FTC Staff Comment Before the Wyoming Attorney General Concerning Statutes that Govern Below-Cost Pricing

U~ITED 5T A TES OF A"'lERICA
FEDERAL TRADE COMMISSIO!"
WASHINGTON, D.C. 20~80
V7;~OOIO
CDMMISSION AUTHORIZED
December 	11, 	1987
Gay 	Woodhouse, 	Esq.
Senior 	Assistant 	Attorney 	General
123 	Capitol 	Building
Cheyenne, 	Wyoming 	82002
Dear 	Ms. 	Woodhouse:
I 	am 	writing 	in 	response 	to 	your 	letter 	of 	Septe~~er 17,
in 	which 	you 	described 	your 	interest 	in 	updating 	the 	Wyoming
statute 	that 	governs 	below-cost 	sales. 	The 	staff 	of 	the
Federal 	Trade 	Commission 	appreciates 	this 	opportunity 	to 	give
you 	some 	information 	about 	our 	own 	statutes 	and 	also 	to 	comment
more 	generally 	about 	this 	subject. 1
We 	believe 	that 	every 	state 	should 	be 	circumspect 	in
enacting 	prohibitions 	against 	below-cost 	pricing. 	statutory
prohibitions 	against 	pricing 	below 	cost 	can 	chill 	price
competition 	that 	would 	be 	beneficial 	to 	consumers, 	due 	to 	the
difficulty 	of 	distinguishing 	between 	below-cost 	pricing 	and
vigorous 	competition. 	Moreover, 	after 	having 	reviewed 	many
allegations 	of 	such 	conduct, 	we 	believe 	that 	firms 	will 	rarely
engage 	in 	genuine 	below-cost 	pricing, 	because 	they 	typically
know 	that 	they 	cannot 	count 	on 	a 	later 	period 	of 	monopoly 	power
during 	which 	they 	can 	raise 	prices 	above 	their 	costs 	and 	recoup
their 	earlier 	losses.
The 	remainder 	of 	this 	letter 	is 	divided 	into 	two 	sections.
In 	the 	first 	I 	set 	out 	some 	general 	thoughts 	about 	the
difficulties 	of 	applying 	predatory 	pricing 	laws 	without 	ha~ing
consumers 	in 	the 	process, 	and 	propose 	an 	interpretive 	rule 	that
you 	may 	want 	to 	consider 	in 	administering 	any 	statute 	in 	this
area. 	In 	the 	second 	section 	I 	address 	the 	specific 	questions
that 	you 	asked 	about 	our 	experiences 	with 	our 	own 	predatory
Fricing 	statutes.
1 	This 	letter 	sets 	out 	the 	views 	of 	the 	FTC's 	Bureaus 	of
Competition, 	Consumer 	Protection, 	and 	Economics, 	and 	not
necessarily 	those 	of 	the 	Corr~ission itself 	or 	of 	any 	individual
Corr~issioner. 	The 	Commission, 	however, 	with 	Corr~issioners
5ailey 	and 	Strenio 	dissenting, 	has 	voted 	to 	authorize 	us 	to
submi~ these 	comments 	to 	you.

Gay 	Woodhouse, 	Esq.
I. 	General 	comments 	on 	below-cost 	pricing
-2-
The 	theory 	of 	below-cost 	or 	predatory 	pricing 	is 	that 	a
firm 	could 	price 	its 	products 	below 	the 	actual 	costs 	of
producing 	them, 	for 	a 	prolonged 	period 	of 	time, 	and 	could
even~ually drive 	its 	less 	well 	financed 	rivals 	from 	the 	market.
The 	original 	firm 	would 	then 	be 	in 	a 	monopoly 	position 	and
would 	seem 	to 	be 	able 	to 	raise 	prices, 	perhaps 	high 	enough 	to
make 	up 	all 	the 	initial 	losses 	and 	still 	show 	an 	overall 	profit
on 	the 	venture.
We 	believe, 	however, 	that 	predatory 	pricing 	is 	difficult
to 	accomplish 	and 	is 	therefore 	quite 	rare. 	At 	least 	two
obstacles 	stand 	in 	its 	path. 	First, 	the 	predator 	must 	absorb
relatively 	large 	losses, 	since, 	as 	it 	acquires 	an 	ever-larger
market 	share, 	it 	must 	bear 	per-unit 	losses 	on 	an 	ever-larger
number 	of 	units. 	This 	means 	that 	the 	predator's 	financial
losses 	will 	be 	much 	larger 	than 	those 	of 	its 	putative 	victims.
Second, 	the 	predator 	cannot 	count 	on 	having 	a 	period 	of
monopoly 	power 	within 	which 	to 	recoup 	these 	losses. 	When 	the
predator 	begins 	to 	raise 	prices, 	the 	market 	will 	become
attractive 	and 	firms 	will 	once 	more 	enter 	in 	response 	to 	the
new 	profitability 	of 	the 	industry. 	This 	competitive 	response
may 	be 	lessened 	if 	the 	predator 	can 	raise 	prices 	in 	a 	piecemeal
or 	hidden 	way, 	or 	if 	the 	market 	is 	protected 	by 	barriers 	to 	the
entry 	of 	new 	fi~s. 	In 	the 	absence 	of 	significant 	problems 	of
this 	sort, 	however, 	we 	can 	expect 	that 	entry 	will 	in 	fact 	occur
rather 	rapidly, 	and 	that 	it 	will 	ensure 	that 	prices 	do 	not
remain 	above 	competitive 	levels.
These 	views 	are 	consistent 	with 	the 	Supreme 	Court's 	rece~t
opinions 	in 	two 	cases 	involving 	predatory 	pricing, 	Matsushita
Electric 	v. 	Zenith 	Radio 	CorD., 	106 	S. 	Ct. 	1348 	(1986), 	and
CarGill 	v. 	Monfort, 	107 	S. 	Ct. 	484 	(1986). 	These 	decisions
contain 	the 	Court's 	first 	discussion 	of 	the 	issue 	since 	1967 2
and 	reflect 	the 	substantial 	developments 	in 	the 	legal 	and
economic 	analysis 	of 	predatory 	pricing 	that 	have 	occurred 	in
the 	past 	two 	decades. 	The 	Y.atsushita 	case 	involved 	allegations
that 	Japanese 	television 	manufacturers 	had 	engaged 	in 	a
complicated 	conspiracy 	to 	raise 	prices 	in 	their 	horne 	market 	and
use 	the 	profits 	to 	subsidize 	predato~ pricing 	here. 	A motion
for 	surr~ary jUdgme~t raised 	the 	question 	of 	whether 	there 	were
any 	genuine 	issues 	of 	fact 	for 	trial. 	Concluding 	that
predation 	was 	unlikely 	on 	the 	facts 	alleged, 	the 	Supreme 	Court
obse~ed that 	"there 	is 	a 	ccnsensus 	among 	commentators 	that
predatory 	pricing 	schemes 	are 	rarely 	tried, 	and 	even 	more
2 	See 	Utah 	Pie 	Co. 	v. 	Continental 	Bakino 	Co., 	386 	U.S.
685 	(1967).

Gay 	Woodhouse, 	Esq. 	-3-
rarely 	successful." 	106.S. 	ct. 	at 	1357-58. 	The 	Cargill 	case
raised 	similar 	issues. 	There 	a 	meat-packing 	company 	had
challenged 	a 	merger 	between 	two 	of 	its 	competitors, 	alleging
that 	this 	would 	give 	the 	merged 	firm 	the 	financial 	resources 	to
engage 	in 	predatory 	pricing. 	Although 	relying 	on 	technical
grounds 	to 	reverse 	a 	rUling 	for 	the 	plaintiff, 	the 	Court
indicated 	more 	generally 	that 	the 	mere 	possibility 	of 	such
harm, 	without 	any 	more 	specific 	evidence, 	was 	too 	speculative
to 	support 	an 	injunction 	against 	the 	merger. 	The 	Court 	said
that 	"[c]laims 	of 	threatened 	injury 	from 	predatory 	pricing
must, 	of 	course, 	be 	evaluated 	with 	care," 	and 	that 	I'the
obstacles 	to 	the 	successful 	execution 	of 	a 	strategy 	of
predatory 	pricing 	are 	manifold, 	and 	.. 	the 	disincentives 	to
engage 	in 	such 	a 	strategy 	are 	accordingly 	numerous." 	107 	S.
ct. 	at 	495 	n.17. 3
Underlying 	these 	decisions 	is 	a 	belief 	that 	the 	success 	of
any 	predatory 	pricing 	effort 	is 	inherently 	uncertain:
[T]he 	short-run 	loss 	[from 	predatory
pricing] 	is 	definite, 	but 	the 	long-run 	gain
depends 	on 	successfully 	neutralizing 	the
competition. 	Moreover, 	it 	is 	not 	enough
simply 	to 	achieve 	monopoly 	power, 	as
monopoly 	pricing 	may 	breed 	quick 	entry 	by
new 	competitors 	eager 	to 	share 	in 	the
excess 	profits. 	The 	success 	of 	any
predatory 	scheme 	depends 	on 	maintaining
monopoly 	power 	for 	long 	enough 	both 	to
recoup 	the 	predator's 	losses 	and 	to 	harvest
some 	additional 	gain.
Matsushita, 	106 	S. 	ct. 	at 	1357-58.
3 	In 	Caroill 	the 	Court 	stated: 	"Predatory 	pricing 	may 	be
defined 	as 	pricing 	below 	an 	appropriate 	measure 	of 	cost 	for 	the
purpose 	of 	eliminating 	competitors 	in 	the 	short 	run 	and
reducing 	competition 	in 	the 	long 	run. I' 	107 	S. 	Ct. 	at 	'93
(footnote 	omitted). 	Accord, 	Matsushita, 	106 	S. 	Ct. 	at 	1355
n.B. 	The 	Court 	found 	it 	unnecessary 	to 	consider 	"whether
above-cost 	pricing 	coupled 	with 	predatory 	intent 	is 	ever
sufficient 	to 	state 	a 	claim 	of 	predation." 	Carcill, 	107 	S. 	Ct.
at 	'93 	n.12. 	Commentators 	and 	courts 	continue 	to 	differ 	on 	the
exact 	measure 	of 	cost 	to 	be 	used 	in 	defining 	below 	cost
pricing. 	Id. 	To 	some 	extent 	the 	definition 	of 	the 	cost
benchmark 	will 	determine 	the 	incidence 	of 	predation. 	The
divergent 	technical 	positions 	on 	the 	cost 	question, 	however, 	do
not 	undermine 	the 	consensus 	that 	predation, 	however 	defined,
occurs 	infrequently.

Gay 	Woodhouse, 	Esq. 	-4-
Several 	factors 	contribute 	to 	the 	uncertainty 	of 	outcome.
One 	is 	the 	need 	for 	entry 	barriers, 	as 	the 	Matsushita 	Court
discussed. 	Entry 	barriers 	are 	essential 	if 	a 	predatory 	scheme
is 	to 	work, 	yet, 	in 	our 	open 	economy, 	a 	market 	generally 	is 	not
insulated 	from 	competition 	long 	e~ough to 	permit 	recoupment 	0:
the 	initial 	losses. 	A~other problem 	for 	the 	rational 	predator
is 	that 	future 	profits 	must 	be 	discounted. 	By 	dropping 	prices
below 	cost 	the 	predator 	forgoes 	profits 	in 	current 	dollars,
whereas 	any 	recoupment 	will 	necessarily 	be 	in 	discounted 	future
dollars. 	still 	another 	source 	of 	uncertainty 	is 	the 	fact 	that
recoupment 	may 	be 	affected 	by 	intervening 	changes 	in 	business,
technological, 	or 	regulatory 	conditions. 	Accordingly, 	we
believe 	that 	predatory 	pricing 	statutes 	address 	a 	rare 	problem.
In 	addition, 	we 	believe 	that 	such 	statutes 	may 	be
affirmatively 	harmful 	to 	consumers. 	If 	the 	statutory
definition 	of 	the 	offense 	is 	overbroad 	(making 	it 	too 	easy 	to
prove) 	or 	if 	the 	offense 	is 	so 	vaguely 	defined 	that 	erroneous
public 	and 	private 	applications 	of 	the 	statute 	are 	probable,
businesses 	may 	be 	deterred 	from 	vigorous 	but 	legitimate 	price
competition. 	Deterrence 	from 	competition 	is 	a 	partiCUlar
problem 	because 	firms 	have 	an 	incentive 	to 	complain 	a~out the
successful 	competitive 	efforts 	of 	their 	rivals, 	however 	proper
those 	efforts 	may 	be.
These 	risks 	can 	be 	seen 	in 	the 	mix 	of 	complaints 	that 	are
brought 	to 	the 	Commission. 	During 	one 	recent 	five-month 	sample
period 	we 	received 	ninetee~ complaints 	of 	predatory 	pricing.
Commission 	attorneys 	followed 	up 	on 	all 	of 	these 	by 	calling 	the
complainants 	to 	request 	additional 	and 	more 	specific
information. 	In 	fourteen 	of 	the 	nineteen 	cases 	the
complainants 	had 	no 	data 	to 	support 	their 	charge; 	they 	simply
II fel til 	that 	their 	corr.peti tors 	were 	pricing 	too 	10"". 	In 	most 	of
these 	cases 	it 	appeared 	more 	probable 	to 	our 	investigators 	that
the 	alleged 	predators 	were 	achieving 	operational 	efficiencies
that 	would 	legitimately 	allow 	the~ to 	charge 	lower 	prices. 	I~
support 	of 	this 	they 	observed 	that 	most 	of 	the 	industries 	had
low 	e~try barriers, 	which 	would 	tend 	to 	rule 	out 	a 	str~tegy 	of
predatory 	pricing.
To 	screen 	out 	those 	cases 	i~ which 	predatory 	pricing 	is
unlikely, 	we 	consider 	the 	structural 	characteristics 	of 	the
market 	before 	reaching 	questions 	of 	costs 	and 	prices. 	This
initia: 	inquiry 	focuses 	on 	whether 	a 	market 	is 	so 	structured
and 	so 	sufficiently 	protected 	by 	entry 	barriers 	that 	predation
is 	a 	realistic 	possibility. 	The 	Commission 	has 	followed 	this

Gay 	Woodhouse, 	Esq. 	-5-
approach 	in 	its 	own 	most 	recent 	predatory 	pricing 	cases. 4 	In
dismissing 	the 	charges 	in 	these 	cases, 	the 	Commission 	found 	it
unnecessary 	to 	reach 	a 	detailed 	examination 	of 	evidence
relating 	to 	either 	intent 	or 	conduct. 	Rather, 	the 	Commission
observed 	in 	each 	case 	that 	the 	market 	structure 	and 	the 	vigor
of 	current 	competition 	precluded 	any 	dangerous 	probability 	that
below 	cost 	pricing, 	if 	it 	had 	occurred, 	could 	have 	led 	to
sustained 	monopoly 	power.
This 	phased 	approach 	permits 	careful 	evaluation 	of
predatory 	pricing 	corr.plaints, 	yet 	also 	reduces 	the 	resources
necessary 	to 	assess 	them, 	because 	market 	information 	typically
is 	more 	available 	and 	less 	ambiguous 	than 	evidence 	regarding 	an
individual 	firm's 	cost 	levels 	or 	intent 	to 	monopolize. 	In
addition, 	reliance 	on 	market 	evidence 	limits 	the 	risk 	that 	a
law 	enforcement 	investigation 	might 	chill 	legitimate 	price
competition. 	By 	using 	such 	evidence 	to 	weed 	out 	improbable
predatory 	pricing 	claims, 	competitive 	firms 	are 	not 	SUbjected
to 	intrusive 	and 	potentially 	expensive 	inquiries 	into 	their
motives, 	cost 	structures, 	and 	business 	plans.
Soecific 	ouest ions
Our 	answers 	to 	your 	specific 	questions 	are 	as 	follows:
1. 	Do 	you 	have 	a 	selling below 	cost 	statute 	or
"discrimination" 	statute?
No 	statute 	enforced 	by 	the 	Commission 	prohibits 	below-cost
pricing 	directly. 	section 	2 	of 	the 	Clayton 	Act, 	as 	amended 	by
the 	Robinson-Patman 	Act, 	15 	U.S.C. 	§ 	13, 	prohibits
discrimination 	in 	price 	between 	different 	purchasers 	of
co~~odities of 	like 	grade 	and 	~uality under 	certain 	conditions.
Section 	2 	of 	the 	Sherman 	Act, 	15 	U.S.C. 	§ 	2, 	prohibits
monopolization 	and 	attempts 	to 	monopolize. 	The 	Commission 	has
~ 	International 	TeleDhone 	& Telecraph 	CorDoration, 	104
:t.T.C. 	280 	(198q 	(":,!,T"); 	General 	Foods 	CerD., 	103 	F.T.C. 	204
(1984) 	("General 	FOO::S"). 	In 	ITT, 	the 	Commission 	determined
that 	sales 	"at 	prices 	that 	equal 	or 	exceed 	average 	variable
cast 	should 	be 	strongly, 	often 	conclusively, 	presumed 	to 	be
legal." 	104 	F.T.C. 	at 	403. 	The 	Corr~ission also 	concluded 	that
sales 	"at 	prices 	below 	average 	variable 	cost 	for 	a 	significant
period 	of 	time 	should 	be 	rebuttably 	presumed 	to 	be
a:-:ticompetitive." 	Id. 	at 	404. 	Finally, 	the 	Commission
determined 	that 	sales 	"at 	prices 	that 	equal 	or 	exceed 	average
total 	cost 	should 	be 	conclusively 	presumed 	to 	be 	legitimate."
Id. 	In 	ITT 	and 	General 	Foods, 	Commissioner 	Bailey 	disagreed
with 	the 	Commission's 	definition 	of 	predation.

Gay 	woodhouse, 	Esq. 	-6-
no 	authority 	to 	bring 	actions 	under 	the 	Sherman 	Act 	directly,
but 	Sherman 	Act 	standards 	can 	be 	applied 	to 	actions 	brought
under 	Section 	5 	of 	the 	Federal 	Trade 	co~~ission Act, 	15 	U.S.C.
§ 	~5.
2. 	Please 	send 	a 	copy 	of your 	law.
Copies 	of 	the 	statutes 	cited 	above 	are 	attached.
3. 	If you 	do 	not 	have 	a 	sales 	below 	cost 	statute, 	how
does 	your 	state 	deal 	with 	problems 	in 	this 	area?
Not 	applicable.
4. 	Do 	you 	consider your 	statute 	effective?
We 	believe 	that 	the 	statutes 	cited 	above 	provide 	effective
means 	of 	challenging 	predatory 	pricing.
5. 	How workable 	is 	your 	statutory 	definition 	of 	"cost?"
"Cost" 	is 	not 	defined 	in 	the 	statutes 	enforced 	by 	the
Commission, 	and 	the 	definition 	of 	the 	term 	remains 	unresolved.
See, 	e.g., 	Matsushita, 	106 	S. 	Ct. 	at 	1355, 	nne 	8 	& 9.
6. 	How 	is 	your 	law 	enforced 	(attorney 	general, 	county
attorney, 	administrative 	agency, 	private 	action)?
Section 	5 	of 	the 	FTC 	Act 	is 	enforced 	by 	the 	Commission.
The 	Sherman 	Act 	is 	enforced 	by 	the 	Department 	of 	Justice 	and 	by
the 	Federal 	Trade 	Commission 	through 	Section 	5 	of 	the 	FTC 	Act.
The 	Robinson-Patman 	Act 	is 	enforced 	by 	both 	the 	Commission 	and
the 	Department 	of 	Justice. 	In 	addition, 	private 	actions 	may 	be
brought 	under 	the 	Sherman 	Act 	and 	the 	Robinson-Patman 	Act.
State 	attorneys 	general 	may 	also 	bring 	suit 	as 	parens 	patriae.
15 	U.S.C. 	§ 	15c.
7. 	How 	effective 	are 	the 	private 	remedies 	in 	your
statute?
A plaintiff 	in 	a 	private 	action 	who 	proves 	injury 	to 	his
business 	or 	property 	may 	recover 	treble 	damages. 	15 	U.S.C. 	§
15.
8. 	What 	are 	the 	penalties 	for 	selling 	below 	cost?
The 	COIT~ission is 	empowered 	to 	issue 	cease-and-desist
orders. 	A court 	may 	award 	injunctive 	relief 	as 	well 	as
darr.ages.

Gay 	Woodhouse, 	Esq. 	-7-
9. 	How many 	actions 	has 	you 	office 	filed 	in 	the 	past 	5
years 	for 	sales 	below 	cost?
a) 	Number 	of 	criminal 	actions?
Not 	within 	our 	jurisdiction.
b) 	Number 	of 	civil 	actions 	for 	injunction?
The 	Commission 	filed 	no 	such 	actions 	in 	this 	period.
It 	decided 	two 	such 	cases, 	ITT 	and 	General 	Foods, 	cited 	above
in 	footnote 	4.
c) 	Number 	of 	civil 	actions 	to 	revoke 	a 	corporate 	charter?
Not 	within 	our 	jurisdiction.
d) 	Description 	and 	number 	of 	other 	actions?
Our 	remedies 	are 	limited 	to 	issuing 	cease-and-desist
orders.
10. 	Who 	investigates 	complaints 	under 	your below 	cost
sales 	act?
The 	predatory 	pricing 	complaints 	that 	appear 	to 	~arrant
investigation 	are 	studied 	by 	the 	agency's 	own 	staff. 	The
primary 	responsibility 	for 	antitrust 	matters 	lies 	with 	our
Bureau 	of 	Competition.
11. 	What 	type 	of 	staff 	does 	the 	agency 	have 	to
investigate 	these 	cases? 	What 	is 	the 	budget 	for 	this 	agency?
Investigatory 	teams 	include 	both 	economists 	and 	lawyers,
~ith paralegal 	assistance 	sometimes 	available 	as 	well. 	The
total 	budget 	of 	the 	FTC 	is 	$69.7 	million, 	with 	$31.4 	million 	of
t~at designated 	for 	all 	antitrust 	patters. 	We 	do 	not 	have 	a
separa~e 	line 	item 	in 	the 	budget 	for 	predatory. pricin; 	matters.
12. 	How many 	attorneys 	in 	your 	office 	are 	assigned 	to
enforcing 	below 	cost 	sales 	statutes?
Attorneys 	are 	assigned 	to 	monitor 	particular 	industries
rather 	than 	to 	enforce 	certain 	statutes. 	Therefore, 	t~ere are
no 	attorneys 	specifically 	designated 	for 	predatory 	pricing
rr.atters.
13. 	Has 	the 	constitutionality 	of 	your 	law 	been 	upheld?
Yes. 	See 	Atlas 	Bldg. 	Products 	v. 	Diamond 	Block 	& Grave:,
269 	F.2d 	950 	(lOth 	Cir. 	1959), 	cer~. 	dE~ied, 	363 	U.S. 	843

Gay Woodhouse, 	Esq. 	-8-
(1960) 	(Robinson 	Patman 	Act 	§ 	2 (a)); 	Sears, 	Roebuck 	& 	Co., 	258
F. 	307 	(7th 	Cir. 	1919) 	(FTC 	Act); 	Standard 	oil 	v. 	United
States, 	221 	U.S. 	1 	(1911) 	(Sherman 	Act).
14. 	Are 	there 	any 	rules 	or 	regulations 	promulgated
pursuant 	to 	this 	statute?
There 	are 	none 	dealing 	specifically 	with 	the 	issue 	of
below-cost 	pricing.
Conclusion
The 	Commission 	staff 	believes 	that 	predatory 	pricing
statutes, 	while 	not 	intrinsically 	without 	merit, 	can 	do 	mo~e
harm 	than 	good. 	We 	therefore 	recommend 	that 	they 	be 	drafted
and 	applied 	with 	care. 	In 	particular, 	we 	believe 	that
revisions 	intended 	to 	make 	the 	law 	stricter 	and 	enforcement
actions 	easier 	to 	bring 	should 	be 	carefully 	considered. 	We
also 	recommend 	that 	any 	analysis 	of 	a 	predatory 	pricing 	claim
begin 	with 	a 	threshold 	inquiry 	into 	market 	structure.
Thank 	you 	again 	for 	the 	opportunity 	to 	comment 	on 	these
issues. 	We 	hope 	you 	find 	our 	observations 	helpful. 	Please
don't 	hesitate 	to 	get 	back 	in 	touch 	if 	we 	can 	give 	you 	any
further 	information. 	In 	pa~ticular, we 	would 	be 	happy 	to
comment, 	at 	your 	request, 	on 	any 	specific 	legislative 	proposal
that 	you 	might 	draft.
Sincerely 	yours,
71h~~~ffrey I. 	Zuckerman
Director