The Effect of Cost Structure on Predatory Pricing To win a predatory pricing case, law enforcement ofテッツャツ…ials traditionally have had to prove that a company has sold products or services for less than their average variable cost. Companies with relatively high テッツャツ』ed costs and low variable costs are less likely to be accused of predatory pricing than are companies with high variable and low テッツャツ』ed costs. A court case in which the U.S. Department of Justice alleged that American Airlines had committed predatory pricing against smaller airlines demonstrates this point.テつ The airline industry has relatively high テッツャツ』ed costs and low variable costs, as least in the short run. If one deテッツャツ]es a テ「竄ャナ砥nitテ「竄ャツ as a passenger テッツャ窶 ying an already scheduled テッツャ窶喨ght, the additional cost of a passenger is smallテ「竄ャ窶拂harges for credit cards, a small amount of fuel because of extra weight, a beverage or two, and not much else. If one deテッツャツ]es a テ「竄ャナ砥nitテ「竄ャツ as a テッツャ窶喨ght, then more costs are variableテ「竄ャ窶敕ッツャ窶喨ght crew costs, fuel, and the cost of baggage handling, for example. Even if the unit is a テッツャ窶喨ght, a large portion of the total costs is テッツャツ』ed.テつ American Airlines had dropped its fares when smaller airlines scheduled competing テッツャ窶喨ghts from the Dallasテ「竄ャ窶廡ort Worth airport to Kansas City, Wichita, and other cities, arguing that this was simply business competition in the marketplace. The judge in the case acknowledged that American had been a tough competitor but ruled that American had priced its ticketsテつ aboveテつ their average variable cost. Therefore, he ruled that the case against American should be dropped.


a. Why is the relation between price and variable cost an issue in predatory pricing?テつ b. Identify companies or industries in which variable costs are relatively low compared to テッツャツ』ed costs, thus making predatory pricing hard to prove.テつ c.テつテつ Identify companies in which variable costs are relatively high compared to テッツャツ』ed costs.テつテつテつ

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