Predatory Pricing and Recoupment

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 profitability.

This Article discusses the evolution of and rationale for the recoupment requirement. It shows how recoupment analysis by courts is often flawed, largely because judges incorrectly assume that market entry, which can prevent recoupment, is easy. This Article then illustrates the many ways in which recoupment can occur, including recoupment in other markets and recoupment through cartel or oligopoly pricing. Despite these various modes of recoupment, federal courts have sometimes structured the recoupment requirement in a way that is literally impossible to satisfy. This Article advocates more fine-tuned recoupment analysis.

After exploring the judicial misapplication of the recoupment requirement, this Article challenges the underlying premises of the element by showing how predatory pricing can hurt consumers and competition even if a firm engaged in predatory pricing is unable to eventually recoup its losses. Ultimately, the recoupment requirement does not distinguish between anticompetitive and benign (or beneficial) conduct. This Article concludes by explaining how eliminating the recoupment requirement in predatory pricing litigation would better serve the purposes of antitrust law.