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- Areeda-Turner Rule proposed that prices below MC are predatory.
- AVC could be used as a proxy for MC
- Areeda, P. and Turner, D.F., (1975): Predatory Pricing and Related Issues Under Section 2 of the Sherman Act, Harvard Law Review, 88: 697-733.
- Rule designed to restrain firms' pricing behaviour as little as possible reflecting authors' view that predation was rare.
- 'For all practical purposes, the Areeda-Turner price-cost relationship is impossible to measure and makes the proof of predation too difficult.'
- L. Phlips, (1995): Competition Policy: A Game-Theoretic Perspective, Cambridge University Press, p.233.
- 'The simplicity of their test may explain why it was adopted with remarkable speed by American judicial circles.' Phlips, p.231.
- Areeda-Turner no longer decisive – US courts emphasise recoupment.
- Increase in output by incumbent in response to entry should be deemed predatory. Williamson, O.E., (1977): Predatory Pricing: a Strategic and Welfare Analysis, Yale Law Journal, 87, 284-340.
- If firm prepared to credibly commit to maintaining lower prices for a sufficient period of time, indicates not engaged in predation. Baumol, W.J., (1979): Quasi-Performance of Price Reductions: A Policy for Prevention of Predatory Pricing, Yale Law Journal, 89: 1-26. Has been employed by OFT.
- Average avoidable cost rather than average variable cost as threshold for predation. Baumol, W.J., (1996): Predation and the Logic of the Average Variable Cost Test, Journal of Industrial Economics, 39 (April), 49-72.
- Kahai, S., Kaserman, D., and Mayo, J., (1995): Deregulation and Predation in Long-Distance Telecommunications: An Empirical Test, Antitrust Bulletin, (Fall), 645-66. Evidence of actual exit - cannot be used for preventive purposes.
- Ordover, J. and Willig, R., (1991): An Economic Definition of Predation: Pricing and Product Innovation, Yale Law Journal, 91, 8-53. Propose wider definition - predation any business strategy that is profitable only because of long-run benefit of eliminating one or more competitors. Captures both price and non-price conduct.
- Gilbert, R.J. and Katz, M.L., (2001): An Economist‘s Guide to US v. Microsoft, Journal of Economic Perspectives, 15(2), (Spring) 25-44. Aargue Ordover-Willig definition should be modified as consumers can be harmed when prey is weakened, even if it is not eliminated.
- Phlips (1995) game theoretic approach based on fact that predation turns profitable entry opportunity into an unprofitable one. Absent the price cut, was there room in the market for an additional firm under normal competition, i.e. in a non-cooperative Nash equilibrium.
- Practical difficulty firms concerned have the information required to perform such analysis - may seek to manipulate data.
221 US 106 (1911). 'Fighting brands' sold below cost in rivals' local markets.
- Standard Oil
- US v. American Tobacco Co.,
Matsushita Electric Industrial Co. Ltd. et al. v. Zenith Radio Corp. et al., 475 US 574. Predatory pricing must be capable of earning excess profits in the long run.
- No evidence of pricing below AVC;
- American had matched but not undercut fares of low cost entrants and evidence that low cost operators continued to enter the market.
- Court held that firm must be likely to earn super-normal profits in the specific market in which predation occurs. Inconsistent with reputation model.
- Govt argued that behaviour predatory 'because Microsoft could recoup costs of engaging in the behaviour only if Netscape were eliminated as a threat to Windows' platform monopoly'.
- Ordover-Willig definition of predation.
- MS and Netscape competing for platform dominance
- Resulted in large consumer benefits led Court to conclude not anticompetitive
- Govt claimed
- (a) zero pricing did not make sense unless predatory
- (b) Price below MC (Areeda-Turner test)
- MC of browser software close to zero
- Other revenue streams
- Opportunity Cost argument rejected
- 'difficult to see virtue in rule that would require dominant firm to always charge as much as possible in SR or be accused of predatory behaviour.'
- Zero pricing legitimate competitive behaviour
- Klein (2001) The Microsoft Case: What Can a Dominant Firm do to Defend its Dominant Position, Journal of Economic Perspectives 15(2)
- ECS/AKZO. ECJ held that prices below AVC were predatory. It went further and stated that prices below average total costs 'must be regarded as abusive if they are determined as part of a plan for eliminating a competitor.' (Emphasis added).
- Where there is evidence of intent on the part of the alleged predator, it is not necessary to satisfy the Areeda-Turner rule. Arguably, harming competitors is the essence of the competitive Phlips (1995) argues that Akzo was a case of Stackleberg warfare rather than predation, noting that the case illustrates the difficulties involved in distinguishing predation from aggressive competition.
- Akzo B.V .v. E.C. Commission
. [1993] CMLR 215- Compagnie Maritime Belge v. Commission
Cases C-395/96 P [2000] 4 CMLR 1076- ECJ upheld Commission's condemnation of the use of 'fighting ships' by the members of a liner shipping conference.
- Whenever a new entrant announced a sailing the freight rate for the conference sailing nearest in date on the same route was reduced to the same price as the entrant's at the collective expense of the conference members.
- ECJ did not apply a cost threshold.
- Held that selective price cutting by collectively dominant firms was capable of being abusive in its own right.
- Whish – Based on particular circumstances.
[2003], 195 ALR 574.
- Australian Competition and Consumer Council v. Boral
ACCC argued that evidence of selling below AVC per se conclusive evidence of predation. Appeal court accepted that low prices were due to a severe recession in the building industry combined with overcapacity in the concrete masonry products industry, which enabled builders to extract lower prices from Boral and its rivals.
- Competition Authority, (1995): Interim Report of Study of the Newspaper Industry, Dublin: Stationery Office. On Reserve
- Alleged predation by UK newspapers
- Parallel inquiry by OFT
- See also Decision of the DGFT No. CA/98/14/2002 Aberdeen Journals Limited on OFT website.
- 'the National Express policy bears some sign of a campaign of predatory pricing but, whether or not this is so, the competition authorities stood by and did nothing.' Vickers, J. and Yarrow, G.(1988): Privatisation: An Economic Analysis, Cambridge Ma.: MIT Press.
- The MMC (1990, 1993a, 1993b and 1995) found evidence of predatory behaviour in Inverness, (1990) Sussex, (1993a) parts of Kent (1993b) and the North East of England (1995).
- MMC (1995) pointed out that, in the bus industry, predation frequently takes the form of over bussing.
- Woolmar (1998) intervention by the competition agencies was too slow to prevent predation in Hastings and Portsmouth, MMC report published a year after the allegations had been referred to it.
- Situation in which entrant has a positive entry value (entry is profitable) but in fact makes losses necessary, but not sufficient condition, for predation.
- Entrant may make mistakes or losses may be the result of aggressive behaviour on its part, rather than the result of actions by the incumbent.
- English midlands case an example of 'Stackleberg warfare' Entrant had too many buses and incumbent responded in similar fashion.
- Similar conclusions regarding Inverness case.
- Dodgson, J.S., Katsoulacos, Y. and Newton, C.R., (1992): A Modelling Framework for the Empirical Analysis of Predatory Behaviour in the Bus Service Industry, Regional Science and Urban Economics, 22, 51-70.
- Dodgson, J.S., Katsoulacos, Y., and Newton, C.R., (1993), An Application of the Economic Modelling Approach to the Investigation of Predation, Journal of Transport Economics and Policy, 153-70.
- Nestor
case claimed that Bus Eireann had increased frequency on Dublin-Galway route, and concentrated new services on departure times for which Nestors had sought an operating licence.- Department of Transport ordered Bus Eireann to discontinue new services on Cavan Dublin route within six days of the launch of a new licensed service by a private operator, Streamline. Bus Eireann introduced services departing from Cavan at 6am and 7am following Streamline's introduction of a 6:30 daily departure. Sunday Business Post, 19.1.2003.
- Collins Coaches,
made similar complaints regarding services between Carrickmacross and Dublin. Sunday Business Post, 26.8.2001.
- Laker
- Canadian Competition Bureau forced Air Canada to abandon discounted fares on a number of internal routes following complaints of predation by CanJet, a low fare airline.
- Air New Zealand and Quantas response to entry by Kiwi International Airlines on routes between Australia and New Zealand during 1995/96 amounted to predatory behaviour.
- Hazledine, T., Green, H., and Haugh, D., (2001): The Smoking Gun? Competition and Predation in the Trans-Tasman Air Travel Market, European Association for Research in Industrial Economics, 28th Annual Conference, 30th August - 2nd September 2001, mimeo.
- Barrett prima facie evidence that Aer Lingus had engaged in predatory behaviour on the Dublin-London City route citing evidence of 'timetable matching, significant fare increases after market exit by a competitor, and operation of services at a loss during the period of competition'.
- Barrett, S., (2001): EC Competition Law and the State, ICEL/IBEC Conference, Dublin 23rd February 2001, mimeo.
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