Competition Law Notes - Abuse of Market Power and Predatory and Excessive Pricing
Read our FREE competition law notes to learn more about abuse of market power through predatory and excessive pricing. Ideal for exam revision and general reference.
Abuse of Market Power: Pricing
excessive pricing
predatory pricing
loyalty rebates (Virgin / BA) & Price squeeze (Deutsche Telekom)
- United Brands v Commission [1978]
Excessive prices
The imposition …of unfair purchase or selling prices is an abuse ..under Article[82]…’charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied is... an abuse’
- United Brands - ECJ
Whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, to consider whether a price has been charged which is either unfair in itself or when compared to other competing products
- Deutsche Post AG [2002] 4CMLR 429
Commission found DP prices for onward transmission of cross-border mail were excessive by comparing DP’s prices for cross-border mail with its domestic tariff.
Predatory Pricing
- Firm with a substantial share of the market cuts its prices in order to damage or eliminate a competitor or deter potential market entrants
- Firm with require structural characteristics for success
- considerable financial resources relative to its rival in order to sustain the inevitable losses
- ability to expand output to absorb excess demand
- barriers to entry which permit recoupment
- Classification of costs
- Fixed costs: do not vary with changes in output - overheads, interest, depreciation
- Variable costs: costs that vary with changes in output - materials, fuel, labour, utilities, maintenance
- Average Avoidable cost (AAC)
- Average per unit cost that the predator would have avoided during the period of below cost pricing had it not produced the predatory increment of sales.
- It is a short run measure which includes all the costs that could have been avoided had the defendant not made the predatory sales, whether fixed or variable.
- Defenses
- promotional pricing
- meeting competition
- excess inventory
- Recoupment: Bork in the Antitrust Paradox
Any realistic theory of predation recognizes that the predator as well as his victims will incur losses during the fighting, but such a theory supposes it may be a rational calculation for the predator to view the losses as an investment in future monopoly profits (where rivals are to be killed) or in future undisturbed profits (where rivals are to be disciplined). The future flow of profits, appropriately discounted, must then exceed the present size of the losses.
- US Supreme Court
- Matsushita Electric Industrial v Zenith Radio Corp (1986)
- Brooke Group v Brown & Williamson Tobacco (1993)
- Strategic practices
e.g. predatory investment
Signaling and reputation effect
The predator lowers prices in order to mislead the prey and potential entrants into believing that market conditions are unfavourable.
These are plausible predatory strategies because a firm’s decision to enter or to leave a market is necessarily based on its evaluation of expected future revenues and costs.
- Art 82 - EC Treaty
- Abuse by one or more of a dominant position
- imposing unfair purchase or selling prices or other unfair trading conditions
- limiting production..
- applying dissimilar conditions to equivalent transactions
- making the conclusion of contracts subject to acceptance of supplementary obligations
- AKZO Chemie v Commission
- AKZO v Commission
- Prices below average variable cost... Are abusive… no interest in applying such prices except that of eliminating competitors
- prices below ATC but above AVC must be regarded as abusive if they are part of a plan for eliminating a competitor.
- AKZO
- There can be an anti-competitive object in price-cutting whether or not the aggressor sets its prices above or below its own costs, whatever the manner in which those costs are understood
- Recoupment?
- Tetra Pak II (1995)
- Review of Article 82 (2005)
- Tetra Pak II
Prices predatory even though no possibility of recoupment...’it would not be appropriate in the circumstances of the present case to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalise predatory prices whenever there is a risk that competitors will be eliminated’.
France Telecom v Commission
Wanadoo [2007] ECR II-000 on appeal to ECJ
