Weyerhaeuser, Predatory Bidding, and Error Costs

In Brooke Group Ltd. v. Brown & Williamson Tobacco Corp.,\u27 the Supreme Court held that the plaintiff in a predatory pricing lawsuit must show that the price during the predatory campaign was cut below some relevant measure of cost and that there was a dangerous probability that the predatory firm would recoup the losses from its predation campaign.2 Weyerhaeuser v. Ross-Simmons Hardwood Lumber Co.\u27 held that the standard adopted in Brooke Group also applies to predatory bidding claims. A predatory bidding campaign is a lot like a predatory pricing campaign. Both involve a predation period, in which the predator suffers a loss in an effort to drive a rival from the market, and a recoupment period, in which the predator reaps monopoly rewards from excluding competition. The key difference is that in the predatory bidding scenario, the predator bids up the price of an input, while in the predatory pricing scenario, the predator cuts the price of its output. The Ninth Circuit refused to apply the Brooke Group standard to the input market predation alleged in Weyerhaeuser on the ground that predatory bidding was more harmful to consumers than predatory pricing.\u27 The Supreme Court reversed the Ninth Circuit and held that the two types of predation are analytically similar. 5 I will argue here that predatory pricing and predatory bidding are analytically distinct in important respects.6 In particular, predatory bidding is likely to be more harmful to consumer welfare than is predatory pricing. Successful input market predation may lead to a dual market power outcome in which the firm has market power in both the input and the output market. This potential reward lends a stronger push to the incentive to engage in input market predation. In spite of the analytical distinction, I conclude that the Brooke Group test remains the best standard to apply to predatory bidding claims. The justification for the Brooke Group standard is based on a balancing of expected false acquittal and false conviction costs.7 The economic incentive arguments that indicate dissimilarities between predatory pricing and predatory bidding do not imply that the balance of error costs should be substantially different in the two predation scenarios. In other words, the incentive arguments are not sufficient to justify replacing Brooke Group with an alternative standard that is more favorable to plaintiffs in predatory bidding cases. I agree with the Court\u27s conclusion, though I would have reached it by a different route.8 Instead of stressing the analytical similarity of the two types of predation, the Court should have put more emphasis on the error-cost rationale and on identifying the costs of false convictions for input market predation. Bidding for inputs happens to be a substantial path through which information held by sophisticated buyers is communicated to prices. Convictions for predatory bidding threaten to obstruct the transmission of private information to markets