After reading the attached article, please write a paragraph as article summary and then respond to the following

questions:

1. What do you think about practicing a predatory pricing strategy and its impact?
2. Should predatory pricing be an illegal strategy? Why?
3. As a policy maker, what do you suggest for protecting consumer rights?

Let the Sharks Roam? A. Roy On April 2?, 2001. a federal Judge threw out the Justice Department's "predatory pricing" case against American Airlines lnc. Is this going to make it easier for big companies to shut out their rivals? Is this a victory for airline customers as well'? Low Prices According to the Supreme Court, predatory pricing arises when "a business rival prices its products in an unfair manner with an object to eliminate or retard competition and thereby gain or exercise control over prices in the relevant market." While the law should protec1 price competition, it should distinguish "unfair" pricing practices that would eliminate competition. The basic antitrust dilemma is to distinguish price predation from hard competition. The notion of rPredatory Pricing' is as old as the hills. The Late Mr. John D. Rockefeller's Standard Oil Company was accused of using low prices to drive away competitors in the late 19th century. AT&T spent $100 million a year in the 1910's defending itself against claims of predatory pricing. The predatory pricing argument is as follows: The predatory rm initially lowers its price until it is below the average cost of its competitors The competitors are then forced to lower their prices below average cost, thereby incurring losses on every unit sold. They are faced With a Catch22 simationifthey opt not to drop their prices. they are bound to lose their entire market share; if they do cut prices. they'll end up losing a lot of money. Aer forcing the competitors out of the market. the predatory rm raises its prices and lives on happily ever after. Customers obviously benefit in the short run, but the longterm effects are not clear. Although the above Situation sounds surreal. researchers over the past four decades have yet to provide a clear-cut example ofa monopoly created by predatory pricing. Some argue that these claims are usually made by competitors who are unable or unwilling to cut prices. ln most cases, the courts have wrestled with how to characterize price predation. So far, three tests have been used: 1) predatory intent 2] below-cost pricing 3) likelihood of recoupment. In most cases. they have considered a combination of these three tests. The American Airlines Case The facts of this case are clear-cut. Between [995 and 1997'. three small carriers--Vanguard. SunJel International and Western Pacicentered the Dallas market by offering low price service to several mid-westem cities. American responded by matching their fares and increasing service on these routes. For example. American's average one-way ticket from Dallas to Kansas City was $108 before the low cost start-ups entered the market in I995. American promptly cut fares to $80 and almost doubled the number of ights to [4. All three start-ups subsequently abandoned Dallas Airport. Soon after. American raised their prices to $14? and scaled back the number offlights. Only Vanguard remains in business today. In order to win a predatory pricing case, one has to prove that a company sold products or sen'ices for less than its average variable cost. The airline industry typically operates with very high fixed costs {e.g.. equipment) and low marginal costs. The same is true for the high tech or the pharmaceuticals industry. In most of these cases. the monster costs are in the area of research and development. Many now have their eyes fixated on Microsoft, Intel. and Dell to see whether they cross the line. The US. Senate Weighs In Many members on both sides of the aisle in the U.S. senate are putting the airline industry on notice that they plan to investigate whether large incumbent airlines engage in anti-competitive and "predatory" practices as pan ofa strategy to drive new entrants out ofbusiness. Senator Harry Reid's bill. the Airline Competition Preservation Act. issues guidelines to prevent large carriers from eradicating the startups. One such suggestion is to force the dominant carrier to continue offering the low fares for two years if they respond to low fare serv1ce by a new entrant. His proposal also gives the Transportation Department the authority to investigate whether or not an airline is charging an average fare on a route that is "unreasonably" high. Retro Case: Ford vs. GM Many people do not realize that Ford actually lost money and market share to Buick, Oldsmobile and other competitors when it introduced Model T in the early 19005. By [910, the auto industry was booming yet Mr. Ford decided to cut his price by 20% to $780, which was below his average total cost. 0n the contrary, GM, Ford's major competitor, had decided to raise their prices. Mr. George Gilder. in his book. The Spirit ofthe Enterprise (New York: Simon and Schusler, [984) on page [55 explained how Ford became a dominant rm in the automobile industry: "Ford set his price not on the basis of his existing costs or sales but on the basis of the much lower costs and much expanded sales that might become possible at the lower price. The effect in the case of Henry Ford in the 1910 was a 60% surge in sales that swept Model T far ahead of the Buick...ln a recession year of I9I4. he cut prices twice, and sales surged up while other companies failed. By [916. he had reduced the price of a Model T to $360 and increased his market share from 10% to 40%.... After cutting prices 30% during the [920 economic crisis. Ford commanded a 60 percent share ofthe market." Ford may have "preyed" on its competitors. yet few would argue that the customers were the ultimate beneciaries. However. it sure does make us wonder whether such actions would have been allowed in today's environment. Quotes: "The attempt to reduce or to eliminate predatory pricing is also likely to reduce or eliminate competitive pricing benecial to consumers." -Professor Harold Demsetz. eminent economist "This effectively means there can be no price predation in industries with low variable costs." -Professor Eleanor Fox. New York University School of Law. commenting on the American Airlines decision