Supreme Court Decides Predatory Bidding Case

On Tuesday, February 20, 2007, the Supreme Court issued a unanimous opinion in Weyerhaeuser Co. v. Ross-Simmons Hard-Wood Lumber Co., Inc. In this case, the plaintiff, a sawmill, alleged that defendant drove it out of business by bidding up the price of sawlogs to a level that prevented plaintiff from being profitable. The Supreme Court held that test applied to predatory-pricing claims in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., also applied to predatory-bidding claims such as plaintiff's claim.

Predatory pricing is a scheme in which the predator reduces the sale price of its product hoping to drive competitors out of business and, once competition has been vanquished, raises prices to a supracompetitive level. In Brooke Group, the Supreme Court established two prerequisites to recover on a predatory-pricing claim: (1) the prices complained of are below cost; and (2) the predator had a "dangerous probability of recouping its investment in below-cost pricing."

Predatory bidding involves the exercise of market power on the market's buy, or input, side. To engage in predatory bidding, a purchaser bids up the market price of an input so high that rival buyers cannot survive, thus acquiring monopsony power (which is market power on the buy side of the market). Once a predatory bidder causes competing buyers to exit the market, it will attempt to drive down input prices to reap supracompetitive profits that will at least offset the loses it suffered in bidding up input prices.

In Weyerhaeuser, the Supreme Court held that, given the analytical similarity between predatory-pricing and predatory-bidding and the close theoretical connection between monopoly power and monopsony power, the same standards should apply in both cases. Thus, the Court held that Brooke Group's two-pronged test should apply in predatory-bidding claims. Accordingly, a predatory-bidding plaintiff must show (1) that the predator's bidding on the buy side caused the cost of the relevant output to rise above the revenues generated in the sale of those outputs; and (2) that the defendant has a dangerous probability of recouping the losses incurred in bidding up input prices through the exercise of monopsony power. Making such a showing will require "a close analysis of both the scheme alleged by the plaintiff and the [relevant market's] structure and conditions."

Keep checking this blog for updates on the other antitrust cases pending before the Supreme Court...