The U.S. government hasn’t successfully challenged a monopoly for quite some time—but that doesn’t mean that the Justice Department and the Federal Trade Commission are giving up on anticompetitive unilateral conduct.
At an April 21 keynote address at the University of Chicago, DOJ Antitrust Division chief Jonathan Kanter spelled out a “five point plan” for renewed antitrust enforcement. Two of the five points were explicitly about unilateral conduct by dominant firms. Particularly, Kanter singled out the standards for predatory pricing and a dominant firm’s “refusal to deal” with a rival as outdated and due for renewal.
Those two antitrust causes of action are indeed moribund because the legal standards courts apply are extremely narrow. It would take a U.S. Supreme Court willing to reexamine its core assumptions about business to change that. Perhaps that’s not as far-fetched as it might sound.
Playing a Longer Game
The Supreme Court set a narrow standard for predatory pricing in its 1993 decision in Brooke Grp. Ltd. v. Brown & Williamson Tobacco Corp.
The case involved two cigarette companies locked in a price war. One company accused the other of predatory pricing—that is, pricing a product below cost to drive a smaller competitor out of business.
A jury believed that predatory pricing had occurred, and returned a verdict for the plaintiff. But the court tossed that verdict and dismissed the case, holding that no harm had occurred in the market. The appellate court agreed, as did the Supreme Court, which held that predatory pricing doesn’t harm competition unless (1) the prices complained of are below an appropriate measure of production costs, and (2) the pricing company had a dangerous probability of recouping its investment in below-cost prices.
Essentially, the high court didn’t see that the scheme ultimately caused higher prices or lower output of cigarettes, so even though Brown & Williamson priced generic cigarettes below cost for 18 months, the court reasoned there had been no harm to consumers.
Since then, courts have shown deep skepticism that below-cost pricing harms competition—a belief rooted in specific assumptions about how businesses operate. Businesses have to make a profit, and can’t afford to lose money for long, the logic goes. And antitrust law has always considered lower prices a plus without immediate, visible harms to the market.
The difficulty with demonstrating recoupment from a predatory scheme, however, is that recoupment can’t start until the predatory firm has successfully driven out rivals. At that point, who is left to complain to the courts? Bankrupt rivals don’t finance 5–10 years of antitrust litigation.
Kanter said that economic research now shows that even “above-cost pricing strategies can drive out rivals, especially in digital markets.” Given that companies “often prioritize long-term growth of share price over short-term profitability,” and executives are paid primarily in stock, Kanter said that we should rethink whether predatory pricing is as implausible as courts found it to be in the 1990s.
Take Uber Technologies Inc. It posted its first quarterly profit in late 2021 after more than a decade in business. It also has about $57 billion in market cap and is known for aggressively low pricing. Online giant Amazon.com Inc. turned its first profit at the end of 2001 after six years in business. Both of these companies lived much longer with quarterly losses than a 1990s court would have believed possible.
If long-term losses don’t dissuade investors from keeping a company afloat, recoupment can be in the long term. If most companies are required to make a profit or go under, and others have unlimited access to capital, even rock-bottom above-cost pricing can quickly drive out all but those with the deepest pockets.
In short, Kanter said, the DOJ urges “reassessing whether precedents are outdated because they reflect embedded assumptions about how markets work that no longer hold true.”
The Power to Exclude
Kanter also pointed to “refusal to deal” as an area where past legal assumptions might not reflect current market realities. Again, online markets are the big change from the cases that made the standard here.
The Supreme Court’s cases on refusal to deal leave a very narrow cause of action. The refusing business must be dominant, it must have had a voluntary relationship with the plaintiff that it discontinued, and the decision to end the arrangement must be against the dominant firm’s short-term profit interest. On top of that, of course, the wider market itself must suffer, not just the excluded firm.
Those cases dealt with a dominant player who had built out an expensive network that others needed to access to do business. But those essential assets were things like telephone lines or ski lifts, which can serve limited numbers of users.
Today’s markets involve online platforms whose value is in the “network effect” of attracting other users and can potentially serve an unlimited virtual market. Concerns about the incentives to innovate and invest have shifted with those conditions. Kanter reasoned that “if the nature of the networks changes, other parts of the analysis should probably follow.”
New Markets, New Thinking
Kanter isn’t the only one suggesting that digital markets function differently than traditional markets, and require a new approach from antitrust enforcers.
The European Union is taking a sweeping new approach to regulating tech companies called the Digital Services Act, and is likewise upending its approach to regulating digital markets. Individual countries like Australia and Germany are also reevaluating how they handle dominant tech players.
It’s a long shot to expect U.S. courts to revise how they think about these markets and the fundamental incentives of the players in them. But antitrust regulators are putting their money where their mouth is, bringing unilateral conduct cases that incorporate these theories in an attempt to change the law and committing to active enforcement litigation. Perhaps new U.S. Supreme Court precedent in these areas isn’t as implausible as it once was.
Updated to include a link to an April 4 speech by Kanter in the final paragraph. An earlier version of this article was corrected in the first paragraph to reflect more recent monopolization litigation by the FTC.
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