Legal Definitions - Areeda–Turner test

The Areeda–Turner test is a legal standard used in United States antitrust law to evaluate whether a company is engaging in illegal predatory pricing. It presumes that a price set below a company's average variable cost is predatory and therefore unlawful. This test is widely accepted by federal courts.

To understand the test, it's helpful to define its key components:

• Predatory pricing: This occurs when a dominant company intentionally sets its prices very low, often below its own costs, with the goal of driving competitors out of the market. Once competitors are eliminated, the dominant company can then raise prices without competition, harming consumers.
• Average variable cost: These are the costs that change directly with the level of production or service provided, divided by the quantity produced or services rendered. Examples include raw materials, hourly wages for production staff, and direct energy costs for manufacturing. It specifically excludes fixed costs, such as rent, administrative salaries, or equipment depreciation, which remain constant regardless of the production volume.

Here are some examples illustrating how the Areeda–Turner test might be applied:

• Example 1: Local Internet Service Provider (ISP)

  A large, national internet service provider enters a new city where a smaller, local ISP has been operating for years. To quickly gain market share, the national ISP offers its internet packages at a price that is less than the direct costs associated with providing the service to each new customer, such as the bandwidth purchased per user and the hourly wages of technicians for new installations. The Areeda–Turner test would examine whether the national ISP's pricing falls below its average variable cost for providing internet service in that area. If it does, it would create a presumption of predatory pricing, suggesting the national ISP is trying to eliminate the local competitor rather than simply compete fairly.

• Example 2: Agricultural Product Market

  A dominant agricultural conglomerate, which processes and distributes a specific type of grain, faces a new, innovative startup that offers a more efficient processing method. In response, the conglomerate begins selling its processed grain to distributors at a price that barely covers the cost of the raw grain itself, not even accounting for the electricity used in its processing plants or the wages of the workers directly involved in the processing line. Under the Areeda–Turner test, if the conglomerate's selling price is below its average variable cost (raw material, direct labor, direct energy), it would be presumed to be engaging in predatory pricing, aiming to bankrupt the startup before its new methods can gain traction.

• Example 3: Online Streaming Service

  A well-established online streaming platform, which has a vast library of content, notices a new competitor gaining popularity by offering a niche selection of exclusive shows. To stifle this growth, the dominant platform launches a new subscription tier that includes access to a similar niche content library at an extremely low price—a price that doesn't even cover the licensing fees for that specific content or the direct server bandwidth costs associated with streaming it to subscribers. The Areeda–Turner test would analyze whether this new subscription tier's price is below the average variable cost of providing that specific content (e.g., per-stream licensing fees, direct bandwidth). If so, it would suggest a predatory strategy designed to undercut and eliminate the smaller, specialized competitor.