The House Judiciary’s Antitrust Reports and Predatory Pricing

It is human nature to fear what we do not understand. And if there is anything politicians do not understand, it is markets. This is clearly shown in the 449-page report issued this week by the House Judiciary Committee’s antitrust subcommittee, headed by Democratic Rep. David Cicilline, and its 19-page companion report from Republican Rep. Ken Buck.

The current state of affairs in Washington reflects what the Nobel economist Ronald Coase wrote in his 1972 paper “Industrial Organization: Proposal for Research,” before the revolution in law and economics scholarship became mainstream:

If an economist finds something—a business practice of one sort or another—that he does not understand, he looks for a monopoly explanation. And as in this field we are very ignorant, the number of ununderstandable practices tends to be very large, and the reliance on a monopoly explanation frequent.

In that spirit, the Democratic report advocates for breaking up the biggest tech companies, expanding antitrust laws with new legislation, banning most tech mergers, and flipping the burden of proof to presumption of guilt in many instances. The Republican report doesn’t go quite that far, but as is often the case in the Trump era, the difference between Republican and Democratic policies is pretty small.

This post will focus on predatory pricing. My colleagues and I will discuss other facets of antitrust policy elsewhere.

Predatory pricing involves selling products deliberately at a loss in order to force competitors out of the market. When the predator has the market to itself, it can then raise the price to unfair levels. Apple, Google, Facebook, and Amazon have all been accused of predatory pricing at some point.

Predatory pricing is already illegal. But the Supreme Court admitted in the 1986 Matsushita case that it has never been able to find an instance of it. After that, courts essentially gave up on their quest. The law in that area is now unenforced, on purpose.

The Democratic report seeks to bring it back by amending the Sherman Act to specifically ban predatory pricing. The Republican report shares the Democrats’ goal, but only recommends “a thoughtful plan,” which it does not specify, and “further committee hearings.”

There is a reason the Supreme Court has never found proof of predatory pricing. That reason is math. A predator has to lose money. The larger that predator’s market share, the more money it has to lose before driving competitors out. And as soon as the predator raises its prices, it also raises an opening for competitors to come back into the market.

It’s easy for many former competitors to reenter the market when the predator’s price goes back up. They already know what they’re doing, and have the infrastructure. And if the predator raises its prices super-high in order to make back its losses, the door opens to even more new competitors who take note of the predator’s unusually high profit margins.

In order for the predator to take back its monopoly, it will once again have to lose money, then raise prices to recoup the losses, which lets competitors back in. And on it goes in a potentially endless loop.

The counterargument goes that a company can sustain predatory prices forever if it subsidizes its losses with profits from elsewhere in the company. But this makes the company less competitive in those other markets. And taking resources away from a profitable product to subsidize a loss-making product is not exactly a profit-maximizing strategy.

So, despite progressives and populist conservative wishes, the Supreme Court’s Matsushita decision’s despair at the lack of predatory pricing is unlikely to change. That is, the definition of “predatory pricing” itself is changed via new legislation or what the Nobel economist Oliver Williamson called “creative lawyering” in the courts. That is what to look out for.

For more on antitrust policy, see Wayne Crews’s and my paper, and CEI’s dedicated antitrust site at antitrust.cei.org.