FTC Staff Comment to the Hon. William R. Ratliff Concerning Texas S.B. 974 to Ban Certain Forms of Below Cost Pricing

100 N. c.nc,a1 bpr_y
SuM ~
O.MU, TX 75201
(21.) 7S7·S503
UNITED STATES OF AMERJCA
FEDERAL TRADE COMMISSION
DALLAS REGIONAL OFFICE
May 	15, 	1989
,\
;IV890066
COMMISSION AUTHORIZED
Office of the RegiorW Director
The 	Honorable William R. 	Ratliff
Economic 	Development 	Committee
Texas 	State 	Senate
P.O. 	Box 	12068
Capitol 	Building
Austin, 	Texas 	78711
Dear Mr. 	Ratliff:
We 	are'pleased 	to 	respond 	to 	your 	invitation 	to 	comment 	on
Texas 	Senate 	Bill 	974, 	which would 	ban 	certain 	forms 	of 	below
cost 	pricing. l 	Specifically, 	the 	proposed 	legislation would 	ban
below 	cost 	sales 	made 	by 	a 	retailer 	or wholesaler 	with 	the 	intent
of 	injuring 	competitors 	or 	competition. 	The 	bill 	defines 	"below
cost" 	to 	mean 	below 	the 	seller's 	invoice 	purchase 	price 	(minus
discounts 	but 	plus 	freight 	and 	other 	charges) .
We 	believe 	that 	careful 	consideration 	should be 	given 	to 	the
costs 	of 	prohibitions 	aimed 	at 	anticompetitive 	below 	cost 	pricing
(normally 	characterized 	in 	the 	antitrust 	literature 	as 	predatory
pricing). 	Due 	to 	the 	difficulty 	of 	distinguishing 	between 	the
below 	cost 	pricing 	targeted 	by 	the 	proposed 	legislation 	and
vigorous 	competition, 	statutory prohibitions 	against 	pricing
below 	cost 	can 	chill 	price 	competition 	that 	would 	benefit
consumers. 	Moreover, 	after 	having 	reviewed many 	allegations 	of
such 	conduct, 	we 	believe 	that 	firms 	will 	rarely 	engage 	in 	genuine
predatory 	pricing, 	because 	they 	typically 	know 	that 	they 	cannot
count 	on 	a 	later 	period 	of monopoly 	power during 	which 	they 	can
raise 	prices 	above 	their 	costs 	and 	recoup 	their 	earlier 	losses.
In 	determining 	whether 	to 	enact 	the 	bill, 	the 	legislature may
wish 	to 	consider 	the 	likely 	anticompetitive 	effect 	of 	this 	bill
and 	the 	relatively 	small 	countervailing 	benefits 	to 	consumers.
Interest 	and 	Experience 	of 	the 	Federal 	Trade 	Commission
The 	Federal 	Trade 	Commission 	("FTC") 	is 	an 	independent
regulatory 	agency 	responsible 	for 	protecting 	competition 	and
1 	These 	comments 	are 	the 	views 	of 	the 	staff 	of 	the 	Dallas
Regional 	Office 	and 	the 	Bureau 	of 	Competition 	of 	the 	Federal
Trade 	Commission. 	They 	are 	not 	necessarily 	the 	views 	of 	the
Commission 	or 	any 	individual 	Commissioner.

safeguarding 	the 	interests 	of 	consumers. 	section 	5 	of 	the
Federal 	Trade 	Commission 	Act 2 	prohibits 	unfair methods 	of
competition 	and 	unfair 	or 	deceptive 	acts 	or 	practices. 	Through
investigations 	of 	alleged 	violations 	of 	this 	statute, 	the 	staff
of 	the 	FTC 	has 	gained 	experience 	in 	analyzing 	the 	effects 	of
various 	trade 	restraints 	and 	the 	costs 	and 	benefits 	of 	these
restraints 	to 	consumers. 	Upon 	request 	by 	federal, 	state 	and
local 	governmental 	bodies, 	the 	FTC 	staff 	regularly 	assesses 	the
competitive 	impact 	of 	legislative 	and 	regulatory 	proposals 	in
order 	to 	identify 	provisions 	that may 	benefit 	consumers 	by
promoting 	competition 	and 	reducing 	prices, 	and 	provisions 	that
may 	harm 	consumers 	by 	impairing 	competition 	or 	increasing 	costs
without 	offering 	offsetting 	benefits.
In 	recent 	years, 	the 	Commission's 	staff 	has 	had 	extensive
experience with 	the 	issue 	of 	predatory 	pricing. 	The 	staff 	has
conducted 	a 	number 	of 	investigations 	of 	alleged 	predation. 	Two
of 	these 	investigations 	have 	led 	to 	antitrust 	enforcement
proceedings.) 	The 	Commission's 	staff 	has 	also 	submitted 	comments
to 	a 	state 	legislature 	and 	a 	state 	agency 	concerning 	other
proposed 	predatory 	pricing 	bills. 4
Description 	of S.B. 	974
section 	1 	of 	S.B. 	974 	would 	add 	a 	new Chapter 	19, 	entitled
"Unfair 	Sales," 	to 	the 	Texas 	Business 	and 	Commerce 	Code. 5
section 	19.03(a) 	of 	the 	bill 	would, 	inter 	alia, 	prohibit
retailers 	and 	wholesalers 	from 	selling 	tangible 	personal 	property
at 	prices 	below 	cost
with 	the 	intent 	to 	induce 	the 	purchase 	of 	other
merchandise, 	unfairly 	divert 	trade 	from 	a 	competitor 	or
2 	15 	U.S.C. 	§ 	45.
3 	International 	Telephone 	& Telegraph 	Corporation, 	104
F.T.C. 	280 	(1984) 	("ITT") ; 	General 	Foods 	Corp., 	103 	F.T.C. 	204
(1984) 	("General 	Foods").
4 	Letter 	from 	Jeffrey 	I. 	Zuckerman, 	Director, 	Bureau 	of
Competition, 	Federal 	Trade 	Commission, 	to 	Senator Gene 	Thayer,
Chairman, 	Business 	and 	Industry 	Committee, 	Montana 	State 	Senate
(March 	10, 	1989) ; 	letter 	from 	Jeffrey 	I. 	Zuckerman, 	Director,
Bureau 	of 	Competition, 	Federal 	Trade 	Commission, 	to 	Gay
Woodhouse, 	Senior Assistant 	Attorney 	General, 	State 	of 	Wyoming
(December 	11, 	1987).
5 	Tex. 	Rev. 	civ. 	Stat. 	(Business 	& Commerce 	Code)
§§ 	19.01-19.08. 	In 	this 	letter, 	the 	particular 	provisions 	of 	the
bill 	will 	be 	referred 	to 	by 	their 	Chapter 	19 	citation, 	as 	they
are 	set 	out 	in 	the 	bill.
2
I,,

otherwise 	injure 	a 	competitor, 	impair 	or 	prevent 	fair
competition 	or 	injure 	the 	public welfare, 	or 	if 	the
advertisement, 	offer, 	or 	sale 	tends 	to 	deceive 	a
purchaser 	or 	prospective 	purchaser, 	substantially
lessen 	competition, 	unreasonably 	restrain 	trade, 	or
create 	a 	monopoly 	in 	a 	line 	of 	commerce. 6
"Cost 	to 	the 	retailer" 	is 	defined 	as 	"the 	invoice 	cost 	of 	the
merchandise 	or 	the 	replacement 	cost, 	whichever 	is 	lower 	..• ,"
less 	most 	trade 	discounts, 	plUS 	other 	specified 	costs 	of 	doing
business, 	such 	as 	taxes 	and 	transportation 	costs.? 	"Cost 	to 	the
wholesaler" 	is 	defined 	similarly. 	A showing 	that 	a 	retailer 	or
wholesaler 	advertised, 	offered 	or 	sold merchandise 	at 	a 	price
"below 	cost" 	would 	be 	prima 	facie 	evidence 	of 	an 	intent 	to 	injure
competition 	or 	competitors. 8
Section 	19.03(b) 	of 	the 	bill 	would 	make 	a 	violation 	of 	the
statute 	a 	misdemeanor. 	sections 	19.04 	and 	19.05 	would 	authorize
private 	actions 	for 	injunctions 	and damages 	to 	remedy 	any
violations. 9
Predatory 	Pricing Generally
The 	theory 	of 	predatory 	pricing 	suggests 	that 	a 	firm 	could
price 	its 	products 	below 	the 	actual 	costs 	of 	producing 	or
obtaining 	them, 	for 	a 	prolonged 	period 	of 	time, 	and 	drive 	its
less 	well 	financed 	rivals 	from 	the 	market. 	A firm 	would 	have 	the
incentive 	to 	pursue 	this 	strategy 	if 	it 	could 	achieve 	a 	monopoly
position, 	thereby 	enabling 	it 	to 	raise 	prices 	high 	enough 	to
recoup 	its 	initial 	losses.
6 	section 	19.08(a) 	specifies 	exceptions 	for 	unusual
circumstances, 	such 	as 	business 	liquidation 	sales, 	clearance
sales, 	or 	sales 	to 	aid 	charitable 	causes. 	However, 	Section
19.08(b) 	may 	be 	interpreted 	to 	provide 	that 	if 	a 	retailer 	or
wholesaler 	purchases 	goods 	at 	such 	a 	sale, 	he 	may 	not 	pass 	his
savings 	on 	to 	the 	consumers 	because 	he 	must 	use 	"replacement
cost" 	in 	the 	"ordinary 	channels 	of 	trade" 	to 	establish 	his 	cost
for 	such 	products.
?
8
section 	19.01(1) 	of 	the 	bill.
S.B. 	974, 	Section 	19.07.
9 	section 	19.04 	allows 	a 	suit 	for 	an 	injunction 	by 	a
"person 	injured 	by 	a 	... 	threatened 	violation 	of 	this 	Act."
(Emphasis 	added.) 	In 	addition, 	under 	this 	section, 	a 	party 	need
not 	show 	irreparable 	injury 	or 	unavailability 	of 	other 	remedies
in 	order 	to 	obtain 	an 	injunction.
3

We 	believe, 	however, 	that 	successful 	completion 	of 	this
strategy 	is 	difficult, 	and 	the 	strategy 	is 	therefore 	quite 	rarely
undertaken. 	At 	least 	two 	obstacles 	stand 	in 	its 	path. 	First,
the 	predator 	must 	absorb 	relatively 	large 	losses, 	since, 	as 	it
acquires 	an 	ever-larger market 	share, 	it must 	bear per-unit
losses 	on 	an 	ever-larger 	number 	of 	units. 	This 	means 	that 	the
predator's 	financial 	losses 	will 	be much 	larger 	than 	those 	of 	its
putative 	victims. 	Second, 	the 	predator 	cannot 	count 	on 	having 	a
period 	of 	monopoly 	power 	within which 	to 	recoup 	these 	losses.
When 	the 	predator 	begins 	to 	raise 	prices, 	the 	market 	will 	become
attractive 	and 	firms 	will 	once 	more 	enter 	in 	response 	to 	the 	new
profitability 	of 	the 	industry. 	This 	competitive 	response 	may 	be
lessened 	if 	the 	market 	is 	protected 	by 	barriers 	to 	the 	entry 	of
new 	firms. 10 	In 	the 	absence 	of 	significant 	problems 	of 	this
sort, 	however, 	we 	can 	expect 	that 	entry will 	in 	fact 	occur 	rather
rapidly, 	and 	that 	it will 	ensure 	that 	prices 	do 	not 	remain 	above
competitive 	levels.
These 	views 	are 	consistent with 	the 	Supreme 	Court's 	recent
opinions 	in.two 	cases 	involving 	predatory 	pricing, 	Matsushita
Electric 	v. 	Zenith 	Radio 	Corp., 	475 	U.S. 	574 	(1986), 	and 	Cargill
v. 	Montfort, 	479 	U.S. 	104 	(1986). 	These 	decisions 	contain 	the
Court's 	first 	discussion 	of 	the 	issue 	since 	1967 11 	and 	reflect
the 	substantial 	developments 	in 	the 	legal 	and 	economic 	analysis
of 	predatory 	pricing 	that 	have 	occurred 	in 	the 	past 	two 	decades.
The 	Matsushita 	case 	involved 	allegations 	that 	Japanese 	television
manufacturers 	had 	engaged 	in 	a 	complicated 	conspiracy 	to 	raise
prices 	in 	their home market 	and use 	the 	profits 	to 	subsidize
predatory 	pricing 	here. 	A motion 	for 	summary 	jUdgment 	raised 	the
question 	of whether 	there were 	any 	genuine 	issues 	of 	fact 	for
trial. 	conclUding 	that 	predation was 	unlikely 	on 	the 	facts
alleged, 	the 	Supreme 	Court 	observed 	that 	"there 	is 	a 	consensus
among 	commentators 	that 	predatory 	pricing 	schemes 	are 	rarely
tried, 	and 	even more 	rarely 	successful." 	475 	U.S. 	at 	589. 	The
cargill 	case 	raised 	similar 	issues. 	There 	a 	meat-packing 	company
had 	challenged 	a 	merger 	between 	two 	of 	its 	competitors, 	alleging
that 	this 	would 	give 	the merged 	firm 	the 	financial 	resources 	to
engage 	in 	predatory 	pricing. 	Although 	relying 	on 	technical
10 	The 	competitive 	response 	might 	also 	be 	lessened 	if
outside 	firms 	were 	deprived 	of 	the 	information 	needed 	to 	make
informed 	entry 	decisions. 	For 	example, 	a 	predator might
cultivate 	a 	reputation 	for 	irrational 	pricing behavior, 	and
thereby 	deter 	entry 	by 	increasing 	the 	market 	uncertainties 	that
an 	entrant 	must 	face. 	See 	J. 	Tirole, 	Theory 	of 	Industrial
Organization 	pp. 	372-77 	(1988). 	Although 	this 	outcome 	is
logically 	possible, 	there 	is 	thus 	far 	no 	consensus 	that 	it
actually 	occurs 	to 	any 	significant 	extent.
11 	See 	Utah 	Pie 	Co. 	v. 	Continental 	Baking 	Co., 	386 	U.S.
685 	(1967).
4
I.I

,Igrounds 	to 	reverse 	a 	ruling 	for 	the 	plaintiff, 	the 	Court
indicated more 	generally 	that 	the 	mere 	possibility 	of 	such harm,
without 	any more 	specific 	evidence, 	was 	too 	speculative 	to
support 	an 	injunction 	against 	the 	merger. 	The 	Court 	said 	that
"(c]laims 	of 	threatened 	injury 	from 	predatory 	pricing must, 	of
course, 	be 	evaluated with 	care," 	and 	that 	"the 	obstacles 	to 	the
successful 	execution 	of 	a 	strategy 	of 	predatory 	pricing 	are
manifold, 	and 	• 	. 	. 	the 	disincentives 	to 	engage 	in 	such 	a
strategy 	are 	accordingly 	numerous." 	479 	U.S. 	at 	121 	n.17. 12
Underlying 	these 	decisions 	is 	a 	belief 	that 	the 	success 	of
any predatory 	pricing 	effort 	is 	inherently 	uncertain:
[T]he 	short-run 	loss 	(from predatory 	pricing]
is 	definite, 	but 	the 	long-run gain 	depends 	on
successfully neutralizing 	the 	competition.
Moreover, 	it 	is 	not 	enough 	simply 	to 	achieve
monopoly 	power, 	as 	monopoly 	pricing may 	breed
quick 	entry by 	new 	competitors 	eager 	to 	share
in 	the 	excess 	profits. 	The 	success 	of 	any
predatory 	scheme 	depends 	on maintaining
monopoly 	power 	for 	long 	enough 	both 	to 	recoup
the 	predator's 	losses 	and 	to 	harvest 	some
additional 	gain.
Matsushita, 	475 	U.S. 	at 	589.
Several 	factors 	contribute 	to 	the 	uncertainty 	of 	outcome.
One 	is 	the 	need 	for 	entry 	barriers, 	as 	the 	Matsushita 	Court
discussed. 	Entry 	barriers 	are 	essential 	if 	a 	predatory 	scheme 	is
to 	work, 	yet, 	in 	our 	open 	economy, 	a 	market 	generally 	is 	not
insulated 	from 	competition 	long 	enough 	to 	permit 	recoupment 	of
the 	initial 	losses. 	Another problem 	for 	the 	rational 	predator 	is
that 	future 	profits 	must 	be 	discounted. 	By 	dropping 	prices 	below
cost 	the 	predator 	forgoes 	profits 	in 	current 	dollars, 	whereas 	any
recoupment 	will 	necessarily 	be 	in 	discounted 	future 	dollars.
12 	In 	Cargill 	the 	Court 	stated: 	"Predatory pricing may
be 	defined 	as 	pricing below 	an 	appropriate 	measure 	of 	cost 	for
the 	purpose 	of 	eliminating 	competitors 	in 	the 	short 	run 	and
reducing 	competition 	in 	the 	long 	run." 	479 	U.S. 	at 	117 	(footnote
omitted). 	Accord 	Matsushita, 	475 	U.S. 	at 	584 	n.8. 	The 	Court
found 	it 	unnecessary 	to 	consider 	"whether 	above-cost 	pricing
coupled with 	predatory 	intent 	is 	ever 	sufficient 	to 	state 	a 	claim
of 	predation." 	Cargill, 	479 	U.S. 	at 	117-18 	n.12. 	Commentators
and 	courts 	continue 	to 	differ 	on 	the 	exact measure 	of 	cost 	to 	be
used 	in 	defining 	predatory 	pricing. 	Id. 	To 	some 	extent 	the
definition 	of 	the 	cost benchmark will 	determine 	the 	incidence 	of
predation. 	The 	divergent 	technical 	positions 	on 	the 	cost
question, 	however, 	do 	not 	undermine 	the 	consensus 	that 	predation,
however 	defined, 	occurs 	infrequently.
5

I.1
Still 	another 	source 	of 	uncertainty 	is 	the 	fact 	that 	recoupment
may 	be 	affected 	by 	intervening 	changes 	in 	business,
technological, 	regulatory, 	or 	demand 	conditions. 	Accordingly, 	we
believe 	that 	predatory 	pricing 	statutes 	address 	a 	rare 	problem.
In 	addition, 	we 	believe 	that 	such 	statutes may 	be
affirmatively 	harmful 	to 	consumers. 	If 	the 	statutory 	definition
of 	the 	offense 	is 	overbroad 	(making 	it 	too 	easy 	to 	prove) 	or 	if
the 	offense 	is 	so 	vaguely 	defined 	that 	erroneous 	public 	and
private 	applications 	of 	the 	statute 	are 	probable, 	businesses 	may
be 	deterred 	from 	vigorous 	but 	legitimate 	price 	competition. 13
Deterrence 	from 	competition 	is 	a 	particular problem because 	firms
have 	an 	incentive 	to 	complain 	about 	the. successful 	competitive
efforts 	of 	their 	rivals, 	however 	proper 	those 	efforts 	may 	be.
These 	risks 	can be 	seen 	in 	the 	mix 	of 	complaints 	that 	are
brought 	to 	the 	Commission. 	During 	one 	five-month 	sample 	period
in 	the 	mid-1980's 	we 	received 	nineteen 	complaints 	of 	predatory
pricing. 	commission 	attorneys 	followed 	up 	on 	all 	of 	these 	by
calling 	the 	complainants 	to 	request 	additional 	and more 	specific
information. 	In 	fourteen 	of 	the 	nineteen 	cases 	the 	complainants
had 	no 	data 	to 	support 	their 	charge; 	they 	simp~y "felt" 	that
their 	competitors 	were 	pricing 	too 	low. 	In most 	of 	these 	cases
it 	appeared more 	probable 	to 	our 	investigators 	that 	the 	alleged
predators 	were 	aChieving 	operational 	efficiencies 	that 	would
legitimately 	allow 	them 	to 	charge 	lower 	prices. 	In 	support 	of
this 	they 	observed 	that 	most 	of 	the 	industries 	had 	low 	entry
barriers, 	which would 	tend 	to 	rule 	out 	a 	rational 	strategy 	of
predatory 	pricing.
To 	screen 	out 	those 	cases 	in which 	predatory pricing 	is
unlikely, 	we 	consider 	the 	structural 	characteristics 	of 	the
market 	(such 	as 	the 	number 	of 	firms 	in 	the 	market, 	their
individual 	market 	shares, 	and 	the 	barriers 	to 	entry 	into 	the
market 	by 	individual 	firms). 	Our 	findings 	may 	obviate 	reaching
questions 	of 	costs 	and prices. 	This 	initial 	inquiry 	focuses 	on
whether 	a 	market 	is 	so 	structured 	and 	so 	protected by 	entry
13 	The 	Supreme 	Court 	specifically 	recognized 	this
potential 	problem when 	it 	stated:
Moreover, 	the 	mechanism 	by which 	a 	firm 	engages 	in
predatory 	pricing 	-- 	lowering prices 	-- 	is 	the 	same
mechanism 	by which 	a 	firm 	stimulates 	competition;
because 	"cutting 	prices 	in 	order 	to 	increase 	business
often 	is 	the 	very 	essence 	of 	competition 	. 	• 	. 	mistaken
infer~nces . 	. 	. 	are 	especially 	costly, 	because 	they
chill 	the 	very 	conduct 	the 	antitrust 	laws 	are 	designed
to 	protect." 	[Matsushita, 	475 	U.S. 	at 	594.J
Cargill, 	479 	U.S. 	at 	121-22, 	n.17.
6

barriers 	that 	predation 	is 	a 	realistic 	possibility. 	The
Commission 	has 	followed 	this 	approach 	in 	its 	own most 	recent
predatory 	pricing 	cases. 14 	In 	dismissing 	the 	charges 	in 	these
cases, 	the 	Commission 	found 	it 	unnecessary 	to 	reach 	a 	detailed
examination 	of 	evidence 	relating 	to 	either 	intent 	or 	conduct.
Rather, 	the 	Commission 	observed 	in 	each 	case 	that 	the 	market
structure 	and 	the 	vigor 	of 	current 	competition precluded 	any
dangerous 	probability that 	below 	cost 	pricing, 	if 	it 	had
occurred, 	could 	have 	led 	to 	sustained monopoly 	power.
This 	phased 	approach 	permits 	careful 	evaluation 	of 	predatory
pricing 	complaints, 	yet 	also 	reduces 	the 	resources 	necessary 	to
assess 	them, 	because market 	structure 	and 	entry 	barrier
information 	typically 	is 	more 	available 	and 	less 	ambiguous 	than
evidence 	regarding 	an 	individual 	firm's 	cost 	levels 	or 	intent 	to
monopolize. 	In 	addition, 	reliance 	on market 	evidence 	limits 	the
risk 	that 	a 	law 	enforcement 	investigation might 	chill 	legitimate
price 	competition. 	After 	all, 	a 	firm 	may 	engage 	in 	allegedly
below 	cost 	pricing 	for 	a 	time 	for 	a 	number 	of 	legitimate 	purposes
(such 	as 	to 	liquidate 	inventory, 	for 	promotional 	reasons 	to 	enter
a 	market, 	in 	response 	to 	competition, 	etc.). 	Because we 	use 	such
evidence 	to 	weed 	out 	improbable 	predatory pricing 	claims,
legitimately 	competitive 	firms.are 	not 	subjected 	to 	intrusive 	and
potentially expensive 	inquiries 	into 	their motives, 	cost
structures, 	and 	business 	plans.
Effect 	of S.B. 	974 	on competition
As 	discussed 	in 	the 	previous 	section, 	a 	below 	cost 	pricing
statute 	can be 	written 	and 	applied 	to 	prohibit 	activities 	that 	do
not 	harm 	or 	threaten 	to 	harm 	competition. 	S.B. 	974 	appears 	to 	be
such a 	statute. 	The 	bill 	appears 	likely 	to 	chill 	price
competition, 	to 	the 	detriment 	of 	consumers.
Section 	19.07 	of 	the 	bill 	provides 	that 	evidence 	of 	a 	sale
or 	the 	offering 	for 	sale 	at 	a 	price below the 	cost 	of 	the
retailer 	or wholesaler would be 	prima 	facie 	evidence 	of 	intent 	to
injure 	competition. 	Since 	section 	19.03(a) 	of 	the 	bill 	would
make 	it 	illegal 	to 	engage 	in below 	cost 	pricing with 	an 	"intent"
to 	injure 	competition 	or a 	competitor, 	these 	provisions 	taken
14 	ITT, 	supra 	note 	3; 	General 	Foods, 	supra 	note 	3. 	In
ITT, 	the 	Commission 	determined 	that 	sales 	"at 	prices 	that 	equal
or 	exceed 	average 	variable 	cost 	should 	be 	strongly, 	often
conclusively, 	presumed 	to 	be 	legal." 	104 	F.T.C. 	at 	403. 	The
Commission 	also 	concluded 	that 	sales 	"at 	prices 	below 	average
variable 	cost 	for 	a 	significant 	period 	of 	time 	should 	be
rebuttably 	presumed 	to 	be 	anticompetitive." 	Id. 	at 	404.
Finally, 	the 	Commission 	determined 	that 	sales 	"at 	prices 	that
equal 	or 	exceed 	average 	total 	cost 	should be 	conclusively
presumed 	to 	be 	legitimate." 	Id.
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together 	may 	in 	certain 	circumstances 	permit 	a 	competitor 	to
prove 	a 	violation 	of 	the 	law 	upon 	a 	mere 	showing 	of 	sales 	made
"below 	cost." 	As 	discussed 	in 	the 	previous 	section, 	such 	a
result may 	injure 	rather 	than 	benefit 	consumers 	by 	deterring
merchants 	from 	engaging 	in vigorous 	price 	competition.
other provisions 	of 	the 	bill 	may 	also 	discourage 	merchants
from 	lowering 	prices 	to 	consumers. 	Section 	19.03(a) 	would
prohibit 	below 	cost 	sales 	"with 	the 	intent 	to 	induce 	the 	purchase
of 	other merchandise." 	This 	provision 	seems 	designed 	to 	prevent
the 	use 	of 	"loss 	leaders," 	a 	competitive 	device 	commonly used 	by
retailers 	to 	encourage 	consumers 	to 	shop 	in 	their 	stores. 	This
is 	troublesome 	because 	loss 	leaders 	can 	benefit 	consumers 	in
several 	ways. 	Loss 	leaders 	can 	convey 	cash 	discounts 	and 	induce
consumers 	to 	try 	new products. 	Frequently 	loss 	leaders 	are 	used
as 	a 	competitive 	device 	to 	facilitate 	the 	entry 	of 	new
competitors 	into 	a 	market 	or 	the 	introduction 	of 	new 	products.
Since 	loss 	leaders 	are 	a 	familiar 	promotional 	technique, 	these
goals 	can 	be 	accomplished 	without 	misleading 	consumers 	as 	to 	the
prices 	prevailing 	elsewhere 	in 	the 	store. 	In 	addition, 	if
section 	19.08(b) 	is 	interpreted 	to 	prevent merchants 	who 	have
purchased 	goods 	at 	costs 	considerably 	lower 	than 	usual 	(due 	to
bankruptcy, 	closeout 	or 	other 	such 	sales) 	from 	passing 	these
savings 	on 	to 	consumers, 	consumers 	will 	not 	receive 	any 	benefit
from 	the 	merchant's 	lower 	than 	usual 	cost.
For 	all 	these 	reasons 	we 	believe 	that 	the 	net 	effects 	of
S.B. 	974 	will 	be 	harmful 	to 	consumers.
Existing State and 	Federal 	Laws
We 	do 	not 	believe 	new 	legislation 	on 	this 	sUbject 	is
necessary. 	There 	are 	existing 	federal 	and 	state 	laws 	that 	can be
used 	to 	prevent 	or 	redress 	injury 	resulting 	from 	true 	predatory
pricing 	on 	the 	rare 	occasions 	when 	it 	occurs. 	(Of 	course, 	we
think predatory 	pricing 	should 	be 	thwarted 	on 	those 	rare
occasions 	that 	it 	takes 	place.) 	Predatory 	conduct 	in 	wholesale
and 	retail 	marketing 	is 	already 	subject 	to 	the 	Sherman Act, 	the
Clayton Act, 	the 	Federal 	Trade 	Commission Act, 	and, 	at 	the 	state
level, 	the 	Texas 	Free 	Enterprise 	and Antitrust 	Act. 15 	These
statutes 	address 	possible 	anticompetitive 	practices 	more
effectively 	than 	would 	legislation 	more 	specifically 	regulating
15 	Tex. 	Rev. 	civ. 	Stat. 	(Texas 	Business 	& Commerce 	Code)
§§ 	15.01-15.05. 	Section 	5 	of 	the 	FTC Act 	is 	enforced by 	the
Commission. 	The 	Sherman Act 	is 	enforced 	by 	the 	Department 	of
Justice 	and 	by 	the 	Federal 	Trade 	Commission 	through 	Section 	5 	of
the 	FTC Act. 	The 	Robinson-Patman Act 	is 	enforced 	by 	the
Commission. 	In 	addition, 	private 	actions 	may 	be 	brought under
the 	Sherman 	Act 	and 	the 	Robinson-Patman 	Act. 	State 	attorneys
general 	may 	also 	bring 	suit 	as 	parens 	patriae. 	15 	U.S.C. 	§ 	15c.
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below 	cost 	selling. 	The 	existing 	antitrust 	laws 	deter 	firms 	from
engaging 	in 	predatory behavior, 	but, 	at 	the 	same 	time, 	allow 	them
to 	engage 	in 	price 	competition 	that 	is 	beneficial 	to 	consumers.
In 	contrast, 	the 	price 	regulation 	envisioned 	by 	S.B. 	974 	may 	deny
firms 	the 	flexibility 	to 	adjust 	their prices 	in 	response 	to
changing market 	conditions.
Conclusion
For the 	reasons 	stated 	above, 	we 	believe 	that 	S.B. 	974, 	if
enacted, 	would 	tend 	to 	insulate wholesale 	and 	retail 	marketers 	of
tangible 	personal 	property 	from 	price 	competition. 	The 	result
would 	likely be 	that 	Texas 	consumers 	would 	end 	up 	paying 	higher
prices 	for 	goods.
We 	appreciate 	the 	opportunity to 	comment 	on 	S.B. 	974.
Please 	feel 	free 	to 	contact 	us 	if 	we 	can be 	of 	further
assistance.
Sincerely,
4&~
omas 	B. 	carte~
Director
Dallas 	Regional 	Office
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