Editing Predatory pricing (section)

==Theories for controlling predatory pricing==
It can be difficult to identify when normal price competition turns into anti-competitive predatory pricing.<ref>{{Cite book|last1=Jones|first1=Alison|title=Jones & Sufrin's EU Competition Law: Text, Cases, and Materials|last2=Sufrin|first2=Brenda|last3=Dunne|first3=Niamh|publisher=Oxford University Press|year=2019|isbn=9780198824657|pages=398}}</ref> Therefore, various rules and economic tests have been established to identify predatory pricing.

===No rule===
According to Easterbrook, predatory pricing is rare and should not be considered a central concern. Introducing laws against predation, especially because it is rare, could lead to generating false positive errors, which would restrict the rule. The main point of the argument is that government intervention is dispensable, as predation is unlikely to succeed and creates a deterrent effect on its own. The deterrent effect results from selling goods and services below the costs, which causes losses without the gain in market power. In this case, the market power does not increase due to the market share holder weathering the predatory strategy. Thus, the firm punished itself by taking losses without gaining market share. As a consequence, this acts a deterrent for other firms. An additional argument against the implementation of rules is the inability of courts or competition authorities to differentiate predatory from competitive prices.<ref>Easterbrook, Predatory Strategies, supra note 1 at 264, 333-37</ref>

===Short-term loss rules and the Areeda-Turner test ===
In 1975, Phillip Areeda and Donald Turner developed a short-run cost-based test, widely referred to as the 'Areeda-Turner rule'.<ref name=":02">{{Cite journal|last1=Areeda|first1=Phillip|last2=Turner|first2=Donald|date=1975|title=Predatory Pricing and Related Practices under Section 2 of the Sherman Act|journal=Harvard Law Review|volume=88|issue=4|pages=697–733|doi=10.2307/1340237|jstor=1340237}}</ref> The rules are based on short term focus due to the long run focus being too speculative and inefficient. The Areeda-Turner rule suggests prices at or above reasonable expected average variable costs (AVC) are presumed to be lawful, but prices below AVC are presumed to be unlawful and anti-competitive.<ref name=":02"/>

In EU law, the approach to testing for predatory pricing under Article 102 of the Treaty on the Functioning of the European Union (TFEU) has been explained in a number of important cases.

In ''ECS/AKZO'', the European Commission did not adopt the Areeda-Turner rule.<ref>''ECS/AKZO'' ([https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31985D0609&from=EN IV/30.698] {{Webarchive|url=https://web.archive.org/web/20210308225632/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31985D0609&from=EN |date=2021-03-08 }}) Commission decision of 14 December 1985, para 76</ref> The Court of Justice upheld this decision for the inclusion of other factors (such as proof of intention to eliminate competition) to be taken into consideration alongside a cost-based analysis.<ref>[https://eur-lex.europa.eu/resource.html?uri=cellar:4905ac67-5a02-44a0-ae93-7724be6073b0.0002.06/DOC_2&format=PDF Case 62/86] {{Webarchive|url=https://web.archive.org/web/20210308110005/https://eur-lex.europa.eu/resource.html?uri=cellar%3A4905ac67-5a02-44a0-ae93-7724be6073b0.0002.06%2FDOC_2&format=PDF |date=2021-03-08 }}, ''AKZO Chemie BV v Commission of the European Communities'' [1991] ECR I-03359, para 65</ref> Instead, the Court in ''AKZO'' suggested that if a dominant firm sets prices below AVC, the predatory pricing is presumed to be abusively predatory due to the assumed intention to eliminate competitors rather than maximize profits.<ref name="Case 62/86"/> However, a strategy would not be presumed predatory were a dominant firm to set prices above AVC but below ATC unless evidence were provided to show dominant firm's plan to eliminate competition.<ref name="eur-lex.europa.eu"/> Additionally, if a dominant firm sets prices above ATC, the firm is most commonly not found guilty of predatory pricing, though, still may be proven anti-competitive if potential for substantial consumer harm is discovered.<ref>''ECS/AKZO'' ([https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31985D0609&from=EN IV/30.698] {{Webarchive|url=https://web.archive.org/web/20210308225632/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:31985D0609&from=EN |date=2021-03-08 }}) Commission decision of 14 December 1985, para 79</ref> The ''AKZO'' test was reaffirmed in ''Tetra Pak II'',<ref>[https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:61994CJ0333&from=EN Case 333/94 P] {{Webarchive|url=https://web.archive.org/web/20210308132553/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:61994CJ0333&from=EN |date=2021-03-08 }}, ''Tetra Pak International SA v Commission of the European Communities'' [1996] ECR I-5951, para 41</ref> and ''France Télécom''.<ref>[https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62007CJ0202&from=EN Case 202/07 P] {{Webarchive|url=https://web.archive.org/web/20210309045840/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62007CJ0202&from=EN |date=2021-03-09 }}, ''France Télécom SA v Commission of the European Communities'' [2009] ECR I-2369, para 8</ref>

In ''Post Danmark I'', the Court of Justice developed upon ''AKZO'' by stating that prices above average incremental costs but below ATC would not likely be ruled abusive under Article 102 of the TFEU if there was no evidence the dominant firm deliberately intended to eliminate competition.<ref>[https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62010CJ0209&from=en Case 209/10] {{Webarchive|url=https://web.archive.org/web/20210308175109/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:62010CJ0209&from=en |date=2021-03-08 }}, ''Post Danmark A/S v Konkurrencerådet'' [2012] EU:C:2012:172, para 44</ref>

===Long-term cost-based rule===
Posner's long-term cost-based rule assumes that long-run marginal costs are a more reliable test of predation than short-run costs. This is due to the predator, who prices at short-run marginal cost, having the ability to eliminate competitors that cannot afford the same losses in the short-run. To determine predation, Posner brought forth a test that substitutes the average costs from the firm's balance sheet to establish a test that relates to the full average costs based on the company's books. The test would include certain prerequisites, an intent element, as well as a defense. As a prerequisite, Posner requires the plaintiff to demonstrate that the market was predestined for effective predatory pricing.<ref>Richard A. Posner, Antitrust Law. An economic Perspective (University of Chicago Press, 1976), 189</ref> As indicators, Posner lists, for instance, that the predator operates in various markets, whereas the prey operates in fewer markets, concentrated markets, slow entry, few fringe firms, homogenous products and numerous buyers. Posner would authorize the firm to defend due to changes in supply or demand, allowing the respondent firm to price its products at short-run marginal cost.<ref>Richard Posner, Antitrust Law: An Economic Perspective 189-190 (1976)</ref>

According to the European Commission's "Guidance on the Commission's Enforcement Priorities in Applying Article 82 of the Treaty to Abusive Exclusionary Conduct by Dominant Undertakings", if a dominant firm does not cover its average avoidable costs or long-run average incremental costs, this implies the dominant firm is operating at a loss in the short-term to foreclose equally efficient competitors from the market.<ref>{{Cite web|title=Guidance on the Commission's Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings|url=https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52009XC0224(01)&from=EN|date=February 24, 2009|publisher=European Commission|at=Paragraph 26|access-date=April 22, 2020|archive-date=March 19, 2020|archive-url=https://web.archive.org/web/20200319184730/https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52009XC0224(01)&from=EN|url-status=live}}</ref> The Guidance does not bind the EU Courts,<ref>[http://curia.europa.eu/juris/document/document.jsf;jsessionid=43AED7BA705C28808688FA3F821FDD7A?text=&docid=169191&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=6938258 Case C-23/14] {{Webarchive|url=https://web.archive.org/web/20200806104314/http://curia.europa.eu/juris/document/document.jsf;jsessionid=43AED7BA705C28808688FA3F821FDD7A?text=&docid=169191&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=6938258 |date=2020-08-06 }}, ''Post Danmark A/S v Konkurrencerådet'' EU:C:2015:651, para 52</ref> however, it is an important document that could influence future decisions.<ref>{{Cite book|last1=Whish|first1=Richard|title=Competition Law|last2=Bailey|first2=David|publisher=Oxford University Press|year=2018|isbn=9780198779063|pages=763}}</ref>

===Rules governing price increases after predation===
[[William Baumol]] proposed a long-term rule seeking to avoid full reliance on cost-based tests to determine predatory pricing.<ref>William J. Baumol, „Predation and the logic of the average  variable cost test“, journal of law and economics vol 39, No 1 (1996)</ref> Baumol's rule involves requiring any price cut made in response to entry to continue for a five-year period after the exit of the entrant (i.e., if an incumbent firm cuts its price to drive out an entrant, the incumbent firm is prevented from increasing price for five years).<ref>Quasi -Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing, 89 Yale Law Journal 1 (1979).</ref> This rule significantly diminishes the incentive of a firm to engage in predatory pricing since the predatory firm cannot reap the benefits of its anti-competitive behavior (monopoly profits) during the five-year period. Baumol's proposed rule is not absolute, however, it does offer the predator some freedom to raise its post-exit price if the price increase is justified by demonstrable changes in the firm's costs or market demand.<ref>Raimundas Moisejevas, Ana Novosad, Virginijus Bitė, supra note 31: 592.</ref>

===Further strategies===

====Industry-specific rules====
Craswell and Fratrik suggest that establishing a legal standard to detect predatory pricing in the retail industry is unnecessary and should not amount to an antitrust violation. The primary reasoning was that predatory pricing typically requires strong barriers to entry to generate profits in the long run, which are absent in the retail grocery industry.<ref>{{Cite journal |last=Craswell |first=Richard |last2=Fratrik |first2=Mark |date=1985-01-01 |title=Predatory Pricing Theory Applied: The Case of Supermarkets vs. Warehouse Stores |url=https://scholarlycommons.law.case.edu/caselrev/vol36/iss1/3/ |journal=Case Western Reserve Law Review |volume=36 |issue=1 |pages=1 |issn=0008-7262}}</ref> When low-cost warehouse stores enter the market, supermarkets often reduce their prices to eliminate this competition or discourage them from expansion. However, Craswell and Fratrik suggest that this may not be predatory pricing, but rather incumbent firms engaging in non-predatory price cuts required for ordinary competition.<ref>{{Cite journal |last=Craswell |first=Richard |last2=Fratrik |first2=Mark |date=1985-01-01 |title=Predatory Pricing Theory Applied: The Case of Supermarkets vs. Warehouse Stores |url=https://scholarlycommons.law.case.edu/caselrev/vol36/iss1/3/ |journal=Case Western Reserve Law Review |volume=36 |issue=1 |pages=1 |issn=0008-7262}}</ref>

====Rule of reason test====
Section 1 of the ''Sherman Act Antitrust Act of 1890'' prohibits '''every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce.''{{'}} However, Courts have adopted the rule of reason test to analyze the effects of a restraint of trade on competition. Recent case law suggests that there is a four-step rule of reason test.<ref>Carrier, MA 2019, 'The Four-Step Rule of Reason,' ''Antitrust'', vol. 33, no. 3, pp. 50-51, viewed 2 May 2022, < https://www.antitrustinstitute.org/wp-content/uploads/2019/04/ANTITRUST-4-step-RoR.pdf {{Webarchive|url=https://web.archive.org/web/20220417034822/https://www.antitrustinstitute.org/wp-content/uploads/2019/04/ANTITRUST-4-step-RoR.pdf |date=2022-04-17 }}></ref> First, the plaintiff must demonstrate an "anti-competitive effect". Second, the defendant must show a "legitimate procompetitive justification". Third, the plaintiff must highlight that the restraint is not "reasonably necessary" to achieve the defendant's objectives or that there are "less restrictive alternatives". Fourth, the Court will balance the restraint of trade's "anti-competitive effects with its pro-competitive justifications."<ref>Carrier, MA 2019, 'The Four-Step Rule of Reason,' ''Antitrust'', vol. 33, no. 3, pp. 50-51, viewed 2 May 2022, < https://www.antitrustinstitute.org/wp-content/uploads/2019/04/ANTITRUST-4-step-RoR.pdf {{Webarchive|url=https://web.archive.org/web/20220417034822/https://www.antitrustinstitute.org/wp-content/uploads/2019/04/ANTITRUST-4-step-RoR.pdf |date=2022-04-17 }}>.</ref> Failure to satisfy any of these elements will defeat the anti-trust violation claim.

====Output restriction rule====
Williamson offers the output restriction rule to restrain dominant firms from engaging in predatory pricing. The rule stipulates that upon the entry of a new firm in a market, a dominant firm cannot abuse their position by increasing their output above the pre-entry level.<ref name="jstor.org">{{Cite journal |last=Williamson |first=Oliver E. |date=1977 |title=Predatory Pricing: A Strategic and Welfare Analysis |url=https://www.jstor.org/stable/795652 |journal=The Yale Law Journal |volume=87 |issue=2 |pages=284–340 |doi=10.2307/795652 |issn=0044-0094}}</ref> A prevention period of 12 to 18 months should be adequate for new entrants to establish a market identity and understand economies of scale while disincentivizing dominant firms from holding excess capacity.<ref name="jstor.org"/> Williamson suggests that the output restriction rule possesses greater welfare properties than the short-run marginal cost rule or short-run average cost rule.<ref>{{Cite journal |last=Williamson |first=Oliver E. |date=1981 |title=Predatory Pricing Rules: A Comment on Williamson's Output Restriction Rule: Reply to Lefever |url=https://www.jstor.org/stable/796084 |journal=The Yale Law Journal |volume=90 |issue=7 |pages=1646–1649 |doi=10.2307/796084 |issn=0044-0094|url-access=subscription }}</ref>

====Two tier approach====
Joskow and Klevorick offer a two-tier approach to identify predatory pricing. The first stage involves an analysis of the structural characteristics of the relevant market and the market power of the firm allegedly engaging in anti-competitive behaviour.<ref name="Joskow, PL 1979, pp. 213-270">{{Cite journal |last=Joskow |first=Paul L. |last2=Klevorick |first2=Alvin K. |date=1979 |title=A Framework for Analyzing Predatory Pricing Policy |url=https://www.jstor.org/stable/795837 |journal=The Yale Law Journal |volume=89 |issue=2 |pages=213–270 |doi=10.2307/795837 |issn=0044-0094|url-access=subscription }}</ref> The plaintiff must demonstrate that the market in which the behaviour occurred would be prone to predatory pricing and cause losses in economic efficiency. The second stage involves behavioural considerations which may demonstrate predation such as the dominant firm pricing below average variable cost.<ref name="Joskow, PL 1979, pp. 213-270"/>

'''The Brooke Group rule'''

The Brooke Group rule was established by the US Supreme Court in 1993 for the particular case involving Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation. Under this rule, to be found guilty of predatory pricing, the plaintiff was to prove the following:

# Defendant set prices to below own cost of production.
# If successful in driving competitors from the market, defendant had high probability of recouping losses through increase in prices in the long-term.
# Defendant had clear intent to engage in predatory pricing

The first element can be proven with sufficient evidence of defendant's costs in the production of their goods and services. The second element can be proven with evidence of the defendant's barriers to entry, market power and other evidence that would likely lead to the increase in prices in the future. The third element would require direct evidence to clearly demonstrate the defendant's plans to manipulate the market through use of predatory pricing strategy. This may be found through capture of firm's internal documents or plans.<ref>{{Cite web |title=Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) |url=https://supreme.justia.com/cases/federal/us/509/209/ |access-date=2023-04-24 |website=Justia Law |language=en}}</ref>

If all elements can be proven with sufficient evidence for each, following the Brooke Group rule, the plaintiff may claim for predatory pricing under the US antitrust law.<ref>{{Cite journal |last=Areeda, Hovenkamp |first=P., H. |date=2013 |title=Antitrust Law: An Analysis of Antitrust Principles and Their Application |journal=New York: Wolters Kluwer |issue=4}}</ref>