Implementing Price/Cost Tests for Predation: Practical Issues
1 July 2004
By Dr. Gary Dorman
Predatory pricing is a controversial topic because predatory conduct can look a lot like aggressive competition: low prices, bitter rivalries among competing suppliers, and the exit of less-efficient firms. To distinguish predation from its seemingly identical twin, economists have looked for below-cost pricing that is intended to induce the exit of rivals, as well as other factors such as the presence of barriers to entry or re-entry that would make supracompetitive pricing possible in the long term.
In this chapter from Economics of Antitrust: New Issues, Questions, and Insights, NERA Senior Vice President Dr. Gary Dorman addresses the price-cost test that is often used to detect below-cost pricing. He shows that we have come a long way since 1975, when Phillip Areeda and Donald Turner introduced the average variable cost test. Dr. Dorman points out that the analysis is much more than a debate about how one should calculate cost. There are important, but sometimes overlooked, questions regarding the unit of output that is examined, the time period that is analyzed, the revenues that are recognized, and the role of opportunity costs.
