Predatory Pricing And Herman Cain

Kevin Drum points us to this Washington Monthly article that unearths a 1994 clip of Herman Cain questioning President Bill Clinton on the employer mandate proposal in the President's health care proposal. Drum focuses on Cain's SOP of making stuff up and Clinton's political skills:

I was actually struck by Cain's embrace of the concept of predatory pricing, an antitrust concept much derided by conservatives. Cain, then the CEO of Godfather's Pizza, said:

Your [Clinton's] other point of having to pass along the increased [health insurance] costs to my customers in the competitive marketplace simply does not work that way larger competitors have more staying power before they go bankrupt than a smaller competitor[.]

Cain has set out the classic argument about predatory pricing:

In business and economics, predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices without losing money, they go out of business or choose not to enter the business. The predatory merchant then has fewer competitors or is even a de facto monopoly, and hypothetically could then raise prices above what the market would otherwise bear.

Critics of the concept argue that it is a conspiracy theory, that there are "virtually no... economists" who believe the theory behind the concept (although a few believe it is theoretically possible based on models, there are virtually none who believe it is an empirical phenomenon), and that there are no known examples of a company raising prices after vanquishing all possible competition.

(Emphasis supplied.) Here is a 1992 paper by the CATO Institute deriding "The Myth of Predatory Pricing":

Predatory pricing is one of the oldest big business conspiracy theories. It was popularized in the late 19th century by journalists such as Ida Tarbell, who in History of the Standard Oil Company excoriated John D. Rockefeller because Standard Oil's low prices had driven her brother's employer, the Pure Oil Company, from the petroleum-refining business.(1) "Cutting to Kill" was the title of the chapter in which Tarbell condemned Standard Oil's allegedly predatory price cutting.

The predatory pricing argument is very simple. The predatory firm first lowers its price until it is below the average cost of its competitors. The competitors must then lower their prices below average cost, thereby losing money on each unit sold. If they fail to cut their prices, they will lose virtually all of their market share; if they do cut their prices, they will eventually go bankrupt. After the competition has been forced out of the market, the predatory firm raises its price, compensating itself for the money it lost while it was engaged in predatory pricing, and earns monopoly profits forever after.

The theory of predatory pricing has always seemed to have a grain of truth to it--at least to noneconomists--but research over the past 35 years has shown that predatory pricing as a strategy for monopolizing an industry is irra- tional, that there has never been a single clear-cut example of a monopoly created by so-called predatory pricing, and that claims of predatory pricing are typically made by com- petitors who are either unwilling or unable to cut their own prices. Thus, legal restrictions on price cutting, in the name of combatting "predation," are inevitably protectionist and anti-consumer, as Harold Demsetz noted.(2)

Predatory pricing is the Rodney Dangerfield of economic theory--it gets virtually no respect from economists. But it is still a popular legal and political theory for several reasons. First, huge sums of money are involved in predato- ry pricing litigation, which guarantees that the antitrust bar will always be fond of the theory of predatory pricing. During the 1970s AT&T estimated that it spent over $100 million a year defending itself against claims of predatory pricing. It has been estimated that the average cost to a major corporation of litigating a predation case is $30 million.(3)

I'm not going to argue the validity of predatory pricing as a concept here, but instead only note that erstwhile conservatives like Cain sure seem willing to embrace when it suits them. Call it my Legal Realist theory of political argument.

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    not only did standard oil practice (5.00 / 0) (#4)
    by cpinva on Thu Oct 20, 2011 at 09:27:17 AM EST
    predatory pricing, they also charged the railroads a penalty, of a dollar a barrel, for every barrel of a competitor's crude they had the audacity to transport.

    old john d. would make today's wall street gonifs look like school boys by comparison. he took greed and corruption, and raised them to the level of art forms.

    But, you forgot how he "gave back." (5.00 / 1) (#6)
    by NYShooter on Thu Oct 20, 2011 at 11:57:28 AM EST
    Don't you remember those shiny dimes he handed out to those ragged street urchins at every photo op?

    Shooter (none / 0) (#13)
    by cal1942 on Thu Oct 20, 2011 at 11:34:42 PM EST
    Love it.

    When I was a young associate (5.00 / 1) (#7)
    by scribe on Thu Oct 20, 2011 at 12:07:31 PM EST
    I worked on a case built around predatory pricing, and it does exist.  It is very effective.

    Without naming names, it worked like this.

    Supplier A was a major player in making and selling a particular product that was essential for large construction projects.  This product had to be worked on to convert it from the raw-ish product Supplier A made into the finished product that would be incorporated into the contstruction project.  So, there were a series of Intermediate Manufacturers B, C, D, etc. who would be bidding on the various construction projects and having to buy the raw product to work into the finished product for each project.  On average, A's product made up about 60 percent of an Intermediate Manufacturer's out-the-door price for the finished product.

    Making matters more interesting, the product came in lots of sizes.  In some of the sizes, A had an effective, if not actual, monopoly because only A could make that size, and gearing up for those sizes was a prohibitive capital expense for those producers competing with A.

    Since all these projects were public knowledge and competitively bid, everyone in the business had essentially equal knowledge.  The product was essentially a commodity.  All the Intermediates'  competitive bids' would have to be devised from price.  While the product was a commodity, it rarely sold at the commodity price.  There usually was some level of discount given, purportedly based on week-to-week market conditions, shipping costs and the like.

    So, A's home office decided they could control who got work, and who didn't.  They did that by discriminatory discounts.  Most of the dealings on price - between A's sales force and the Intermediates' purchasing agents - went down on the golf course.  So, the level of discount your company got depended on how well your purchasing agent lost to A's salesmen at golf.  Make a good game of it and lose closely (without obviously throwing it) and you got a good discount.  Do otherwise, lousy discount.

    Given that the largest portion of your bid on any project was in A's product (and all the Intermediates' had similar labor and work cost rates), if you got a good discount you could win the job and even make a better profit if you got a good discount.  If you didn't, you could be out of business inside of a year.

    We surveyed something like 450 or 500 different construction projects where this discounting had gone on, and had them in our case.

    A's general counsel got the complaint and offered our client a million dollars to settle before even starting to draft an answer.  

    This is like a horrible all day puzzle to me (5.00 / 1) (#8)
    by Militarytracy on Thu Oct 20, 2011 at 12:51:01 PM EST
    I can't stop trying to figure out what the product was :)

    LOL (none / 0) (#10)
    by sj on Thu Oct 20, 2011 at 01:40:51 PM EST
    Same here :)

    Price discrimination (none / 0) (#9)
    by Big Tent Democrat on Thu Oct 20, 2011 at 12:52:34 PM EST
    rather than predatory pricing it seems to me.

    Maybe I did not understand your comment.


    Hey whatever works in keeping (none / 0) (#1)
    by Militarytracy on Thu Oct 20, 2011 at 08:13:03 AM EST
    people in their place.  Herman Cain reminds me of every horrible boss I've ever had.  It is hurting him more than it is hurting you to have to do this to you.

    I believe that may be a fall back position (none / 0) (#2)
    by coast on Thu Oct 20, 2011 at 08:24:21 AM EST
    on both conservative and liberal business men alike, considering that is the position being taken by the now infamous executive at the failed Solyndra solar panel company.  The Chinese just weren't playing fair.

    We all know that Tim Geithner (5.00 / 0) (#3)
    by Militarytracy on Thu Oct 20, 2011 at 09:17:11 AM EST
    and Larry Summers and the Bernanke probably as well think that "stress" upon "businesses" is intolerable.  If they feel doubtful about anything the whole world will grind to a halt and then explode.

    Ironical (none / 0) (#5)
    by Rojas on Thu Oct 20, 2011 at 11:24:35 AM EST
    Using President Enron to illustrate that conservatives are hypocrites.  

    I think he's saying that (none / 0) (#11)
    by NYShooter on Thu Oct 20, 2011 at 01:46:30 PM EST
    Manufacturer, A, has a proprietary (60% complete) product that competing subcontractors, B, C, & D need in order to complete the product, and make it ready for sale to a consumer.

    How Manufacturer, A, makes  the decision as to which subcontractor wins the contract for their product is the issue.

    I kinda doubt, however, whether a golf score is the determining factor though.

    Shocking (none / 0) (#12)
    by Rojas on Thu Oct 20, 2011 at 02:21:37 PM EST
    folks actually gamble on those games.