Rule of reason versus mechanical tests in the adjudication of price predation

Research paper by Charles W. McCall

Indexed on: 01 Mar '88Published on: 01 Mar '88Published in: Review of Industrial Organization


There is considerable controversy surrounding the legal standards used to detect and prosecute cases involving predatory pricing. This paper recommends the use of a two tiered standard in predatory pricing litigation. The first part of the test is designed to determine whether the market is structurally predisposed toward predation. The second part of the test examines the issue of predatory intent. Flexibility is built into these guidelines by giving the plaintiff an option in terms of the evidentiary burden it must carry. The administrative feasibility of this two tiered proposal is demonstrated in a case study analysis. The case analysis shows that the application of a mechanical price-cost predation rule would have incorrectly resulted in a guilty verdict.