John McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case.”

· All of those acts were fear of PP that would harm consumers · SO was the example that “proved” PP, which is why he looks at this case · All the acts should go; they ban practices that MIGHT lead to monopoly o Demsetz’s alternative, just ban M—leave all the competitive devices in · SO already lost a lot of its market share by this time o Oil fields in other states had been opened, therefore there were a number of competitors

· Entry will come in an erode M power; however they said it wasn’t true · But this is what actually happened

· At this time they didn’t see much advantage to price cutting but they saw the potential harm · Everything competitive drives rivals out of business · Cutting $, consumers are better off o They wouldn’t fail to notice if you were doing PP; example, hair stylist o Even though you have to pay higher prices later, you say you value it in PV terms more (value the present value of cheap prices more than the possibility of higher prices later)—you can prevent it by sticking with your old hairstylist

· To get this PP you have to start with significant monopoly power to finance it because it’s a big money losing campaign · Initial market share for SO was 4%, they didn’t get big at the beginning because they didn’t have enough power to finance this · This is important for access to crude, if their access to crude was low that means that anyone had access to it o Only barriers were efficiency

· McGee’s argument is that SO got monopoly power by merging with other firms · What happens if merger is always more profitable, would anyone use PP? · A small amount over PV of normal ROR would be enough to buy someone out, and you can get monopoly profits NOW o How does that compare to PP? § PP is more costly than merger—one preyed upon can reduce output and costs and shut down—predator has to offer that price to effectively the entire market § Monopoly profits start much later so not much value—reduces PV of gains to be had, it takes ex. 18 months to drive people out of business

· Cost of PP have to be lower than cost of merger or else it wouldn’t make sense · Because you’re delaying time of profits, you’d only do it if it was less than merger

· As you drive people out of business predator has to supply more of the market, therefore predator has to bear all the costs · You won’t lose a million to lower the purchase price by half a million · If prey stops producing, costs are 0= monopolizer has to bear all the costs of predation o If predator decide to raise price (and tries to take the benefits), people can just start up again and hurt the predator

· Say you use PP make someone go out of business, factory is still there o Someone can buy the factories cheap, if you try and raise the price it doesn’t work because someone buys the capital assets at a low price and can compete · If you do PP you want to merge, because you don’t want it to go to competitors hands o Government says that you cant use PP and price, which means PP is even less likely because you would have to wear out ALL their equipment · Therefore you cant do it immediately, you may have to take 50 years to do PP.

· When you’re taking over another firm you’re interested in some of the assets value · You want to max the sum of the value of all assets o You don’t want to hurt your assets by more that it benefits you for the purchase price. You wouldn’t give up $1 million to get a discount of $500,000

· Predatory campaign is temporary and if other people know that, it wont work · If you know permanent predatory pricing is a dumb idea, you would tough it out o If someone thought it’d be forever, they’d drop out and it’d be better for the other competitors that thought it’d only last 2 weeks

· This is an important anecdotal evidence · PP is supposed to make you worse off, if this were the case you wouldn’t enter and get bought out and do it again · You wouldn’t do it if you were worse off · If you’re alleging predation, it shouldn’t be profitable to the prey o Could it be merger? Merger is supposed to be beneficial to the buyer and the seller.

· Standard economic literature, you can extract monopoly profits if you have a monopoly at ONE level therefore theres no reason to extend your monopoly to any other level—you wouldn’t raise your profits anymore o You want to pick whichever level will be cheapest and last the longest; if its hard for others to do well at refining, you’d want a monopoly in refining · If they had a monopoly in refining they wouldn’t want a monopoly in anything else · In the std literture, if you monopolize one level, you assume the other levels are competitive; what if other decided to collude at another level, that leaves lower profits for SO o SO wouldn’t want that so SO would enter that market to make sure distributors wouldn’t collude § When they try and break up collusion, the price will fall § It was meant to maximize monopoly profits at another level

Because if there is entry then there is no point in going through predatory pricing. If you have 25% of the market and after 12% there is diseconomies of scale then people can enter with lower costs.

Could be a change in situation. Before you thought you were a monopoly but once there was entry you thought you were in PC therefore you lower your price to compete with your rivals.

· Consumers would want PP because they’d want lower prices for a few year before being subjected to monopoly pricing rather than monopoly prices right away with merger