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FEDERAL TRADE COMMISSION
DAVID CLANTON, Acting Chairman
PAUL RAND DIXON, Commissioner
MICHAEL PERTSCHUK, Commissioner
PATRICIA P. BAILEY, Commissioner
...
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BUREAU OF ECONOMICS ---.
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MICHAEL P. LYNCH, Acting Director
RONALD S. BOND, Deputy Director for
Management and Operations
JOHN PETERMAN, Deputy Director for Policy
JOHN C. HILKE, Assistant to the Director
KEITH B. ANDERSON, Assistant Director for
Industry Analysis
JOHN P. BROWN, Assistant Director for
Consumer Protection
DOUGLAS C. DOBSON, Assistant Director for
Economic Evidence
WILLIAM H. SPRUNK, Assistant Director for
Financial Statistics
The report of the proceedings does not necessarily represent the
views of the Commission or any individual commissioner.
STRATEGY, PREDATION,
AND
ANTITRUST ANALYSIS
.
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.
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edited by
Steven C. Salop
'~.
FEDERAL TRADE COMMISSION
BUREAU OF ECONOMICS
BUREAU OF COMPETITION
September 1981
A C K NOW LED G MEN T S
This volume contains the proceedings of a conference held at
the Federal Trade Commission. As with any bureaucratic endeavor,
both the conference and the preparatio~ of this volume were
team efforts •. The efforts of Cary Hoagland, Dianne Jones, Kenneth
Leyba, Dorothy Tingen, Walter Wujcik, and Betsy Zichterman
in the Bureau of Economics Word Processing Center are greatly
appreciated •. William Cornanor, Jack Kirkwood, and Robert Lande
provided continuing aid and support. Without Pat Cahill, the
conference would not have functioned at all. Without Mark
Fratrik, this volume would have remained an "ongoing project"
forever.
--scs--
A B LEO F CON TEN T S
~T
Page
Introduction--Steven C. Salop 1
I. BACKGROUND AND OVERVIEW 43
Competition, Entry, and Antitrust Policy 45
A. Michael Spence
Comments
William S. Comanor 89
W. J. Lie be Ie r 95
Current Legal Standards of Predation 101
James D. Hurwitz
·William E. Kovacic
Thomas A. Sheehan III
Robert H. Lande
A Confused Lawyer's Guide to the Predatory 155
Pricing Literature
George A. Hay
II. APPLICATIONS TO ANTITRUST ANALYSIS 203
J
Patents, Sleeping Patents, and Entry Deterrence 205
Richard J. Gilbert
Comments
Richard Craswe11 271
F. M. Scherer 287
Rejoinder 295
Richard J. Gilbert
TAB LEO F CON TEN T S
Page ;€' ,:
An Economic Definition of Predatory Product 301
....
Innovation
Janusz A. Ordover
Robert D. Willig
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Comments
David T. Scheffman 397
Frank H. Easterbrook 415
III. NEW TOOLS FOR STRATEGIC ANALYSIS 4-4.7
Strategic Interaction: Some Lessons from Industry 449
Histories for Theory and Antitrust Policy
Michael E. Porter
Comments
Robert D. Stoner 507
Lawrence A. Sullivan 511
of Industrial Organization as 523
Theor~es
Explanations of ,Experimental Market Behavior
Charles Plott
Comments
Vernon L. Smith 579
John B. Kirkwood 605
IV. ROUNDTABLE DISCUSSION 623
Participants
George Hay
Paul Joskow
Alvin Klevorick
Janusz Ordover
Frank Easterbrook
Josh Greenberg
APPENDIX 709
Du Pont Decision
STRATEGY, AND ANTITRUST ANALYSIS: AN INTRODUCTION
PREDAT~ON,
Steven C. Salopl
.
"',.- . ---.
The mainstream of industrial organization economics has begun
to deal explicitly with dynamic interdependencies among oligopo~
listic sellers. Traditional analysis focused on oligopolistic
interaction at a single moment of time among sellers who ignored
the responses of rivals. Sellers are now more often 'viewed as
sophisticated business strategists who take into .account rivals'
likely responses when evaluating alternative courses of-' action and
who formulate tactics contingent on the dynamics of competitive
forces in the marketplace. Economists' increased sophistication
is reflected in their greater reliance' on dynamic models developed
by mathematical game theorists and the greater attention paid to
the logical consistency of their analysis.
1 Visiting Professor of Economics and Law, Georgetown University
Law Center, and Associate Director of Special Projects at the FTC
at the time of the conference. I would like to thank Richard
Craswe1l, Frank Mark Fratrik, Judith Gelman, David
Easterbrook~
Scheffman, Robert Pitofsky, and Torn Sullivan for helpful comments
and conversations. I have also benefited from reading Oliver
Williamson's interesting papers, "Wage Rates as a Barrier to
Entry: The Pennington Case," 82 Q. J. Econ. 85 (1968) and
"Antitrust Enforcement: Where It's Been, Where It's Going,"
University of Pennsylvania discussion paper (May 1981), as well as
James V. Delong's "The Role, If Any, of Economics in Antitrust
Enforcement," Southwestern Law Review (forthcoming).
·~.
This new "strategic" approach has important implications for
antitrust because it is more sophisticated and complete. For
2
example, in contrast to the old "structuralist" approach of Bain
and his follower.s, detailed modeling of oligopoly conduct changes
the focus of antitrust rules. Under strategic analysis, the
existence of barriers to entry is viewed as a necessary, but not
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sufficient, first step to finding competitive injury. Once this
structural "first tier" is passed, "second tier" analysis of the
competitive and welfare implications of ·the questioned conduct
must be undertaken. 3 On the other hand, the existence of pro-
competitive "efficiencies" is not conside'red a sufficient
, defense4 but rather must be balanced against any co.mpetitive
harms uncovered. Thus, this new approach is hostile to Eer se
rules. At the same time, economists are beginning to understand
the demands of the Rule of Reason--that it be "focused on the
challenged restt~int's impact' on competitive conditions. "5
Development of simple tests based on observable conduct is rising
toward the top of many industrial economists' agendas.
2 J. Bain, Industrial Organization (1959).
3 This division into two tiers is developed in P. Joskow and
A. Klevorick, "A Framework for Analyzing Predatory Pricing
Pol icy , 89 Ya 1 e L. J. 213 (19 7 9) •
II
4 Cf. R. Posner, "The Next Step in the Antitrust Treatment of
Restricted Dlstribution: Per Se Legality," 48 U. Chi. L. Rev. 6
(1980).
5 National Society of Professional Engineers v. United States,
435 U.S. 688.
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The new approach permits analysis of some issues that were
too complex or too subtle to be handled with Ie"s5 sophlsticated·
tools. As this volume illustrates, economists are now developing
a framework to evaluate strategies involving firms which interact
in multiple markets. Study of the "institutional" structure of
the marketplace is also beginning, thus permitting a finer under
standing of possible "plus" factors thA't "mTght improve oligopo-.
lists' chances of successful consciously parallel conduct.
It is important that antitrust enforcement agencies keep
abreast of the latest developments in economic analysis. Because
of the likely importance of this new analysis, the
s~rategic
Bureaus of Economics and Competition jointly sponsored a staff
seminar on these new developments. The conference was held on
June 5 and 6, 1980. The primary purposes of the conference were
(1) to report to staff attorneys and economists on the "strategic"
approach, (2) to provide academic researchers with an opportunity
to hear practicing litigators react to their work, and (3) to
facilitate further research, both at academic institutions and at
the FTC, into the theory and practical application of strategic
antitrust analysis.
This volume contains the proceedings of that conference plus
some added contributions included for completeness. The seven
::;.: papers presented at the conference provide the background and
theory underlying strategic antitrust analysis, applications of
that analysis to some specific antitrust problems, and some new
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tools to carry out the analysis, as well as discussion and
commentary on the theoretical and practical impl'ications of the
approach. These papers were prepared by some of the leading
researchers in their respective specialties. Commentary was
provided by a diverse group of legal and economic researchers and
6
practitioners.
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OVERVIEW
The volume is organized into four main,sections: Background
and Overview, Applications to Antitrust Analysis, New Tools for
Strategic Analysis, and Roundtable Discussion. In the first
section, the paper by A. Michael Spence places the concepts of
entry deterrence and predation into the larger context of
strategic marketplace competition. Earlier research by Spence on
entry,deterrence represents an important focal point for strategic
analysis~7 In the paper presented at the conference, he provides r(':-
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a useful map of the field, . including the relationship of research
into practices to experience curve analysis and inter-
predat~ry
national competition. He also emphasizes the limitations of
antitrust in regulating strategic competition. The commentaries
by William Comanor and Wesley Liebeler nicely complement Spence's
analysis. To Comanor, Spence1s analysis "lends credence" to the
6 Richard Craswell's commentary was prepared after the confer
ence. The comments given at the conference by Bruce Owen and
Robert Reich were not prepared for publication.
7 A. M. Spence, "Entry, Investment and Oligopolistic Pricing," 8
Bell J. Econ. 534 (1977).
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Description:who formulate tactics contingent on the dynamics of competitive forces in the theory underlying strategic antitrust analysis, applications of that analysis to rivals exceeds the 9hort-run damage inflicted on itsel~, the dominant firm
