Predatory bidding is a pricing strategy of bidding up the price of inputs to prevent other competitors from acquiring enough supplies. Predatory bidding is very similar to predatory pricing. Like predatory pricing, predatory bidding involves the use of market power (power of monopsony) to make other rivals unable to survive in the market. Once a predatory bidder succeeds in clearing the market, it will lower the input prices to earn extra profit that would at least cover the damage caused by predatory bidding (Supracompetitive profit).
On Feb 28, 2007, the Supreme Court finally set a legal model concerned about matters of predatory bidding in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (No. 05-381). The court explained that the same legal standards that test the legality of predatory pricing apply to predatory pricing as pointing out the similarities between them. The Court implemented the test used in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) to judge the lawfulness of the price bidding claim. The main three points that made the Court believe the similarities were these (taken directly from link):
- A rational business will rarely make the financial sacrifice necessary to engage in either predatory bidding or predatory pricing;
- The actions taken in allegedly predatory bidding and predatory pricing schemes are often "the very essence of competition," and legal rules should not deter such conduct; and
- Failed predatory bidding or predatory pricing schemes may often result in lower consumer prices.
The Court unanimously decided that the plaintiff must prove two points to allege the defendant’s predatory bidding. First, the plaintiff should provide evidence that the defendant paid too high price for inputs that at which price level doesn’t even cover the cost of outputs. Secondly, they also have to prove that the defendant has believable possibility of increasing its inputs’ price in order to regain its losses caused by predatory bidding in future. Just like we learned in predatory pricing, measuring marginal cost of a firm and judging these antitrust matters are very hard and controversial for court.
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The group does a nice job pointing out the economic incentive to predatory bidding in the market for inputs. One (exciting? dramatic? ironic?) example that immediately came to mind was the Hunt Brothers' attempt in 1979 to corner the silver market. The brothers set about buying up silver on the market through much the same methods as the group highlights until they controlled about 50%! The result was a tenfold increase in the price of silver, from $5 per ounce in 1979 to $54 in 1980.
Although it was a good try, the Hunt Brothers were soon innundated with margin calls and were forced to sell off, causing a dramatic decrease in the price of silver. Eventually they declared bankruptcy, giving credence to the Court's reasoning that although economically profitable in principle, few will be able to pull of predatory bidding schemes successfully.
-Pam, Katie, Jung-In, Helen
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