Predatory Pricing, the Theory of the Firm and the Recoupment Test: An Examination of Recent Developments in Canadian Predatory Pricing Law

Abstract

Under US federal antitrust law, predatory pricing requires both pricing below cost as well as a reasonable prospect of recoupment on investment. Recent changes in Canadian law have moved away from the recoupment test and this article critically examines the rationale and wisdom of such developments. In support of the move away from recoupment, it is true that even unprofitable predatory pricing, which has no potential of recoupment, still engenders deadweight loss to the society. Moreover, unprofitable predatory pricing is not necessarily self-defeating; managers of firms may rationally engage in costly price wars in order to retain their private benefits of control, and firm owners may allow such self-interest for strategic reasons.

These considerations do not, however, support a move away from the recoupment test. Rather, they offer a new interpretation of it: although it is true that unprofitable predatory pricing is not captured by the recoupment test explicitly, the presence of competitive markets suggest both that recoupment is not likely and that unprofitable predatory pricing is unlikely; the recoupment test therefore implicitly accounts for unprofitable predatory pricing. Moreover, simple reliance on price-cost tests creates its own problems, including the risk of overdeterrence. It is dangerous to diminish the importance of the recoupment test in predatory pricing cases.

JEL Classification: K00, K21, L40