When the competitor turns predator

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When is a price cut bad for consumers? When it is predatory.

Should Rupert Murdoch be allowed to cut the price of The Times? The result has been lower prices for all quality national newspapers (except this one): more vigorous competition between them: and higher newspaper sales overall. On the face of it, competition is working as it should.

The argument for intervention is that what we see is predatory behaviour. The predator is someone who uses low prices to put his rival out of business, expecting to recoup his losses by raising prices when the competition has gone. There are not many documented cases of this actually happening.

John D. Rockefeller used to be vilified in textbooks as the archetype of the predator for achieving dominance of the US oil industry by crushing his competitors. Such beliefs helped bring about the Sherman Act, the first piece of anti-trust legislation anywhere in the world. But more revisionist interpretations of history have cast doubt on whether Rockefeller ever did this. In the main, he achieved his market dominance by buying out his rivals at high prices: a course which remains the normal route to monopoly today.

Predation has something of the character of dumping, or witchcraft, or satanic abuse. A bureaucracy to stamp it out comes into being with its own rituals and signs. It has its own language and judgements, and is obsessive in pursuit of something that probably does not exist. The difficulty of finding the evil only demonstrates its enormity more conclusively.

Still, there are some cases of predation. When deregulated bus companies ran free services which arrived a minute or two ahead of the schedules of their rivals, it is hard to believe they did it out of benevolence or because they erroneously thought that this was a way to make a profit. So how do we distinguish predatory price cutting – which might ultimately reduce competition – from competitive price cutting, which enhances it? Not by looking at the price, which is low in both cases.

The bus example gives a more useful clue. An action is predatory if, taken on its own, it doesn’t make commercial sense. If predatory behaviour is profitable, the profits come because of the reaction of competitors. You succeed in making money by forcing them out of the market, rather than from selling lots of the goods or services in question.

So the search for predation begins by asking whether the alleged predator is selling below the variable cost of production. The argument is that you would never have a good commercial reason for wanting to do this. This has become known as the Areeda-Turner test, following American investigations which helped to establish the relevant case law in the United States. A similar principle has been adopted in Europe, following a case in which AKZO was accused of predatory pricing of its chemicals. It is the new Competition Bill, which incorporates these European concepts into English law, which gave the House of Lords an opportunity to debate the price of the Times.

The Areeda-Turner principle is an attempt to bring clarity and precision into the law, and so avoid speculation about either the motives of firms or how the market will develop in future. But this clarity soon disappears when you let lawyers and economists debate it. What costs are fixed and which variable? Many business people are convinced (usually wrongly) that almost all their costs are fixed: in which case virtually no price, however low, could be predatory. And there might be cases when even selling at a loss could have a commercial rationale: the operators of free buses might and did (implausibly) argue that they did so to create public awareness of their services, and the Times (more reasonably) that newspaper reading is an acquired habit. After all, you can get free copies of the Independent and the Telegraph on trains.

So who is right? Lord Borrie (non-executive director of the Independent) who argues that Mr Murdoch should be restrained, or Lord Harris (non-executive director of the Times) who argues that he should be allowed to do whatever he likes? It is truly a complex issue.

There is certainly a defect in the Competition Bill. European competition law, and the British proposals which follow it, prohibit abuse of a dominant position. But the purpose of predation is not to abuse a dominant position, but to create one. Since the Times is obviously not dominant in the national newspaper market – it would merely like to be – its predatory activity could not, in itself, be illegal. Such illegality would arise only if it could be shown that News International was abusing its dominant position in some other market. But this test is both irrelevant and impossible to apply. Is the money Mr Murdoch loses on the Times earned in a competitive market, derived from a dominant position, or simply money which would otherwise be in his pocket? I don’t know and nor does he. The American law, which bans not only monopoly but the attempt to create monopoly, deals with the matter in a more appropriate way.

But the Lords amendment is also defective. It would oblige the Times to set whatever price was high enough to keep the Independent in business, however badly the Independent was doing. And since the Independent’s troubles are mostly of its own making, not Mr Murdoch’s, such a provision is deeply anti-competitive in intention and effect. The essence of competition is that the unsuccessful go to the wall. Anti-trust law is there to protect competition, not competitors, and most certainly not to protect specific competitors. Laws which, under the guise of general principle, are aimed at particular individuals, are the stuff of corruption and authoritarianism.

The basic question is straightforward to pose. Does Murdoch’s strategy make commercial sense on its own, or does it depend for its rationale on taking the Independent or some other paper off the news-stands. While straightforward to pose, the question is not straightforward to answer, and neither the existing bill nor the House of Lords amendment to it provide the right framework for doing so. And the answer depends on facts which no-one who participated in the Lords debate had. Still, the decision provides an opportunity to think through the issue properly, which is what the House of Lords is for.

All this against the background of what really is a special product. Diversity in newspapers is more important than diversity of soap powders. It is good to be able to write a column which annoys the editor of the Times, the editor of the Independent, and possibly even the editor of the Financial Times and still have it published. There is more to life than business economics.

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