Thursday, July 24, 2008
Posted by D. Daniel Sokol
Herb Hovenkamp of the University of Iowa Law School and Erik N. Hovenkamp, University of Iowa - Department of Economics, B.S. Candidate 2009 (I am guessing this is Herb's son) have written on The Viability Of Antitrust Price Squeeze Claims.
ABSTRACT: At this writing the Supreme Court has granted certiorari in the Ninth Circuit's Linkline decision holding that the plaintiff stated a claim for an unlawful price squeeze. A price squeeze occurs when a vertically integrated firm "squeezes" a rival's margins between a high wholesale price for an essential input sold to the rival, and a low output price to consumers for whom the two firms compete. Here we examine the law and economics of the price squeeze, beginning with Judge Hand's famous discussion in the Alcoa case in 1945. While Alcoa has been widely portrayed as creating a "fairness" or "fair profit" test for unlawful price squeezes, Judge Hand actually adopted a cost-based test, although a somewhat different one than most courts and scholars would adopt today. We conclude that Brooke Group style predatory pricing tests are not appropriate to the concerns being raised in a price squeeze. We also consider several efficiency explanations, the importance of joint costs, situations in which the dominant firm uses a squeeze to appropriate the fixed cost portion of the rival's investment, as well as those where the shared input is a fixed rather than variable cost for the rival. Ultimately, we find little room for liability except in one circumstance where a squeeze is used to restrain the rival's vertical integration into the monopolized market.