The Failure of the US Antitrust Laws in Tackling Predatory Pricing

The Biden administration has made antitrust enforcement a top priority. In July 2021, President Biden signed the Executive Order on Promoting Competition in the American Economy, which directed the antitrust agencies to take a more aggressive approach to enforcement. The administration has also appointed a team of enforcement-minded leaders to lead the main antitrust agencies, including Lina Khan as the chair of the FTC. In the first major antitrust case in the context of the contemporary Big Tech landscape, the DOJ has brought a lawsuit against Google, alleging that the company has abused its dominance in the online search and advertising markets. The suit accuses Google of illegally monopolizing the advertising technology market in violation of sections 1 and 2 of the Sherman Antitrust Act of 1890, which prohibits using exclusionary practices to maintain a monopoly. The trial commenced in September 2023 and is anticipated to take three months.

In theory, the court could order Google to be broken up, but legal analysts consider that option unlikely and even impossible. This raises the question of whether antitrust laws created in the late nineteenth through mid-twentieth century have failed to keep pace and become obsolete. Our solution to the anti-monopoly problems must align with our ideals of political and economic democracy. This article will first briefly map out the US antitrust laws and some of the main critiques, and next, it will lay out a potential reform to such laws.

The focus of antitrust laws until the 1960s was to ensure that the market structure was competitive by prohibiting price fixing. In the landmark case Standard Oil, the Supreme Court held that predatory pricing violated antitrust laws because Standard Oil used such practice to drive out rivals and gain monopoly in an otherwise competitive market. Starting in the 1970s, as the Chicago school of economic theory developed, antitrust laws shifted to consumer welfare standards, which see antitrust laws’ purpose as to promote efficiency. In the leading case Reiter, the SCOTUS solidified this view and held that “[c]ongress designed the Sherman Act as a “consumer welfare prescription.”This decision fundamentally reformed the antitrust litigation by changing the standing requirement, which required the plaintiff to show that there was harm to consumer welfare in the form of price increase and output restrictions. The Court introduced the recoupment test, under which the plaintiff must demonstrate that the target company can recoup its investment after the predatory scheme.

However, the recoupment test is no longer equipped to tackle big tech’s power. As one example, Amazon accomplished its rise as the world’s largest e-commerce website, at least in part, through pricing schemes that completely disregarded antitrust laws. Amazon evaded scrutiny by keeping its prices low, which forced publishers to set their own prices, and Apple would get a 30% cut. The DOJ charged Apple with colluding with the publishers to fix the prices of e-books and raise their prices in the market. The DOJ completely missed how Amazon’s below-cost pricing tactics afforded it significant advantages to achieve monopoly power in the e-book market. The current antitrust system fails to account for how modern-day e-commerce platforms can recoup losses.

One of the major voices for change in antitrust laws is Senator Elizabeth Warren. Her plan consists of two parts. First part of the Senator Warren’s proposal is to designate large tech platforms, such as Amazon, as “Platform Utilities” and break them apart from any participant on that platform. In other words, these companies would be prohibited from owning both the platform utility and any participants on that platform. They also would be required to meet a standard of fair, reasonable, and nondiscriminatory dealing with users. Second, Senator Warren proposes to enforce existing laws to break up mergers that reduce competition and to put pressure on big tech companies to be more responsive to user concerns.

Warren’s plan shifts the focus of antitrust enforcement to a more holistic standard. By breaking up large companies, she is reigning in the power these companies have to manipulate markets in their favor. Following a standard of “fair, reasonable, and nondiscriminatory dealings,” the courts can look at various factors to decide if a company’s activity violates the antitrust laws. This plan is a great way to attack some structural issues with our modern-day antitrust enforcement system; however, it does not account for predatory pricing schemes as it does not offer a solution for recoupment requirements.

One way to strengthen Warren’s plan is to place the presumption of predation on such company when a dominant company prices its products below its production cost. As seen in the Amazon case, recoupment does not count for today’s e-commerce economy, because there is a business justification to engage in such actions. The presumption puts the burden on these giant conglomerates.