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The American Airlines Case: A Chance to Clarify Predation Policy

  • Edlin, Aaron S.
  • Farrell, Joseph

Predation occurs when a firm offers consumers favorable deals, usually in the short run, that get rid of competition and thereby harm consumers in the long run. Modern economic theory has shown how commitment or collective-action problems among consumers can lead to such paradoxical effects. But the paradox does signal danger. Too hawkish a policy might ban favorable deals that are not predatory. “It would be ironic indeed if the standards for predatory pricing liability were so low that antitrust suits themselves became a tool for keeping prices high.†Predation policy must therefore diagnose the unusual cases where favorable deals harm competition. To this end, courts and commentators have largely defined predation as “sacrifice†followed, at least plausibly, by “recoupment†at consumers’ expense. The American Airlines case raises difficult questions about this approach.

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Paper provided by Competition Policy Center, Institute for Business and Economic Research, UC Berkeley in its series Competition Policy Center, Working Paper Series with number qt32h8b40m.

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Date of creation: 02 Oct 2002
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Handle: RePEc:cdl:compol:qt32h8b40m
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  1. Joseph Farrell and Michael L. Katz., 2001. "Competition or Predation? Schumpeterian Rivalry in Network Markets," Economics Working Papers E01-306, University of California at Berkeley.
  2. Farrell, Joseph & Katz, Michael, 2000. "Innovation, Rent Extraction, and Integration in Systems Markets," Department of Economics, Working Paper Series qt15k4v7xb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  3. Baumol, William J, 1996. "Predation and the Logic of the Average Variable Cost Test," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 49-72, April.
  4. Severin Borenstein, 1992. "The Evolution of U.S. Airline Competition," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 45-73, Spring.
  5. Klevorick, Alvin K, 1993. "The Current State of the Law and Economics of Predatory Pricing," American Economic Review, American Economic Association, vol. 83(2), pages 162-67, May.
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