December 9, 2021
W. Todd Miller, Erin Glavich, Lucy Clippinger
Most of the recent attention to antitrust policy and enforcement has centred on mergers and big tech. The discussion usually involves analysis of the application of the “progressive” agenda to reinvigorate what is perceived to be the weak or error-prone enforcement of prior administrations. Yet, so far, little attention has been paid to the day-to-day decisions that companies might make that implicate antitrust law and principles, such as pricing. While little progressive movement has occurred in the area of pricing so far, it is anticipated that US antitrust agencies under their new leadership are unlikely to leave this area untouched. Further, President Biden has recently been seeking some enforcement action to address rising gasoline, food and other prices.
While traditional antitrust principles generally allow firms to freely set the price of their goods and services without collusion with competitors, there are some exceptions. The traditional exceptions include pricing below cost (predatory pricing) and price discrimination among competing purchasers. However, because of court decisions making the pursuit of such cases relatively difficult, and the ability of clients to structure pricing programmes in compliance with the price discrimination law, both of these areas have been largely untouched by the federal agencies for the past two decades. Private litigation has been rare and generally unsuccessful.
The same fate has been experienced by vertical price fixing (also known as “resale price maintenance” (RPM)). While RPM remains a concern under state and non-US law, the practice is subject to comprehensive economic analysis before being condemned under federal law, and enforcement at the federal level is, therefore, practically non-existent.
The covid-19 pandemic has brought price gouging to the forefront, but federal antitrust law generally lacks an effective basis to prosecute persons that set prices too high, instead relying on the free market to correct any high prices through competition. Price gouging traditionally has been in the domain of state law and enforcement, and often only for certain products such as gasoline – a common product purchased in a panic.
With a landscape where federal antitrust law only modestly affects unilateral pricing actions, and where significant change has begun and is anticipated to continue in other areas of antitrust law, it can be fairly asked what might be expected in the pricing arena as a result of the attention being paid to reinvigorating antitrust enforcement.
Over time, different social, economic and political schools have caused shifts in US antitrust policy. Since the late 1970s, US antitrust law has been dominated by the consumer welfare standard and the underlying idea that antitrust laws were designed to promote lower prices for consumers. In a simplified view, the consumer welfare standard focuses on the effect of a practice (or an acquisition) on consumers to determine the effect of the practice on competition, and hence, whether the practice should be condemned. If prices to consumers are materially higher as the result of a particular practice, the conduct is anticompetitive. If prices are essentially the same or lower, the conduct is benign or procompetitive. Under the standard, courts have increasingly upheld pricing programmes that do not have a clear, adverse effect on the price consumers pay, without much regard for whether the programme might cause other types of harm to competition.
The consumer welfare standard has been attacked since its inception by persons who believe that the federal antitrust laws were enacted with broader goals in mind, including the general democratisation of the economy, the prevention of undue concentration and the protection of consumer choice. This broader view of the antitrust laws’ goals has been embraced by the Biden administration and is embodied in both the president’s executive order on competition as well as Federal Trade Commission (FTC) Chairperson Lina Khan’s statement on enforcement priorities (for further details please see “Merger review: FTC attempts to correct “failed experiment”“).
This shift in doctrinal position raises questions about the entire pricing area: if higher prices to consumers were the sine qua non of an improper pricing practice, how do the non-consumer welfare goals of antitrust effect the current enforcement and legal landscape? At the enforcement level, new theories of harm beyond potential effects on prices to consumers should be expected. How the courts will react is a different matter; many of the key cases limiting liability to conduct that results in clear harm to consumers were decided by the US Supreme Court and, therefore, cannot be easily sidestepped.
The rest of this article looks at key areas involving pricing and how the doctrinal shifts may affect them.
Enforcers may seek reconsideration of predatory pricing standards that were articulated by the Supreme Court in the Brooke Group case. That case required a challenger to show both that the challenged pricing was below cost and that there was the prospect of recouping the losses resulting from such pricing. The consumer welfare standard was at play: below-cost pricing meant lower consumer prices and there was harm to consumers only if the predatory firm could raise its prices to regain what it lost. The dual requirements created high hurdles for the plaintiff and effectively extinguished the pursuit of predatory pricing cases.
The criticism of the predatory pricing approach is that it allows practices that do harm competition but that do not have a clear, adverse effect on prices to consumers. For example, the current approach would seem to require persistent below-cost pricing, yet intermittent below-cost pricing may be more effective at discouraging competition and difficult to pursue under the current approach. Alternatively, a firm may price above its costs, gained through the efficiencies of being a dominant market power, but price below a nascent competitor’s costs in an attempt to stifle new competition. In such a situation, consumer prices would be lower at the time that the pricing programme was in effect, but the exclusion of a potential future efficient competitor might eliminate a future competitive force for increased innovation, competition for labour and/or price competition. Variations of these practices appear in bundling and tied pricing programmes, where companies may provide a discount on a bundle of products purchased together or require that multiple products be purchased together, which are all the more difficult to challenge as they cross product markets.
The enforcement agencies may seek ways to adjust the analysis and broaden it to various forms of bundling and other pricing practices that inhibit competition, even if it does not quite fit the current Supreme Court framework. Such an adjustment in an effort to avoid the Supreme Court’s Brooke Group decision would seem particularly well-suited for FTC enforcement as “unfair methods of competition” since the FTC’s enabling statute can be read more broadly than other antitrust laws. The FTC also has the option to do studies and reports on economic effects of practices in certain markets as they have done in the past for hospitals mergers and have recently announced for supply chain disruptions.
The entire field of price discrimination, which is prohibited by the Robinson-Patman Act (the RP Act), would appear to be attractive to the current administration for re-examination and reinvigoration. The RP Act was specifically designed to protect small businesses from being squeezed out by a larger or more dominant competitors’ ability to leverage better pricing, discounts or deals. However, case law developed under the influence of the consumer welfare standard, which emphasised the need to show actual competitive harm from the price discrimination. This competitive injury requirement made the pursuit of basic price discrimination cases more difficult. At the same time, defences also developed that protect well-counselled companies establishing pricing programmes, including a judicially created defence that finds no discrimination where the lower price was “functionally available” to other higher-price paying purchasers. In fact, there has been no federal enforcement of the RP Act since the FTC’s Boise Cascade case initiated in 1980, in which a federal court of appeals bemoaned the confused language and precedent surrounding the RP Act and required courts to consider evidence of healthy competition to rebut any claimed violation of the RP Act.
If the antitrust agencies were to explore more creative and previously unrecognised theories of competitive harm, perhaps related to harm to labour market competition or consumer choices, they may be able to use those theories to overcome the barrier of proving competitive injury and reinvigorate RP Act enforcement.
RPM was per se illegal in the United States under federal law until 2007. At that time, the Supreme Court reversed its long-held position on the matter and now requires a more complete competitive analysis. In some ways, this relaxation makes this area unattractive for federal enforcement. However, many states still maintain laws that limit or prohibit RPM, particularly when consumer goods are involved. In addition, as with price discrimination, new theories of competitive harm, and acceptance of those theories by courts, could provide a pathway to reinvigorate enforcement of RPM in particularly troubling cases. With the administration’s focus on big tech, it seems possible that it might focus more on the ways in which RPM might limit the growth and innovation of nascent online retailers.
The charging of “too high” prices that are set without agreement with competitors has never been easily challenged under federal antitrust law. It is well-established that companies are free to set their own prices, even if those prices are high, provided that the prices set are not designed to protect a monopoly position.
Yet the Biden administration has expressed grave concern with rising prices in the gasoline and food sectors, among others, and recently specifically requested that the FTC investigate oil and gas companies for conduct that might be causing high gasoline prices. Khan has announced increased efforts to pursue “collusive practices” among oil and gas companies, and other parts of the administration are examining food prices, although most of the efforts appear directed at preventing further consolidation in each industry. The administration is clearly looking at what conduct implicating antitrust concerns may fuel increased prices, be it interdependent pricing by a small group of companies in a consolidated industry, price signalling, exclusive dealing contracts or other practices that may allow for coordinated and unjustified price increases.
The FTC may attempt to use its power to condemn “unfair acts and practices” to attack such matters, but the Carter administration’s unsuccessful efforts to attack oligopolistic pricing in the cereal industry approximately 45 years ago should provide a cautionary tale. In that case, the FTC undertook what was seen as a test as to whether the FTC Act could be used to prohibit oligopolies from controlling markets. However, after years of administrative litigation, the FTC itself voted to abandon the case.
Some of the FTC’s recent moves have focused on increased enforcement of traditional antitrust violations, such as its recent expansion of its criminal referral programme. Independent of the FTC’s efforts, the Department of Justice has been pursuing price-fixing cases in the chicken broiler industry and a merger in the sugar industry, and there has been private litigation challenging collusion in the pork, beef and turkey industries. Actual cartel cases will remain the low-hanging fruit of the antitrust world and can be expected to be pursued aggressively, as they are in most administrations. However, given the progressive efforts of this administration, it is anticipated that changes will not be limited to increased investigation and enforcement of low-hanging fruit. Instead, creative theories that would bring more conduct within the boundaries of antitrust law, particularly in the pricing arena, are likely.
Given the vast amounts of attention that antitrust has been receiving, combined with substantial concern with rising prices, greater attention is likely to be paid to pricing practices. This in turn suggests that companies selling in highly concentrated markets as well as companies with high shares in a relatively unconcentrated markets should recognise that they will be increasingly attractive antitrust targets to the extent that they engage in pricing behaviour that raises red flags. Such behaviour can include pricing too low where it has the effect of discouraging competition, charging competing customers different prices or even charging too high a price where not readily justified by increased costs.
This content was originally published on December 9, 2021, via the International Law Office (ILO) newsletter. It can be found here: Progressive antitrust agenda on pricing: silence before the storm?
ILO delivers expert legal commentary, in the form of concise weekly newsletter emails, to senior corporate counsel and law firm partners worldwide. Free to receive, the ILO newsletters have been providing tailored, quality-assured updates on global legal developments to more than 70,000 registered subscribers since 1998. ILO content is generated in collaboration with over 500 of the world’s leading experts and covers more than 100 jurisdictions.