On the Possibly-Predatory Character of Non-Systems-Rivalry Investments and Systems Rivalry: Definitional, Functional, and Legal Analyses

Richard S. Markovits


The Article analyzes the possibly predatory character of both investment decisions unrelated to system rivalry and systems rivalry. It argues that an investment unrelated to systems rivalry is predatory if the investor's ex ante perception that it would be at least normally profitable was critically affected by his belief that it might or would increase the profit-yields of the investor's other products by reducing the absolute attractiveness of the offers against which they will have to compete (e.g., by deterring a rival investment that would have reduced those projects' profit yields by more than it would itself reduce those projects' profit-yields). The Article demonstrates that both quality-or-variety-increasing (QV) investments (which create new products, distributive outlets, or capacity or inventory) and cost-reducing investments (in plant-modernization, new-plant construction, or production-process research) can be predatory. It also (1) points out that the case law on predatory investments (A) deals only with QV investments, (B) fails to recognize why QV investments unrelated to systems rivalry may be predatory and when they will be predatory, and (C) mistakenly assumes that QV investments in this category that are not predatory may still delegitimate the monopoly power of the investors who made them; and (2) argues that the authors of the canonical article on predatory investments - Ordover and Willig - (A) ignore the possibility that cost-reducing investments may be predatory, (B) acknowledge but do not address the possibility that QV investments that are unrelated to systems rivalry may be predatory even when they do not drive an existing rival QV investment out, and (C) reach a false conclusion about the circumstances in which QV investments unrelated to systems rivalry will be predatory - in essence, conflate predatory QV investments with "limit QV investments" (investments made by investors who would not have perceived them to be ex ante profitable but for their belief that the investments might or would deter a new entry). The Article also (1) examines the legitimate functions that systems rivalry can perform for its employer and (2) delineates the (unusual) circumstances in which systems rivalry will be predatory - viz., when its practitioners' perception of its ex ante profitability was critically affected by their belief that it might or would deter independent complement producers from entering the primary-product business or induce them to exit from the complement-producing business. It argues that although the courts correctly exonerated the defendants in the three canonical systems-rivalry cases, the judges did not grasp the range of functions the systems rivalry under investigation performed and did not appreciate that systems rivalry may be predatory. The Article also criticizes Ordover and Willig's analysis of the legality of systems rivalry for failing to recognize that our antitrust laws do not prohibit firms from profiting by converting buyer surplus into seller surplus and points out that their claims for the economic efficiency of their legal and policy conclusion ignore Second-Best Theory. Finally, the Article criticizes Shapiro's functional, legal, and policy analyses of aftermarket-conduct systems rivalry on diverse grounds.