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The Areeda–Turner Test for Exclusionary Pricing: A Critical Journal

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Abstract

Few scholarly articles have had the impact enjoyed by Areeda and Turner’s (Harv Law Rev 88(4):697–699, 1975) article on predatory pricing, which is elaborated in the Antitrust Law (Areeda and Hovenkamp in Antitrust law. Aspen Publishers, New York, 2015) treatise. Proof of predatory pricing under the Areeda–Turner Test requires two things: a market structure plausibly indicating the possibility of “recoupment,” and prices below a relevant measure of cost, which was presumptively average variable cost (AVC). That so many courts embraced the Areeda–Turner Test might seem surprising, given that contemporary assessments from economists were quite negative: They faulted the AVC test itself, the test’s inadequate consideration of fixed costs, and the exclusive focus on short-run (nonsustainable) strategies.

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Notes

  1. On the Eleventh Circuit's position adopting an average total cost test see McGahee v. Northern Propane Gas Co., 858 F.2d 1487, 1496 (11th Cir. 1988), cert. denied, 490 U.S. 1084 (1989). On individual variations in the other Circuits, see Areeda and Hovenkamp (2015 ¶724c3).

  2. E.g., International Air Indus., Inc. v. American Excelsior Co., 517 F.2d 714 (5th Cir. 1975); Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir. 1976); Janich Bros., Inc. v. American Distilling Co., 570 F.2d 848 (9th Cir. 1977).

  3. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 590–591 (1986).

  4. A.A. Poultry Farms, Inc. v. Rose Acre Farms, Inc., 881 F.2d 1396 (7th Cir. 1989).

  5. Brooke Group v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 226 (1993).

  6. Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., Inc., 549 U.S. 312 (2007).

  7. One exception is Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917 (6th Cir. 2005).

  8. E.g., Concord Boat Corp. v. Brunswick Corp., 207 F.3d 1039, 1059 (8th Cir. 2000), cert denied, 531 U.S. 979 (2000) (market share discounts not unlawful unless the fully discounted price is below cost); Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008) (bundled discount not unlawful unless the incremental price for taking the second good is less than average variable cost); Virgin Atlantic Airways Ltd. v. British Airways PLC, 69 F. Supp. 2d 571, 580 n.8 (S.D.N.Y. 1999), aff'd on other grounds, 257 F.3d 256 (2d Cir. 2001) (similar). One exception is LePage's Inc. v. 3 M, 324 F.3d 141 (3d Cir. 2003) (en banc), cert. denied, 542 U.S. 953 (2004), which condemned bundled discounts without requiring proof of any price below cost. See Areeda and Hovenkamp (2015, ¶749).

  9. Lloyd A. Fry Roofing Co. v. FTC, 371 F.2d 277 (7th Cir. 1966) (finding predatory pricing without prices below cost); E.B. Muller & Co. v. FTC, 142 F.2d 511 (6th Cir. 1944) (at or slightly below cost).

  10. Utah Pie Co. v. Continental Baking Co., 386 U.S. 685, 703 & n.14 (1967).

  11. Porto Rican Am. Tobacco Co. v. American Tobacco Co., 30 F.2d 234, 236 (2d Cir. 1929), cert. denied, 279 U.S. 858 (1929).

  12. Utah Pie, 386 U.S. at 696–699 & n.12.

  13. For example, if the AVC curve has a flat bottom the predator will have a range of output choices at price = AVC. Areeda and Turner did not consider the possibility but assumed that the AVC curve was U-shaped. See Areeda and Hovenkamp 2015, ¶740a.

  14. Cf. MCI Communic. Corp. v. AT&T, 708 F.2d 1081, 1118 (7th Cir. 1981), cert. denied, 464 U.S. 891 (1983), which adopted long-run incremental cost as a test for a communication utility with high fixed costs.

  15. Brooke Group, 509 U.S. 209, 217 (1993).

  16. E.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 899–900 (9th Cir. 2008); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 232 (1st Cir. 1983). See Areeda and Hovenkamp 2015, ¶736).

  17. Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2007).

  18. Permitting the proportions to be changed, as they can be in most of the cases, vastly complicates the cost analysis. See Hovenkamp and Hovenkamp (2009).

  19. William Inglis & Sons Baking Co. v. ITT Continental Baking Co., 668 F.2d 1014, 1035 (9th Cir. 1981), cert. denied, 459 U.S. 825 (1982).

  20. E.g., Fiberglass Insulators, Inc. v. Dupuy, 856 F.2d 652 (4th Cir. 1988) (alleged predatory pricing of insulation, but not of storm windows, fireplaces, and doors). See Areeda and Hovenkamp 2015, ¶742d).

  21. In re General Foods Corp., 103 F.T.C. 204, 343 (1984).

  22. Following this approach is Stitt Spark Plug Co. v. Champion Spark Plug Co., 840 F.2d 1253, 1256 (5th Cir 1988).

  23. Transamerica Computer Co. v. IBM, 459 F. Supp. 626 (N.D. Cal. 1978), aff'd, 698 F.2d 1377 (9th Cir.), cert. denied, 464 U.S. 955 (1983).

  24. United States v. AMR Corp., 140 F. Supp. 2d 1141 (D. Kan. 2001), aff'd, 335 F.3d 1109 (10th Cir. 2003).

  25. ZF Meritor, LLC v. Eaton Corp., 696 F.3d 254 (3d Cir. 2012).

  26. E.g., Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008).

  27. E.g., LePage's Inc. v. 3 M, 324 F.3d 141 (3d Cir. 2003) (en banc), cert. denied, 542 U.S. 953 (2004).

  28. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986).

  29. Spirit Airlines, Inc. v. Northwest Airlines, Inc., 431 F.3d 917 (6th Cir. 2005).

  30. United States v. AMR Corp., 140 F. Supp. 2d 1141 (D. Kan. 2001), aff'd, 335 F.3d 1109 (10th Cir. 2003). See also Beech-Nut Nutrition Corp. v. Gerber Products Co., 69 Fed. Appx. 350, 2003 WL 21317277 (9th Cir. June 4, 2003, unpub.), which sustained a complaint that the predator charged below cost prices in the market for baby cereals but obtained recoupment in that market in addition to a market for jarred baby food.

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  1. University of Iowa College of Law, 432 Boyd Law Building, University of Iowa, Iowa City, IA, 52242, USA

    Herbert Hovenkamp

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Hovenkamp, H. The Areeda–Turner Test for Exclusionary Pricing: A Critical Journal. Rev Ind Organ 46, 209–228 (2015). https://doi.org/10.1007/s11151-015-9456-1

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