market because they cannot make a profit at the lower prices. Our antitrust laws are designed to enhance the competitive process and they therefore protect competition, not competitors.
A necessary element of a section 2 Sherman Act claim is proof of anticompetitive conduct. Janich Brothers, Inc. v. American Distilling Co., 570 F.2d 848 (9th Cir. 1977), cert. denied., 439 U.S. 829, 99 S. Ct. 103, 58 L. Ed. 2d 122 (1978). Anticompetitive conduct may be used to infer a specific intent to monopolize, and, if coupled with proof of monopoly power, it may satisfy the requirement that the attempt have a dangerous probability of success. Northeastern Telephone Co. v. American Telephone and Telegraph Co., et al., 651 F.2d 76 (2d Cir. 1981).
Sunshine alleges that the prices charged by the University during the one week manager's special were predatory. Although the concept of predatory pricing is difficult to define in precise economic terms, it has generally been defined as the sacrificing of present revenues for the purpose of driving competitors from the market with the intent of recouping lost revenues through monopoly profits thereafter. See O'Hommel Co. v. Ferro Corp., 659 F.2d 340 (3d Cir. 1981). To determine whether a firm has engaged in predation, it is necessary to compare its prices with its costs.
Costs can be divided into two broad categories-fixed costs, which do not change with output, and variable costs, which do change with output. The sum of all costs divided by output equals average total cost. The sum of all output divided by variable costs equals average variable cost. Marginal cost is the incremental cost that results from producing additional output.
The question is: which measure of cost is best suited to determine whether a firm is engaging in predatory pricing. Several courts and commentators agree that only prices below marginal cost should be used to infer predatory pricing.
See e.g., Northeastern Telephone Co. v. American Telephone and Telegraph Co., et al., 651 F.2d 76 (2d Cir. 1981); Hanson v. Shell Oil Co., 541 F.2d 1352 (9th Cir. 1976), cert. denied 429 U.S. 1074, 97 S. Ct. 813, 50 L. Ed. 2d 792 (1977); International Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714 (5th Cir. 1975), cert. denied, 424 U.S. 943, 96 S. Ct. 1411, 47 L. Ed. 2d 349 (1976); Weber v. Wynne, 431 F. Supp. 1048 (D.N.J.1977); Areeda & Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, 88 Harv.L.Rev. 697 (1975).
The line between competitive and predatory pricing is difficult to draw. If the price below which predatory pricing will be inferred is too high, price competition will be discouraged, a result inconsistent with the antitrust laws. Since marginal cost is the cost of producing an additional unit, any price at or above marginal cost will not reduce short run net returns. Furthermore, when price is at marginal cost, the consumers are willing to pay the cost of producing the last unit of output; therefore the economy is achieving the most efficient allocation of resources in the short run. See Areeda & Turner, supra, at 709-711.
At prices above marginal cost, output is restricted, and the economy produces at less than optimal efficiency in the short run. Id. at 711. A price floor above marginal cost would also protect less efficient firms and allow them to survive despite cost inefficiency.
I am persuaded by the Areeda & Turner analysis and conclude that only prices below marginal cost can be presumed to be predatory. Because marginal cost cannot be accurately measured by conventional accounting methods, I will use average variable cost in its place. Accord, Northeastern Telephone Co. v. American Telephone and Telegraph Co., et al., 651 F.2d 76, 88 (2d Cir. 1981); Chillicothe Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d 427, 432 (7th Cir. 1980); Janich Brothers, Inc. v. American Distilling Co., 570 F.2d 848, 858 (9th Cir. 1977), cert. denied, 439 U.S. 829, 99 S. Ct. 103, 58 L. Ed. 2d 122 (1978); Pacific Engineering & Production Co. v. Kerr-McGee Corp., 551 F.2d 790, 797 (10th Cir.), cert. denied, 434 U.S. 879, 98 S. Ct. 234, 54 L. Ed. 2d 160 (1977).
Variable costs change with output and "typically include such items as materials, fuel, labor directly used to produce a product, indirect labor such as foreman, clerks, and custodial help, utilities, repair and maintenance, and per unit royalties and license fees." Areeda & Turner, supra, at 700. Fixed costs "typically include most management expenses, interest on bonded debt, depreciation, property taxes and other irreducible overhead." Id. Whether a cost is considered fixed or variable depends on the time frame in question. As the time frame lengthens more fixed costs become variable. Id. The costs which are variable in the present case include: invoice costs, freight, bad check expense, payroll expense and advertising expenditures.
The total sales of the fifty titles included in the manager's special amounted to $ 118,427.85 and their invoice price was $ 108,012.40, leaving a gross margin of $ 10,415.45 or 8.8% of total sales.
Both parties agree that the freight in charge for the books sold during the manager's special was $ 2,134.65. The University argues that the cost of shipping returned books should not be considered a variable cost of the books sold during the special because the special increased sales, thereby decreasing the books to be returned. The University, however, controls its freight expense through its ordering policies. Sunshine argues, and I agree for the purposes of this motion, that the University ordered more books than usual in anticipation of increased sales due to the manager's special. The freight expense of the 2166 returned books, therefore, may be considered part of the variable cost of the books sold during the manager's special. That expense, as calculated by Sunshine, was $ 528.41 each way, or $ 1,056.82.
Both parties accept the bad check expense figure of $ 355.28 for the discounted books sold during the manager's special. The University also spent $ 148.00 having handbills specially printed to advertise the manager's special.
The University calculates its payroll expense to be $ 2,885.00. It arrived at this figure by listing the amount of direct labor devoted to all textbook sales during the period of July 1, 1980 to September 13, 1980 ($ 42,363.00) and then dividing that total by the textbooks ordered, shelved and priced during that period to arrive at a per volume figure of .311. Multiplying .311 by the number of discounted textbooks sold during the manager's special, the University determined its payroll expense to be $ 2,885.46.
Sunshine accepts the University's calculations as to the amount of labor directly related to the textbook sales with the exception that it would increase the amount of the manager's labor in the project, raising the allocation figure to $ 45,052.83. Using the University's method of calculation, this raises the cost per textbook to .331 and the amount directly attributable to the 9,278 textbooks sold during the manager's special to $ 3,071.02.
The University did not include in its calculations the cost of ordering, pricing and shelving books that were part of the special but were returned as unsold. Although these books may not have been priced and shelved-there is no evidence that they were unpacked-I will assume for the purposes of this motion that they were and that they should be considered part of the variable cost of the manager's special. This brings the payroll expense attributable to the manager's special to $ 3,787.97.
The sales and costs figures relating to the manager's special are as follows:
GROSS REVENUES $ 118,427.85
Invoice Cost $ 108,012.40
Freight In 2,134.65
Freight for Returned Books 1,056.82
Bad Check Expense 355.28
Handbill Expense 148.00
Payroll Expense 3,787.97
RETURN ABOVE VARIABLE COST $ 2,932.73
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