An Economic Definition of Predation: Pricing and Product Innovation

Abstract

Many forms of business conduct have been attacked as predatory since the passage of the Sherman Act' in 1890.Neither the courts 2 nor legal and economic scholars, 3 however, agree on a general definition of predatory behavior.Section I of this paper presents a definition of predation' that is economically sound, judicially workable, and broadly applicable to a wide variety of business practices.Section II shows how the well-known costbased tests for predatory pricing can be derived from this general standard.It also clarifies these cost-based tests, and expands their applicability to encompass multi-product firms.Sections III-V contain the most novel aspect of this paper-the derivation from our general standard of specific tests that distinguish between predatory and procompetitive product innovations.These sections argue that even genuine innovations-new products that in some ways are superior to existing products in the eyes of both engineers and consumers-are in some circumstances anticompetitive.Such innovations do not provide benefits to consumers that are worth the cost, and are motivated solely by * This article is a substantially revised and expanded version of our paper, An Economic Definition of Predatory Product Innovation, in STRATEGY, PREDATION, AND ANTITRUST ANALYSIS (S.Salop ed.