A Note on Price-Cost Tests for Predation: How Do Start-Up Ventures Affect the Price-Cost Test?
1 September 1994
By Dr. Phillip Beutel
Economists and legal scholars have long debated how to test for predatory pricing. Collectively, economists have advocated some variation of a three-part test: (1) the alleged predator must possess sufficient market power to affect the market price for the product or service in question; (2) the alleged predator must have made investments in predation—i.e., its price(s) must be less than appropriately measured costs; and (3) following Brooke Group v. Brown & Williamson, the alleged predator must be able to use its post-predation monopoly position to recoup its losses from predation.
This paper focuses on how a price-cost test for predatory pricing may be conducted when these assumptions are no longer met; more precisely, this paper focuses on two situations: (1) the seller engages in allegedly predatory behavior with the introduction of a new (start-up) product or service and, therefore, is not an incumbent; and (2) the ongoing production and sale of the product involves many shared costs—i.e., costs which are, in some sense, only incremental when the seller makes its initial capacity decision.
