How the Market Self-Polices Against Predatory Pricing

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Courts today are more skeptical than in the past of predatory-pricing allegations. This skepticism grows largely from economic research showing that predatory pricing is unlikely to result in a monopoly because rivals of predators have both incentive and ability to withstand the predatory onslaught. Moreover, customers and suppliers of predatory pricers also often have incentive and ability to thwart predatory efforts. However, the incentives and strategies available to customers and suppliers have thus far escaped systematic investigation.

While some of these ‘private policing’ strategies are lawful, one of the perverse consequences of antitrust law is to make many of these strategies unlawful. Minimum resale price maintenance, maximum resale price maintenance, and price discrimination are only some of the means that would be open to suppliers to police against predation if such practices did not run afoul of antitrust law. Antitrust prohibitions thus increase the costs to private firms of protecting themselves from monopoly.

Once the incentives customers and suppliers have to prevent monopoly are more fully taken into account, predatory pricing is recognized as even less likely than when only rivals’ reactions to below-cost prices are considered. Appreciation of the role of customers and suppliers in the competitive process makes clear the senselessness of several recent antitrust suits — such as the federal government’s suit against Microsoft, and the suit filed by independent booksellers against book publishers.