The Paradox of Predatory Pricing

Predatory pricing law attempts to keep prices low by harshly sanctioning prices that are anticompetitively low. The paradox of predatory pricing law is that even an analytically perfect specification of the line between predatory and innocent price cuts would result in deviations from optimal pricing because the very recognition of a predatory pricing offense will induce some firms to forgo innocent price cuts. This occurs for several reasons. Firms can strategically misuse predatory pricing law to coerce more efficient rivals to forgo price cuts or to help organize tacit collusion schemes. Even apart from strategic misuse, the remedial structure of antitrust law-including treble damages, unilateral fee shifting, and ease in proof of damages-coupled with unavoidable ex ante uncertainty over adjudicatory results and managerial risk aversion will cause some firms to raise their prices to avoid predatory pricing litigation. No complete solution to the paradox exists, since both the absence and presence of a legal prohibition on predatory pricing would induce upward deviations from optimal pricing. Courts, Congress, and the antitrust agencies can attempt to minimize the costs of maintaining a legal prohibition on predation by adopting decisional rules that mandate deliberate underinclusion in establishing liability norms and in adjudication. They can also adopt procedural and remedial rules-such as detrebling damages in predation cases, bilateral fee shifting, and limiting information exchange in discovery-to minimize the costs of the predatory pricing prohibition.