Thursday, July 30, 2009
Posted by D. Daniel Sokol
Nicola Giocoli of the Department of Economics, University of Pisa has a piece on When Low is No Good: Predatory Pricing and the History of Antitrust Economics (Part I).
The history of predatory pricing law and economics is peculiar on account of
the seemingly inescapable contradiction between the legal habit of condemning a
business practice on account of its possible unfair and inefficient effects and
the necessity of providing an economic rationale for the condemnation without
undermining the essence of competition itself. The apparently rock-solid
equation “low price = good price” makes such a rationale neither immediate nor
easy to find – and predatory pricing such an interesting issue from the
viewpoint of historians of economics. How to circumvent the equation has been
the challenge for several of the most brilliant minds of postwar microeconomics,
as well as for outstanding law scholars. It is a fascinating story, with deep
implications for at least two major historiographic issues: first, the evolution
of neoclassical economics, as embodied in one of its most important branches,
industrial organization; second, the relationship between the formal results of
theoretical economics and their policy implications, in a particular their
applicability for courtroom litigation.
This is the first in a pair of papers dedicated to this story. The division between the two works is strictly chronological: the present paper covers the period from the 1950s to about 1980, that is to say, until the verge of the game-theoretic revolution in industrial organization; the other will focus on the period 1980–2000, covering the above-mentioned revolution and its relationship with a couple of remarkable Supreme Court’s decisions on predatory pricing. The main thesis of the two works is that the traditional dichotomy between alternative legal standards, those based on “stories” and those based on “rules”, may prove useful in interpreting the evolution of economists’ thought about predatory pricing and, more generally, in explaining under what conditions a theoretical statement may have an effective policy impact, especially in courtrooms.