software antitrust-law
How is the cost of a software service determined?
<p>I just went through a Compliance eLearning which had a section covering anti-trust laws.
My understanding of predatory pricing from that is inline with this description I found on <a href="https://en.wikipedia.org/wiki/Predatory_pricing#Implementation_conditions" rel="nofollow noreferrer">wikipedia</a></p>

<blockquote>
  <p>During the period of predatory prices, the predator's profit is negative, or the price is lower than the cost.</p>
</blockquote>

<p>At the end of the eLearning, a quiz asked:</p>

<blockquote>
  <p>If a competitor tries to enter the same market one is in, what would be lawful behavior and what might lead to prosecution in regards to anti-trust laws?</p>
</blockquote>

<p>The correct answer, of multiple possible answers, suggested that</p>

<blockquote>
  <p>One could try to make their products attractive by giving the best reasonable discount you could offer.</p>
</blockquote>

<p>While another possible answer was  </p>

<blockquote>
  <p>Giving a discount on the Software suite that will temporarily sell the software below cost price. But this can be changed again as soon the competitor is driven off the market.</p>
</blockquote>

<p>which obviously would be a breach of anti-trust laws.</p>

<p>But this left me confused, if I ever was working in sales or a related department....</p>

<p>What is actually considered the cost of a software service in this regard?
And what is considered a reasonable discount in that regard, and what is unreasonable?</p>

<p>There is no fixed rule for this. Every situation is different, and of course there is nothing specific to software in there. It is very much a matter of intent. </p>

<p>For example, negative profits are no clear sign. Company X thinks they could make $6 million profit by developing a product and selling it, minus $4 million development cost. It turns out development cost is $10 million. Raising prices is not possible because of competition. Company X will suffer losses of $4 million, without being predatory in any way. </p>

<p>The reality is that a judge will look at the situation, take everything into account, and make a decision based on what they see. </p>

<p>Since this is all about competition law, the main point is the intent or effect that your pricing makes competition impossible. That's what the judge will decide. For example, if you offer your service for $500,000 while others offer a similar service for $1,000,000 you could be using some super efficient processes that allow you to make money at that price, or you might have an idiotic sales person who will drive your company into bankruptcy, or you are trying to drive your competitors out of business. That's what the judge will decide. </p>

<p>Realistically, this definition doesn't work - it works for manufactured goods, but since almost all the cost of software is in development and there is little <em>marginal</em> cost, it's impossible to assess.</p>

<p>You might be able to evaluate some situations where boxed software is sold below the cost of the boxes, or software services that are hosted on Amazon AWS are sold for less than is being paid to Amazon.</p>

<p>Anti-trust is not a very powerful tool any more in the US, especially around pricing.  This is really just an accounting issue, because software license revenue recognition is different from services recognition, leading companies to try play games between the two (which is covered in the US by GAAP).</p>

<p><em>Eastman Kodak Co. v. Image Technical Services, Inc.</em> seemed to allow charges for predatory pricing, but in practice such charges remain very difficult to prove and prosecute.  The environment has moved away from anti-trust worries in general.  For example, at Procter &amp; Gamble in the 90s, we held that wholesalers or manufacturers setting prices for retailers was an anti-trust worry, but this is done now in virtually all markets.</p>

<p><a href="https://www.hbs.edu/faculty/Publication%20Files/19-110_e21447ad-d98a-451f-8ef0-ba42209018e6.pdf" rel="nofollow noreferrer">https://www.hbs.edu/faculty/Publication%20Files/19-110_e21447ad-d98a-451f-8ef0-ba42209018e6.pdf</a> gives an excellent overview of how anti-trust application has changed since its introduction in the US.</p>

<blockquote>
  <p>which obviously would be a breach of anti trust laws.</p>
</blockquote>

<p>I'm not sure it's obvious at all. Anti-trust law is complex and subtle. In the US, selling below your costs is only a violation of anti-trust law if done to eliminate competition, but <a href="https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct/predatory-or-below-cost" rel="nofollow noreferrer">"A firm's independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition"</a>. If it came to trial, a judge or jury would have to assess the company's behavior and intentions.</p>
