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7-UpDate
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A bi-monthly, internationally circulated e-newsletter of the CUTS-Centre for International Trade, Economics & Environment (CUTS-CITEE), which has been designed to disseminate information about the "7 UP Project", in addition to reporting interesting newsitems, which have been reported across the globe on competition and other related issues. The 7-Up Project is a 2 year research and advocacy programme being conducted by the Centre with the support of DFID, UK for a comparative study of competition regimes of seven developing countries of the Commonwealth. |
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ISSUES |
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7 Update: Vol. 1, No. 4, April 2001 |
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Contents |
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In this edition of the 7-UpDate, we inform you about the progress of the 7-Up Project: comparative study of competition regimes in seven developing countries of the Commonwealth, which was launched in September 2000 and will conclude in August 2001. More importantly, we would also like to use this forum to report and/or comment on some major issue, which has cropped up during this period. That said, we carry an important debate in this issue around predatory pricing in the USA, culled from the Business Week of 14 May 2001. The case involves the American Airlines against whom an action, brought forth by the US Justice Department failed, and the commentator believes, would also meet a similar fate in appeal. It is indeed a milestone, which will establish new precedents in anti-trust acquis. The issue revolves around the difference between ‘predatory pricing’ and ‘vigorous price competition’. We would welcome comments from readers, and look forward to hearing from you. The CUTS Team This was yet another important period for the 7-Up Project, as it is popularly known. The project entitled “Comparative Study of Competition Regimes in Select Developing Countries of the Commonwealth”, is being implemented by CUTS, Jaipur with the support of DFID, UK. The countries selected for the study are India, Pakistan, Sri Lanka, Kenya, South Africa, Tanzania and Zambia. The Project is running in its third quarter now and following is a brief report of its progress during the months of March and April 2001. 1.1
Field Survey Most of the partners were able to get the questionnaire filled from the authority and collect the relevant data. The process is expected to be completed by the end of the month. 1.2
Phase-I Report A format for preparing the report was suggested to the researchers by Prof. Rakesh Basant, the core-researcher of the Project. The draft report would be sent to Prof. Basant for his comments and would be finalised after incorporating his comments therein. This final draft of the report would then be discussed at the National Reference Group Meeting. 1.3
National Reference Group The NRG would deliberate on the inputs prepared in each country and create a base that would be used for launching advocacy for strengthening competition culture. 1.4
Outreach 1.
Predatory Pricing: Cleared for Takeoff When a federal judge threw out the Justice Dept.’s “predatory pricing” case against American Airlines Inc. on Apr. 27, it wasn’t even front-page news in most cities. But the ruling, which the Administration is not expected to appeal, will likely have an impact well beyond the airlines. “This case represented the department’s best efforts to fashion a predatory-pricing doctrine for the New Economy,” observes Washington antitrust attorney Robert A. Skitol. Best – and for now, probably last. The suit’s failure means the virtual end of predatory pricing as an anti-trust issue for the foreseeable future. But that does not mean the problem will go away. Instead, the judge’s ruling opens the door for dominant companies to wage bare-knuckles price wars against pesky smaller competitors. The consequences could be especially serious in New Economy industries such as software, chips, and computer hardware. Unimpressed. Here’s why. To win a predatory-pricing case, trustbusters traditionally had to prove that a company sold products or services for less than its average variable cost. But Justice Dept. lawyers realized this would be almost impossible to do against American. Why? Because the airline industry, like high tech, has high fixed costs and low marginal costs. The big expense is buying equipment. Once a flight is scheduled, the marginal cost of providing a seat for an additional passenger is peanuts—plus a Coke, maybe. So Justice attorneys argued that the test should be updated. Specifically, they suggested that U.S. District Judge J. Thomas Marten, based in Wichita, should determine whether there was any business justification for American’s aggressive pricing, other than driving away competition. Under that definition, trustbusters thought they had a great case. Every time a fledgling airline tried to get a toehold in the Dallas market, for example, American met its fares and added flights. As soon as the rival retreated, American jacked fares back up. Between Dallas and Kansas City, for instance, American’s average one-way ticket, was $108 before low-cost startup Vanguard Airlines Inc. entered the market in early 1995. That prompted American to cut fares to $80 and almost double the number of daily flights, to 14. When Vanguard gave up in December 1995, American jacked up prices to $147 and scaled back the number of flights. Justice lawyers even had memos from American execs plotting the upstarts’ demise. Alas, Judge Marten would have none of this. Unimpressed, he stuck to the old definition of predatory pricing. “Americana priced its fares consistently above its average variable costs,” Marten wrote. While Marten acknowledged that predatory pricing existed, he doubted that judges would be able to distinguish it from good, old-fashioned competition. “Identifying [predatory pricing] in the particular case without chilling aggressive, competitive pricing is far beyond the capacity of any antitrust tribunal” he wrote, quoting from a well-known antitrust treatise. “Sole Survivor” Now that the average-variable-cost standard has been etched into law, it will be a lot easier for dominant companies to drive their rivals out of business. “This effectively means there can be no price predation” in industries with low variable costs, says New York University law professor Eleanor M. Fox. Beyond airlines, these industries are primarily found in New Economy sectors. Most of the cost of making software, chips, and prescription pills, for example, is in research and development. Once that money has been spent, the cost of making additional units is tiny. In these businesses, aggressive pricing can leave dominant companies “as the sole survivor,” says analyst Roger Kay, of IDC in Framingham, Mass. Indeed, Intel and Dell Computer have recently begun aggressively cutting prices. Nobody is accusing them of illegal predation. But in the wake of Marten’s decision, they may be able to lower prices into previously unexplored territories. Of course, low prices sound great for consumers. And they frequently are. But so is competition. Marten’s ruling, by putting whole parts of the economy off-limits to predatory-pricing suits, could wind up costing some consumers a lot more than peanuts. 2. Don’t Blame American Airlines for Trying to Compete: Robert E. Cooper, Partner, Gibson, Dunn & Crutcher, Trial Counsel for American Airlines Inc., Washington. [Dan Carney’s commentary] on Judge J. Thomas Marten’s dismissal of the antitrust action brought by the Justice Dept. against American Airlines Inc. missed one of the central points of the debate generated by the case and ignored decades of antitrust law (“Predatory Pricing: Cleared for takeoff,” News: Analysis & Commentary, May 14). The court properly rejected the Justice Dept.’s proposed new legal standard because it would have branded vigorous competition illegal, and in so doing, chill the very conduct the antitrust laws are meant to protect. Judge Marten applied long-accepted antitrust principles governing price competition-principles that courts have repeatedly employed to distinguish between predatory pricing and the vigorous price competition the antitrust laws encourage. The Justice Dept. was blaming
American for competing. There was no dispute that it was the new
entrants, not American, who set the prices. American did nothing
more than match those prices and add capacity to ensure seats were
available at the new, lower price levels. If the Justice Dept.
believes that the antitrust laws need updating to reflect the “New
Economy” of which Mr. Carney writes, then it should pursue a legislative
remedy open to public debate and consideration. The project partners have finalised the dates of the National Reference Group Meetings. The NRG would deliberate on the draft Phase-I report prepared by the partners and create a base that would be used for launching advocacy for strengthening competition culture. The following are the dates of these meetings: India: “Symposium on
Existing and Proposed Competition Law of India”- 27th June 2001 Pakistan: 25th June 2001 Sri Lanka: 19th June 2001 Kenya: 13th June 2001 South Africa: 29th June
2001 Tanzania: 15th June 2001 Zambia: 18th June 2001 1. All About International
Investment Agreements 2. ReguLetter, No.2, March
2001 3. Consumer Protection in the
Global Economy 4. Contours of a National
Competition Policy |
CUTS
Centre For International Trade, Economics
& Environment (CITEE)
D–217, Bhaskar Marg, Bani Park, Jaipur 302 016, India, Ph: 91.141.2282821 Fax: 91.141.2282485 Email: cuts@cuts.org |
D-217, Bhaskar Marg, Bani Park, Jaipur 302 016, India Phone: +91(0)141-228 2821-3, Fax: 91.141.2282485
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