4. Suppose that the Department of Justice catches wind of the predator’s actions and files suit against the predator.

Present several examples of false assertions the predator’s managers might make in order to defend themselves against the charge of predatory pricing. In 1911, the U.S. Justice Department charged Standard Oil of New Jersey (now ExxonMobil) with unlawfully monopolizing the petroleum industry. More specifically, Standard Oil allegedly used profits made in its noncompetitive geographic markets to fund below-cost pricing in its competitive markets. After forcing its competitors into bankruptcy, Standard Oil allegedly then raised its price to the monopoly level and earned an economic profit. Standard Oil lost the antitrust case brought against it, and the U.S. Supreme Court’s judgment forced the company to break into 34 independent companies.

Standard Oil allegedly was engaged in predatory pricing, the use of below-cost pricing to drive competitors out of business in order to boost the price and make an economic profit. Predatory pricing is illegal under Section 2 of the Sherman Act. (See Section 9.2 for a more complete discussion of illegality of predatory pricing.)

But even if predatory pricing were legal, it might not be a sensible business strategy because it might not be profitable.

This case analyzes the profitability of predatory pricing—not because we suggest its use but because it is possible to mount a successful defense against an accusation of predatory pricing by demonstrating that it would not be profitable.