微信客服：xiaoxionga100
微信客服：ITCS521
ECON3440-无代写
时间：2024-05-27
Nicholas Fidler (s43954418)
ECON3440 Case Essay 2018
Word Count (excluding footnotes): 3820
Referencing Style: Third Australian Guide to Legal Citation
Table of Contents
1 Overview ...................................................................................................................... 2
2 Relevant Market .......................................................................................................... 2
3 Monopoly and Market Power ..................................................................................... 3
3.1 Market Share and Market Share Growth ............................................................................ 3
3.2 Price Control ..................................................................................................................... 4
3.3 Barriers to Entry ............................................................................................................... 5
3.4 The District Court’s Decision ............................................................................................ 6
4 Intention to Monopolize .............................................................................................. 6
5 Anti-Competitive Conduct .......................................................................................... 7
5.1 Price-Cost Margins ........................................................................................................... 8
5.2 Meeting Competition ........................................................................................................ 9
5.3 Recoupment ...................................................................................................................... 9
5.4 Reputation ...................................................................................................................... 10
6 Conclusion ................................................................................................................. 10
7 Bibliography .............................................................................................................. 11
7.1 Cases .............................................................................................................................. 11
7.2 Books ............................................................................................................................. 11
7.3 Journal Articles ............................................................................................................... 11
7.4 Other .............................................................................................................................. 12
2
Review of United States of America v American Airlines
1 Overview
United States of America v AMR Corporation & Ors (‘the American Airlines Case’)
concerned a complaint brought in 1999 by the United States of America (‘the United States’)
alleging that AMR Corporation, American Airlines Inc., and American Eagle Holding
Corporation (together ‘American’) monopolised or attempted to monopolise by participating
in a scheme of predatory pricing, in contravention of Section 2 Sherman Act. At first
instance, American was found not guilty. This finding was upheld on appeal.
Claims for monopolisation require proof that a firm firstly has monopoly power in a defined
market, and secondly that the firm wilfully acquired or maintained this power by means of
anti-competitive conduct.1 Claims for attempted monopolisation on the other hand require
proof that a firm firstly operates in a defined market, secondly that it has a specific intent to
monopolise in that market, thirdly that it furthers that attempt using anti-competitive conduct,
and fourthly that there is a dangerous probability that the attempt will succeed.2
Ultimately, the District Court only considered one element: whether American Airlines had
engaged in anti-competitive conduct. That is because American’s application for summary
judgment only raised that element. Nonetheless, each section of this report discusses an
element of either or both claims.
Section 2 defines the relevant market. Section 3 considers the market or monopoly power of
American. Section 4 briefly considers the evidence of American’s intent to monopolize.
Section 5 considers the central question of whether American’s pricing strategy amounted to
anti-competitive conduct.
2 Relevant Market
American Airlines argued, and the United States agreed, that that the relevant markets were
connecting, one-stop and non-stop airline passenger services between Dallas-Fort Worth
Airport (‘DFW’) and other airports. These services fitted the definition of markets because
passengers do not view different city pairs as reasonable substitutes. In addition, they do not
view connecting, one-stop or nonstop services on the same city pairs as reasonable
substitutes.3
There were two groups of relevant markets. The first group included 4 core markets in which
the United States had expert evidence indicating that actual predatory pricing had occurred.
The 4 city pairs in this group were DFW-MCI, DFW-ICT, DFW-COS, DFW-LGB.4 The
1 TV Communications Network v. Turner Network Television, 964 F.2d 1022, 1025 (10th Cir. 1992).
2 Multistate Legal Studies v. Harcourt Brace Jovanovich Legal and Prof'l Publications, 63 F.3d 1540, 1550
(10th Cir. 1995).
3 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 8. Available at
.
4 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1246 (D Kan, 2001).
3
second group included 44 other markets which the United States claimed were monopolised
by the repudiation for predation that American had built in the four core markets. 5
A relevant feature of the markets operating out of DFW is that DFW is a hub airport. Flow
passengers on connecting or one-stop flights pass through ‘hub’ airports on their way to
spoke airports. Local passengers also use hub airports like DFW to fly directly to their
destinations, whether those destinations are spokes or hubs.
3 Monopoly and Market Power
A monopolisation claim under Section 2 Sherman Act requires proof of monopoly power.
Furthermore, although market power is not an element of an attempted monopolisation claim,
the ‘dangerous probability’ element is ‘usually demonstrated though market power’.6 As a
result, it is important to consider both monopoly and market power. It is also apt to consider
both forms of power in one section because they only differ in degree (monopoly power
being an extreme form of market power7).
The District Court did not directly consider whether American possessed monopoly power.
However, it set out many of the relevant facts at the beginning of its judgment. It also
considered these facts when later determining if there was a dangerous probability that
American could charge supra-competitive prices to recover the losses caused by predatory
pricing. It concluded that a dangerous probability of supra-competitive pricing did not exist.
This implies that it did not view American as a monopolist. I disagree with that conclusion
because American’s market share, the evidence of supra-competitive pricing, and the barriers
to entry all indicate otherwise.
3.1 Market Share and Market Share Growth
Market share is one instructive, but not determinative, factor in whether a firm has market or
monopoly power8. The market share of American Airlines was high compared to the market
shares of other carriers operating at DFW, including the LCCs.
In 2000 American’s share of passengers who boarded at DFW (whether on nonstop, one-stop
or connecting flights) was 70.2%, whilst the share of LCCs was only 2.4%. In 1999,
American’s share of passengers who boarded nonstop flights from DFW was between 61% to
100%.9 Delta Airlines Inc., American’s largest competitor at DFW, carried only 16% of all
passengers boarding nonstop flights from DFW. No other carrier accounted for more than 4%
of nonstop passengers.10 There was no data on the percentage of passengers who boarded
one-stop and connecting flights specifically. However, as the District Court rightly pointed
5 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1273 (D Kan, 2001).
6 Bright v Moss Ambulance Service, 824 F.2d 819, 823 (10th Cir. 1987).
7 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1187.
8 Ibid 1188.
9 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1151 (D Kan, 2001).
10 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 10. Available at
.
4
out, American’s share of passengers on such flights would likely have been higher than its
share of passengers on non-stop flights given that it operated DFW as a hub airport.11
American’s share of passengers at DFW also increased by 3.1% from 1999 to 2000.
However, both the Court and American Airlines pointed out that the passenger share of LCCs
had increased at a greater rate. In 1999 to 2000, the number of passenger carried by low fare
airlines at DFW increase by 30.7%.
Firms with high market shares do not necessarily possess market power if the market
elasticity of demand and the elasticity for supply by rivals are quite high.12 It is therefore
necessary to consider other factors, including price controls and barriers to entry.
3.2 Price Control
I agree with the United States’ argument that American was able to charge supra-competitive
prices in the relevant city pair markets.
The United States argued that supra-competitive prices were evidenced by the difference
between fares in LCC-competitive and non-competitive markets.13 These fare differences, as
the Court rightly stated, were not indicative of supra-competitive pricing because there was
no evidence that the routes subject to comparison were similar in distance, frequency and
cost.14
American’s relatively high price-average cost margins were evidence of supra-competitive
prices on the other hand. In 1999, the margin for all service types ranged from 28% to 59%
and for non-stop services in particular it ranged from 28% to 60%. Furthermore, American’s
price-average cost margin in non-stop markets in which it competed with Southwest Airlines
or other LCCs was 30.2% higher than in non-stop markets without competition.15 Given that
the Court concluded that American’s prices in Southwest and LCC-competitive markets
could be used as proxies for competitive prices, the 30.2% difference is strong evidence of
supra-competitive pricing. When considering the likelihood of American recovering profits
lost due to predatory pricing, the District Court stated, ‘there is no evidence that the prior
fares were in fact supra-competitive’.16 However, that statement plainly contradicts the
evidence.
11 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1147 (D Kan, 2001).
12 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1092-1093.
13 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1152.
14 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1088.
15 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1154 (D Kan, 2001).
16 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1263 (D Kan, 2001).
5
It would be impossible in either a Cournot or Bertrand game (which are both applicable to
airline markets17) for American to have raised prices about the competitive level. Thus, the
price-cost margins discussed above suggest that American had monopoly power.
However, supra-competitive prices alone are insufficient to prove that a firm has monopoly
power. The Lerner Index (and the price-average variable cost margin used in this case as an
estimate of the Lerner Index) is especially ‘misaligned with the competitive counterfactual’
in markets with significant fixed costs such as the aviation industry.18 Such markets could not
function if prices were equal to marginal cost.19 Recognising these deficiencies in the Lerner
Index, most courts have begun require evidence of barriers to entry to find that monopoly
power exists.20
3.3 Barriers to Entry
When considering the probability of American engaging in supra-competitive pricing after a
period of predation, the District Court concluded that there were no barriers to entry. I
disagree.
The Court cited two characteristics of the DFW in support of the conclusion that no barriers
to entry existed. First, gates, ticket counters and other physical assets at DFW were readily
available to LCCs. Second, DFW implemented a Carrier Support Program, which provided
advertising funds to new entrants. These characteristics only demonstrate that LCCs were not
barred from commencing operations at DFW. However, barriers to entry are not just things
which an entrant must overcome to ‘gain a foothold’ in the market.21 A barrier to entry is any
condition which imposes higher long-run costs of production on a new entrant. A number of
characteristics of the DFW markets fitted this definition.
First, American experienced significant economies of scale as a result of operating DFW as a
‘hub’ airport. As can be seen in Chart 1, by operating a ‘hub’ airport American reduced the
number of necessary routes and saved the fixed costs of linking unnecessary city pairs. It also
increased traffic on the fewer routes it operated. That provided economies of density.22
Furthermore, operating a ‘hub’ airport allowed an American to centralise its maintenance
apparatus.23 These economies of scale reduced American’s long term costs and allowed them
an advantage over LCCs.
17 J.A. Brander and A. Zhang, ‘Market Conduct in the Airline Industry: An Empirical Investigation’ (1990)
21(4) The RAND Journal of Economics 567.
18 D.A. Crane, ‘Market Power without Market Definition’ (2014) 90(1) Notre Dame Law Review 31, 57.
19 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 126. See also W. M. Landes &
R. A. Posner, ‘Market Power in Antitrust Cases’ (1981) 94(5) Harvard Law Review 937, 939.
20 United States v. Eastman Kodak Co., 63 F.3d 95, 109 (2d Cir. 1995).
21 R. Posner, Antitrust Law: An Economic Perspective (The University of Chicago Press, 1976) 59.
22 O. Renard, ‘Modelling Airline Competition’ (Paper presented at the ANU/NECG Conference on the
Performance of Air Transport Markets, The Australian National University, 24 June 2004) 7.
23 Ibid 8.
6
Chart 124
Travellers’ entrenched preferences for flying American were also a barrier to entry. The
United States argued that many travellers preferred to fly American due to its brand
recognition; frequent flyer programs; and greater service frequency.25 The advantage
conferred by greater frequency is known as ‘origin point presence’ advantage.26 American
also engaged in sales commission practices which incentivised travel agents to encourage
passengers to fly with American. Furthermore, it held contracts with local businesses which
obligated them to use American for a substantial portion of their air travel.27 All of these
advantages weakened the ability of smaller airlines to attract customers at DFW without
establishing a hub. As the United States pointed out28 and the District Court agreed29 that
building a hub would have been ‘difficult, time consuming and costly’.
3.4 The District Court’s Decision
The District Court did not ultimately decide whether American had market or monopoly
power because its decision on summary judgment turned solely on whether American had
engaged in anti-competitive conduct.30 In my opinion, American did possess monopoly
power, as evidenced by the barriers to entry and the supra-competitive prices charged by
American.
4 Intention to Monopolize
The District Court did not consider any evidence in relation to American’s alleged intent to
monopolize as doing so was not necessary to determine whether summary judgment should
have been given. Nonetheless, the United States initial memorandum does disclose evidence
relevant to American’s intent.
The United States argued that American’s DFW LCC Strategy was designed to remove
competition from the relevant markets. They cited a record of a conversation between
American’s then-CEO Robert Crandall and another American employee. The employee
stated that ‘more aggressive pricing [by American] probably would not fix [American’s]
24 Ibid 7.
25 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 11. Available at
.
26 United States v. AMR Corporation 140 F. Supp. 2d 1141, 1152 (D Kan, 2001).
27 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 11. Available at
.
28 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 11. Available at
.
29 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1153 (D Kan, 2001).
30 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1234 (D Kan, 2001).
7
profitability problem’. Crandall responded by saying ‘It will when [a competing LCC] is
gone!’ and that that was ‘a clear example of a place where [American] should match straight
up to get them out’. Whilst intent to compete is permitted,31 statements like this evince a clear
intention to remove competition from the market and thus amount to intent to monopolise.
The United States also used American’s prior anti-competitive behaviour as evidence of its
intent to monopolise and cited cases in which American had been found guilty of a violation
of Section 2 Sherman Act. Prior violations of Section 2 may be insufficient to prove an intent
to monopolise in a particular case. However, prior violations may evidence a culture of
eliminating competitors.
5 Anti-Competitive Conduct
The central question that the District Court considered when making a decision on summary
judgment was whether or not American’s pricing strategy amounted to anti-competitive
conduct. For a firm to be found guilty of violating Section 2 Sherman Act, one must prove
that the firm either acquired or maintained monopoly power through anti-competitive conduct
rather than ‘as a consequence of a superior product, business acumen of historic accident’.32
In other words, one must prove that the pro-competitive effects outweighed the anti-
competitive effects.33 This is the hallmark of the ‘Rule of Reason’ approach to anti-trust
law.34
Prior to American making an application for summary judgment, the United States alleged
that the predatory pricing scheme engaged in by American was anti-competitive. After
American made the application, the United States amended its claim, arguing that a predatory
increase in capacity was instead the offending anti-competitive behaviour.35 The District
Court rightly refused to decide the application for summary judgment on the basis of the
amended claim36 and instead decided it on the basis of the claim of predatory pricing. The
Court’s rationale for doing so was that pricing and capacity are ‘two sides to the same coin’ -
predatory pricing inherently involves an increase in capacity.37 Even if the Court had decided
the summary judgment application on the basis of the ‘predatory capacity’ claim, summary
judgment would likely still have been awarded. That is because the Court made an obiter
remark that to allow American to compete in prices, but not increase capacity to meet the
increased demand would ‘place [it] in a competitive straight jacket.’38The Court instead
decided the summary judgment application on the basis of a predatory pricing claim.
31 A.A. 10 Poultry Farms, Inc. v. Rose Acre Farms Inc., 881 F.2d 1396, 1401-1402 (7th Cir. 1989).
32 M. Motta, Competition Policy: Theory and Practice (Cambring University Press, 2004) 515. See also TV
Communications Network v. Turner Network Television, 964 F.2d 1022, 1025 (10th Cir. 1992).
33 R. H. Allensworth, ‘The Commensurability Myth in Antitrust’ (2016) 69(1) , 69 Vanderbilt Law Review 1, 5.
34 Ibid.
35 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1236 (D Kan, 2001).
36United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1236 (D Kan, 2001).
37 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 308.
38 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1236 (D Kan, 2001).
8
5.1 Price-Cost Margins
To prove that American had engaged in predatory pricing, the United States had to prove that
‘[American] priced its product below an appropriate measure of cost, and… enjoyed a
realistic prospect of recouping its losses by supra-competitive pricing.’39
The Court based its decision on numerous measures of average variable cost which were used
in American’s internal accounting systems. This test is known as the Areeda-Turner test.40
Implementing this test, the Court found that in all core markets American’s prices were not
lower than any of these measures of variable cost.41 The United States did not accept this as
conclusive evidence that American had not engaged in predatory pricing. It argued that
average variable cost margins were inappropriate measures of costs.
The United States proposed four alternative tests of predatory pricing, none of which the
Court accepted. The first and fourth tests considered the difference between incremental
revenue (calculated in two different ways) and incremental cost. The Court rejected the use of
these tests because they were both effectively ‘short-run profit maximisation tests’. The Court
was right to reject their use because, as the US Court of Appeals for the 7th Circuit stated in
MCI Communications:42
A rule of predation based on the failure to maximize profits would rob consumers of the
benefits of any price reductions by dominant firms facing new competition. Such a rule would
tend to freeze the prices of dominant firms at their monopoly levels and would prevent many
pro-competitive price cuts beneficial to consumers and other purchasers. In addition, a "profit
maximization" rule would require extensive knowledge of demand characteristics — thus
adding to its complexity and uncertainty. Another, and related, effect of adopting the "profit
maximization" theory advocated by [plaintiff] would be to thrust the courts into the unseemly
role of monitoring industrial prices to detect, on a long term basis, an elusive absence of
"profit maximization." Such supervision is incompatible with the functioning of private
markets.
The District Court also rejected the second and third proposed tests, which both used a
measure of costs from American’s internal accounting system called FAUNDC, which
incorporated variable and fixed costs. In the Courts opinion, allocating fixed costs to
individual units of output was arbitrary and did not reflect the true costs of an individual
flight. I disagree. In my opinion the District Court should have used either of these tests
instead of considering price-average variable cost margins. The reason is that contrary to pure
economic theory, cost measures which incorporate fixed costs provide better competitive
counterfactuals than cost measures which do not (such as marginal cost). They provide a
better counterfactual because if a firm only sets prices equal to marginal cost (or average
variable cost), they are unable to fully recover their fixed costs and therefore incur a loss.43
39 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1237 (D Kan, 2001).
40 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 378.
41 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1246 (D Kan, 2001).
42 MCI Communications Corp v. American Tel. & el. Co., 708 F.2d 1081, 1114 (7d Cir. 1983).
43 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 126. See also W. M. Landes &
R. A. Posner, ‘Market Power in Antitrust Cases’ (1981) 94(5) Harvard Law Review 937, 939.
9
Courts have long cited this as a reason to not use the Lerner Index when measuring market
power.44 Unfortunately, there is no publicly available data on the price-FAUNDC margin of
the relevant markets and so we cannot conclude whether, on the basis of the second and third
proposed tests, American engaged in predatory pricing.
We must instead rely on the less accurate price-average variable cost margins disclosed in the
Courts opinion. Due to the inaccuracy of price-average variable costs margins, I am not
persuaded by the Court’s conclusion that no predatory pricing occurred
5.2 Meeting Competition
The conclusion that American did not engage in predatory pricing is reinforced by the fact
that its prices were never lower than those of its competitors. American only ever matched
LCC prices. As the District Court highlighted ‘meeting the competitors prices – is precisely
the sort of activity that antitrust laws are intended to encourage.’45
The fact that American only ever matched LCC prices is in fact a forma defence to a
predatory pricing claim.46 It is known as the ‘meeting the competition defence’ and it was
successfully raised by American.
It should be noted that if American merely met the prices of LCCs but still pushed LCCs out
of the market, then the exit of LCCs is attributable not to the pricing strategy but to other
market features or barriers to entry. Those barriers to entry should be the subject of antitrust
prosecution instead.
5.3 Recoupment
In addition to proof of actual predatory pricing, a predatory pricing claim requires proof of a
dangerous likelihood that the accused firm would subsequently recover its losses by supra-
competitive pricing.47 This is a sensible requirement because even though pricing below cost
is inconsistent with economic theory, it will not have detrimental effects unless it allows the
monopolist to exclude competitors and charge supra-competitive prices.
The District Court ultimately concluded that there was not a dangerous likelihood of
recoupment in this case. I disagree with this decision because American engaged in supra-
competitive pricing after LCC exit in the four core markets and numerous barriers to entry
enabled it to do so.
44 United States v. Eastman Kodak Co., 63 F.3d 95, 109 (2d Cir. 1995).
45 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1254 (D Kan, 2001).
46 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1254 (D Kan, 2001).
47 Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993), 224-25.
10
After LCC exit in each of the four core markets, American increased its prices to the supra-
competitive levels they were at prior to LCC entry. The District Court was wrong to find that
the pre-LCC entry price levels were not supra-competitive. That finding was inconsistent
with the evidence. As Edlin and Farrell have stated, the finding was ‘odd given that the court
also found that prices on Southwest routes are proxies for competitive prices… and that
margins on American-dominated non-LCC routes are higher’.48
The District Court also concluded that there were no barriers to entry in the DFW markets
which would have allowed American to charge supra-competitive prices. For the reasons
discussed above, I disagree.
The Court should have concluded that there was a likelihood that American could have
recovered its losses in the four core markets. Consequently, the Court should have concluded
that American engaged in predatory pricing in the four core markets.
5.4 Reputation
In addition to claiming that American had actually engaged in predatory pricing in four core
markets, the United States argued that American used the reputation for predation it had built
in these four markets to deter competition in 44 other markets. This practice was referred to
as ‘monopolisation by reputation.’ The District Court rightly decided that ‘monopolisation by
reputation’ did not violate Section 2 Sherman Act.
I agree with the Court’s decision because prosecuting firms on the basis of ‘monopolisation
by reputation’ could contradict the primary aim of antitrust laws: to promote competition.
Prosecuting firms for ‘monopolisation by reputation’ would exponentially increase the
potential liability for predatory pricing and could dissuade firms from cutting prices even
when it is competitive.49
6 Conclusion
The District Court’s decision to award summary judgment and dismiss the claim for
predatory pricing is representative of wider judicial scepticism regarding predation claims.50
This scepticism is not entirely misplaced. Courts are understandably hesitant to conclude that
predatory pricing has occurred given the difficulty in distinguishing between lawful
competitive responses to rivals and predatory behaviour.51 Nonetheless, in the American
Airlines Case the District Court was wrong to conclude that anticompetitive pricing had not
occurred. The decision essentially rested upon the Court’s use of an Areeda-Turner test to
determine whether predatory pricing had occurred. As discussed above, the Areeda-Turner is
48 A. S. Edlin and J. Farrell, ‘The American Airlines Case: A Chance to Clarify Predation Policy’ in J.E. Kwoka,
The Antitrust Revolution: Economics, Competition, and Policy (Oxford University Press, 2004) 502, 519.
49 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1275 (D Kan, 2001).
50 C. Snider, Predatory Incentives and Predation Policy: The American Airlines Case (22 September 2009)
University of California Berkely School of Economics, 2
.
51 M. Motta, Competition Policy: Theory and Practice (Cambring University Press, 2004) 412. See also D. A.
Crane, ‘The Paradox of Predatory Pricing’ (2005) 91(1) Cornell Law Review 1.
11
an inaccurate indicator of predation in industries with significant fixed costs. In these
industries, Courts and regulators must compare prices with fixed and incremental costs – not
just the latter. My hope is that this report will motivate the ACCC to do so.
7 Bibliography
7.1 Cases
A.A. 10 Poultry Farms, Inc. v. Rose Acre Farms Inc., 881 F.2d 1396 (7th Cir. 1989)
Bright v Moss Ambulance Service, 824 F.2d 819 (10th Cir. 1987)
Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993)
MCI Communications Corp v. American Tel. & el. Co., 708 F.2d 1081 (7d Cir. 1983)
Multistate Legal Studies v. Harcourt Brace Jovanovich Legal and Prof'l Publications, 63
F.3d 1540 (10th Cir. 1995)
TV Communications Network v. Turner Network Television, 964 F.2d 1022 (10th Cir. 1992)
United States v. AMR Corporation, 140 F. Supp. 2d 1141 (D Kan, 2001)
United States v. Eastman Kodak Co., 63 F.3d 95 (2d Cir. 1995)
7.2 Books
Areeda, P. and Hovenkamp, H., Antitrust Law (Aspen Publishing, 3rd ed, 2007)
Edlin, A. S. and Farrell, F., ‘The American Airlines Case: A Chance to Clarify Predation
Policy’ in Kwoka, J.E., The Antitrust Revolution: Economics, Competition, and Policy
(Oxford University Press, 2004)
Kaplow, L. and Shapiro, C., ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of
Law and Economics (Elsevier, 2nd ed, 2007)
Motta, M., Competition Policy: Theory and Practice (Cambring University Press, 2004)
Posner, R., Antitrust Law: An Economic Perspective (The University of Chicago Press, 1976)
7.3 Journal Articles
Allensworth, R. H., ‘The Commensurability Myth in Antitrust’ (2016) 69(1) , 69 Vanderbilt
Law Review 1
Brander, J.A. and Zhang, A., ‘Market Conduct in the Airline Industry: An Empirical
Investigation’ (1990) 21(4) The RAND Journal of Economics 567
Crane, D.A., ‘The Paradox of Predatory Pricing’ (2005) 91(1) Cornell Law Review 1
Crane, D.A., ‘Market Power without Market Definition’ (2014) 90(1) Notre Dame Law
Review 31
12
7.4 Other
‘Memorandum of the United States’, United States of America v American Airlines [1999],
11. Available at
O. Renard, ‘Modelling Airline Competition’ (Paper presented at the ANU/NECG Conference
on the Performance of Air Transport Markets, The Australian National University, 24 June
2004)
Snider, C., Predatory Incentives and Predation Policy: The American Airlines Case (22
September 2009) University of California Berkely School of Economics, 2
ECON3440 Case Essay 2018
Word Count (excluding footnotes): 3820
Referencing Style: Third Australian Guide to Legal Citation
Table of Contents
1 Overview ...................................................................................................................... 2
2 Relevant Market .......................................................................................................... 2
3 Monopoly and Market Power ..................................................................................... 3
3.1 Market Share and Market Share Growth ............................................................................ 3
3.2 Price Control ..................................................................................................................... 4
3.3 Barriers to Entry ............................................................................................................... 5
3.4 The District Court’s Decision ............................................................................................ 6
4 Intention to Monopolize .............................................................................................. 6
5 Anti-Competitive Conduct .......................................................................................... 7
5.1 Price-Cost Margins ........................................................................................................... 8
5.2 Meeting Competition ........................................................................................................ 9
5.3 Recoupment ...................................................................................................................... 9
5.4 Reputation ...................................................................................................................... 10
6 Conclusion ................................................................................................................. 10
7 Bibliography .............................................................................................................. 11
7.1 Cases .............................................................................................................................. 11
7.2 Books ............................................................................................................................. 11
7.3 Journal Articles ............................................................................................................... 11
7.4 Other .............................................................................................................................. 12
2
Review of United States of America v American Airlines
1 Overview
United States of America v AMR Corporation & Ors (‘the American Airlines Case’)
concerned a complaint brought in 1999 by the United States of America (‘the United States’)
alleging that AMR Corporation, American Airlines Inc., and American Eagle Holding
Corporation (together ‘American’) monopolised or attempted to monopolise by participating
in a scheme of predatory pricing, in contravention of Section 2 Sherman Act. At first
instance, American was found not guilty. This finding was upheld on appeal.
Claims for monopolisation require proof that a firm firstly has monopoly power in a defined
market, and secondly that the firm wilfully acquired or maintained this power by means of
anti-competitive conduct.1 Claims for attempted monopolisation on the other hand require
proof that a firm firstly operates in a defined market, secondly that it has a specific intent to
monopolise in that market, thirdly that it furthers that attempt using anti-competitive conduct,
and fourthly that there is a dangerous probability that the attempt will succeed.2
Ultimately, the District Court only considered one element: whether American Airlines had
engaged in anti-competitive conduct. That is because American’s application for summary
judgment only raised that element. Nonetheless, each section of this report discusses an
element of either or both claims.
Section 2 defines the relevant market. Section 3 considers the market or monopoly power of
American. Section 4 briefly considers the evidence of American’s intent to monopolize.
Section 5 considers the central question of whether American’s pricing strategy amounted to
anti-competitive conduct.
2 Relevant Market
American Airlines argued, and the United States agreed, that that the relevant markets were
connecting, one-stop and non-stop airline passenger services between Dallas-Fort Worth
Airport (‘DFW’) and other airports. These services fitted the definition of markets because
passengers do not view different city pairs as reasonable substitutes. In addition, they do not
view connecting, one-stop or nonstop services on the same city pairs as reasonable
substitutes.3
There were two groups of relevant markets. The first group included 4 core markets in which
the United States had expert evidence indicating that actual predatory pricing had occurred.
The 4 city pairs in this group were DFW-MCI, DFW-ICT, DFW-COS, DFW-LGB.4 The
1 TV Communications Network v. Turner Network Television, 964 F.2d 1022, 1025 (10th Cir. 1992).
2 Multistate Legal Studies v. Harcourt Brace Jovanovich Legal and Prof'l Publications, 63 F.3d 1540, 1550
(10th Cir. 1995).
3 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 8. Available at
4 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1246 (D Kan, 2001).
3
second group included 44 other markets which the United States claimed were monopolised
by the repudiation for predation that American had built in the four core markets. 5
A relevant feature of the markets operating out of DFW is that DFW is a hub airport. Flow
passengers on connecting or one-stop flights pass through ‘hub’ airports on their way to
spoke airports. Local passengers also use hub airports like DFW to fly directly to their
destinations, whether those destinations are spokes or hubs.
3 Monopoly and Market Power
A monopolisation claim under Section 2 Sherman Act requires proof of monopoly power.
Furthermore, although market power is not an element of an attempted monopolisation claim,
the ‘dangerous probability’ element is ‘usually demonstrated though market power’.6 As a
result, it is important to consider both monopoly and market power. It is also apt to consider
both forms of power in one section because they only differ in degree (monopoly power
being an extreme form of market power7).
The District Court did not directly consider whether American possessed monopoly power.
However, it set out many of the relevant facts at the beginning of its judgment. It also
considered these facts when later determining if there was a dangerous probability that
American could charge supra-competitive prices to recover the losses caused by predatory
pricing. It concluded that a dangerous probability of supra-competitive pricing did not exist.
This implies that it did not view American as a monopolist. I disagree with that conclusion
because American’s market share, the evidence of supra-competitive pricing, and the barriers
to entry all indicate otherwise.
3.1 Market Share and Market Share Growth
Market share is one instructive, but not determinative, factor in whether a firm has market or
monopoly power8. The market share of American Airlines was high compared to the market
shares of other carriers operating at DFW, including the LCCs.
In 2000 American’s share of passengers who boarded at DFW (whether on nonstop, one-stop
or connecting flights) was 70.2%, whilst the share of LCCs was only 2.4%. In 1999,
American’s share of passengers who boarded nonstop flights from DFW was between 61% to
100%.9 Delta Airlines Inc., American’s largest competitor at DFW, carried only 16% of all
passengers boarding nonstop flights from DFW. No other carrier accounted for more than 4%
of nonstop passengers.10 There was no data on the percentage of passengers who boarded
one-stop and connecting flights specifically. However, as the District Court rightly pointed
5 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1273 (D Kan, 2001).
6 Bright v Moss Ambulance Service, 824 F.2d 819, 823 (10th Cir. 1987).
7 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1187.
8 Ibid 1188.
9 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1151 (D Kan, 2001).
10 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 10. Available at
4
out, American’s share of passengers on such flights would likely have been higher than its
share of passengers on non-stop flights given that it operated DFW as a hub airport.11
American’s share of passengers at DFW also increased by 3.1% from 1999 to 2000.
However, both the Court and American Airlines pointed out that the passenger share of LCCs
had increased at a greater rate. In 1999 to 2000, the number of passenger carried by low fare
airlines at DFW increase by 30.7%.
Firms with high market shares do not necessarily possess market power if the market
elasticity of demand and the elasticity for supply by rivals are quite high.12 It is therefore
necessary to consider other factors, including price controls and barriers to entry.
3.2 Price Control
I agree with the United States’ argument that American was able to charge supra-competitive
prices in the relevant city pair markets.
The United States argued that supra-competitive prices were evidenced by the difference
between fares in LCC-competitive and non-competitive markets.13 These fare differences, as
the Court rightly stated, were not indicative of supra-competitive pricing because there was
no evidence that the routes subject to comparison were similar in distance, frequency and
cost.14
American’s relatively high price-average cost margins were evidence of supra-competitive
prices on the other hand. In 1999, the margin for all service types ranged from 28% to 59%
and for non-stop services in particular it ranged from 28% to 60%. Furthermore, American’s
price-average cost margin in non-stop markets in which it competed with Southwest Airlines
or other LCCs was 30.2% higher than in non-stop markets without competition.15 Given that
the Court concluded that American’s prices in Southwest and LCC-competitive markets
could be used as proxies for competitive prices, the 30.2% difference is strong evidence of
supra-competitive pricing. When considering the likelihood of American recovering profits
lost due to predatory pricing, the District Court stated, ‘there is no evidence that the prior
fares were in fact supra-competitive’.16 However, that statement plainly contradicts the
evidence.
11 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1147 (D Kan, 2001).
12 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1092-1093.
13 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1152.
14 L. Kaplow and C. Shapiro, ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of Law and
Economics (Elsevier, 2nd ed, 2007) 1088.
15 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1154 (D Kan, 2001).
16 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1263 (D Kan, 2001).
5
It would be impossible in either a Cournot or Bertrand game (which are both applicable to
airline markets17) for American to have raised prices about the competitive level. Thus, the
price-cost margins discussed above suggest that American had monopoly power.
However, supra-competitive prices alone are insufficient to prove that a firm has monopoly
power. The Lerner Index (and the price-average variable cost margin used in this case as an
estimate of the Lerner Index) is especially ‘misaligned with the competitive counterfactual’
in markets with significant fixed costs such as the aviation industry.18 Such markets could not
function if prices were equal to marginal cost.19 Recognising these deficiencies in the Lerner
Index, most courts have begun require evidence of barriers to entry to find that monopoly
power exists.20
3.3 Barriers to Entry
When considering the probability of American engaging in supra-competitive pricing after a
period of predation, the District Court concluded that there were no barriers to entry. I
disagree.
The Court cited two characteristics of the DFW in support of the conclusion that no barriers
to entry existed. First, gates, ticket counters and other physical assets at DFW were readily
available to LCCs. Second, DFW implemented a Carrier Support Program, which provided
advertising funds to new entrants. These characteristics only demonstrate that LCCs were not
barred from commencing operations at DFW. However, barriers to entry are not just things
which an entrant must overcome to ‘gain a foothold’ in the market.21 A barrier to entry is any
condition which imposes higher long-run costs of production on a new entrant. A number of
characteristics of the DFW markets fitted this definition.
First, American experienced significant economies of scale as a result of operating DFW as a
‘hub’ airport. As can be seen in Chart 1, by operating a ‘hub’ airport American reduced the
number of necessary routes and saved the fixed costs of linking unnecessary city pairs. It also
increased traffic on the fewer routes it operated. That provided economies of density.22
Furthermore, operating a ‘hub’ airport allowed an American to centralise its maintenance
apparatus.23 These economies of scale reduced American’s long term costs and allowed them
an advantage over LCCs.
17 J.A. Brander and A. Zhang, ‘Market Conduct in the Airline Industry: An Empirical Investigation’ (1990)
21(4) The RAND Journal of Economics 567.
18 D.A. Crane, ‘Market Power without Market Definition’ (2014) 90(1) Notre Dame Law Review 31, 57.
19 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 126. See also W. M. Landes &
R. A. Posner, ‘Market Power in Antitrust Cases’ (1981) 94(5) Harvard Law Review 937, 939.
20 United States v. Eastman Kodak Co., 63 F.3d 95, 109 (2d Cir. 1995).
21 R. Posner, Antitrust Law: An Economic Perspective (The University of Chicago Press, 1976) 59.
22 O. Renard, ‘Modelling Airline Competition’ (Paper presented at the ANU/NECG Conference on the
Performance of Air Transport Markets, The Australian National University, 24 June 2004) 7.
23 Ibid 8.
6
Chart 124
Travellers’ entrenched preferences for flying American were also a barrier to entry. The
United States argued that many travellers preferred to fly American due to its brand
recognition; frequent flyer programs; and greater service frequency.25 The advantage
conferred by greater frequency is known as ‘origin point presence’ advantage.26 American
also engaged in sales commission practices which incentivised travel agents to encourage
passengers to fly with American. Furthermore, it held contracts with local businesses which
obligated them to use American for a substantial portion of their air travel.27 All of these
advantages weakened the ability of smaller airlines to attract customers at DFW without
establishing a hub. As the United States pointed out28 and the District Court agreed29 that
building a hub would have been ‘difficult, time consuming and costly’.
3.4 The District Court’s Decision
The District Court did not ultimately decide whether American had market or monopoly
power because its decision on summary judgment turned solely on whether American had
engaged in anti-competitive conduct.30 In my opinion, American did possess monopoly
power, as evidenced by the barriers to entry and the supra-competitive prices charged by
American.
4 Intention to Monopolize
The District Court did not consider any evidence in relation to American’s alleged intent to
monopolize as doing so was not necessary to determine whether summary judgment should
have been given. Nonetheless, the United States initial memorandum does disclose evidence
relevant to American’s intent.
The United States argued that American’s DFW LCC Strategy was designed to remove
competition from the relevant markets. They cited a record of a conversation between
American’s then-CEO Robert Crandall and another American employee. The employee
stated that ‘more aggressive pricing [by American] probably would not fix [American’s]
24 Ibid 7.
25 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 11. Available at
26 United States v. AMR Corporation 140 F. Supp. 2d 1141, 1152 (D Kan, 2001).
27 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 11. Available at
28 ‘Memorandum of the United States’, United States of America v American Airlines [1999], 11. Available at
29 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1153 (D Kan, 2001).
30 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1234 (D Kan, 2001).
7
profitability problem’. Crandall responded by saying ‘It will when [a competing LCC] is
gone!’ and that that was ‘a clear example of a place where [American] should match straight
up to get them out’. Whilst intent to compete is permitted,31 statements like this evince a clear
intention to remove competition from the market and thus amount to intent to monopolise.
The United States also used American’s prior anti-competitive behaviour as evidence of its
intent to monopolise and cited cases in which American had been found guilty of a violation
of Section 2 Sherman Act. Prior violations of Section 2 may be insufficient to prove an intent
to monopolise in a particular case. However, prior violations may evidence a culture of
eliminating competitors.
5 Anti-Competitive Conduct
The central question that the District Court considered when making a decision on summary
judgment was whether or not American’s pricing strategy amounted to anti-competitive
conduct. For a firm to be found guilty of violating Section 2 Sherman Act, one must prove
that the firm either acquired or maintained monopoly power through anti-competitive conduct
rather than ‘as a consequence of a superior product, business acumen of historic accident’.32
In other words, one must prove that the pro-competitive effects outweighed the anti-
competitive effects.33 This is the hallmark of the ‘Rule of Reason’ approach to anti-trust
law.34
Prior to American making an application for summary judgment, the United States alleged
that the predatory pricing scheme engaged in by American was anti-competitive. After
American made the application, the United States amended its claim, arguing that a predatory
increase in capacity was instead the offending anti-competitive behaviour.35 The District
Court rightly refused to decide the application for summary judgment on the basis of the
amended claim36 and instead decided it on the basis of the claim of predatory pricing. The
Court’s rationale for doing so was that pricing and capacity are ‘two sides to the same coin’ -
predatory pricing inherently involves an increase in capacity.37 Even if the Court had decided
the summary judgment application on the basis of the ‘predatory capacity’ claim, summary
judgment would likely still have been awarded. That is because the Court made an obiter
remark that to allow American to compete in prices, but not increase capacity to meet the
increased demand would ‘place [it] in a competitive straight jacket.’38The Court instead
decided the summary judgment application on the basis of a predatory pricing claim.
31 A.A. 10 Poultry Farms, Inc. v. Rose Acre Farms Inc., 881 F.2d 1396, 1401-1402 (7th Cir. 1989).
32 M. Motta, Competition Policy: Theory and Practice (Cambring University Press, 2004) 515. See also TV
Communications Network v. Turner Network Television, 964 F.2d 1022, 1025 (10th Cir. 1992).
33 R. H. Allensworth, ‘The Commensurability Myth in Antitrust’ (2016) 69(1) , 69 Vanderbilt Law Review 1, 5.
34 Ibid.
35 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1236 (D Kan, 2001).
36United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1236 (D Kan, 2001).
37 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 308.
38 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1236 (D Kan, 2001).
8
5.1 Price-Cost Margins
To prove that American had engaged in predatory pricing, the United States had to prove that
‘[American] priced its product below an appropriate measure of cost, and… enjoyed a
realistic prospect of recouping its losses by supra-competitive pricing.’39
The Court based its decision on numerous measures of average variable cost which were used
in American’s internal accounting systems. This test is known as the Areeda-Turner test.40
Implementing this test, the Court found that in all core markets American’s prices were not
lower than any of these measures of variable cost.41 The United States did not accept this as
conclusive evidence that American had not engaged in predatory pricing. It argued that
average variable cost margins were inappropriate measures of costs.
The United States proposed four alternative tests of predatory pricing, none of which the
Court accepted. The first and fourth tests considered the difference between incremental
revenue (calculated in two different ways) and incremental cost. The Court rejected the use of
these tests because they were both effectively ‘short-run profit maximisation tests’. The Court
was right to reject their use because, as the US Court of Appeals for the 7th Circuit stated in
MCI Communications:42
A rule of predation based on the failure to maximize profits would rob consumers of the
benefits of any price reductions by dominant firms facing new competition. Such a rule would
tend to freeze the prices of dominant firms at their monopoly levels and would prevent many
pro-competitive price cuts beneficial to consumers and other purchasers. In addition, a "profit
maximization" rule would require extensive knowledge of demand characteristics — thus
adding to its complexity and uncertainty. Another, and related, effect of adopting the "profit
maximization" theory advocated by [plaintiff] would be to thrust the courts into the unseemly
role of monitoring industrial prices to detect, on a long term basis, an elusive absence of
"profit maximization." Such supervision is incompatible with the functioning of private
markets.
The District Court also rejected the second and third proposed tests, which both used a
measure of costs from American’s internal accounting system called FAUNDC, which
incorporated variable and fixed costs. In the Courts opinion, allocating fixed costs to
individual units of output was arbitrary and did not reflect the true costs of an individual
flight. I disagree. In my opinion the District Court should have used either of these tests
instead of considering price-average variable cost margins. The reason is that contrary to pure
economic theory, cost measures which incorporate fixed costs provide better competitive
counterfactuals than cost measures which do not (such as marginal cost). They provide a
better counterfactual because if a firm only sets prices equal to marginal cost (or average
variable cost), they are unable to fully recover their fixed costs and therefore incur a loss.43
39 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1237 (D Kan, 2001).
40 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 378.
41 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1246 (D Kan, 2001).
42 MCI Communications Corp v. American Tel. & el. Co., 708 F.2d 1081, 1114 (7d Cir. 1983).
43 P. Areeda and H. Hovenkamp, Antitrust Law (Aspen Publishing, 3rd ed, 2007) 126. See also W. M. Landes &
R. A. Posner, ‘Market Power in Antitrust Cases’ (1981) 94(5) Harvard Law Review 937, 939.
9
Courts have long cited this as a reason to not use the Lerner Index when measuring market
power.44 Unfortunately, there is no publicly available data on the price-FAUNDC margin of
the relevant markets and so we cannot conclude whether, on the basis of the second and third
proposed tests, American engaged in predatory pricing.
We must instead rely on the less accurate price-average variable cost margins disclosed in the
Courts opinion. Due to the inaccuracy of price-average variable costs margins, I am not
persuaded by the Court’s conclusion that no predatory pricing occurred
5.2 Meeting Competition
The conclusion that American did not engage in predatory pricing is reinforced by the fact
that its prices were never lower than those of its competitors. American only ever matched
LCC prices. As the District Court highlighted ‘meeting the competitors prices – is precisely
the sort of activity that antitrust laws are intended to encourage.’45
The fact that American only ever matched LCC prices is in fact a forma defence to a
predatory pricing claim.46 It is known as the ‘meeting the competition defence’ and it was
successfully raised by American.
It should be noted that if American merely met the prices of LCCs but still pushed LCCs out
of the market, then the exit of LCCs is attributable not to the pricing strategy but to other
market features or barriers to entry. Those barriers to entry should be the subject of antitrust
prosecution instead.
5.3 Recoupment
In addition to proof of actual predatory pricing, a predatory pricing claim requires proof of a
dangerous likelihood that the accused firm would subsequently recover its losses by supra-
competitive pricing.47 This is a sensible requirement because even though pricing below cost
is inconsistent with economic theory, it will not have detrimental effects unless it allows the
monopolist to exclude competitors and charge supra-competitive prices.
The District Court ultimately concluded that there was not a dangerous likelihood of
recoupment in this case. I disagree with this decision because American engaged in supra-
competitive pricing after LCC exit in the four core markets and numerous barriers to entry
enabled it to do so.
44 United States v. Eastman Kodak Co., 63 F.3d 95, 109 (2d Cir. 1995).
45 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1254 (D Kan, 2001).
46 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1254 (D Kan, 2001).
47 Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993), 224-25.
10
After LCC exit in each of the four core markets, American increased its prices to the supra-
competitive levels they were at prior to LCC entry. The District Court was wrong to find that
the pre-LCC entry price levels were not supra-competitive. That finding was inconsistent
with the evidence. As Edlin and Farrell have stated, the finding was ‘odd given that the court
also found that prices on Southwest routes are proxies for competitive prices… and that
margins on American-dominated non-LCC routes are higher’.48
The District Court also concluded that there were no barriers to entry in the DFW markets
which would have allowed American to charge supra-competitive prices. For the reasons
discussed above, I disagree.
The Court should have concluded that there was a likelihood that American could have
recovered its losses in the four core markets. Consequently, the Court should have concluded
that American engaged in predatory pricing in the four core markets.
5.4 Reputation
In addition to claiming that American had actually engaged in predatory pricing in four core
markets, the United States argued that American used the reputation for predation it had built
in these four markets to deter competition in 44 other markets. This practice was referred to
as ‘monopolisation by reputation.’ The District Court rightly decided that ‘monopolisation by
reputation’ did not violate Section 2 Sherman Act.
I agree with the Court’s decision because prosecuting firms on the basis of ‘monopolisation
by reputation’ could contradict the primary aim of antitrust laws: to promote competition.
Prosecuting firms for ‘monopolisation by reputation’ would exponentially increase the
potential liability for predatory pricing and could dissuade firms from cutting prices even
when it is competitive.49
6 Conclusion
The District Court’s decision to award summary judgment and dismiss the claim for
predatory pricing is representative of wider judicial scepticism regarding predation claims.50
This scepticism is not entirely misplaced. Courts are understandably hesitant to conclude that
predatory pricing has occurred given the difficulty in distinguishing between lawful
competitive responses to rivals and predatory behaviour.51 Nonetheless, in the American
Airlines Case the District Court was wrong to conclude that anticompetitive pricing had not
occurred. The decision essentially rested upon the Court’s use of an Areeda-Turner test to
determine whether predatory pricing had occurred. As discussed above, the Areeda-Turner is
48 A. S. Edlin and J. Farrell, ‘The American Airlines Case: A Chance to Clarify Predation Policy’ in J.E. Kwoka,
The Antitrust Revolution: Economics, Competition, and Policy (Oxford University Press, 2004) 502, 519.
49 United States v. AMR Corporation, 140 F. Supp. 2d 1141, 1275 (D Kan, 2001).
50 C. Snider, Predatory Incentives and Predation Policy: The American Airlines Case (22 September 2009)
University of California Berkely School of Economics, 2
51 M. Motta, Competition Policy: Theory and Practice (Cambring University Press, 2004) 412. See also D. A.
Crane, ‘The Paradox of Predatory Pricing’ (2005) 91(1) Cornell Law Review 1.
11
an inaccurate indicator of predation in industries with significant fixed costs. In these
industries, Courts and regulators must compare prices with fixed and incremental costs – not
just the latter. My hope is that this report will motivate the ACCC to do so.
7 Bibliography
7.1 Cases
A.A. 10 Poultry Farms, Inc. v. Rose Acre Farms Inc., 881 F.2d 1396 (7th Cir. 1989)
Bright v Moss Ambulance Service, 824 F.2d 819 (10th Cir. 1987)
Brooke Group Ltd. v. Brown & Williamson Tobacco, 509 U.S. 209 (1993)
MCI Communications Corp v. American Tel. & el. Co., 708 F.2d 1081 (7d Cir. 1983)
Multistate Legal Studies v. Harcourt Brace Jovanovich Legal and Prof'l Publications, 63
F.3d 1540 (10th Cir. 1995)
TV Communications Network v. Turner Network Television, 964 F.2d 1022 (10th Cir. 1992)
United States v. AMR Corporation, 140 F. Supp. 2d 1141 (D Kan, 2001)
United States v. Eastman Kodak Co., 63 F.3d 95 (2d Cir. 1995)
7.2 Books
Areeda, P. and Hovenkamp, H., Antitrust Law (Aspen Publishing, 3rd ed, 2007)
Edlin, A. S. and Farrell, F., ‘The American Airlines Case: A Chance to Clarify Predation
Policy’ in Kwoka, J.E., The Antitrust Revolution: Economics, Competition, and Policy
(Oxford University Press, 2004)
Kaplow, L. and Shapiro, C., ‘Antitrust’ in A. M. Polinsky and S. Shavell (eds), Handbook of
Law and Economics (Elsevier, 2nd ed, 2007)
Motta, M., Competition Policy: Theory and Practice (Cambring University Press, 2004)
Posner, R., Antitrust Law: An Economic Perspective (The University of Chicago Press, 1976)
7.3 Journal Articles
Allensworth, R. H., ‘The Commensurability Myth in Antitrust’ (2016) 69(1) , 69 Vanderbilt
Law Review 1
Brander, J.A. and Zhang, A., ‘Market Conduct in the Airline Industry: An Empirical
Investigation’ (1990) 21(4) The RAND Journal of Economics 567
Crane, D.A., ‘The Paradox of Predatory Pricing’ (2005) 91(1) Cornell Law Review 1
Crane, D.A., ‘Market Power without Market Definition’ (2014) 90(1) Notre Dame Law
Review 31
12
7.4 Other
‘Memorandum of the United States’, United States of America v American Airlines [1999],
11. Available at
O. Renard, ‘Modelling Airline Competition’ (Paper presented at the ANU/NECG Conference
on the Performance of Air Transport Markets, The Australian National University, 24 June
2004)
Snider, C., Predatory Incentives and Predation Policy: The American Airlines Case (22
September 2009) University of California Berkely School of Economics, 2
