Predatory Pricing and Consumer Welfare: A Critical Discussion

Introduction

Predatory pricing refers to the practice of setting prices low with the intent to eliminate or damage
competition, often followed by a later price increase once the competition has been driven out of the
market. This practice raises significant concerns in antitrust and competition law, as it can harm market
dynamics and lead to monopolistic behaviors. The relationship between predatory pricing and consumer
welfare has been a subject of intense debate in both legal and economic contexts.

The assertion that "predatory pricing should always be assessed on the basis of consumer welfare"
presents an important starting point for evaluating how antitrust law addresses these practices. Consumer
welfare, in the context of competition law, is typically defined in terms of maximizing consumer surplus
— the difference between what consumers are willing to pay for a product and what they actually pay.
This notion, however, has been critiqued for potentially oversimplifying complex competitive dynamics
and for ignoring long-term market effects.

1. Legal Background and Approaches

The legal treatment of predatory pricing varies across jurisdictions, but it is typically governed by antitrust
or competition law frameworks. Below is a brief overview of the key jurisdictions:

United States

In the United States, predatory pricing is primarily governed by the Sherman Act (Section 2), which
prohibits monopolistic behavior, including attempts to acquire or maintain monopoly power by anti-
competitive means. The landmark case in U.S. law is Brooke Group Ltd. v. Brown & Williamson
Tobacco Corp. (1993). The U.S. Supreme Court held that a claim of predatory pricing requires two
essential elements:

1. Price below cost: The defendant must be pricing below a cost benchmark, typically average
variable cost (AVC) or average total cost (ATC).
2. Recoupment: The plaintiff must show that the defendant has a reasonable likelihood of recouping
its losses once competition is eliminated and prices are raised again.

The Court emphasized the importance of consumer welfare in assessing whether predatory pricing
occurred. The Court was wary of discouraging aggressive pricing strategies that might benefit consumers
in the short run. As such, the ruling set a high bar for proving predatory pricing, reflecting the view that
competition should not be unduly restrained in the interest of protecting competitors.

European Union

The Treaty on the Functioning of the European Union (TFEU), specifically Article 102, prohibits the
abuse of a dominant market position. In the EU, the General Court in AKZO Chemie v. Commission
(1991) established a key principle for predatory pricing: pricing below average variable cost (AVC) was
presumptive evidence of an anti-competitive intent. The European Commission, in this case, found that
AKZO’s pricing was intended to drive competitors out of the market and was thus an abuse of dominant
position.

However, unlike the U.S. approach, the EU has traditionally focused less on recoupment and more on the
potential for harm to competition in the market, prioritizing long-term competition and market structure
over immediate consumer welfare. This has led to a somewhat broader approach, wherein any predatory
behavior that harms competition is actionable, even if the immediate consumer benefits are not apparent.

2. Consumer Welfare

2.1. Consumer Welfare in U.S. Competition Law

In the United States, consumer welfare is a cornerstone of antitrust law, particularly within the framework
established by the Sherman Act (1890) and Clayton Act (1914). The modern interpretation of antitrust
law in the U.S. has been heavily influenced by Chicago School economics, which emphasizes economic
efficiency, with the goal of maximizing consumer welfare.

Chicago School and Consumer Welfare

The Chicago School, especially influential in the late 20th century, argues that antitrust enforcement
should primarily focus on the effects of business practices on consumer prices and output. According to
this view, actions that lead to lower prices and increased output are beneficial to consumers, and should
not be penalized, even if they may harm competitors. The Chicago School supports a consumer welfare
standard, which primarily considers the effect of business practices on prices, quality, and choice for
consumers.

This principle was solidified by the U.S. Supreme Court in the landmark case of United States v.
Microsoft Corp. (2001), where the Court focused on how Microsoft's practices harmed consumer welfare
by reducing competition in the software market.

2.2. Consumer Welfare in EU Competition Law

In the European Union, consumer welfare plays a role in competition law, but the EU approach to
competition is more explicitly focused on preserving the competitive process itself, with Article 102
TFEU prohibiting the abuse of a dominant position and Article 101 TFEU addressing anti-competitive
agreements.

The EU approach is shaped by the idea that competition law should protect not only consumers but also
the competitive process, which in turn benefits consumers in the long run. While consumer welfare is
certainly a consideration in EU law, it is often seen as secondary to maintaining the structural integrity of
competitive markets.

Consumer Welfare and Market Structure in the EU

In the EU, consumer welfare is understood not only in terms of lower prices and increased consumer
choice but also in terms of maintaining a competitive market structure that encourages innovation and
entry by new competitors. The EU often looks at the broader effects of business practices on the
competitive process, which can include evaluating the potential for market entry or the exclusion of
competitors.

For example, in AKZO Chemie v. Commission (1991), the European Court of Justice (ECJ) held that
pricing below cost by a dominant firm was presumptively anti-competitive, even if there were no
immediate price increases following the conduct. The Court found that predatory pricing had the potential
to undermine the competitive structure of the market, harming competition even if consumer prices were
temporarily reduced. This reflects a broader approach to competition that sees the protection of
competition itself as the ultimate safeguard for consumer welfare in the long run.
European Commission’s Approach

The European Commission has also focused on protecting competition rather than just consumer welfare
in the narrow sense of price effects. In cases like Intel v. European Commission (2017), the
Commission looked at the effects of anti-competitive conduct (such as rebates that punished distributors
for dealing with competitors) on competition and innovation, rather than only on the direct harm to
consumers. The Commission tends to take a more structural approach, focusing on the long-term effects
of practices on the competitive landscape of the market.

Competition and Consumer Welfare in EU Jurisprudence

The EU’s competition policy is generally more interventionist compared to the U.S., and this reflects a
belief that preserving competition, even at the cost of short-term consumer welfare (such as higher
prices), is critical for long-term benefits. For instance, the EU's approach to mergers tends to focus on
whether the merger would create or strengthen a dominant position, which might eventually lead to less
competitive pressure and higher prices for consumers.

2.3. Key Differences Between the U.S. and EU Approaches

 Focus on Market Structure vs. Price: The U.S. tends to focus more narrowly on price effects
and consumer welfare in terms of immediate price reductions or output increases. The EU, on the
other hand, emphasizes maintaining competitive structures and the process of competition,
which may occasionally involve higher prices if they are deemed to be the result of a more
competitive market.
 Enforcement and Interpretation: The EU is generally more aggressive in enforcement against
potentially anti-competitive practices, with a stronger focus on structural remedies and market
preservation. In contrast, U.S. antitrust law has historically been less inclined to intervene in cases
where consumer prices are low, even if this is achieved through potentially anti-competitive
practices like predatory pricing.
 Predatory Pricing: The U.S. courts, especially in Brooke Group, require proof of recoupment
(i.e., the ability to raise prices after competitors are driven out) before finding that predatory
pricing violates antitrust laws. The EU, as seen in cases like AKZO, tends to view below-cost
pricing as inherently anti-competitive without necessarily requiring proof of recoupment, focusing
more on the potential harm to the competitive process.

3. Arguments in Favor of Consumer Welfare as the Sole Criterion

Economic Efficiency: The main argument in favor of the consumer welfare standard is that it provides an
efficient and clear framework for antitrust enforcement. By focusing on price effects and consumer harm,
it helps authorities avoid making subjective determinations about market structure or other factors.

Short-Term Benefits for Consumers: Predatory pricing may result in short-term benefits for consumers,
such as lower prices. The consumer welfare standard recognizes that this benefit is important, as long as it
does not lead to harm in the long term, which aligns with economic theories of efficiency.

Chicago School of Economics: Scholars like Robert Bork and Richard Posner from the Chicago School
argue that antitrust law should focus on protecting consumers, not competitors. They suggest that the
focus on consumer welfare avoids penalizing firms for aggressive pricing strategies that might improve
efficiency and benefit consumers.

4. Arguments Against Relying Solely on Consumer Welfare

Long-Term Harm to Consumers: Critics of the consumer welfare standard argue that focusing solely on
short-term benefits for consumers overlooks the long-term consequences. George Stigler, a Nobel-
winning economist, emphasized that predatory pricing could allow firms to eliminate competition and
then raise prices once they have established dominance. This would harm consumers in the future, a
concern that is minimized under a strict consumer welfare framework.

Non-Price Effects: Predatory pricing can also have non-price effects that harm consumer welfare, such as
reducing innovation or reducing product variety. The consumer welfare standard, with its emphasis on
price, might miss these other dimensions of harm.

Market Structure and Competition: Eleanor Fox, a leading scholar of competition law, argues that
competition law should protect the competitive process itself, not just the welfare of consumers. She
suggests that protecting market structure and competition is an essential part of safeguarding long-term
consumer interests. Predatory pricing can distort the market and reduce future competition, even if
consumers benefit in the short term.

Other Jurisdictions and Broader Perspectives: In jurisdictions like the EU, the law does not always require
proof of harm to consumers, focusing more on preventing anti-competitive conduct. The focus is on
maintaining competitive market structures rather than just the price effects of pricing behavior.

5. Alternative Approaches: A Balanced View

While the consumer welfare standard is effective in some cases, a more nuanced approach might be
required in certain situations. Some scholars, such as David S. Evans and Ariel Pakes, have argued for a
more holistic approach that considers both price and non-price effects, as well as market dynamics. The
goal should be to prevent strategies that undermine competition, even if short-term consumer benefits are
evident.

In some cases, a broader focus on market structure, such as preventing monopolistic tendencies or
ensuring diversity in supply, might better serve long-term consumer welfare than a strict reliance on price
effects alone.

Some scholars and legal scholars advocate for broader models of welfare, such as total welfare or
producer welfare, which consider the interests of firms and the overall economic health of the market,
not just consumers. Elhauge (2003) has argued that a focus on total welfare is more consistent with long-
term economic growth and innovation, as it recognizes the role of competition in stimulating innovation
and efficiency across the entire market, not just in the short term.

Conclusion

While the consumer welfare standard has advantages in providing clarity and a straightforward basis for
assessing predatory pricing, it is not always the most comprehensive or appropriate measure. It is
important to consider both short-term and long-term effects on consumers, the competitive process, and
market structure. Thus, while consumer welfare should be a key criterion in evaluating predatory pricing,
it should not be the only criterion, and a more holistic approach to competition law may be warranted to
ensure fair and efficient markets in the long run.