Janusz Ordover Presentation

This document is available in two formats: this web page (for browsing content) and PDF (comparable to original document formatting). To view the PDF you will need Acrobat Reader, which may be downloaded from the Adobe site. For an official signed copy, please contact the Antitrust Documents Group.

Slide 1

Predatory Pricing

Janusz A. Ordover
Professor of Economics, New York University

DOJ/FTC Hearings on Single-Firm Conduct and Antitrust Law

June 22, 2006

Slide 2

How to Analyze Challenged Conduct
for Monopolization?

  • The slogan is: "Antitrust should protect competition, but not competitors"
    • But what does it mean in practice?
  • Irrespective, at least as a predicate, any monopolization claim must establish a direct and causal link between the conduct at issue and significant harm to competition in a well-defined relevant market (or markets)
  • But how should a decision-maker delineate conduct that does harm "competition" by harming scarce rivals from standard, day-to-day market interactions?

Slide 3

Sacrifice and Welfare Test Coincide

  • The prescriptions from the profit sacrifice tests consistent with social welfare in many market settings
  • Seeking profits is generally conducive to economic welfare: hence coincidence not surprising
  • When incumbent can extract maximum profits from the market without distorting consumer choices, a choice of profit sacrificing strategy that harms competition is presumptively inimical to welfare
  • Examples include a choice of product design or the price for access to a bottleneck input or raising rival's cost of competing
  • But when profit maximization leaves surplus un-extracted, even absent competition, there could be exclusion seemingly even without sacrifice

Slide 4

Example: Inferior Source of Supply

  • An incumbent may have an incentive to exclude a rival when there exists an inferior alternative source of supply to its monopolized product
  • Consumers demand a system with two components A and B and are willing to pay up to $100
  • An entrant can produce standalone component B' at a lower cost than incumbent. Incumbent profits increase by withdrawing its component B and charging a compensatory (=ECPR+) price for A
  • Not an optimal strategy if another firm can offer A'. Then max price for A+B =willingness to pay for A' + B'
  • With these facts, incumbent has an incentive to foreclose the more efficient B' in order to drive it irreversibly out of the market
  • However, if incumbent could force A' exit it would rather do that!
  • In this example, profit sacrifice could be gauged against the profits under ECPR+

Slide 5

Example: Discounting

  • Assume that, like in Ortho v. Abbott, a consumer demands a package of five products
  • Abbott has a monopoly on three and two are competitive
  • Abbott's bundled price for five tests is allegedly less than the price for three tests plus the incremental cost of the two competitive tests
  • Abbott can extract full surplus from the buyer, without foreclosing Ortho from the competitive tests
  • Clear profit sacrifice (but the case is not clear as to the non-coincident market that strategy would affect)

Slide 6

Example (Virgin v. BA)

  • Consumer needs 10 distinct products and is willing to pay $100 for each. It costs the incumbent $80 to make each product. An entrant can make any one (but only one) product for $70 and hence more efficient
      Alternative 1: Each product priced separately. Result: 9 products sell for $100 and one for $80 - a penny

      Alternative 2: Incumbent announces policy "Buy any 9 products and get 10th free." Entrant decides whether to sink $z to come in. If it does, competition ensues; if it does not, incumbent sets the price

      Equilibrium: E does not come in and I sets price of $ 111.10 per product

Slide 7

Example of Quantity-Forcing Contracts

    Slide 8

    Plenty to Focus on

    Business strategies that have a "commitment" value are a more relevant focus for antitrust concerns with predation

    • commitment to discount (Virgin v. BA)
    • commitment to a product design (IBM cases)
    • commitment to defend lucrative market ("new era" tying models)
    • commitment to create network economies ("aggressive" prices for market penetration)
    • commitment to raising rival's cost of competing

    Slide 9

    To Sum up

    • The sacrifice test protects conduct that is part of competition, even if it harms and weakens competitors
    • The sacrifice test is quite general in its applicability to diverse circumstances
    • The sacrifice test is well-defined, though sometimes takes some work to sort out
      • Essential to keep track of the benchmark against which profits to be calculated
      • Benchmark is the profits that would be earned under competitive circumstances if rival were to remain viable

    Updated June 25, 2015

    Was this page helpful?

    Was this page helpful?
    Yes No