The study of strategic behavior has made remarkable progress during the past five years. A number of troublesome problems nevertheless remain. These include (1) whether efforts to curb predation should focus primarily on price and output or if other aspects of rivalry should be included; (2) inasmuch as rules governing predation set up incentives for established firms to preposition, should allowance be made for prepositioning in assessing the merits of alternative rules; and (3) whether victims of “mistaken predation” should be accorded protection.
Although they are not independent, the study of strategic behavior is usefully split into ex ante and ex post parts. Ex ante behavior takes the form of preentry investment (in capacity, R&D, promotion, the offer of multiple brands, and so on), while ex post behavior involves specific adaptations by dominant firms contingent upon rival behavior—especially new entry. As between the two, aggressive strategic behavior in ex post respects is widely believed to be the more reprehensible, but there are complicating factors here as well.
Christian von Weizsacker’s work on innovation is instructive in »hat regard. He distinguishes between progressive and mature industries and observes that the positive externalities of innovation are especially strong in a progressive industry due to the “possibility of generating the next innovation” (1981, p. 150). A welfare assessment of the intertemporal incentives to engage in innovation in a progressive industry leads Weizsacker to conclude that “a pricing action by an incumbent, which by reasonable standards is not considered a predatory action in a nonprogressive industry, [a fortiori] cannot be called a predatory action in a progressive industry” (1981, p. 210).
A somewhat different aspect is emphasized by Ordover and Willig, who contend that ex post “manipulation of the product set can frequently be more effective than price cutting as an anticompetitive tactic” (1981, p. 326). Two types of tactics are examined. The first entails “the introduction of a new product that is a substitute for the products of the rival firhi and that endangers its viability by diverting its sales. The second tactic is employed m the context of systems rivalry. It consists of the constriction in the supply of components that are vital to consumers’ use of the rival’s product, coupled with the introduction of systems components that enable consumers to bypass their use of the rival’s products” (Ordover and Willig, 1981, pp. 326-27). Although both their criterion for assessing predation and the practicability of implementing their rules for components complementary to a rival may be disputed, the issues have nevertheless been structured in a useful way. Follow-on studies will surely make use of that framework.
But what should be done in-the meantime when the law is confronted with problems that run well ahead of the theory? Thus SCM Corporation asked for compulsory licensing relief in its complaint that Xerox had excluded SCM from the plain copier market.21 And Berkey Photo argued that unannounced product innovations by Kodak placed it at an unfair disadvantage.
The ETC has also brought some rather ambitious strategic behavior suits. A collusive strategy of brand proliferation- formed the basis of its complaint against the principal producers of ready-to-eat cereais (Kellogg, General Mills, General Foods, and Quaker Oats).148-* And the FTC subsequently charged du Pont with making preemptive investments in the titanium dioxide market.24
Except for cases that are patently protectionist (and some of these have a protectionist flavor), there are no happy choices. Put differently, tradeoffs proliferate and our capacity to evaluate them is very primitive. Thus although some reject those suits with the observation that plaintiffs’ “arguments in the high technology cases of the 1970s rest implicitly on an atomistic theory of competition which posits an organized economy with no changes in technology, no shifts in consumer tastes, no change in population—and no future that is essentially different from the past” (Conference Board, 1980, p. 18), that is really a red herring. Strategic behavior is an interesting economic issue only in an intertemporal context where uncertainty is featured. The high- technology cases are plainly of that kind and arguably involve strategic calculations in which private and social valuations differ. The courts have been understandably cautious in moving ahead in that area. Assuming that those are matters that can be reexamined as a deeper understanding of the issues and capacity to make informed tradeoffs develops, that would appear to be the responsible result.
Such caution in enforcing Section 2 of the Sherman Act against complaints ol unlawful strategic behavior are usefully joined, however, with greater vigilance in enforcing Section 7 of the Clayton Act. Although the present primitive state of the an makes it very difficult to prove conclusively that strategic moves made by established Arms are in fact predatory, such an admission does not imply that strategic behavior is unproblematic. To the contrary, it is deeply troubling and recent scholarship demonstrates that it may be even more subtle and serious than had previously been imagined. Accordingly, any merger that poses antitrust concerns when evaluated in normal (nonstratetgic) terms becomes all the more worrisome if strategic concerns would be deepened if the merger were to be approved. The prophylactic use of Section 7 in such circumstances would appear to be the judicious interim response—awaiting resolution of the Section 2 issues referred to above.
A primary focus on ex post price and output behavior does not, however, mean that ex ante investments should be ignored entirely. Indeed, if comprehensive comparisons of the welfare ramifications of alternative predatory pricing rules are to be attempted, differential ex ante consequences, if they exist, should presumably be included.
The ways by which firms will preposition in relation to different rules have been addressed by Spence (1977), Salop (1979), Dixit (1979; 1980), and Eaton and Lipsey (1980; 1981) in relation to entry deterrence in general and by Williamson (1977) as entry deterrence applies to predation. The general argument here is that an “established firm can alter the outcome to its advantage by changing the initial conditions. In particular, an irrevocable choice of investment allows it to alter its post-entry marginal cost curve, and thereby the post-entry equilibrium” (Dixit, 1980, p. 96). That line of reasoning has been applied to the study of predation with the following result; Each predatory pricing rule predictably gives rise to “pre-entry price, output, and investment adjustments on the part of dominant firms whose markets are subject to encroachment. To neglect the incentives of rules whereby dominant firms make pre-entry adaptive responses of a strategic kind necessarily misses an important part of the problem” (Williamson, 1977, p. 293; emphasis in original).
3. Mistaken Predation
A troublesome question arises where predatory pricing is attempted in circum- stances where the structural preconditions described in section 3 are not satisfied. I shall refer to that class of events as “mistaken predation, in that even if the predator is successful in driving a rival from the market, it will fail to realize anything but very transient market power benefits. A significant excess of price over cost cannot be supported for any but a short period of time where rivals are many and entry is easy. Where that obtains, an attempt at predation is mistaken because a correct assessment of the net benefits of “successful” predation will disclose that they are negative.
The fact that attempted predation is mistaken does not, however, guarantee that it will never occur. Where it does, should the victims be entitled to relief by bringing suit and recovering damages? Applying the type of reasoning employed by Joskow and Klevorick would suggest a negative answer. The hazard is that many of the suits brought by firms in competitive industries would have the purpose of relieving those firms from legitimate rivalry rather than attempted predation. Since mistaken predation will presumably be rare or at least not repeated, the “false positive errors—that is . . . errors that involve labeling truly competitive price cuts as predatory” (Joskow and Klevorick, 1979, p. 223) would appear to be high and augurs against allowing suits of that kind. Some firms would be victimized as a result, however, and other students of predation may assess the hazards differently.
Assistant Attorney General (now, once again, Professor) William Baxter counsels the courts to move cautiously in the strategic behavior areas. Subtle and sophisticated though much of the recent work has been, the issues are enormously complex. Even if rules of law—with respect, for example, to predatory pricing—could be agreed to, formidable problems of implementation would have to be faced (Baxter, 1983).
Caution on these matters does not mean, however, that strategic behavior is forever beyond the competence of antitrust. I anticipate that there will be further developments on these matters and that, albeit limited, some applications will be made.
Source: Williamson Oliver E. (1998), The Economic Institutions of Capitalism, Free Press; Illustrated edition.