Predatory pricing in antitrust law and economics a historical perspective

Predatory Pricing in Antitrust Law
and Economics

Can a price ever be too low? Can competition ever be ruinous? Questions like
these have always accompanied American antitrust law. They testify to the difficulty of antitrust enforcement, of protecting competition without protecting
competitors.
As the business practice that most directly raises these kinds of questions,
predatory pricing is at the core of antitrust debates. The history of its law and
economics offers a privileged standpoint for assessing the broader development
of antitrust, its past, present and future. In contrast to existing literature, this
book adopts the perspective of the history of economic thought to tell this
history, covering a period from the late 1880s to present times.
The image of a big firm, such as Rockefeller’s Standard Oil or Duke’s American Tobacco, crushing its small rivals by underselling them is iconic in American antitrust culture. It is no surprise that the most brilliant legal and economic
minds of the last 130 years have been engaged in solving the predatory pricing
puzzle. The book shows economic theories that build rigorous stories explaining
when predatory pricing may be rational, what welfare harm it may cause and
how the law may fight it. Among these narratives, a special place belongs to the
Chicago story, according to which predatory pricing is never profitable and
every low price is always a good price.
Nicola Giocoli is an Associate Professor of Economics at the University of Pisa,
Italy.


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A historical perspective
Nicola Giocoli
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Predatory Pricing in Antitrust
Law and Economics
A historical perspective

Nicola Giocoli

Routledge
Taylor & Francis Group
LONDON AND NEW YORK


First published 2014
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© 2014 Nicola Giocoli
The right of Nicola Giocoli to be identified as author of this work has been
asserted by him in accordance with sections 77 and 78 of the Copyright,
Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
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Trademark notice: Product or corporate names may be trademarks or
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without intent to infringe.
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A catalogue record has been requested for this book.
ISBN: 978-0-415-82252-7 (hbk)
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Typeset in Times New Roman
by Wearset Ltd, Boldon, Tyne and Wear


To Ninetta and the four cousins Enzo, Maria, Rita and
Vincenzo


In our worship of the survival of the fit under free natural selection we are sometimes in danger of forgetting that the conditions of the struggle fix the kind of
fitness that shall come out of it; that survival in the prize ring means fitness for
pugilism; not for bricklaying nor philanthropy; that survival in predatory competition is likely to mean something else than fitness for good and efficient production; and that only from a strife with the right kind of rules can the right kind
of fitness emerge. Competition and its purpose are not individual but social. It is
a game played under rules fixed by the state to the end that, so far as possible, the
prize of victory shall be earned, not by trickery or mere self-­seeking adroitness,
but by value rendered. It is not the mere play of unrestrained self-­interest; it is a
method of harnessing the wild beast of self-­interest to serve the common good –
a thing of ideals and not of sordidness. It is not a natural state, but like any other
form of liberty, it is a social achievement, and eternal vigilance is the price of it.
(Clark and Clark [1912] 1914, 200–1)
Highly speculative belief about behavior or its consequences does not satisfy [the
legal] standard, even when endorsed by expert economic witnesses.
(Demsetz 1992, 209–10)
It would be indeed an extraordinary thing to strike at competition in the name of
competition.
(Macrosty 1907, 345)

Contents



Acknowledgments



Introduction
§1  Three basic dichotomies  1
§2  The trickiest antitrust problem  3
§3  Further reasons to love predation  5
§4  Lessons in persuasion  8
§5  Treasures in the attic  9
§6  Plan of the book  11

1

The economics of predatory pricing
§1  Classic and modern definitions of predatory pricing  13
§2  The basic story  19
§3  The Chicago critique of the basic story  22
§4  It’s a brand new game: predation as strategic
paradox  25
§5  The Stanford connection  28
§6  Madamina, il catalogo è questo  35
§7  Assessing the Bayesian approach to predation  42

13

2

The two freedoms and British common law
§1  The two freedoms  49
§2  The monopoly problem in British common law  50
§3  The classical view of competition  54
§4  Competition in the late nineteenth-­century British
economy  58
§5  The dawn of predatory pricing: the Mogul case  60
§6  The Mogul decisions: is predation “a matter contrary to
law”?  62
§7  The new reasonableness test: the Nordenfelt case  66

49

xii
1


x   Contents
§8  The legacy of Mogul and Nordenfelt  69
§9  Restraints of trade in American common law  73
3

American economists and destructive competition
§1  Monopoly as the inevitable outcome of competition  81
§2  “Let us have peace”: the combination way-­out  83
§3  From destructive competition to predatory pricing  86

§4  Economic power and the curse of bigness  88
§5  Playing the trump card: potential competition  90
§6  From Clark to Clarks  94

4

Predatory pricing in the formative era of antitrust law
§1  Constitutionalizing freedom of contract  103
§2  The two views in action: the Sherman Act’s Congressional
debate  105
§3  Transcending common law: monopolizing and third-­party
actionability  109
§4  The economists’ reaction to the Sherman Act  110
§5  Common law, literalism and reasonableness  112
§6  The predatory side of the 1911 cases  120
§7  The economists’ reasonable dissent  125
§8  The Clayton and FTC Acts  127
§9  Predatory pricing in the formative era: an assessment  130

103

5

Predatory pricing in the structuralist era
§1  The decades of neglect (1918–35)  135
§2  Competition strikes back: the end of associationalism  138
§3  The structuralist paradigm  140
§4  Mason’s SCP manifesto  142
§5  Extreme structuralism versus workable competition  145
§6  A “new” Sherman Act?  149

§7  The return of Old Sherman  156
§8  The horror list  160
§9  Intent to exclude intent  163
§10 The worst antitrust decision ever?  166
§11  Conclusion: the divorce between antitrust and
microeconomics  169

135

6

The Chicago School and the irrelevance of predation
§1  The dissolution proposals  176
§2  Chicago to the rescue  179
§3  The two Chicagos  181

176

81


Contents   xi
§4  Listen to McGee: predation doesn’t exist!  187
§5  Chicago’s peculiar methodology  191
§6  Three Chicago boys  193
§7  Conclusion: a new Chicago story  202
7

Harvard rules: Areeda and Turner’s solution
§1  Two reactions to McGee  210

§2  Strategic predation without game theory  211
§3  From the “wilds of economic theory” . . .  215
§4  . . . to a “meaningful and workable” rule  217
§5  A new legal standard  220
§6  The courts’ reaction to the ATR  223
§7  The economists’ reaction to the ATR  226
§8  The post-­ATR debate in courts  235
§9  Conclusion: lessons from the ATR saga  237

210

8

The demise of predatory pricing as an antitrust violation
§1  Mr. Justice goes to Chicago  245
§2  Predatory pricing case law meets Chicago antitrust  248
§3  Predatory pricing’s last cigarette  253
§4  The Brooke test – Chicago creed or apostasy?  255
§5  Administrability is key  259
§6  Price theory no more: a game-­theoretic alternative to
Brooke   263
§7  “An almost interminable series of special cases”  268
§8  Conclusion: Daubert nails in the Post-­Chicago coffin  271

245



Conclusion
§1  Star Wars without Darth Vader  278

§2  It’s the ideology, stupid!  280
§3  Games judges don’t play  284
§4  Chicago rule(s)  285

278





List of cases
References
Index

289
292
305


Acknowledgments

This volume is part of a broader research project on the history of American
antitrust law and economics. Along the years I have benefited from the comments and help of several colleagues. Without involving them in any responsibility for remaining mistakes, I wish to thank Robert Albon, David Andrews, Jeff
Biddle, Ivars Brivers, Chris Colvin, Carlo Cristiano, Marco Dardi, Luca Fiorito,
Salar Ghahramani, Francesco Guala, Dan Hammond, Herrade Igersheim, Bruna
Ingrao, Andrew Jewett, Albert Jolink, Robin Paul Malloy, Alain Marciano, Steve
Medema, Maurizio Mistri, Ivan Moscati, Lorenzo Pace, Sylvie Rivot, Rodolfo
Signorino, Rob Van Horn, Joshua Wright, Alberto Zanni and the editors and
anonymous referees of the journals where parts of the book have been published
before. I am especially grateful to Tony Freyer (our Harvard meeting shows it’s

a small world – really!), Robert Lande, Andrea Maneschi, Henry Manne, Robert
T. Masson and Jim Rhodes, who gave me additional suggestions and valuable
historical insight.
Portions of the book have appeared elsewhere. Chapter 2 follows in part
Giocoli (2013a); sections of Chapters 6 and 7 are based on Giocoli (2011);
Chapter 8 and Conclusion draw on Giocoli (2013b). I am grateful to the editors
and publishers of, respectively, the Research in the History of Economic Thought
and Methodology (Emerald Group Publishing), the European Journal of the
History of Economic Thought (Routledge, Taylor & Francis Group) and the
Supreme Court Economic Review (University of Chicago Press) for granting
permission to reproduce parts of these papers.
Librarians at the Historical and Special Collections of Harvard Law School
Library were extremely helpful in assisting me while doing archival research on
Areeda, Phillip E., 1930–1995. Papers, 1927–1995. I thank them all – in particular Leslie Schoenfeld, whose kindness and smile did a lot to warm the atmosphere in the HSC room (it does need warming, trust me). I am also grateful to
Ed Moloy for granting permission to quote excerpts from Areeda’s collection.
The Routledge editorial team, past and present, gave me assistance and
encouragement. I thank Rob Langham, Emily Kindleysides, Simon Holt and
Andy Humphrys.
Last, but not least, my collaborators. Domenico Fanelli, Tiziana Foresti,
and,  especially, Francesco Cattabrini offered precious research and teaching


Acknowledgments   xiii
assistantship. My deepest gratitude to all of them. Simon Cook did an incredible
job in polishing my English – and beyond. I have no words to express my admiration for someone who combines editorial skills, historical knowledge, good
humor and enduring patience at such a high level. He trespassed the duties
which belong to an editorial assistant (sorry, Simon, I couldn’t resist).
My research benefited from generous financial support by the INET (Institute
for New Economic Thinking). INET grant #5190, awarded to the project “Free
from what? Evolving notions of ‘market freedom’ in the history and contemporary practice of US antitrust law and economics,” is gratefully

acknowledged.
The book is dedicated to the loving memory of my parents, Benedetta and
Vincenzo, my aunts, Maria and Rita, and my uncle Enzo, for what they taught
and gave me.


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Introduction

1  Three basic dichotomies
Antitrust law is about competition. It aims at guaranteeing economic agents’
freedom to compete as the best way to promote maximum social welfare. Simple
as they may seem, these statements are far from undisputed or self-­explanatory.
Controversy about the meaning and goal of antitrust law is as old as the law
itself – and even older, as it dates back to mid-­nineteenth-century debates over
the British common law restraints of trade.
One may legitimately ask what “competition,” “freedom to compete” and
“social welfare” exactly mean. Recognizing them as technical terms does not
help, because two technical and only partially overlapping jargons apply in the
field of antitrust: the language of law and the language of economics. The economic point of view has been on the rise during the last three decades of antitrust
law, but still the subject belongs to the legal realm. Antitrust enforcement is part
of the legal (and administrative) system; acquainted as they may be with economics, judges and agencies adjudicate cases following legal rules.
Even within the boundaries of economics, unsettled issues exist. For example,
economists have different ideas of what “competition” actually means. What is
competition? Two main characterizations prevail.1 In the first, competition is
viewed as a process, the product of the actions and reactions of sellers and
buyers bargaining in the marketplace. It is a force operating in the market that
does not coincide with any given market structure. Alternatively, competition

may be characterized as a state; that is, as a specific market structure, endowed
with certain desirable properties relating to equilibrium output and price. Historically speaking, the former view was typical of nineteenth-­century classical economists, the latter of twentieth-­century neoclassical ones. However, in the world
of antitrust both views have always co-­existed.
The same can be said of the notion of “freedom to compete.” When is competition free? Once again, two interpretations exist.2 According to the first, competition is free when market participants may exercise the utmost freedom of
contract – that is to say, when they have unlimited access to every possible
exchange opportunity and the full management of their property rights. In the
second characterization, free competition means freedom from market power, or


2   Introduction
freedom to trade. Loosely speaking, market power may be defined as a market
participant’s capability of increasing her own surplus by constraining or coer­
cing other agents’ exchange opportunities or trade. In a freely competitive
market this power is kept at an insignificant level by the force of competition
itself; all agents are therefore on equal footing with respect to the possibility of
exploiting trade opportunities (though some agents may still have more opportunities than others).
The two interpretations are obviously related, but do not coincide. The key
difference resides in the dichotomy between market and non-­market coercion.
The government and the law are the main non-­market sources of constraints on
freedom of contract, in that they set boundaries to what an economic agent may
do with her own property rights. For example, the law may prohibit a merger –
that is, the free exchange of property – between two businesses. Hence, freedom
of contract may also be characterized as freedom from government or legal coercion. Together with the right to enjoy the fruits of one’s own work, this was the
basic kind of economic freedom for classical liberals at the time the first antitrust
statutes were enacted. Freedom to trade is on the contrary constrained first and
foremost by other agents’ market power. This may take the form of, say, supra-­
competitive prices, denial of access to essential inputs or territorial limitations.
Apart from the idealized situation of perfect competition, where no such power
exists by definition, what causes problems is not market power per se (as it may
be the legitimate fruit of superior talent and ability), but rather the way it is

employed to constrain or coerce other agents’ trade.
The ideal of freedom from market power is intimately related to neoclassical
economics and its idea of competition as a state. Market power itself is a technical notion that economists measure in terms of price/cost margins and market
shares. However, it also one that easily lends itself to a non-­analytical extension.
In the history of antitrust law, freedom from market power has often been interpreted as freedom from economic power. By the latter term is meant a kind of
power that trespasses upon the market and spreads its negative influence over the
whole society. A powerful business in this sense is one capable of affecting not
only a country’s economy, but also its politics and social life; a threat to democracy in its most basic nature of a system based on equal rights and duties. Antitrust law has a long tradition of looking suspiciously at large concentrations of
economic power, usually summarized in terms of sheer business size. Simplistic
as it may be, the idea that big is bad has been a driving force for much of the
subject’s history.
Economic power, as distinguished from market power, is also the reason why
even the notion of “social welfare” is problematic. Analytically speaking, the
notion may be interpreted in purely economic terms, such as allocative efficiency
or total surplus. Even broadening the analysis to encompass a dynamic setting so
as to accommodate the long-­run efficiencies generated by, say, product innovation leaves the basic theoretical framework unchanged. Setting social welfare as
the goal of antitrust law thus makes antitrust itself a branch of economic policy
that must be governed by economic analysis. All other concerns, such as


Introduction   3
fairness, the plight of small businesses or, crucially, the socio-­political consequences of unbalanced economic power, become irrelevant. This is how
modern antitrust usually proceeds. However, when and if economic power is
viewed as the main foe, as it has often been throughout history, then the goal of
antitrust changes. It becomes, broadly speaking, the pursuit of marketplace egalitarianism, of a Jeffersonian ideal of an economy of “small dealers and worthy
men,”3 none of whom are capable of coercing anyone else and, therefore, of negatively affecting a country’s socio-­political life. Social welfare then takes a
broader, less rigorous meaning that transcends economics and even the law, in
that neither discipline may properly account for loose notions such as marketplace fairness or the protection of small businesses.
These considerations should suffice to reveal how difficult – and fascinating –
a topic the law and economics of antitrust may actually be. Even the simplest of

statements, such as “antitrust law is about competition” or “antitrust promotes
free competition,” conceal a universe of interpretive problems. The present book
is an effort to analyze the above-­mentioned dichotomic views of “competition,”
“freedom to compete” and “social welfare” from the vantage point of the history
of the economic analysis of antitrust. Three general results will emerge: first, that
these dichotomies have characterized the entire history of antitrust law; second,
that the courts’ evolving attitude towards them has largely determined the way
antitrust law has been enforced over the years; third, that the influence of theoretical economics upon this attitude has been anything but steady, as antitrust
courts have oscillated between a total neglect and a partial or full endorsement
of basic economic principles.
My analysis will focus on a single antitrust issue and a single country. I will
deal with the history of the law and economics of predatory pricing in American
antitrust. The geographical focus hardly requires explanation. In every respect,
the United States is the cradle of antitrust, the country where the discipline first
became a serious matter and where the relationship between the legal and the
economic sides of competition has been most intensively studied. But why predatory pricing? Why should the history of the law and economics of this specific
violation of antitrust statutes merit a book of its own? Is there anything special
about predatory behavior? And, in any case, why adopt a history of economic
thought viewpoint? Are there any lessons the historical method may teach
current antitrust enforcers? The remainder of the Introduction tries to answer
these legitimate questions.

2  The trickiest antitrust problem
Predatory pricing (PP hereafter) is an unlawful business behavior within the
broader category of unlawful exclusionary practices. A practice is exclusionary
when it is
reasonably capable of creating, enlarging, or prolonging monopoly power by
limiting the opportunities of rivals [and] either does not benefit consumers at

4   Introduction
all, or is unnecessary for the particular consumer benefits produced, or produces harms seriously disproportionate to the resulting benefits.
(Hovenkamp 2005, 152)
A predatory price is then “a price that is profit-­maximizing only because of its
exclusionary or other anti-­competitive effects” (Bolton et al. 2000, 2242–3). In
other words, PP takes place when a firm sets such a low price that its only rationale is to damage competitors, current or potential. The predator’s eventual goal
is to increase its market power and charge a higher price in the future, after competition has been either disciplined or destroyed.
Historically speaking, PP surely ranks high in the catalogue of antitrust violations – at least as high as cartelization. And as with cartels, predatory behavior
has always symbolized what antitrust law is supposed to fight against. The iconic
picture of a big business preying upon its smaller rivals by setting the price so
low that none of them could survive is second to none in the history of antitrust
law, the only possible exception being the image of smoke-­filled backrooms in
which businessmen secretly agree to fix prices. Opposition to predatory behavior
was the primary motivating force of the American public opinion’s hostility
towards trusts and, therefore, one of the key impulses that led Congress to pass
the 1890 Sherman Act.
There is more to PP than mere history, though. The antitrust problem with
cartels is easy to apprehend. Cartels are clearly anti-­competitive – indeed, their
very goal is to avoid competition. While even joining a cartel may be seen as an
expression of a member’s own freedom of contract as much as the negation of
nonmembers’ freedom to trade, the fact remains that the harmful welfare effects
of cartelization are well established and largely undisputed. Nobody doubts that
fighting cartels means fostering competition. This is not so in the case of PP.
Predatory behavior is the paradigmatic example of using competition to destroy
competition – what several American economists at the turn of the twentieth
century called destructive competition. We know that defending the utmost
freedom to compete is supposed to be the core of antitrust. Mind-­boggling questions thus arise. Whose freedom to compete deserves antitrust protection – the
predator’s or the prey’s? Can a firm ever be condemned for competing too
much? Can a price ever be too low? In short, can competition really be destructive? Questions like these make anti-­PP enforcement one of the trickiest, if not
the trickiest part of antitrust law.

Enforcing law against PP means prohibiting competition to foster competition. The danger is clear. The law risks discouraging actual competition as
freedom of contract for the sake of protecting an abstract ideal of competition as
freedom from market power. The age-­old proscription of predatory behavior
indeed reflects a specific policy choice, namely, the idea that using the law to
curb a firm’s freedom to set its own price (i.e., to constrain that firm’s contractual freedom) may nonetheless foster freedom to trade, i.e., avoid undue concentrations of market or economic power. This policy choice is, however, far from
undisputed.


Introduction   5
The trade-­off between the two freedoms, and between the conflicting views
of what free competition actually means, is therefore intrinsic to the law and economics of PP – and the chief reason why the subject deserves special scrutiny.
When still a Judge for the First Circuit, Justice Stephen Breyer once described
the trade-­off in the following terms:
A price cut that ends up with a price exceeding total cost – in all likelihood a
cut made by a firm with market power – is almost certainly moving price in
the “right” direction (towards the level that would be set in a competitive
marketplace). The antitrust laws very rarely reject such beneficial “birds in
hand” for the sake of more speculative (future low price) “birds in the bush.”4
The metaphor captures the power of PP to lay bare the most controversial features and deepest contradictions of antitrust law. “Using competition to destroy
competition” and “prohibiting competition to foster competition” are challenging statements that push to the extreme the antitrust project’s goal and method.
The law and economics of PP is the only framework where these statements
really make sense – and, therefore, also the best diagnostic tool for inquiry into
the very heart of antitrust.

3  Further reasons to love predation
That a low price may not necessarily be a good price is the chief reason for
taking PP law and economics as the most exciting vessel for sailing the turbulent
waters of antitrust law. It is not the only one, though. A few more are listed in
this section and the next.
3.1  The short-­run/long-­run tradeoff

Breyer’s “birds” highlight another crucial tradeoff. Every business practice has
short- and long-­run effects on social welfare.5 In most cases, economic theory
shows that these effects point in opposite directions. PP is exemplary in this
respect: consumers gain during predation, when prices are low, but suffer after
predation is over, when (and if ) the successful predator raises its price to a level
higher than before. Other instances of the tradeoff are patents, efficiency-­driven
mergers and essential facilities.
When an antitrust case involves a business practice characterized by the
short-­run/long-­run tradeoff, the court may reach a decision only by attributing
weights to the practice’s immediate and future welfare effects. The choice of
weights may seem theoretically driven, but it is not. Economics often fails to
provide objective grounds for the choice – by, say, proving that short-­run effects
always (or at least in this specific case) outweigh long-­run ones, or vice versa.
Assigning weights is frequently a normative operation even for the least
ideologically oriented court. It is a peculiar, one-­dimensional kind of normativeness, as it depends only on the court’s preference for short- over long-­run


6   Introduction
consequences. Still a normative judgment it is, one that analytical arguments
cannot fully validate.
Not only is PP exemplary of the short-­run/long-­run tradeoff. The history of its
law and economics also highlights the inevitably normative nature of the courts’
choices in the face of that tradeoff. For a good part of the twentieth century
American courts emphasized predation’s negative long-­run effects over its positive short-­run ones. The consequence was a strict enforcement of the per se prohibition of predatory behavior. More recent PP case law has reversed this
attitude, with courts giving decisive weight to the short-­run gains guaranteed by
any price cut, regardless of its possible strategic motivation and negative long-­
run effects. The reversal mirrors the greater confidence of most contemporary
courts in the spontaneous ability of free markets to deliver their efficient outcomes in the long run, without any specific intervention by the law or the state.
Hence, it is believed that even successful predators will not enjoy their victory
long because new competition will surely, and quickly, erode any market power

they may have conquered.
This belief is clearly a normative judgment that finds no analytical justification in modern economics, exception being made for the most idealized version
of perfect competition. It is a judgment that is typical of many chapters of
current antitrust case law besides PP – but it is also one the true nature of which
only PP reveals with both clarity and immediacy.
3.2  The predatory paradigm for exclusionary acts
The previous definition of exclusionary acts is not the only one. Narrower definitions exist that characterize more specifically under what conditions a business
practice may be deemed exclusionary. Their goal is operational, as they tend to
be formulated in terms of a test that may help courts to identify violations of the
anti-­monopolization provision of antitrust law – that is, section 2 (§2) of the
Sherman Act.
According to Herbert Hovenkamp (2008, 114), the recent anti-­monopolization
literature “has been preoccupied to the point of obsession with the formulation
of a single test for exclusionary conduct.” In the so-­called sacrifice test, a firm’s
conduct violates §2 when it entails giving up some immediate profits as part of a
strategy whose profitability strictly depends on the exclusion of rivals. For
example, setting a low price today means sacrificing short-­run revenues in view
of the benefits that will accrue tomorrow thanks to the high price that follows the
creation of a monopoly or the strengthening of a dominant position. PP thus fully
partakes of the rationale for the sacrifice test, which aims at sanctioning genuinely competitive conduct, i.e., conduct that is profitable without regard to the
creation or preservation of monopoly. The sacrifice test is implicit in the way
contemporary antitrust courts handle PP cases.
A slightly different alternative is the “no economic sense” test, which condemns conduct that would be irrational (i.e., would make no economic sense)
except when used as a mechanism for excluding rivals and earning monopoly


Introduction   7
profits. The test – which is also frequently used by modern courts – entails that
no single-­firm practice should be condemned per se, but only if its sole rational
explanation is that the firm used it to eliminate or lessen competition. Note that,

regardless of their weaknesses,6 both tests are highly operational. No calculation
of the given conduct’s net welfare effects is required because the mere existence
of a defendant’s gain that does not come from injuring competitors would suffice
to sanction that conduct.
Georgetown economist Steven Salop has classified popular tests like the sacrifice or the “no economic sense” under the banner of the predatory paradigm
for exclusionary acts.7 The paradigm is built on the idea that predatory behavior
epitomizes §2 violations. All kinds of exclusionary practices should be reduced
within the boundaries of PP, as they all partake of its key principle of suffering
losses now to earn more tomorrow. Given the current very lenient enforcement
of anti-­PP law, the paradigm’s implication is obvious. If all exclusionary practices are like PP, then it is very likely that, exactly like PP, they should cause
little, if any, antitrust concern.
The predatory paradigm thus explains why current §2 enforcement is based
upon highly permissive tests that would show violation in only a very few cases.
It is not just that the sacrifice or “no economic sense” tests are ill-­devised. The
real issue is that the trickiest of all antitrust violations, price predation, has been
taken as the foundation for all kinds of exclusionary behavior. Studying the law
and economics of PP may allow a better understanding of the paradigm’s limits
and help in the devising of more effective anti-­monopolization tests.
3.3  Big is bad
That big business is bad business is an idea that predates antitrust law and has
accompanied it throughout its existence. To quote from a famous case, the fear
that “the vast accumulation of wealth in the hands of corporations and individuals [. . .] and their power had been and would be exerted to oppress individuals
and injure the public generally”8 has been a major driver of antitrust legislation
and enforcement.
It is not by chance that the previous passage came from Standard Oil. That
decision by the 1911 Supreme Court established the key precedent for more than
seven decades of anti-­PP case law. Rockefeller’s trust symbolized the “big is
bad” mantra in turn-­of-the-­century American culture, where the popular press
depicted Standard Oil as a giant octopus crushing smaller rivals to death.
The  privileged way a trust could “oppress individuals and injure the

public  generally” was, of course, by pricing at a predatory level, or by undertaking similar exclusionary acts. Hence, PP became the leading example of
everything that might be wrong with business size. The 1911 decision simply
acknowledged that.
The point is that American antitrust law did not condemn size per se – and
would never do so even in later decades. So-­called “no fault” structural remedies,
which called for the dissolution of giant corporations and trusts on account of


8   Introduction
their mere size, never reached beyond the status of legislative proposals or academic debate. Moreover, despite decades of intense controversy, economic analysis has never offered a clear rationale for condemning size as such. Still, fear of
the negative consequences that “the vast accumulation of wealth” might cause the
economy and, therefore, also American society never disappeared from the antitrust landscape. How to reconcile the dread of economic power with the absence
of any legal or analytical justification for condemning business size per se?
Once again, PP came to the rescue. If predatory behavior symbolized the evil
of giant business, then what courts had to do was “just” search for evidence
about that very behavior. The idea was simply that if a business is big, it must
have preyed, or still be preying, upon its rivals. PP thus became a proxy – an
excuse, if you wish – to condemn size.9 This does not mean that Standard Oil or
other large businesses that, over the decades, have been found guilty of predatory behavior were actually innocent. Almost surely they were not. It is just to
recognize the role that PP has played in supporting the antitrust fight against economic, as distinct from merely market, power. As we said above, this was an
eminently socio-­political fight, aimed at preserving no less than American democracy, not just marketplace efficiency. The patterns of anti-­PP enforcement that
courts have applied over the years thus mirror the evolution of socio-­political
views about economic power at least as much as they track the progress of legal
and economic thinking about exclusionary behavior.

4  Lessons in persuasion
Reconstructing the history of PP law and economics may have another, broader
justification. Antitrust law in general, and anti-­PP law in particular, are ideal
fields to investigate the crucial theme of how economists persuade – that is, of
how, when and why theoretical economics may become a tool for concrete

policy- and law-­making. Under what conditions might economists be listened to
by policy- and law-­makers? Or, as I like to say, what kind of economic arguments have the highest chances of successfully migrating from classroom to
policy room or courtroom?
Focusing just on the legal realm, the answer hinges upon the different professional practices of economists and judges. Starting (at least) from World War II
(WWII), the former have striven for rigor and generality, accumulating new disciplinary knowledge in terms of mathematical models, that is, by way of idealized
representations of reality that by necessity abstract from seemingly irrelevant
details and specific circumstances. By contrast, judges’ interest and practice reside
in finding the most effective way to administer law in any given case, by taking
into account every single fact and detail of the trial record and in pursuit of whatever goal the law may have been assigned. It follows that, regardless of their
intrinsic theoretical or empirical validity, economists’ models have succeeded in
migrating from classrooms to courtrooms only when they enjoyed two properties:
that of being general enough not to depend upon idiosyncratic or heroic hypotheses, and that of being easily translatable into workable rules or principles.


Introduction   9
The history of antitrust law offers several examples of that migratory pattern,
and even more so of cases where the migration failed – that is, where economists’ arguments were either totally neglected by judges and legislators or
endorsed on a purely ad hoc, inconsistent basis. So, for instance, it is well known
that American economists opposed in vain the enactment of the first antitrust
statute in 1890, severely criticized the Supreme Court’s rule of reason formulated in Standard Oil, and had a major direct influence in the passing of the 1914
Clayton Act. The ebbs and flows of economists’ efforts to persuade antitrust
judges and legislators continued over the following decades.10 Antitrust is therefore an invaluable source of teachings for grasping the power of economics to
affect reality.
The law and economics of PP is especially rich in this respect. As the following chapters show, the evolution of theoretical reflections about predatory behavior offers a whole array of different styles of economic reasoning: from basic
price-­theoretic models to semi-­automatic rules, from vague “economic-­flavored”
arguments to rigorous game-­theoretic analysis. Understanding how, when and
why these different approaches managed to persuade courts – or failed to – may
thus provide a useful case study. In particular, the erratic fortune of PP models in
courtrooms seems to validate the previous claim that economists’ practices can
be compatible with those of judges only in those special cases where the product

of the former’s theorizing is at the same time general enough and sufficiently
operational.

5  Treasures in the attic
Common law systems naturally lend themselves to an appreciation of the historical evolution of legal doctrines and enforcement practices. Due to the rule of
precedent, entire areas of the law may be presided over by age-­old principles. A
few of these principles may sometimes have been inspired, either directly or
indirectly, by economic reasoning. As a consequence, traces of old economic
ideas may still survive in common law. This is clearly a boon for historians of
economic thought. The law is one of those rare fields where historians have an
edge with respect to theoretical or applied economists.
Antitrust law is the best example. Its statutes have gone almost unchanged for
a century or more. Key case law doctrines have provided the ruling precedents
for many decades. Old ideas, sometimes dating back to the late nineteenth and
early twentieth century, still hold sway in various chapters of antitrust law. Save
for a few later amendments introduced by Congress, changes in enforcement
have always been due to changing interpretations of the same norms. Hence, one
may understand current enforcement patterns by tracing back what particular
interpretation of the law underlay a given doctrine at the time it was formulated.
Saying that history is essential for understanding antitrust law is hardly a
novelty. Since 1890 antitrust scholars, judges and practitioners have continually
turned to history as a fundamental source of guidance, insight and justification.
Historical research has helped illuminate both the original legislative intent and


10   Introduction
the meaning of earlier case law. Courts at all levels have always based their antitrust opinions on historical evidence and interpretation – and they still do.11
However, the term “history” in antitrust has always meant legal history, as
written by lawyers themselves for their own direct use or, more recently, by professionally trained legal historians.12 While the latter have questioned the naïve
view that “the legal past speaks authoritatively to the legal present” (Ernst 1990,

879), thereby paving the way to a more mature understanding of the inevitable
historical contingency of the legal system, it remains true that the history of antitrust has so far been entirely reconstructed using the language and methods of
legal history.13
This is somehow unfortunate because antitrust law has always been related
to, when not directly affected by, the economic analysis of firms, markets and
competition. But economic theory has never been a datum. Just think of the
evolving meaning, since 1890, of key concepts such as market, technology,
welfare, efficiency and, of course, competition. Economists over the years have
shaped, dissected and rebuilt each of these concepts. Through a multiplicity of
avenues the fruit of these economists’ efforts has eventually reached antitrust
enforcers, or legislators, influencing their own work. “Because the [Sherman
Act’s] vital terms directly implicated economic concepts, their interpretation
inevitably would invite contributions from economists,” wrote Bill Kovacic and
Carl Shapiro. “As economic learning changed, the contours of antitrust doctrine
and enforcement eventually would shift, as well” (Kovacic and Shapiro 2000,
43). If we accept that changing economic ideas have played an important role in
shaping antitrust statutes and case law, then it is only natural to turn to the discipline the professional goal of which is precisely to investigate the historical
evolution of those very ideas, namely, the history of economic thought (HET).
Think of a basic question one may legitimately raise in the face of every antitrust decision: what kind of economic “theory” (in the broadest sense of the
word) did the court have in mind when making that decision? I claim this is a
question that only HET may properly answer; and, equally importantly, one that
contemporary economists cannot answer. Acknowledging what today’s antitrust
economics says about a certain business practice that the given decision condemned falls short of explaining why that practice was prohibited in the past,
why that prohibition held for a long time, and why it still does. Only historians
are equipped to asses what the “contextual” (read: theoretical, political, social,
legal, etc.) conditions and goals were that led an old court to first prohibit that
practice, and that justified maintaining the prohibition every time the same practice was challenged in later cases. And only historians of economic thought may
fully appreciate a circumstance that contemporary economists often forget,
namely, that economic theories are never developed in a vacuum, that we may
never take the universal value of economic principles for granted, that some

economic arguments are compatible only with some contextual conditions and
goals while others are not. What economic ideas were compatible with, say, the
socio-­politico-legal context of 1911 America, when Standard Oil was decided
and PP prohibited – a prohibition that lasted for the next seven decades? What