Final answer:
Predatory pricing is an antitrust issue where a firm lowers prices to oust a competitor, but proving it is complex due to the difficulty of distinguishing it from legal competitive behavior and accurately assessing costs.
Step-by-step explanation:
Predatory pricing occurs when an established firm reacts to a new competitor by lowering its prices significantly with the intention to drive the competitor out of the market, after which the firm raises the prices again. This method is seen as a barrier to entry, aimed at deterring new firms from entering the market. However, some economists are skeptical of these antitrust claims because predatory pricing can be challenging to identify and prove. They argue that aggressive price competition can be mistaken for predatory pricing, especially when an established company like American Airlines simply matches the prices of a new entrant to stay competitive.
The difficulty in distinguishing predatory pricing from regular competition stems from the problem of accurately determining a firm's cost structure. The common rule suggests that selling below average variable cost provides evidence of predatory pricing, but real-world variable and fixed costs can be hard to accurately calculate. Further complicating matters, cases such as the Microsoft antitrust case show grey areas in identifying restrictive practices, where companies might engage in behaviors that could be viewed as anti-competitive.