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Abstract

In this review of John Lott's book, Are Predatory Commitments Credible?: Who Should the Courts Believe?, we find that Lott is more successful in pointing out the likelihood of predatory pricing by public enterprises than in proving that predatory pricing by private enterprises does not occur. In Part I of this Review, we critique Lott's theoretical and empirical attempts to show that predatory pricing by private firms is implausible. We review the theoretical arguments regarding the plausibility of predation by private firms, we critique Lott's empirical research on the credibility of predatory commitments by private firms, and finally we assess Lott's theoretical analysis of the effects of allowing would-be victims of predation to benefit directly from their privileged knowledge of a predator's intended activities. In Part II, we assess Lott's theoretical and empirical analyses of predatory pricing by public enterprises. In Part III, we present, as a proposed research agenda for scholars in law and economics, important unanswered questions that extend Lott's research on predatory pricing by public enterprises.

No antitrust lawyer, industrial organization economist, or regulator should fail to read John Lott's book, Are Predatory Commitments Credible?: Who Should the Courts Believe? It is a provocative and significant contribution to the antitrust literature. As the book's subtitle suggests, the work is intended to shape antitrust law in the most practical sense by influencing the decisions that courts render in predation cases. Lott disputes economists who have employed game theory over the past two decades to lend plausibility to the assertion that predation is a serious concern. He endeavors to rebut them both theoretically and empirically. In the process, he produces a provocative hypothesis: while predation by private enterprises is implausible, predation by public enterprises is not.

There is much to applaud in Lott's book, but it is not flawless. A recurring limitation is that Lott's creative empirical tests yield results that can support interpretations other than the ones that Lou offers. We find Lott's book to be more successful in pointing out the likelihood of predatory pricing by public enterprises than in proving that predatory pricing by private enterprises does not occur. Moreover, with respect to predation by public enterprises, Lott does not develop the economic and legal implications of his thesis in detail. Some of the relevant analysis may exceed the scope of Lott's concise book, but additional analysis along some of the dimensions described below would have strengthened Lott's important insights. Despite these limitations, Are Predatory Commitments Credible? advances significantly the legal and economic understanding of predatory pricing.

In Part I of this Review, we critique Lott's theoretical and empirical attempts to show that predatory pricing by private firms is implausible. Our discussion covers three topics. First, we review the theoretical arguments regarding the plausibility of predation by private firms. Second, we critique Lott's empirical research on the credibility of predatory commitments by private firms. Lott's research tests the hypothesis that predatory firms should adopt different employment and management compensation policies from those adopted by nonpredatory firms. Third, we assess Lott's theoretical analysis of the effects of allowing would-be victims of predation to benefit directly from their privileged knowledge of a predator's intended activities, as, for example, when the victim short sells the stock of the predator.' Such short selling can enable the victim to gain financially from the sacrifice in profit that the predator incurs when it predates, and may thereby encourage the victim to persist in its struggle against the predator.

A consistent theme emerges in these sections. Lott's observations are insightful and provocative. However, because he does not model the phenomena of interest carefully in each case, it is often difficult to infer the exact merits of Lott's arguments and how broadly his insights apply. Furthermore, although Lott's empirical work is creative and suggestive, it is not definitive.

In Part II, we assess Lott's theoretical and empirical analyses of predatory pricing by public enterprises. We first emphasize the practical importance of these analyses, both in the United States and abroad where state-owned enterprises are prevalent. Then, we examine Lott's attempt to test empirically whether public enterprises have a greater propensity to undertake predatory pricing than private firms. Again, we find Lott's empirical findings provocative but not definitive.

In Part III, we present, as a proposed research agenda for scholars in law and economics, important unanswered questions that extend Lott's research on predatory pricing by public enterprises. The relevant legal questions encompass such diverse issues as the proper scope of antitrust law, sovereign immunity, and Chevron deference' for regulatory decisions by a government enterprise regarding the scope of its own privileges and immunities from competition. In addition, we explain how Lott's analyses can be formalized and extended to analyze the likely incidence of predatory pricing by public enterprises and the exact patterns in which it is likely to appear. We also ask what policies might be pursued to limit undesirable predation by public enterprises, and discuss some drawbacks to standard legal and regulatory policies.

I. PREDATION BY PRIVATE FIRMS

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J. Gregory Sidak is an Expert Economist in the fields of Antitrust, Telecommunications Regulation, Commercial and Investment Arbitration, and Intellectual Property Law. Prof. Sidak is the Ronald Coase Professor of Law & Economics at Tilburg University and the Chief Economic Expert at Criterion Economics in Washington, DC. The focus of his research has been regulation of network industries, antitrust policy, the Internet and electronic commerce, intellectual property, and constitutional law issues concerning economic regulation.

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