REGULATION OF PREDATORY BUSINESSES.
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Examines laws & Supreme Court decisions restricting predatory corp. innovation & pricing, examples (cigarette & travel industries), policy recommendations.... More...
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Examines laws & Supreme Court decisions restricting predatory corp. innovation & pricing, examples (cigarette & travel industries), policy recommendations.
The purpose of this research paper is to provide an overview of territorial restrictions that are impacting the movement of products and services within the United States. Specifically, antitrust and other regulations are discussed, with an emphasis on Supreme Court decisions. Furthermore, an analysis is provided of these restrictions upon manufacturers, retailers, or the ultimate consumer. Finally, directions are given as to what ought to occur and where these restrictions should lead. According to Kotler and Singh (1981), "successful marketing ... requires devising competition-centered strategies, not just customer-centered and distribution-centered strategies" (p. 30). Faced with declining market growth, resource scarcities, and the proliferation of new technologies, companies are increasingly pursuing profit gains at the expense of their rivals through
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1993, p. Financial Times,21. The alternative view was that Philip Morris' real target was itsmajor competitor, RJR, manufacturer of half a dozen strong brands,including Winston, Camel, and Vantage. International Travel v. Over the years, the Supreme Court has addressed predatory pricing onvarious occasions. Tactics can include sustained price cuts to below-costlevels, discriminatory pricing, and temporary price warring. Such strategies are commonly referred to as predationor predatory strategies and can involve both price and nonprice tactics(Zeithaml & Zeithaml, 1984). Handbook of the law of antitrust. Forexample, in International Travel Arrangers v. Harvard Law Review, 89(4). 47 2). And, generally, retailers are caught in the middle. ?13. Federal antitrust law attempts to control predation through Section 2of the Sherman Act (189 ), Section 2 of the Clayton Act (1914) as amendedby the Robinson-Patman Act (1936), and Section 5 of the FTC Act (1914).The Sherman Act (Section 2) states, "Every person who shall monopolize, orattempt to monopolize, or combine or conspire with any other personor persons, to monopolize any part of the trade or commerce among theseveral States, or with foreign nations, shall be deemed guilty of afelony." As outlined in United States v. (1914). In particular,motivations for below-cost pricing often stem from strategic objectivesthat focus on volume sales with the intent of achieving long-term customersatisfaction. Specifically, antitrust and otherregulations are discussed, with an emphasis on Supreme Court decisions.Furthermore, an analysis is provided of these restrictions uponmanufacturers, retailers, or the ultimate consumer. TheArkansas Supreme Court overturned the lower court 1993 ruling that Wal-Martengaged in predatory pricing. Suffolk University Law Review, 22, 997-1 28. ?1-7. Nonprice predation involves a competitor'sattempt to increase a rival's costs through such tactics as the acquisitionand "sleeping on" of patents, predatory product announcements, uselessproduct modifications, exclusionary market channel arrangements,disparaging advertising, and sham litigation (Gundlach, 199 ). Kotler, P., & Singh, R. As to the questionsof benefit or loss, it is clear that in some instances, consumers stand togain, albeit temporarily, from a price war involving competing firms.Sometimes, manufacturers gain as well, but invariably at the expense ofanother company. C. 47 3). 62 U.S.L.W.2279-2 Trade, 7 , 382. As the events unfolded, RJR ultimately reduced its premium prices.Discount competitors also unveiled new brands in lower (but not insuperdiscount) price ranges. The ruling is not binding inany other state, but it will be cited as a precedent. 47 3). These decisions suggest a narrowing of the Court'sstance from relying on predatory intent derived from extensive analysis ofcircumstances including below-cost pricing, to relying on a more limited,but objective, below-cost price and reasonable expectation of recoupmenttest. On the other hand, competitive strategies may also have the objectiveof weakening or even destroying a competitor (i.e. Perhaps the mostfamous fighting brand was Battle Axe plug tobacco used by the AmericanTobacco Company to force other plug companies to form a trust combination(Burns, 1982). Brown & Williamson Tobacco Corp. Federal Trade Commission Act. 1 63. Ingeneral, these agencies have adopted a similar posture to that of theSupreme Court. The primary objective of public policy that addresses competitiveinteraction as it relates to the movement of products or services isdistinguishing those strategies that are anticompetitive from those thatsimply involve aggressive competition and are procompetitive (Scherer,1976). In one, the strategic target was viewed as thegrowing discount segment of the market. Theairline's conduct was held to violate the Sherman Act's antimonopolystatute. (1981). Besides the federal laws, many states have sales-below-cost statutesor constitutions prohibiting monopolies that can be employed to challengepredatory pricing (Haynes, 199 ). (1993, July 23). Productive and allocative efficiency are most oftenidentified as the economic standards against which welfare implications forconsumers should be judged. Rivalry that does occur is generally the result ofone firm poorly servicing its market niche, a new competitor bringing newadvantages to the market, or changes occurring in the market environment.Strategies of this kind are welfare-enhancing, since they facilitateefficient competition. The state view is thus morecharacteristic of a more traditional industrial-organization perspective ofantitrust in that it focuses on industry concentration and as a consequenceis adverse to large-scale firms. (1994). A less blatant method available for accomplishing market channelpredation is the use of market channel agreements such as exclusive dealingagreements, refusals to deal, territorial restraints, and tyingarrangements (Krattenmaker & Salop, 1986; Salop & Scheffman, 1983). The cost of the price war finally became too high for PhilipMorris, which gradually ended its deep discounting program. 57 -71). The Supreme Court and predatory pricing.Journal of Public Policy & Marketing, 13(1), 163-67. For example, a firm mayattempt to make product changes to imitate or counter a competitor'sproducts, and thus create a fighting brand (Petty, 1988). Wal-Mart Stores, Inc.,1993, p. Grinnell Corporation (1966),monopolization requires monopoly power and conduct indicating a "wilfulacquisition or maintenance of that power, as distinguished from growth ordevelopment as a consequence of a superior product, business acumen, orhistoric accident" (pp. The Supreme Court's most recent case involves an allegation ofpredatory price discrimination (Brooke Group v. In markets where the number of competitors decline fromthree to two, the total volume of traffic is more than $4.75 billion. By 1984, generics held 4 percent of the market, primarily atthe expense of market share of branded cigarettes. Thedifficulty of this task is even more complicated when predatory pricing isinvolved. For example, theDepartment of Justice expressed antitrust concerns about the proposedmerger between Union Pacific and Pacific Railroad. Old loyalties tested by price war: Philip Morris' efforts to lureU.S. Journal of PublicPolicy & Marketing, 9, 129-53. (1981). The department, incomments filed with the Surface Transportation Board (formerly known as theInterstate Commerce Commission), said that the proposed deal wouldadversely affect a large number of markets throughout the West, where thenumber of possible rail carrier competitors would decline from two to oneor from three to two. v. Three independent pharmacies in Conway,Arkansas, had sued Wal-Mart, accusing the company of violating the ArkansasUnfair Practices Act. Gundlach, G. The Clayton Act (1914, Section 2), as amended, makes it unlawful forany seller to discriminate "in price between different purchases orcommodities of like grade and quality ... In asimilar vein, the state of Washington indicated that, in the proposedmerger between BankAmerica and Security Pacific, the banks would violateantitrust laws. Predatory pricing and the Sherman Act: Acomment. 15 U.S.C.A. (1976). 47 3). When such tactics are pursued by several larger firms in a market, smallercompetitors may be severely restricted in their access to establisheddistribution channels. (1966). The contracts involved only the companies' promisesnot to sell electricity to other aluminum producers, not the sale ofelectricity to Alcoa. The tworailroads compete for significant amounts of traffic in a large number ofmarkets, and, in some places where they compete, they are the only railcarriers providing service. United States v. Sheffet, M. 3. Did itunderestimate the cost of the price war or overestimate the envisioned gainin market share, or was the decision made without regard to any profitgoal? Western Airlines. Petty, R. The new brand was Depend, an amber-colored mouthwash withadvertising copy similar in content to Extend, and introduced in the sametest market. Forexample, a large firm may establish a policy of selling to buyers only oncontractual terms that exclude competitors from selling to the same buyers. 869-9 . Salop, S. where the effect of suchdiscrimination may be substantially to lessen competition or tend to createa monopoly in any line of commerce." The act forbids exclusionary conductof a discriminatory nature (Sullivan, 1977). (1984). The purpose of this research paper is to provide an overview ofterritorial restrictions that are impacting the movement of products andservices within the United States. 4699. Antitrust and innovation: Are productmodifications ever predatory? P., & Zeithaml, V. References American Drugs, Inc. Finally, directionsare given as to what ought to occur and where these restrictions shouldlead. Courts have been hesitant to find anticompetitive effects wherechannel members integrate for a "legitimate business purpose" (e.g., betterefficiency, transaction costs, quality improvements), although restraints-of-trade issues are weighed on a case-by-case basis. In a similar case involving the cigarette industry, Philip Morris, inApril of 1993, announced major price cuts on its Marlboro brand, thecigarette industry leader, admitting that the proposed plan could cost thecompany $2 billion in lost operating income for the year. Claims of predatory pricing typically originate between competitors,and thus the majority of cases involve private litigation. Krattenmaker, T. The Court's comments suggest a skeptical outlooktoward predatory pricing and one that arguably disfavors legal claims thatthey rely on such conduct. Environmentalmanagement: Revising the marketing perspective. However, as was reported subsequently in Discount-Store-News(1995, February 6, p. Internal documents released incourt describe Brown & Williamson's plan to introduce competing low-pricecigarettes in packs designed to look like Liggett's and to use anaggressive rebate system to induce wholesalers to purchase these cigarettesrather than Liggett's. The loss of small competitors is animportant consideration at the state level. In discussing their standard, the Court observed, "Theseprerequisites are not as easy to establish, but they are not artificialobstacles to recovery; rather they are essential components of real marketinjury" (p. Ultimately, Brown &Williamson's plan succeeded, and the company surpassed Liggett's marketshare in the low-priced segment and drove up the price of the off-pricebrands nearer to that of the higher-priced branded cigarettes. Scherer, F. Often, these statutes require evidenceof below-cost pricing and a specific intent to injure a competitor. (1988). Under the Washington state antitrust measure, a bankcontrolling more than 3 percent of deposits in the state would beviolating state antitrust regulations. 47 3). Brown & Williamson TobaccoCorporation, 1993). In 198 , Liggett & Myers pioneered the economy segmentof the cigarette market through the development of a line of genericcigarettes offered at a list price 3 percent lower than brandedcigarettes. The remedy proposed by the two parties - an agreement to grant morethan 3,8 miles of trackage rights to Burlington Northern/Santa Fe -appears to be inadequate to prevent rate increases in markets where thenumber of rail carrier competitors would decline from two to one, and doesnot remedy the effects of the transaction in markets where the number ofcompetitors would decline from three to two. However, evidence from marketing and other disciplines hashistorically questioned the assumption of profit maximization as theexclusive motive for managerial decision making. Did consumers benefit (health questions aside) from the pricecompetition unleashed by Philip Morris? T. However, the Supreme Court said that loss leadersare not illegal and are a common practice. (198 ). The narrowing price gap between premium anddiscount brands did result in sales growth for the Marlboro brand, but atthe expense of Philip Morris' own discount brands. DidPhilip Morris have a high probability of recouping the profits lost fromthis price action if RJR could be eliminated or rendered less competitive?Did Philip Morris act out of confidence or out of fear? As can be surmised from the previous discussions, this task isextremely difficult when price is involved, and involves both legal andeconomic assessments. (1986). The Supreme Court found that predatory discrimination had notoccurred, and articulated a two-part standard: First, a plaintiff seeking to establish injury resulting from arival's low prices must prove that the prices complained of are belowan appropriate measure of its rival's costs (p. Section 5 of the FTC Act (1914) authorizes the Commission tochallenge predatory practices deemed to be "unfair methods of competition." The act permits (1) challenges to predatory conduct violating the Shermanand Clayton acts and (2) transgressions of the spirits of these acts. Raising rivals' costs.American Economic Review, 73(2), 267-271. (199 ). 3 ). A3. In this case, a firm sets its prices low enoughand for a sufficient time period to disadvantage its rivals in some way(Sheffet, 1994). Sherman Antitrust Act. Such an approach involves a business that entrenches itself in somepart of the market in which it has a natural and comparative advantage.This advantage discourages aggressive behavior by rivals and favorspeaceful coexistence. Clayton Act. Current policy assessments of predatory pricing rely on the narrowbehavioral assumptions of neoclassical price theory, in which parties areassumed to be motivated exclusively by profit maximization, to possessperfect information, and to act rationally in their decisions. Robinson-Patman Act. Supp. (1993). The previous example exemplifies predatory nonpricing policies. C., & Scheffman, D. AlthoughPhilip Morris was a player in this market segment (primarily with its Basicbrand), a pack of discount cigarettes earned only about one nickel per packfor the manufacturer - about one-tenth the margin of premium cigarettes.By narrowing the gap between premium and discount from as much as $1 toperhaps 45 cents per pack, arguably Marlboro would draw back market sharefrom the discount segment, both from lower-margin Philip Morris brands andfrom competitors' brands (Financial Times, 1993). (1993). The department also said that SouthernPacific is likely to survive for the foreseeable future and remain asignificant competitor. Aluminum Co. other charter services). Predatory innovation may take many forms. Brown & Williamson Tobacco Corp. (1914). 15 U.S.C.A. A form of nonprice competition involves tying arrangements. Industry analysesfell into two camps. The ensuing price war resulted in Liggett'scomplaint that Brown & Williamson's strategy amounted to below-cost pricingand an attempt to pressure Liggett to raise prices on generics, which wouldthus restrain the segment's growth and preserve Brown & Williamson'ssupracompetitive profits on branded cigarettes. A primary objective of the antitrust laws is to distinguishcompetitive strategies (and, more particularly, predatory strategies) thatare welfare-enhancing from those that reduce the welfare of consumers. Zeithaml, C. Forexample, in a recent well-publicized case, Wal-Mart, America's leadingdiscounter, was found guilty of violating an Arkansas state unfair-pricingstatute: Its stated pricing strategy was to "meet or beat the competitionwithout regard of cost" (American Drugs, Inc. In view of the stance that the Supreme Court took with regard topredatory pricing in the Liggett & Myers case, predatory pricing chargeswould probably not have been filed against Marlboro. D. J. (1941). 384 U.S. A key assumption underlying the economic perspectives of predatorypricing is that managers act to maximize profits through their pricedecisions. Brown & Williamson,feeling the loss of share of its branded cigarettes, entered the genericmarket at prices lower than Liggett's. Marketing warfare in the 198 s.Journal of Business Strategy, 1 (Winter), 3 -41. Yale LawJournal, 96, 2 92D293. Did Philip Morris benefit? Anticompetitiveexclusion: Raising rivals' costs to achieve power over price. 61L.W. Within a fewmonths, it became apparent that the plan was not simply a short-termpromotion but a price cut that could be in effect for some time. Wal-Mart Stores, Inc. v. 15 U.S.C.A. Accordingto federal law, predatory pricing is considered rarely tried and even morerarely successful. (1995, February 6). This skepticism is the result of the presumedirrationality of a firm pricing at predatory levels to maximize profits.In contrast to the federal stance, state courts have taken a moreaggressive posture toward predatory pricing by adopting the single elementof below-cost pricing as prima facie evidence of anticompetitive injury.Many states have "sales below cost" statutes or minimum markup laws.Although the definition of below cost varies by state, the majority definesit as average total cost, with others employing criteria similar to averagetotal cost or average variable cost. Wouldthe prospect of significant damage to RJR, Brown & Williamson, or Liggett &Myers have provided fertile ground for predatory pricing charges. The second prerequisite to holding a competitor liable under the antitrust laws for charging low prices is a demonstration that the competitor had a reasonable prospect (under Robinson-Patman), or under Section 2 of the Sherman Act, a dangerous probability, of recouping its investment in below-cost prices (p. An aggressive firm may also attempt to lower a rival's profitsthrough price predation. Viewed from a strictly legal perspective, these questions proved tobe moot. In light of the emerging coalescence of literature supportive ofpredation, policymakers may wish to re-evaluate their prescriptions forpredatory conduct and, at a minimum, should include recognition of the manynonprice predation strategies that enhance or hinder the movement of goods. Furthermore, markettests conducted in Oregon the previous winter demonstrated that Marlboroshare gains came equally from discount and competing premium brands.Industry insiders concluded that Philip Morris hoped to inflict significantdamage on RJR by increasing Marlboro's market share in the premium segmentor forcing RJR to cut prices on its premium brands and push prices on RJR'sdiscount brands. Various questions come to mind in view of the price war describedabove. According to Kotler and Singh (1981), "successful marketing ...requires devising competition-centered strategies, not just customer-centered and distribution-centered strategies" (p. L. of America. are especially costly, because they chill the very conduct the antitrust laws are designed to protect (Brooke Group Ltd. v. denied, 449 U.S. Price-oriented competitors hadbeen taking a steadily increasing share of the market for several years,with a substantial portion of this growth coming from Marlboro. The Supreme Court states the following in one of its more recentcases: The mechanism by which a firm engages in predatory pricing - lowering prices - is the same mechanism by which a firm stimulates competition, because cutting prices in order to increase business often is the very essence of competition ...(;) mistaken inferences ... 15 U.S.C.A. Beyond characterizing interfirm pricing decision making and behaviorand providing explanations for the basis for conduct such as predatorypricing, research in marketing can also provide insights on the welfareimplications of marketing strategies as defined in antitrust law. T. Discount Store News. The department said that Union Pacific and Southern Pacific's claimedefficiencies appear to be vastly overstated and insufficient to outweighthe probable rate increases. 7 ). The Battle Axe brand was heavily advertised, sold belowcost, and sometimes given away in an attempt to coerce rival producers toform the trust, which later controlled 85 percent of the tobacco plugmarket. The total volume oftraffic where the number of competitors decline from two to one is morethan $1.5 billion. Evenwhen using purely economic definitions of consumer welfare (i.e.efficiency), marketing scholars possess the potential of informing currentantitrust analysis. The departmentsaid that the Union Pacific and Southern Pacific railroad systems havesignificant overlaps, including lines through the Central Corridor - whichstretches between northern California through Salt Lake City and Denver toKansas City, Missouri - and lines running from Texas through Little Rock,Arkansas, and Memphis, Tennessee, to St. Predictably, after Extend was pulled from its test market byProctor & Gamble, Depend was also withdrawn by Warner Lambert. 3), Wal-Mart was cleared of charges of sellingmerchandise below cost to drive the competition out of business. Wall Street Journal. (1992, February 1 ). Western Airlines (1988),Western Airlines possessed an air transport monopoly in certain markets.Along a portion of the routes within these markets, the airline preferred aparticular travel agent for allocations of discount tickets. The department will file its final brief to theSurface Transportation Board in mid-1996 and is participating as a fullparty in this proceeding. Strategies directed toward competitors can involve differentobjectives. St.Paul: West Publishing Co. Journal of Marketing, 48(Spring), 953-93.----------------------- 12 On the one hand, a company may employ competition-centeredstrategies to create a state of peace between rivals (Kotler & Singh,1981). (1977). 563. (1936). 623F.2d 1255 (8thCir); cert. G., & Salop, S. The banks hold a combined 3 .8percent of financial institution deposits in the state, but BankAmericasaid it will reduce that share to 26 percent by selling 69 branches and$2.5 billion of those deposits (Wall Street Journal, 1992). 16 ?12-27. A more recent example of predatory innovation was Listerinemanufacturer Warner Lambert's introduction of a mouthwash product inresponse to Proctor & Gamble's test market of Extend, an amber-coloredmouthwash. While competition between firms envisions a rivalrous environment in whichfirms vie with each other for the ultimate prize - the consumer -benefitting consumers through the efficient use of resources, strategiessuch as predatory pricing and nonprice behavior may lessen consumerwelfare. Brooke Group Ltd v. United States v. But had theaggressive pricing continued, what would have been the consequences? Alcoa reportedly purchasedexclusionary covenants from power companies from which Alcoa did notpurchase electricity. Heavily burdened by the debt fromits famous leveraged buyout in 1989, RJR was viewed as ill-equipped for aprice war involving its premium-priced cash cows. ?41-58. Faced withdeclining market growth, resource scarcities, and the proliferation of newtechnologies, companies are increasingly pursuing profit gains at theexpense of their rivals through market share rather than market growth. The department said that the agreement with Burlington Northern/SantaFe is unlikely to ensure effective competition because BurlingtonNorthern/Santa Fe would have to pay Union Pacific/Southern Pacific anexcessive compensation rate for trackage rights, the agreement givesinadequate guarantees to ensure Burlington Northern/Santa Fe's servicequality and other factors exist that reduce Burlington Northern/Santa Fe'sincentive to compete using the trackage rights. 97(S.D.N.Y.), affirmed in part, reversed in part, 148 F. Louis and Chicago. However,actions against predation are also within the authority of both theDepartment of Justice (DOJ) and the Federal Trade Commission (FTC). To discouragecompetition, veiled threats were made to the agent suggesting that theagent's preferential treatment would be jeopardized by continuedinvolvement with other airlines (i.e. (1983). Predatory practices in competitiveinteraction: Legal limits and antitrust considerations. The department was concerned that this transaction would createmonopolies or duopolies for crucial transportation services that industriesand consumers depend upon throughout the United States. An attempt to monopolize, alternately,requires (1) specific intent to control prices or destroy competition, (2)predatory or anticompetitive conduct directed toward that end, and (3) adangerous probability of success. Sullivan. A. Grinnell Corp. A. The Court also reiterated its assertion that "predatorypricing schemes are rarely tried, and even more rarely successful" (BrookeGroup, 1993, p. In extreme cases, some dominant firmsmay attempt to extract exclusionary covenants from suppliers or buyerswhich restrict the firm from selling or buying from the predator's rivals.This form of predation was present in the classic case United States v.Aluminum Company of America (1941). 2d 416 (2d Cir.1945). The affected markets involve commodities such as wood andagricultural products, iron and steel, plastics and intermodal traffic,moving in hundreds of corridors throughout the West. What strategic objectives motivated these cuts? Predator firms may also engage in tactics to restrict competitiveaccess to market channel sources. smokers back to Marlboro Country. 44 F. cutthroat competition).These strategies can be injurious to competition and may potentially reducecompetitor welfare. In the context ofmarketing, a variety of motivations for below-cost pricing which are notoriented toward profit maximization have been identified.
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