The inflation rate is now 8.6 percent — the highest rate in 40 years. President Biden says that reducing the level of inflation is his top domestic priority. Yet, the chair of the Federal Trade Commission and the head of the Antitrust Division of the Department of Justice are obsessed with the need to throw consumers under the bus and force sellers to increase the prices they charge for goods and services.
Both FTC Chair Lina Khan and the head of the Antitrust Division, Jonathan Kanter, have made it a high priority to eliminate the consumer welfare standard that the Supreme Court and most antitrust scholars have embraced for 50 years. They want to replace that standard with a list of rules of fair play among firms. One of the rules at the top of their list is a prohibition on charging low prices to consumers. They refer to the practice of charging low prices as predatory pricing.
Khan and Kanter spend a lot of time criticizing what they call predatory pricing and threatening to take aggressive enforcement actions against firms that engage in that practice. It is easy to predict the results of their campaign to punish firms that charge low prices. When we engaged in a campaign to punish predatory pricing in the past, the results were not pretty.
Predatory pricing refers to the use of low prices to drive competing firms out of business and then to use the resulting monopoly power to charge high prices. The Supreme Court encouraged aggressive efforts to eliminate predatory pricing during the 1960s. The results were awful.
When a firm angered a competitor by reducing the price it charged, the competitor often filed a complaint or threatened to file a complaint alleging that the firm was engaged in predatory pricing. The risk of being a defendant in an antitrust case that was based on a claim of predatory pricing discouraged firms from reducing the prices that they charged for goods and services. The threat to file such a complaint also led to discussions between the two firms about ways of settling their dispute. The easiest way to settle such a dispute was to agree to raise the price that the firm charges and to agree never to charge a price below the price that the competing firm charges.
Those two incentives — the incentive not to reduce prices and the incentive to raise prices at the request of a competitor — are the opposite of the incentives that antitrust law should create.
In 1986, the Supreme Court concluded that its prior efforts to encourage aggressive enforcement of the ban on predatory pricing were increasing prices and encouraging price fixing. They were also influenced by scholarly studies that concluded that predatory pricing rarely, if ever, succeeds. Based on those beliefs, the court issued opinions in which it rejected claims of predatory pricing and announced a new test that made it difficult for any plaintiff to prevail by filing a complaint based on a claim that a competitor is engaged in predatory pricing. The court stated that its decision was based on its conclusion that “predatory pricing schemes are rarely tried and even more rarely successful.” It later added that “unsuccessful predation is, in general, a boon to consumers.”
The current leaders of the FTC and the Antitrust Division want to overturn those precedents and return to the time when antitrust law was routinely used to punish firms that charge low prices in order to protect firms that charge high prices. That is not an effective strategy to fight inflation.
Richard J. Pierce Jr. is the Lyle T. Alverson professor of Law at George Washington University. His work has been cited in hundreds of judicial opinions, including more than a dozen opinions of the U.S. Supreme Court.