ANALYSIS: Can the DOJ lead a reflection on the abuses of dominant companies?

The U.S. government has failed to challenge a monopoly for about 20 years, but that doesn’t mean the Justice Department and the Federal Trade Commission are giving up unilateral anti-competitive conduct.

During an April 21 opening speech At the University of Chicago, the head of the DOJ’s antitrust division, Jonathan Kanter, has laid out a “five-point plan” for renewing antitrust enforcement. Two of the five points explicitly addressed the unilateral behavior of dominant firms. In particular, Kanter pointed to predatory pricing standards and a dominant firm’s “refusal to deal” with a rival as outdated and in need of renewal.

Both of these antitrust causes of action are indeed moribund because the legal standards applicable by the courts are extremely narrow. It would take a United States Supreme Court willing to re-examine its fundamental assumptions about business to change that. It might not be as far-fetched as it sounds.

Play a longer game

The Supreme Court set a narrow standard for predatory pricing in its 1993 decision in Brooke Grp. ltd. vs. Brown & Williamson Tobacco Corp.

The case involved two cigarette companies engaged 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 its business.

A jury found that there had been predatory pricing and returned a verdict in favor of the plaintiff. But the court rejected this verdict and dismissed the case, finding that no harm had been caused to the market. The appeals court agreed, as did the Supreme Court, which ruled that predatory pricing does not harm competition unless (1) the impugned prices are below an appropriate measure of production costs, and (2) the pricing company had a dangerous probability of recouping its investment in below-cost pricing.

Essentially, the High Court failed to see that the scheme ultimately led to higher prices or lower cigarette production. So even though Brown & Williamson priced generic cigarettes below cost for 18 months, the court found that there was 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 need to make a profit and cannot afford to lose money for long, the logic goes. And antitrust law has always viewed lower prices as a plus without immediate and visible harm to the market.

The difficulty in demonstrating recovery from a predatory system, however, is that recovery cannot begin until the predatory firm has succeeded in driving out its rivals. At that point, who is left to file a complaint in court? Bankrupt rivals are not funding 5-10 years of antitrust litigation.

Kanter said economic research now shows that even “pricing above cost strategies can drive out rivals, especially in digital markets.” Given that companies “often prioritize long-term share price growth over short-term profitability” and that executives are paid primarily in stock, Kanter said we should rethink whether predatory pricing is as implausible as the courts ruled in the 1990s.

To take Uber Technologies Inc.. It released its first quarterly profit at the end of 2021 after more than a decade in business. It also has a market capitalization of around $57 billion and is known for its extremely low prices. giant online Inc. made its first profit at the end of 2001 after six years of activity. Both of these companies have lived much longer with quarterly losses than a court in the 1990s would have believed possible.

If long-term losses don’t deter investors from keeping a business afloat, recovery can be long-term. While most businesses are bound to make a profit or go bankrupt, and others have unlimited access to capital, even prices above the lowest costs can quickly drive out all but the deepest pockets. deeper.

In short, Kanter said, the DOJ urges “reassessing whether precedents are outdated because they reflect embedded assumptions about how markets work that are no longer true.”

The power to exclude

Kanter also pointed to “refusal to deal” as an area where past legal assumptions may not reflect current market realities. Again, online marketplaces are the big change from the cases that have been the norm here.

That of the Supreme Court case in case of refusal to sell leaves a very narrow cause of action. The refusing company must be dominant, it must have had a voluntary relationship with the plaintiff that it terminated, and the decision to terminate the arrangement must be against the short-term profit interests of the company. dominant company. On top of that, of course, the wider market itself must suffer, not just the excluded company.

These cases involved a dominant player who had built an expensive network that others needed to access to do business. But those essential assets were things like phone lines or ski lifts, which can serve a limited number of users.

Markets today involve online platforms whose value lies in the “network effect” to attract other users and which can potentially serve an unlimited virtual market. Concerns about incentives to innovate and invest have evolved with these conditions. Kanter reasoned that “if the nature of the networks changes, other parts of the analysis should probably follow.”

New markets, new way of thinking

Kanter is not alone in suggesting that digital markets operate differently from traditional markets and require a new approach from antitrust authorities.

The European Union is taking a radical new approach to regulating tech companies called the Digital Services Act, and is also changing its approach to regulation digital markets. countries like Australia and Germany are also reassessing how they deal with dominant tech players.

It is far from expecting that the American courts revise their vision of these markets and the fundamental incentives of the actors who participate in them. But antitrust regulators are putting their money where they say, bringing unilateral conduct case who incorporate these theories in an attempt to change the law. Perhaps the new US Supreme Court precedent in these areas is no longer as implausible as it once was.

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