Transcript non-predatory pricing

Music: Machine is
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TODAY
• OTHER CONDUCT THAT MIGHT
VIOLATE §2
• INTRODUCTION TO THE STATE
ACTION DOCTRINE
Conduct Requirement:
Very Testable Issue
• Lots of Caselaw & Significant Policy
Concerns
• Review Problem #5 is an old test
question based on case in materials
on BarBri (Am. Prof. Testing Servs.)
• Spring 2008 Question I explored
conduct requirement
• Issue in many years in Question II
Conduct Requirement:
Very Testable Issue
• Remember lower court decisions aren’t
binding outside of own jurisdiction
• Remember that Supreme Court has
shifted right since Aspen and even more
since approving Alcoa and Shoe
Machinery
Conduct Requirement:
General Standards
From Alcoa:
• OK if survivor of group of competitors by
virtue of “superior skill, foresight, or
industry.”
• OK if passive beneficiary of monopoly
Conduct Requirement:
General Standards
From Grinnell:
• Violation if “willful acquisition or
maintenance of monopoly power”
• OK if “growth or development as a
consequence of a superior product,
business acumen or historic accident."
Conduct Requirement:
General Standards
From Barry Wright:
• Exclusionary conduct is conduct other than
competition on the merits or restraints
reasonably necessary to competition on the
merits, that reasonably appears capable of
making a significant contribution to creating
or maintaining monopoly.
Conduct Requirement:
General Standards
From Berkey Photo:
• Cross-market benefits OK if any integrated
firm could do (efficient production;
complementary products; reduced transaction
costs)
• Not OK if “using” monopoly power
Conduct Requirement:
Recurring Concerns
Tension Between:
• Harms caused by monopoly (high
price; low output)
• Fear of deterring innovation and
aggressive competition by
monopolists
Conduct Requirement:
Recurring Concerns
Context for Conduct Requirement
• Must show Monopoly Power or DPS
before finding liability
• Greater Market Power  Greater
Range of Conduct is Problematic
• Liability often found re conduct that
would be fine for a non-monopolist
Conduct Requirement:
Recurring Concerns
Aggregation Question
• Can you find liability by aggregating
two or more types of conduct that,
standing alone, would be
insufficient?
• Several cases seem to allow this.
Conduct Requirement:
Recurring Concerns
Aggregation Question: Policy
• If overall effect of aggregate conduct
meets is to create or maintain monopoly
power, should be actionable
• BUT: Very hard for monopolist to know
what is allowed
• Also don’t want to make AT case out of
sporadic examples of business torts
Conduct Requirement:
Recurring Concerns
Aggregation Question: Approach
1. Discuss whether aggregation should be
allowed at all
2. Discuss whether this particular set of
acts should be actionable
OTHER CONDUCT THAT
MIGHT VIOLATE §2
• Non-Predatory Pricing
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Exclusive Dealing Contracts
Predatory Hiring
Other Predatory Conduct
False Advertising & Other Bad Behavior
NON-PREDATORY PRICING
1. Monopoly Pricing
2. Limit Pricing
3. Price Squeezes
NON-PREDATORY PRICING
Monopoly Pricing
• Not bad conduct for §2 purposes
• See Berkey Photo; USFL (2d Cir. 1988)
– Not anti-competitive; invites competition
– Can see as reward for innovation/skill
– Can be evidence of market power
NON-PREDATORY PRICING
1. Monopoly Pricing
2. Limit Pricing
3. Price Squeezes
NON-PREDATORY PRICING
Limit Pricing
• Price above monopolist’s marginal
cost, but low enough that
– Existing rivals can’t meet AND/OR
– Potential rivals won’t enter
• Arises in Alcoa (re foreign producers);
IBM Cases; BarBri case/Rev. Prob. #5
NON-PREDATORY PRICING
Limit Pricing: Legal Treatment
• Suggestions in some lower court
cases that can violate §2
• Language in Brooke Group re price
below cost suggests otherwise
• Liability may be more plausible if
aggregated with other conduct
NON-PREDATORY PRICING
1. Monopoly Pricing
2. Limit Pricing
3. Price Squeezes
NON-PREDATORY PRICING
Price Squeeze
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Monopolist re a raw material also makes
finished product using that raw material.
– Monopolist sets price of raw material high;
finished product’s price low.
– Rivals re finished product have trouble
meeting monopolist’s price.
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Form of Limit Pricing
NON-PREDATORY PRICING
Price Squeeze: Benign?
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Hovencamp: Low price of finished product
may result from efficiencies of vertical
integration.
Monopolist at two levels may not be any
worse in short run; can only extract same
amount of monopoly profit from ultimate
consumer.
NON-PREDATORY PRICING
Price Squeeze: Concerns
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2-Level Monopoly Increases Entry Barriers
(more expensive to enter on both levels)
Monopolist cautiously pricing on one level
may feel freer to take full monopoly profit
Rivalry at one level can encourage
innovation and non-price competition
NON-PREDATORY PRICING
Price Squeeze: Legal Treatment
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Alcoa says improper conduct (in dicta).
Some courts have found liability.
Good discussion in Town of Concord (1st
Cir. 1990) (Breyer) (no liability in highly
regulated industry)
After Brooke Group & Trinko: maybe only
actionable if predatory.
OTHER CONDUCT THAT
MIGHT VIOLATE §2
• Non-Predatory Pricing
• Exclusive Dealing Contracts
• Predatory Hiring
• Other Predatory Conduct
• False Advertising & Other Bad Behavior
Exclusive Dealing Contracts
• Contracts with Suppliers or
Purchasers Requiring That They
Only Do Business with Monopolist
• E.g., Alcoa (pre-1912) contracts
with power companies
Exclusive Dealing Contracts
Can be pro-competitive:
• Insures that a dealer focuses on
your product
• Guarantees sufficient supplies
from supplier
• Reduces negotiation costs for
party granting exclusivity
Exclusive Dealing Contracts
Problems if Monopolist or Cartel:
• Raises costs to rivals b/c forecloses some customers/suppliers
• If widespread, difficult for rivals to
do business at all
Exclusive Dealing Contracts
Leading Case: Lorain Journal (1951)
• Newspaper had effective monopoly of news
& advertising in one Ohio city.
• Radio station opens nearby
• Paper refuses to run print ads for those
advertising w radio station.
• SCt finds attempt to monopolize.
Exclusive Dealing Contracts
More on Legal Treatment
• Seen as clearest example of bad conduct
• Like Prototype I boycotts
• PepsiCo = case in materials similar to
Lorain Journal
• Might be defensible if monopolist can show
significant efficiencies result
OTHER CONDUCT THAT
MIGHT VIOLATE §2
• Non-Predatory Pricing
• Exclusive Dealing Contracts
• Predatory Hiring
• Other Predatory Conduct
• False Advertising & Other Bad Behavior
“Predatory Hiring”
• Monopolist hires away key employees
or potential employees of rivals
• Effect may be to make it harder for
rivals to do business
• Claim can be seen as a subset of
exclusive dealing
“Predatory Hiring”
General Concerns
• Normal competition to want to hire
best in the field
• Can only be problematic if limited
supply of that type of employee
• Don’t want to impede ability of
employee to market skills/self
“Predatory Hiring”
General Concerns
• Most likely to be problematic if
“predatory”:
– Cost of employee to monopolist is
greater than benefits
– Only makes sense as way to harm
rivals
“Predatory Hiring”
Legal Treatment
• Several circuits have said claim might
be actionable in some circumstances
• Some examples of tests in materials
“Predatory Hiring”
Legal Treatment
Most courts want greater showing than
mere hiring away from rival. E.g.,
• that employee didn’t help monopolist
(BUT can be predatory even if help)
• evidence of harm to price or output
• part of larger pattern of bad conduct
“Predatory Hiring”
Wichita Clinic (D.Kansas 1997)
• Seems to require least, although facts most
compelling
• Following allegations state cause of action
– D runs largest hospital in Wichita area.
– P clinic refused D’s merger overtures
– D hired away 20% of P’s doctors w intent to
monopolize Wichita health care
• Note: rests a lot on intent w/o objective
evidence of harm or predation
“Predatory Hiring”
Abcor (4th Cir. 1990)
• D hired 2 of Ps employees
• Not actionable where
– P had hired # of employees from D, so
“fighting back”
– Both employees had strong personal
reasons to leave & initiated contact w D
• Suggests very fact-specific inquiry
OTHER CONDUCT THAT
MIGHT VIOLATE §2
• Non-Predatory Pricing
• Exclusive Dealing Contracts
• Predatory Hiring
• Other Predatory Conduct
• False Advertising & Other Bad Behavior
Other Predatory Conduct
• Conduct that is not cost-justified in
the short run.
• Sensible only if intending to recoup
through long-term monopoly profits.
Other Predatory Conduct
Alcoa: Predatory Expansion Theory
• Possible harms discussed in
presentation of case & in outline
• Hovenkamp: Has pro-competitive
aspect
– Makes supplier very attractive to buyers
– Insures won’t run out of supplies
Other Predatory Conduct
Exclusion Cases that Require Predation
• Arguably Aspen/Trinko
• Some predatory hiring cases
Other Predatory Conduct
Photovest v. Fotomat (7th Cir. 1979)
• D both owns and franchises kiosk
photofinishing services
• P gets contract to run 15 franchises
• D discovers that company-owned
kiosks are more profitable than
franchises
Other Predatory Conduct
Photovest v. Fotomat (7th Cir. 1979)
Steps taken to eliminate franchises in
the aggregate = attempt to monop.:
• Increases prices to franchises
• Conceals available discounts
• Placement of new kiosks
Other Predatory Conduct
Photovest v. Fotomat (7th Cir. 1979)
Kiosk placement predatory:
• Opened many kiosks to reduce value of
franchises so D could buy back cheaply.
• E.g., 14 kiosks in Indianpolis, more than 1/2
on overlapping sites
• Evidence that new kiosks operating at
below break-even point
Other Predatory Conduct
Photovest v. Fotomat (7th Cir. 1979)
Q: Should attempt by monopolist to
rearrange own distribution system
be actionable under AT laws (as
opposed to breach of contract
suits by franchisees)
OTHER CONDUCT THAT
MIGHT VIOLATE §2
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Non-Predatory Pricing
Exclusive Dealing Contracts
Predatory Hiring
Other Predatory Conduct
• False Advertising & Other Bad
Behavior
False Advertising & Other
Bad Conduct
• Possible to interfere w rival’s business
through lying, coercion, etc.
• Q is when should we treat as AT violation
(v. use of other laws)
• Facts of three cases described in materials
(Note that two of them are aggregate
conduct cases)
False Advertising & Other
Bad Conduct
False Advertising (in Rev. Prob #5)
• Problem if discourages purchasers from
using rivals’ products (tho can combat w
own ads)
• At least 2 circuits say possible §2 claim
• Tests in cases in materials basically require
harm to competition
The State Action Doctrine
• Sherman Act not intended to restrain
ability of states to do economic
regulation
• Acts that would otherwise violate AT
laws immune if fall within exception
• E.g., Parker v. Brown (1943)
The State Action Doctrine
• Easy Cases: State officials acting
pursuant to legislative scheme
• Harder cases (We’ll Discuss in
Turn):
– Private citizens acting pursuant to
state scheme
– Acts by municipalities
The State Action Doctrine
Private citizens acting pursuant to state
scheme: 2-prong test
1. “Clearly articulated and firmly expressed
as state policy"
2. Conduct must be “actively supervised by
State itself"