinclusion in Liability Rules
The over or under inclusiveness of predatory pricing rules is a frequent

topic in scholarship about predation. Aaron Edlin observes that “[w]hen setting a
legal standard intended to distinguish procompetitive from anticompetitive low
prices, courts must balance the possibility of being underinclusive against that of
203
See generally Bolton, Brodley & Riordan, supra n. ___; Tor, supra n. ___.
204
See generally Meir Dan-Cohen, Decision Rules and Conduct Rules: On Acoustic
Separation in Criminal Law, 97 Harv. L. Rev. 625 (1984).
54
being overinclusive.”205 Edlin further argues that “[t]he probabilities of these two
types of errors depend . . . upon the underlying plausibility of predatory
pricing.”206 But underinclusion need not be an error at all, even if predatory
pricing is plausible and frequent. Herbert Hovenkamp aptly notes that “[u]ntil
antitrust tribunals are able to identify above cost prices as anticompetitive in a
reliable manner, a consumer-oriented antitrust policy has no choice but to adhere
to the admittedly underdeterrent below cost pricing requirements of the Areeda-
Turner or some similar rule.”207 Underinclusion – prohibiting less conduct than
all predatory and socially costly conduct – could be an optimal decisional
strategy if prohibiting the marginal instances of predation would invite greater
strategic misuse of predatory pricing law or self-policed failures to engage in
innocent price cuts. Further, the Supreme Court has quite reasonably justified its
current approach to predatory pricing as deliberately underinclusive, even
without regard to the possibility of false positives, because above-cost “predatory
pricing schemes [are] ‘beyond the practical ability of a judicial tribunal to
control.’”208 Even if the exact line separating predation from beneficial price cuts
could be identified with analytical precision, courts would be ill-advised to draw
the legal line in the same place as the analytical line if the collateral costs to the
legal line-drawing were great.
Suppose that a court could identify with absolute precision that in x

circumstances a price-cut would be socially costly in the long run because of its
exclusionary impact on competitors. For reasons discussed in Part II, specifying
x as the governing legal norm would not be the optimal solution given the
structural status quo of antitrust law. Firms tempted to predate by engaging in x
would face strong disincentives to do so, given the inherent riskiness of predation
strategies, the high likelihood of detection, treble damages, leniency in proof of
the amount of damages, mandatory unilateral fee-shifting, the costs of defending
a predatory pricing lawsuit, and managerial risk aversion. To deter firms from
engaging in conduct x, it might be sufficient to specify (x + 1) as the liability
standard. On the other hand, setting x as the legal standard would induce
innocent price-cutters in circumstances (x – 1) and perhaps even (x – 5) to forgo
205
Edlin, supra n. ___ at 953.
206
Id.
207
Hovenkamp, supra n. ___ at 314-15.
208
Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S.
398, 414 (2004) (citing Brooke Group, 509 U.S. at 223); see also Joseph F. Brodley,
Antitrust Standing in Private Merger Cases: Reconciling Private Incentives and Public
Enforcement Goals, 94 Mich. L. Rev. 1, (1995) (noting that predatory pricing plaintiffs
“must overcome deliberatively underinclusive liability rules”).
55
socially beneficial price-cuts, given the risk of adjudicatory error,209 the costs of
defending even a successful suit to conclusion, and the disproportionate costs in
the event of an adverse judgment. Further, setting the liability rule at exactly x
would provide greater opportunities for firms to use predatory pricing law
strategically to organize tacit collusion schemes than if the liability rule were set
at (x + y). Thus, even if a court were absolutely confident in x as the correct
analytical line, setting the substantive liability rule at (x + y) would produce a
more efficient outcome.
Courts and antitrust enforcement agencies would be well-advised to

adopt a decisional rule with respect to predatory pricing that mandates deliberate
underinclusion in the specification of the liability rule. The degree of the
deliberate underinclusion should be determined not only by the court’s certainty
in the soundness of its decision-making but by an appreciation of the degree to
which predatory pricing law discourages innocent price-cuts. If, as I have
suggested here, predatory pricing law’s tendency to induce deviations from
optimal pricing is strong, then the additive factor should be substantial.
2. Deliberate Underinclusion in Adjudication
The underinclusion rule just described would apply to the specification

of the governing liability rules. A similar set of principles could be – and may
already be – applied to judicial supervision of the adjudicatory process.
Although liability rules might be thought to operate on incentives ex ante and
adjudicatory rules only ex post, the predictions that business executives make
with respect to the outcome of predatory pricing adjudications will also influence
their incentives ex ante. Particularly if executives perceive – probably with good
reason – that jurors are systematically predisposed to false positives in predatory
pricing cases, the effects on price competition could be deleterious.
As discussed in Part II, Matsushita suggests that the solution to juror bias
is for courts carefully to scrutinize the soundness of predation theories at the
summary judgment stage. While this may work out to a mandate of deliberate
adjudicatory underinclusion of what cases may be given to juries, there are more
explicit ways to achieve the same result. For example, standards establishing the
necessary quantum of evidence can operate optimally to calibrate social behavior
when adjustments in the liability rule are inadvisable.210 If there are expressive
or operational constraints on deliberate underinclusion in the specification of the
liability rule for predatory pricing, then the costs of maintaining a prohibition on
predatory pricing could be minimized by requiring plaintiffs to prove predation
by a some heightened quantum of proof – for example, clear and convincing
209
Ex ante, the perceived risk of adjudicatory error simply cannot be eliminated by
courts, even if courts have a high degree of confidence in the correctness of the
substantive liability rule.
210
Richard A. Bierschbach & Alex Stein,Overenforcement, 93 Geo. L. J. 6 (2005).
56
evidence.211 Specifying a heightened quantum of proof would still result in

deterrence of predatory pricing campaigns, given the significant costs of an
adverse judgment, and it would make some innocent price cuts less likely to be
chilled by the existence of predatory pricing law.
Both forms of deliberate underinclusion could be used simultaneously to

create an optimal structure of incentives. For example, adopting the average
variable cost test as a necessary condition for predation and requiring proof of
predation by clear and convincing evidence might produce superior results even
if there were clearly identifiable instances of above average variable cost
predation and even though the evidentiary rule would sometimes excuse below
average variable cost price cutters.
3. Bright-Line Liability Rules
Ex ante uncertainty over adjudicatory results combined with managerial

risk aversion makes it likely that some firms will forgo innocent price cuts that
come close to the predation line, even in the absence of competitor’s threat to
sue. If the predation line is fuzzy, the chilling effects are compounded. As the
survey results discussed in Part IIC reveal, business executives in industries
susceptible to predation and predation claims are being told that they must not
price below cost, but they usually are not being told what cost means. If the
academic and judicial debates over the conceptualization of predation have
shown anything, it is that the differences between various possible cost standards
are highly significant. If business executives are internalizing the general and
non-specific predation advice they are given, they could be led to self-police
according to a widely varying range of interpretations of what predation means.
Despite its concern over chilling vigorous price competition, the

Supreme Court has been reticent to establish a bright-line cost standard. Three
times it has declined to adopt a specific measure of cost.212 Although these
specific cases could be justified on the grounds that the cost issue was not
directly presented in any of those cases,213 the Court has also shown no interest
granting certiorari in cases where the issue was squarely presented.214 The
Supreme Court’s reticence to establish bright-line predation standards is not
211
Id. at ___.
212
See n. ___ supra.
213
For example, in Brooke Group the parties agreed that average variable cost was
the appropriate measure, as one would expect given that Phillip Areeda represented
Liggett and Robert Bork represented Brown & Williamson. 509 U.S. at 211.
214
See Rebel Oil Co., Inc. v. Atlantic Richfield Co., 146 F.3d 1088 (9th Cir.), cert.
denied, 525 U.S. 1017 (1998); International Travel Arrangers v. NWA, Inc., 991 F.2d
1389 (8th Cir.), cert. denied, 510 U.S. 932 (1993).
57
limited to the question of the appropriate cost measure. The Court recently
denied certiorari in a case involving the appropriate treatment of bundled rebates
– a form of multi-product price discounting – after the Solicitor General, Justice
Department, and Federal Trade Commission advised that it would be better to
deny certiorari because the issues presented were “novel and difficult” and
because the Third Circuit’s en banc “ruling does not conflict with the decisions
of any other court of appeals.”215
Disposition toward incremental decision-making, lengthy incubation of

experimentation in the lower courts, and multi-factored balancing tests may be
appropriate in many circumstances, but these are poor strategies for the
administration of a predatory pricing regime. Uncertainty over the governing
legal standards imposes barriers to efficient price competition. Particularly given
the desirability of underinclusion, the courts should precommit to draw bright-
line, underinclusive predation rules at the earliest opportunity. Examples of
desirable predation rules include complete immunity against predation claims for
firms with market shares below particular thresholds, per se legality for prices
above the specified cost threshold, and well-defined safe-harbors for mixed
bundling schemes.216
Given the uncertainty costs of predation law and the glacial pace of
Supreme Court rule-making in antitrust, it is doubtful that the creation of
predation liability rules through incremental common law development is
desirable. Agency rule-making of prospective pricing rules would be superior,
although neither the Justice Department nor the Federal Trade Commission
currently has the statutory authority to make predation rules that would apply to
private predation lawsuits, the primary source of concern.217 If the predatory
pricing cause of action is to be maintained, Congress should consider delegating
such rule-making authority to the FTC.
Bright-line rules are not a panacea in predation law. As discussed above,

even when the cost standard is clearly articulated, its meaning and application is
complex and uncertain. However, a greater degree of clarity in the specification
of the predation offense would be a beneficial incremental step toward
minimizing the chilling effects of predation law.
215
Brief of the United States as Amici Curiae, 2004 WL 1205191, at 8 (May 28,
2004).
216
Thomas A. Lambert, Evaluating Bundled Discounts, forthcoming Minn. L. Rev.
(2005).
217
The FTC has the authority to promulgate substantive competition rules, National
Petroleum Refiners Ass'n v. FTC, 482 F.2d 672 (1973), although any such rules would
not apply to private lawsuits under the Sherman Act.
58
B. Remedial Rules
Much of the reason that predation law exerts a pull away from optimal
pricing, requiring the suggested adjustments to liability and adjudicatory rules
suggested above, has to do with the remedial structure of U.S. antitrust law. In
particular, the treble damages remedy, unilateral fee-shifting, competitor
enforcement, and liberal discovery rules provide opportunities for abuse.
Alterations of some of these features of antitrust law in predatory pricing cases
could have significant positive effects without losing the primary deterrent value
of predatory pricing law.
1. Eliminating the Treble Damages Remedy
The incentive dislocations caused by the treble damages remedy in

predatory pricing cases have long been observed.218 As discussed in Part IIB, the
traditional justifications for the treble damages remedy in antitrust have little
force as applied to predatory pricing, which is unlikely to go undetected. Further,
as Easterbrook has shown, trebling in predatory pricing cases takes place over a
baseline damages award typically measured by a competitor’s lost profits, which
bears no relationship to the optimal damages necessary to deter predation.219
And this observation works apart from the fact described in Part IA that the
culture of antitrust damages awards – strictness on causation and antitrust injury
but liberality on proof of amount of damages – systemically inflates damages
awards in predatory pricing cases. Together, these features of antitrust law have
costly consequences for firms’ incentives to engage in vigorous price
competition.
It is difficult to see the justification for keeping the treble damages

remedy in predatory pricing cases, given its tendency to discourage price-cuts
approaching the legally established price floor. One possible argument is that
single damages would lead to underdeterrence because, if predatory pricing has a
less than 100% detection rate, the expected gains from predation would be
positive. This argument not only wrongly assumes that a competitor’s lost
profits are a fitting starting place for deterring would-be predators,220 it also
ignores the fact that other features of antitrust litigation – statutory fee-shifting,
the defendant’s costs of defense, reputational costs with customers and
shareholders, and managerial risk-aversion – provide significant deterrent weight
over the amount of the damages award. Further, if liberality in proof of damages
continues to be the practice in those cases where predatory pricing is established,
218
Baumol & Ordover, supra n. ___ at 263 (“One should consider both the use of a
multiple smaller than three, at least in those types of cases, such as predatory pricing . . .
and in some types of cases one might even consider [single damages].”); Easterbrook,
supra n. ___ at 329-30.
219
Easterbrook, supra n. ___ at 327.
220
Id.
59
then little more incentive is necessary to deter predation given the small
likelihood that it will not be detected. Eliminating the trebling rule for predation
cases would be a simple way of minimizing the costs of predatory pricing law.
2. Eliminating Competitor Standing
The chilling effects of predation law do not arise exclusively from the
fact that competitors are the primary enforcers, but almost so. Virtually every
private predatory pricing case is brought by a competitor, and competitors have
unique incentives to misuse predatory pricing law to chill price competition.
Competitors want to see higher prices both in the short run and in the long run.
The law tolerates their complaint that prices were too low because of their further
allegation that the low prices would eventually lead to higher prices. But the law
does not require proof of actual higher prices. In an attempted monopolization
through predatory pricing case, it is sufficient to prove that defendant’s low
prices created a dangerous probability of subsequent higher prices.221 Thus,
competitor-plaintiffs are often in the position of asserting that defendant’s prices
were anticompetitively low merely based on the speculation that, left unchecked,
defendant would have driven plaintiff from the market and raised its prices –
even though that never actually happened.
Giving firms the standing to challenge their rivals’ prices as too low on
the theory that higher prices might eventually emerge is like asking the fox to
guard the henhouse. Consumers – the intended beneficiaries of antitrust law –
have exactly the opposite incentives as competitors. They prefer sustainably low
prices, and therefore make far better-intentioned predation enforcers than
business rivals of the “predator.” If predatory pricing were a frequent and
successful enterprise, one would expect to see many class action lawsuits by
overcharged consumers.222 Such lawsuits are extremely rare,223 which is probably
more a testament to the absence of successful predation schemes than to
221
See supra n. ___.
222
See Herbert Hovenkamp, Tying Arrangements and Class Actions, 36 Vand. L.
Rev. 213, 236 (1983) (discussing possibility of class action lawsuits for overcharges
following predatory pricing and recoupment).
223
Such a class action case is pending against 3M following a jury verdict by 3M’s
rival, LePage’s, in case involving allegedly exclusionary bundled rebates. See supra n.
___. The case has a number of difficulties. At least one of 3M’s ostensibly injured
customers and plaintiff class members – Staples – joined an amicus curiae brief urging
the Supreme Court to reverse LePage’s jury verdict. See Brief of The Boeing
Corporation; Brunswick Corp., Caterpillar Inc., Honeywell International Inc., Northwest
Airlines Inc., Staples, Inc., and Xerox Corp. as Amici Curiae in Support of Petition, 2003
WL 22428377. Further, since 3M never succeeded in driving LePage’s from the market,
the customers were beneficiaries of the allegedly predatory prices without having to
endure a period of recoupment.
60
consumers’ deficiencies as enforcers. The collective action problems necessary

to organize such suits are unlikely to be significantly greater than those for
collusion cases brought consumers, which are not at all infrequent. Consumers
may be ill-positioned to detect predation as compared to competitors,224 but that
should not be a serious obstacle to reliance on consumers as the primary
predatory pricing enforcers. Injured competitors would still have an incentive to
be on the lookout for instances of predatory pricing and could communicate that
information to plaintiffs’ class action lawyers who also share those incentives.
Of all the remedial proposals suggested here, Easterbrook’s suggestion

that “[w]e should abandon reliance on competitors’ suits to enforce the rule
against predation”225 would produce the most immediate and profound social
gains. Except for the possibility of government enforcement, this would
effectively eliminate liability for attempted monopolization through predation,
since consumers would have no standing to complain of below marginal cost
prices that failed to exclude a competitor or lead to recoupment.226 As discussed
in Part IIA, such pricing is allocatively inefficient, but of less concern than
monopoly pricing because the harmful effects on consumers are less certain. The
law’s interest in deterring monopoly pricing is much stronger than its interest in
deterring mistaken, non-predatory below-cost prices, which are likely to be
quickly self-correcting.
Eliminating competitor predation suits would make predation into an

actual recoupment offense. This would eliminate the bizarre feature of many
predatory pricing cases where the only misconduct alleged is prices that were too
low and no proof is offered of resultant higher prices, except in a speculative
predictive sense. It would focus predatory pricing law on the conduct that is
actually undesirable – monopoly pricing – and make the conduct that is generally
desirable – price cutting – merely a step in the necessary proof. Dominant firms
would be incentivized to worry about raising their prices if a competitor exited
the market following a price war, but would be far less worried about the initial
price-cutting decision. This would put the incentives in the proper places: price
cuts would be encouraged and price hikes following a rival’s exit discouraged.
Making consumers the exclusive private enforcers of predation law would result
in far fewer predation cases, but with far greater average merit than competitor
suits, and would vastly diminish the problems of competitor misuse and chilling
innocent price cuts.227
224
Easterbook, supra n. ___ at 331.
225
Id.
226
Theoretically, consumers could sue for an injunction against attempted
monopolization through predation, but the likelihood that consumers would seek
equitable remedies in cases without damages is remote.
227
As discussed in the text accompanying notes ___, competitors can strategically
misuse even government-enforced predation law and, even if consumers had exclusive
61
3. Bilateral Fee-Shifting
Part IA described the possibility that less efficient firms strategically

invoke predatory pricing law to raise the costs of their more efficient rivals and
thereby discourage aggressive price competition. If this indeed occurs, a simple
solution is to make fee-shifting bilateral in predatory pricing cases. This would
make filing a meritless predatory pricing lawsuit a negative expected value event
and drastically undercut the attractiveness of predation as a strategic tool to chill
price competition. A bilateral fee-shifting rule would make it impossible for a
firm to raise its rival’s costs through predatory pricing litigation unless the
underlying claim had significant merit. In an unmeritorious case, the plaintiff
would only expect to raise its own costs. If, as I suggested in Part IA, defendants
tend to pay more to defend predatory pricing cases than plaintiffs pay to
prosecute them, then a bilateral fee-shifting rule would more than double the
expected costs of initiating predatory pricing suits, which would help to winnow
predation litigation to those cases where a substantial damages award is a
significant possibility. Those are the cases in which we should be least worried
about chilling price competition and most interested in chilling predation.
By increasing the costs of predatory pricing litigation as a cartel-

organizing tool, a bilateral fee-shifting rule would also discourage firms from
using predatory pricing lawsuits to try to organize tacit collusion schemes. Firms
might still conclude that the expected cost of having to pay both their own fees
and their rivals’ litigation expenses would be less than the gains from securing a
tacit understanding on pricing, but bilateral fee-shifting would significantly
reduce the temptation.
A loser-pays fee-shifting regime for predation cases would discourage

injured rivals and consumers from suing except in very strong predation cases,
particularly given that the defendant’s litigation expenses are likely to exceed
plaintiff’s.228 While this might eliminate some meritorious and socially
beneficial predation suits, the effects of bilateral fee-shifting would be very much
like that of requiring proof of predation by clear and convincing evidence, as
discussed above. Given defendants’ risk-aversion and the costs of being found
liable for predation, a remedial scheme that restricted predation suits to those
very likely to succeed would still have deterrent effects on predatory conduct
closer to the line of legality.
________________________________________________________
private standing, competitors could manipulate their customers for anticompetitive ends.
However, eliminating competitor standing would substantially reduce the incidence of
strategic misuse by taking away a firm’s right to seek treble damages and attorney’s fees
for injuries resulting from its competitor’s low prices.
228
See supra text accompanying notes ___-____.
62
4. Prohibiting Discovery on Pricing and Costs until Threshold

Showing of Market Screens
Part IB described the possibility that firms use predatory pricing

litigation to exchange sensitive business information in discovery and thereby
facilitate tacit collusion. Whether or not firms intentionally initiate predation
suits in order to seek competitor information for nefarious purposes, predatory
pricing litigation almost invariably results in undesirable levels of information
exchange. A partial solution to this problem is for courts to order bifurcated
discovery sua sponte, limiting discovery to facts concerning threshold market
screens – market power, barriers to entry, and the like – until the plaintiff shows
based on these facts that predation was plausible in the relevant market. Only
after passing the market screen would plaintiff and defendant be allowed
information on one another’s prices, costs, strategic plans, and other sensitive
competitive information. Even then, discovery should be conducted under court-
mandated and strictly enforced protective orders limiting access to essential
litigation decision-makers only.
There is already some precedent for such bifurcation in predation cases.

The parties have consented to it in some cases229 and in other cases it has been
ordered by the court.230 Given the large number of predation cases that are
dismissed based on market screens,231 this practice would decrease the costs of
litigation by initially limiting discovery to issues that are likely to be dispositive.
This would save the parties’ litigation expenses, prevent a free flow of
competitive information, and diminish the attractiveness of predatory pricing
litigation as a strategic tool.
A practice of bifurcated discovery in predation cases is the easiest to

implement of the remedial modifications suggested here because it would not
require Congressional action. It is also the least effective of the four changes I
suggest and would be largely mooted by the elimination of competitor standing
and, to a lesser degree, by making fee-shifting bilateral. Of the first three
proposed changes, eliminating competitor standing would produce the deepest
changes in the incentive structure of predation law and would largely remake
predatory pricing into an actual recoupment offense. Eliminating competitor
suits would also make bilateral fee-shifting and permitting only single damages
229
Western Parcel Exp. v. United Parcel Service of America, Inc., 190 F.3d 974, 975
(9th Cir 1999) (reporting that defendant prevailed on summary judgment after initial
phase of discovery, limited by stipulation of the parties to issue of defendant’s market
power).
230
Rebel Oil Co., Inc. v. Atlantic Richfield Co., 133 F.R.D. 41, 45 (D. Nev.1990)
(limiting discovery to facts concerning barriers to entry and not permitting discovery as
to pricing matter relevant to predatory pricing claims until plaintiff established the
existence of barriers to entry).
231
See supra. n. ____.
63
relatively less necessary. If competitors are to continue asserting predation suits,

then bilateral fee-shifting and eliminating treble damages are a worthwhile pair
of remedial statutory changes.
CONCLUSION
The paradox of predatory pricing is that both prohibition and non-

regulation unavoidably result in social harm of the same kind – upward deviation
from optimal pricing. Left unregulated, some firms would lower their prices to
predatory levels to drive out rivals and subsequently recoup through monopolistic
prices. At the same time, any prohibition on predatory pricing – no matter how
carefully crafted – will cause some firms to forgo socially beneficial price cuts
because of risk aversion, adjudicatory uncertainty, and the devilishly tempting
opportunity for rivals to abuse a liability rule condemning excessively low prices.
Predatory pricing law is, inescapably, a damned if you do, damned if you don’t
enterprise.
Much of the disagreement over the optimal content of predatory pricing

liability rules seems to be influenced by the degree to which one believes in the
risks of false positives and false negatives and, beyond adjudicatory error, the
general disposition of firms to deviate from optimal pricing because of, or in the
absence of, a legal prohibition on predation. This paper has attempted to give a
fuller account of the costs of overdeterrence – particularly as they relate to
strategic misuse and the remedial features of U.S. antitrust law. To be sure,
overdeterrence is only half of the story, but it is the half that has received less
than half of the attention, even though it may account for more than half of the
problem. As the theoretic inquiry about the optimal structure of predatory
pricing law continues, it is a part of the story that deserves equal time.
Predatory pricing has been heavily theorized but underexplored

empirically. Most of the empirical work that has been done on predation
concerns litigated cases – which may not be representative of the wider
influences of predation law – and older cases (for example, Standard Oil and the
gunpowder trust) which may not reflect present economic realities. Reaching a
broad consensus on optimal liability and remedial rules to govern predatory
pricing would be much aided by more detailed empirical inquiry into the extent
to which firms engage and succeed in pricing strategies designed to exclude
rivals or strategically misuse predation law to chill price competition. This
article has suggested several useful lines of inquiry and taken some modest steps
toward providing data on the penetration of predation law into business culture
and consciousness. Much more work along these lines awaits. In the meantime,
deliberate underinclusion in defining and adjudging the predation offense seems
the wisest way to handle the predatory pricing paradox.
64

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Benjamin N.

Cardozo School of Law

Working Paper No. 115

The Paradox of Predatory Pricing

THE PARADOX OF PREDATORY PRICING

Predatory pricing law attempts to keep prices low by harshly sanctioning

I. STRATEGIC USES OF PREDATORY PRICING THEORIES ......................4

A. The Availability of Strategic Predatory Pricing Claims......................7

II. THE SOCIAL COSTS OF CHILLING PRICE COMPETITION ................32

A. The Socially Optimal Pricing Point ..................................................33

III. OPTIMAL PREDATORY PRICING POLICY IN LIGHT OF MARKET

A. Decisional Rules ................................................................................54

Predatory pricing is a paradoxical offense.1 Although antitrust law

* Assistant Professor of Law, Benjamin N. Cardozo School of Law, Yeshiva

Too high, according to many. In the past decade, some commentators

Perhaps that is because the “chilling price competition” claim was

Given the importance of the “chilling price competition” assertion to the

Finally, Part III suggests some decisional and remedial approaches to

I. STRATEGIC USES OF PREDATORY PRICING THEORIES

plaintiffs to win predatory pricing cases.14 While this pessimism may be

vulnerable adversary. As recognized by Ordover and Baumol, Snyder and

Predatory pricing law is perhaps the most suggestive of all antitrust

A. The Availability of Strategic Predatory Pricing Claims

1. Overcoming Rival’s Efficiency Advantages

If a predatory pricing lawsuit is so unlikely to succeed in light of the

a. Raising Rival’s Costs Through Predatory Pricing Litigation

A common focal point in predatory pricing litigation and scholarship is

section).26 In order for the threat of strategic predatory pricing litigation to be

First, defendant’s loss-aversion may exceed plaintiff’s gain-preference

Second, and in a similar vein, defendants may have reputational reasons,

stronger on the defendant’s side of the equation than on the plaintiff’s.

Third, plaintiffs may be able to hire lawyers on contingency, thus

Finally, as Frank Easterbrook has argued, antitrust litigation may create

A predatory pricing case need not be successful or even very likely to

b. Exploiting the Magnitude of Recoverable Damages

In the wake of Brooke Group and Matsushita, plaintiffs find it difficult to

tendency has significant systemic effects in predatory pricing cases. A firm’s

While the jury is considering what damages to award plaintiff in light of

Predatory pricing claims thus present a “perfect storm” of factors

would have amounted to a $1.8 billion judgment in 1980 dollars.45 Predation

In light of the sheer magnitude of potential damages in predatory pricing

2. Facilitating Oligopolistic Pricing Through Price Signaling,

Tacit collusion among oligopolists, or even conscious parallelism – its

The most immediate competitive effect of a predatory pricing complaint

Discovery in litigation may also provide valuable information about

threshold question is whether defendant’s revenues exceeded its costs.61

Admittedly, litigation is not the ideal tool for oligopolistic information-

exchanged is stale, simply exchanging reciprocal details about cost structures

Predatory pricing plaintiffs may also hope to involve the courts in

To be sure, predatory pricing litigation is an expensive way of sending

In sum, predatory pricing litigation provides opportunities for

in which Crandall encouraged Putnam to raise prices by twenty percent.72 In

Department of Transportation about predatory pricing by larger airlines,

If so, the strategy seems to have worked. American announced the

B. Do Firms Actually Engage in Strategic Predatory Pricing Litigation?

It is not hard to see how predatory pricing lawsuits could be used

One approach to appraising the intentions of predatory pricing plaintiffs

A similar analysis suggests that many of the post-Brooke Group

Consistent with these observations, the following hypotheses can be