Bundling as Exclusionary Pricing to Maintain Monopoly

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Jonathan Rubin, Jun 10, 2008

A controversy in antitrust policy is raging over two principal and competing approaches to liability rules for bundling. Under the rule adopted by the U.S. Court of Appeals for the Third Circuit, the appropriate legal standard for liability for bundling is based on well-settled, general principles of monopolization law. Under the LePage’s decision, bundling may be deemed unlawful exclusionary conduct under the general rule in Aspen Skiing, where the U.S. Supreme Court defined anticompetitive conduct as behavior that impairs the opportunities of rivals through conduct that either does not constitute competition on the merits or achieves a competitive benefit in an unnecessarily restrictive way. The other approach to liability rules applies before the U.S. Court of Appeals for the Ninth Circuit and was recommended by the Antitrust Modernization Commission (AMC). This approach requires as an essential element of liability some form of below-cost pricing. Under the AMC’s “cost-based” test, for example, a firm violates Section 2 if the fully discounted price of the product facing competition—attributing any discounts given on other products to the price of the product facing competition falls below the cost of its production by a hypothetical equally efficient rival. The presumption is that a cost-based rule provides a sensible proxy for determining when an equally efficient rival should have grounds to complain. The maintained assumption is that as long as the dominant firm sets prices above its cost, equally efficient rivals should be able to compete and antitrust intervention should not be necessary. Various grounds have been put forward in support of a cost-based rule. Because it would presumably not intervene to protect firms less efficient than the dominant incumbent, it seems to operationalize the famous dictum that the antitrust laws are enacted for “the protection of competition not competitors.” On a more practical level, it also seems to satisfy the need for predictable rules to help the business community determine ex ante when rebate and discount strategies might constitute anticompetitive unilateral misconduct. Last, and perhaps not least, is that a cost-based rule would extend the decision-theoretic regime established for predatory pricing by the Supreme Court in Brooke Group and for predatory bidding in Weyerhaeuser, lending an appearance of continuity and consistency to the development of Supreme Court antitrust doctrine. The Supreme Court should not extend the decision-theoretic approach to liability rules taken in predatory pricing (and bidding) cases to bundling or to other types of exclusionary conduct, even if the exclusionary strategy involves pricing, discounts, or rebates. The Third Circuit’s approach to bundling under standard antitrust principles conceives of bundling not as predatory pricing, but as exclusionary conduct, or “exclusionary pricing.” As a matter of antitrust policy, dealing with exclusionary pricing on its own terms is superior to trying to apply rules adopted for the rare and atypical case of predatory pricing. Certain “plus factors,” which, when present with exclusionary effects, can be identified that focus attention on those cases in which competitive harm is most likely to occur.

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