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Carl Person writes,
Without recoupment, even if >predatory pricing causes the target
painful losses, it produces lower >aggregate prices in the market, and
consumer welfare is enhanced."
>(As Kates points out in his Washington Quarterly article ("Recouping
the >Losses of Brooke Groupe"), the last statement is of course terrible
>economics since below-cost pricing reduces consumer welfare by
>misallocating resources just as much as above competitive profit
pricing.>Even if neo-classic economics and current welfare theory is holy
to >you. But that's another story.)
Ralph Anspach writes:
It might be useful to spell out why below cost pricing reduces consumer
welfare because this is counter-intuitive. What is involved is a simple
application of the law of supply and demand. Below-cost pricing attracts
more resources away from other uses than would happen when goods are
priced in accordance with their equilibrium costs determined by a
well-functioning market. But this leaves fewer resources to produce
other goods and hence the restriction of supply in these other markets
raises their prices over the equilibrium level.
The above cost prices in the other markets will more than offset the
below-cost prices in the predatory market because economic theory teaches
that deviations from the competitive norm create inefficiencies which
will be reflected in higher consumer prices.
Therefore, what Kates is pointing out in a brilliant analysis is that
Brooke not only condones misallocation of resources but creates
inefficiencies and HIGHER PRICES ON BALANCE, thereby damaging the very
consumers the Brooke approach is supposed to be putting on a pedestal as
the only objective for AT law.
>But Brooke raises the further question whether this bad law and
economics >also applies to the actions of single firms which are
recognized by >courts to be monopolists and hence fall under Sherman 2
("shall >monopolize") rather than Sherman 2 ("attempt to monopolize" or
"conspire >to monopolize".)
>All the citations Brooke refers to and Brooke itself clearly are
>oligopoly cases and not Sherman 2 (shall monopolize) cases. So what
>does the language "the type alleged here, is of the same general
>character...." mean? And why did the court "bring in Sherman 2 to
The answer may be that the Brooke case is not a clear oligopoly case; it
is a hybrid of oligopoly and monopoly. Brooke pioneered in the generic,
black and white cigarette market, a submarket of the branded cigarette
market. Brooke was a 97% monopolist in this market, though a small
player in the branded cigarette marke. When Brown etc. entered the
generic market, it used predatory pricing to cut into the monopolist's
market. The sub-market monopolist Brooke then claimed predatory pricing,
a strange thing for a monopolist to be claiming against an entrant, on
the theory (probably true) that Brown was trying to discipline Brooke to
keep the generic market from encroaching on the branded market - by
forcing Brooke to raise its generic prices to reduce the difference
between generics and branded cigarettes
So, perhaps, the Supremes were applying Sherman 2 ("attempt to
monopolize" or "conspire >to monopolize") to describe that a
monopolist (Brooke) charging predatory pricing according to an "attempt
to monopolize" or "conspire >to monopolize" was in the same boat under
Sherman 2 in this sense as under primary-line discrimiantion in terms of
establishing below cost pricing and recoupment.
Therefore, Brooke could perhaps be differentiated not only for
monopolists but also for monopolists claiming predatory pricing.
I would be interested in comments, especially since most lawyers tell me
that they don't understand Brooke.
Is there anything new in the list? I'm trying to go through my list
mail for the past 3 months.