Cafe Hayek: Free the Price-Cutters!

January 20, 2006

Free the Price-Cutters!

Don Boudreaux

In the current issue of Regulation, law professor Daniel Crane has a well-worth-reading article on the perverse consequences of prohibitions on so-called "predatory pricing."

Here's an especially interesting part of the article:

A study by Case Western law professor Arthur Austin is telling. Austin interviewed jurors in four antitrust trials, including Brooke Group v. Brown & Williamson, the latest predatory pricing case decided by the Supreme Court. Austin's interviews revealed that "the jurors were overwhelmed, frustrated, and confused by testimony well beyond their comprehension.... [A]t no time did any juror grasp -- even at the margins -- the law, the economics, or any other testimony related to the allegations or defense." Austin reports,

At no time have I encountered a juror who had the foggiest notion of what oligopoly, market power, or average variable cost meant, much less how they applied to the case.... Typical is the response I received when I asked a juror whether he remembered average variable cost. The juror replied, 'Yes, explain it to me. I still don't know what it means.'

Mind you, the jury found that Brown & Williamson engaged in predatory pricing, which required a finding that it had priced below average variable cost. If the jury did not understand the legal test, on what basis did it award a $148.8 judgment against Brown & Williamson?

Fortunately, in 1993 the U.S. Supreme Court found in favor of Brown & Williamson on appeal.

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