Industry View: Predatory proprietors revel in a tussle with the law

Did you read the Times on Monday? At just 10p you could pick up several with the loose change from a packet of cigarettes. Of course Mr Murdoch is not making a profit from his latest gimmick - but keeping the daily cover price at 20p wasn't too profitable either, and he kept that up for 16 months. For all the rise in prices at the end of last year, it seems that the newspaper cover-price war is back with us once more.

Mr Murdoch's News International has been accused of unethical and anti- competitive behaviour; subsidising price cuts with profits earned elsewhere in order to bully and destroy other competitors. Predatory pricing, it's called.

The Office of Fair Trading disagrees. Called in to investigate when the Times and the Telegraph cut their prices in the summer of 1994, the then director general, Sir Bryan Carsberg, concluded that there was nothing to worry about.

It would be easy to see this as another British failure to enforce competition. Could it be that we should change our method for catching predators - perhaps along US or European lines?

Sadly it isn't as easy as that. There is, in Sir Bryan's words, "a fine line between aggressive competition and predatory behaviour". No matter how tough your laws, it can often be hard to distinguish between the two. And no matter how malign you may believe Mr Murdoch's intentions, it's almost impossible to pin anything on him.

Predatory pricing is a problem for competition authorities because in the end it is anti-competitive. Big dominant companies cut their prices to get rid of a small irritating competitor. Although both make losses in the short run, the big guy has the financial resources (the deep pockets) to hold out for longer, and the smaller company is pushed out of business. The most effective and efficient predation is swift and silent; competitors will decide quickly that they cannot win, and quietly bale out to cut their losses. Or - if they are potential competitors - they will not enter the market at all. Having dealt with the young whipper-snapper, the big bruiser can raise its prices - and its profits - once more to compensate for those earlier losses. The consumer ends up with less choice and higher prices.

Luckily for that put-upon consumer, the occasions when predation works to get rid of existing companies are extremely limited. Aggressive price wars in practice are often risky and counter-productive. If the ferocious little guy turns out to have deep pockets itself, it might decide to call the predator's bluff. And even if the victim retreated, bloodied, what would stop someone else entering the market and starting the whole chain all over again?

Companies considering predatory strategies need to feel confident that they won't topple straight into another expensive battle - perhaps because it is costly for someone new to enter the market, or because the ruthless reputation of the incumbent is too intimidating. They need also to believe they can prey covertly, without the OFT or the Monopolies and Mergers Commission catching them at it.

In the circumstances you might expect to see little evidence of predatory behaviour in practice at all. Not so. Thanks to bus deregulation in the mid-Eighties, those double-deckers and mini-buses have been at it like crazy in towns across the country. Of the eight OFT reports dealing with predation between 1988 and 1995, seven were on buses. From Inverness to Darlington, Fife to Southend-on-Sea, bus companies have engaged in all kinds of furious strategies to achieve market dominance and push each other off the streets.

When the OFT reported on Darlington buses last year, it concluded that United Bus - unlike the Times - was guilty of predatory pricing.

For a start, United was pursuing a strategy which increased its losses. When Your Bus, a new company, started up minibuses on certain Darlington routes, United Bus went ballistic. Although it didn't cut ticket prices, it did stuff the streets with extra buses of its own. According to the allegations, United minibuses even hung out on street corners to nip out in front of an on-coming Your Bus and nick all the passengers at the next bus-stop. The OFT calculated that running the extra 13 buses cost United over pounds 10,000 a month.

So far the Times would seem as guilty as United. It too increased its losses with the 20p cover price - although circulation rose from 358,000 in 1993 to around 660,000 today. And Mr Murdoch is certainly losing money on the 10p Monday edition. After all, the Times has to pay 10.4p for every copy to retailers and wholesalers.

But this in itself is not enough to find Mr Murdoch (or United) guilty of predatory behaviour. Loss-making strategies can still be competitive if they are designed to push up demand for the product to profitable levels, regardless of what anyone else is doing. Suppose, for example, the cheap Times on Monday pushes sales up throughout the week, it could be a legitimate strategy for reducing losses - a "loss leader", as it is sometimes known. Similarly the OFT adjudicated that the Times' original price cuts were a legitimate strategy to boost circulation in the face of continuing losses.

So the OFT goes searching for further evidence. The next important question is whether the companies really have market power to manipulate. United clearly was a dominant player, with its 45 per cent of Darlington bus rides. The Times has only 28 per cent of the broadsheet market - 12 per cent if you include the Express and the Mail. Even if the Independent was pushed out altogether and the Times acquired all our readers, it would still only eat up 17 per cent of the larger market. This, for Sir Bryan Carsberg, was decisive in showing that Rupert Murdoch could not be guilty of predatory pricing. If one newspaper had indeed been knocked out of the game,Sir Bryan believed competition from the remaining papers would not allow the Times to make "supra-normal" profits by pushing prices up high afterwards anyway.

In other words, as far as the OFT was concerned, predatory pricing was not a feasible strategy in the broadsheet newspaper market. The evidence appears to prove it right, if for different reasons. Price, it appears, is not sufficient on its own to win and keep readers. The Independent still survives. The Daily Telegraph - perhaps the real target or Mr Murdoch's price cuts - still sells more than a million copies each day.

So why does he keep on cutting, if he isn't making profits and he isn't pushing anyone else out of the picture? Who knows? The fact that we can't pin predatory behaviour on him is because it isn't working. It is not because our competition policy is inadequate. Should things change in the newspaper industry in future, however, the real failing in current policies on predatory pricing may become apparent. By the time the OFT reported on Darlington, Your Bus had already gone out of business and the entire market had changed. Were a Times predatory pricing strategy really to prove effective, a competitor could be long gone before the OFT ever got round to pointing out the anti-competitive practices.

As John Bridgeman, the current director of the OFT, pointed out in a lecture last month, "stronger investigatory powers and some form of interim measures", would be a help. It's all very well for economists to decide only in retrospect whether predatory pricing is taking place or not. Consumers and producers in the industry need protection rather faster than that.