Posted by Social Science Research Network
Predatory Pricing and Recoupment by Christopher R. Leslie (University of California, Irvine School of Law)
ABSTRACT: Predatory pricing is a two-step strategy for securing monopoly profits. During the first step–thepredation stage–a firm charges a price below its costs in the hope of driving its competitors out of the market by forcing them to sell at a loss as well. If it succeeds, the firm can proceed to the second step–the recoupment stage. After it has the market to itself, the now-dominant firm charges a monopoly price in an effort to recoup the losses it sustained in the predation stage and to earn a steady stream of monopoly profits into the future.
Predatory pricing violates section 2 of the Sherman Act, which prohibits the use of anticompetitive conduct to acquire or maintain monopoly power. Predatory pricing is one form of anticompetitive conduct. Many judges and scholars, however, believe that predatory pricing does not occur because the two-step strategy combines significant up-front costs with a low probability of success. This skepticism has led courts to impose a recoupment element for section 2 predatory pricing claims. The recoupment element requires an antitrust plaintiff bringing a predatory pricing claim to prove that the defendant will be able to acquire monopoly power and to charge a monopoly price for long enough to make the whole scheme profitable. Antitrust liability becomes a function of the defendant’s