faced by Frito-Lay in various markets. Frito-Lay prices for some
potato chip products in the Chicago market were lower for
significant periods than prices for the same products in other
Jays' first amended complaint contains three counts. Count I
alleges that Frito-Lay has engaged in predatory pricing in
violation of Section 2 of the Sherman Act. Count II is brought
under Section 2 of the Clayton Act and alleges that Frito-Lay has
engaged in illegal price discrimination. Count III contains
pendent claims brought under the deceptive trade practices laws
of the states served by Jays and alleges that Frito-Lay engaged
in anti-competitive conduct. Jays claims that it sustained a loss
totalling $4,311,806.73 for fiscal years 1975-1981, because of
its inability to increase prices to reach a 6% pre-tax rate of
return as a result of Frito-Lay's anti-competitive conduct.
In Count I Jays claims that Frito-Lay attempted to monopolize
the Chicago market for potato chips in violation of Section 2 of
the Sherman Act. 15 U.S.C. § 2. The elements of an attempt to
monopolize are (1) intent to control prices or destroy
competition with respect to a part of commerce; (2) predatory or
anti-competitive conduct directed at accomplishing the unlawful
purpose; and (3) a dangerous probability of success. Chillicothe
Sand & Gravel Co. v. Martin Marietta Corp., 615 F.2d 427, 430
(7th Cir. 1980).
The parties agree on the definition of predatory pricing as the
dominant firm's deliberate sacrifice of current revenues through
lower prices for the purpose of driving rivals out of the market.
Once it has vanquished its rivals, the dominant firm can more
than recoup its short-term losses through higher profits earned
in the absence of competition. MCI Communications Corp. v.
American Telephone & Telegraph Co., 708 F.2d 1081, 1112 (7th
Cir.), cert. denied, ___ U.S. ___, 104 S.Ct. 234, 78 L.Ed.2d 226
(1983). The parties disagree on the proper test for predation,
namely, the sufficiency of cost-based measures of predation and
the relevance of non-cost indicia of predatory intent.
The modern era of predatory pricing analysis was ushered in by
Professors Areeda and Turner. Areeda & Turner, Predatory Pricing
and Related Practices Under Section 2 of the Sherman Act, 88
Harv.L.Rev. 697 (1975). They argued that prices at or above
marginal cost, even if not profit-maximizing, generally should be
presumed to be non-predatory. Id. at 711. Marginal cost is the
"increment to total cost that results from producing an
additional increment of output." Because marginal costs are
difficult to determine, Areeda and Turner advanced average
variable cost as an acceptable surrogate for marginal cost. Id.
at 716-718. Variable costs are costs which vary in a short run
with changes in output. Such costs include items such as
materials, labor, fuel, use depreciation, and a return on
investment needed to attract enough working capital to pay for
variable costs. Average variable cost is total variable cost
divided by output. Fixed costs, in contrast, are costs which in
the short run do not vary with changes in output. Fixed costs
include such items as management expenses, interest on bonded
debts and other items of irreducible overhead. Total cost is the
sum of fixed and variable costs and average total cost is the
total cost divided by output. See generally Northeastern
Telephone Co. v. American Telephone & Telegraph Co., 651 F.2d 76
(2d Cir. 1981).
The Areeda & Turner formula has won wide if cautious acceptance
by the courts. Some courts have hewed closely to average variable
cost as the conclusive test of predatory pricing. See e.g. Barry
Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983);
Northeastern Telephone, supra. Most courts have recognized the
central importance of a cost-based test of predatory pricing, but
have noted that in unusual circumstances special market
characteristics, such as high entry barriers, might permit a
finding of predatory pricing even if prices were above average
cost but below average total cost. See e.g. Chillicothe Sand &
Gravel, 615 F.2d at 431-32; 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); International
Air Industries, Inc. v. American Excelsior Co., 517 F.2d 714,
723-25 (5th Cir. 1975), cert. denied, 424 U.S. 943, 96 S.Ct.
1411, 47 L.Ed.2d 349 (1976). The Ninth Circuit has strayed most
from sole reliance on a cost-based test of predation. See
Transamerica Computer Co., Inc. v. IBM Corp., 698 F.2d 1377 (9th
Cir. 1983). See also D.E. Rogers Associates, Inc. v.
Gardner-Denver Co., 718 F.2d 1431 (6th Cir. 1983), cert. denied
___ U.S. ___, 104 S.Ct. 3513, 82 L.Ed.2d 822 (1984). In
Transamerica the court held that by reference to non-cost factors
a plaintiff could show that a defendant engaged in predatory
pricing even if its prices were above average total cost. Id. at
In Chillicothe Sand & Gravel the Seventh Circuit recognized the
centrality of the average variable cost test in the analysis of
a predatory pricing claim. It cautioned, however, that non-cost
factors were not to be neglected when determining whether a
defendant's pricing policy was predatory:
[W]hile we accept the use of marginal or average
variable cost as both a relevant and an extremely
useful factor in determining the presence of
predatory conduct we are willing to consider the
presence of other factors in our evaluation of
whether or not plaintiff has made out a prima facie
case of monopolizing or attempt to monopolize.
615 F.2d at 432. Indeed, after concluding that defendant's prices
were above average variable cost, the Chillicothe court went on
to consider and ultimately to reject a variety of non-cost
factors which plaintiff had argued revealed defendant's predatory
intent. Id. at 432-34.