A New Test for Predation: Targeting


The prevailing test for predation under section 2 of the Sherman Act is the Areeda-Turner rule, which condemns pricing below a dominant firm's own average variable cost. This rule is both underinclusive and overinclusive, and is not generalizable to cases of nonprice predation. Alternative rules are also flawed. Those based on behavior do not address predation before the victim has been destroyed. Other recently proposed rules are simply legislative suggestions that, if predation is allowed, the lower price should be continued for an arbitrary period to benefit consumers. Other rules condemn the use of asymmetric information, which should, instead, be viewed as a firm's inherent advantage.

In place of these rules, the authors propose that action by a firm with market power be deemed predatory if-and only if-it targets some but not all competitors. Both price and nonprice predation can be challenged under this targeting rubric. Condemning targeting does not run the risk of chilling pro-competitive behavior, nor of punishing a firm for being more efficient than a rival. The authors test recent case law against this new model, and find that it would have accurately predicted all major recent antitrust decisions. They also show that it is allocatively and productively efficient. The method of proof for the authors' propositions includes the use of Voronoi diagrams, illustrating competition between firms in up to three dimensions.

About the Author

Tom Campbell is a Bank of America Dean and Professor of Business, Haas School of Business, University of California at Berkeley. Nirit Sandman is a J.D. candidate, 2007, Boalt Hall School of Law, University of California, Berkeley.

By uclalaw