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Generation, Deregulation, and Market Power: Will Antitrust Laws Fill the Void?

Fortnightly Magazine - October 15 1996

showing of predatory intent.3 And some courts have suggested that in industries in which barriers to entry are extremely high, a plaintiff can prevail by showing that the defendant is "charging a price below its short-run, profit-maximizing price."4 To date, the Supreme Court has declined to "consider whether recovery should ever be available . . . when the pricing in question is above some measure of incremental cost."5

At the turn of the century, certain titans of industry engaged in vicious but selective price wars to destroy competitors. Their conduct, in large measure, supplied the impetus for the antitrust laws. In responding with national legislation, Congress solved a political need (em to curb the power that had, in the view of many, allowed certain individuals and corporations to dominate the economy. As Sen. Sherman explained: "If we will not endure a king as a political power, we should not endure a king over the production, transportation, and sale of any of the necessaries of life."6 So too, the Clayton Act prohibition on price discrimination was designed to outlaw "[a] most common practice of great and powerful combinations engaged in commerce . . . to lower prices of their commodities, often times below the cost of production in certain commodities and sections where they had competition, with the intent to destroy and make unprofitable the business of their competitors."7

In the ensuing years, however, predatory pricing has taken on a primarily economic flavor and, indeed, the very concept is regarded with great skepticism by many courts, including the Supreme Court. The high court has openly questioned whether predatory pricing is ever economically rational conduct, venturing that "predatory pricing schemes are rarely tried, and even more rarely successful."8 In large part, the Court's aversion to predatory pricing allegations stems from the fact that the same mechanism used in predatory pricing (em lowering prices (em stimulates competition and benefits consumers, the intended beneficiaries of the antitrust laws.

Under the present doctrine, two elements must be proven to establish actionable predatory pricing: 1) pricing below "an appropriate measure" of cost, and 2) a reasonable prospect that the predator could recoup its investment in below-cost prices (em i.e., a subsequent ability to recover monopoly rents or collect supra-competitive prices. The first element provokes sharp disagreement among the various federal Circuits as to what the appropriate measure of cost should be, and what role, if any, subjective intent to destroy competitors plays in alleging and proving predation. The Supreme Court has noted the controversy among the Circuits, but has specifically declined to take sides in the debate (see insert, "Proof and Presumptions in the Federal Courts: A Conflict Among the Circuits").

Price Cutting

in the Electric Industry

Most newly deregulated industries follow a familiar pattern during the onset of competition. A rush of new entrants, fierce competition, the failure of inefficient existing firms and many of the new en-trants, followed by a

consolidation of market position by the survivors. This pattern played out when the airline industry was deregulated, and is ongoing in the telecommunications industry. However, the