1. Introduction
Predatory pricing one of the oldest conspiracy methods that competing large
businesses may inflict. The law that started regulating this malign form of
competition is dating back to 19th century nevertheless it is still complex
and controversial. After all, competing on price is the core essence of
competition and firms should not be deterred passing the efficiency – that
they have achieved – on to the price of a product. The law on predatory
pricing is enforced on the very thin ice where underneath is sheer
competition and above is abusing practice and it is important not to break
in. A firm has to raise itself an anxious question if it is dominant and
then to face a dilemma where both a price rise and a price cut might be
considered to be abusive. The dominant firm might simply argue that it is
competing – as it should do – whereas the complainant will argue that it
has departed from beneficial competition and is guilty of abusive
behavior[1].1.2 Elimination
In this assignment I have concentrated on EC law dealing with abuse of a
dominant position in relation to predatory pricing. I made some referances
to UK law as it gives some helphul guidelines in the enforcment of EC law.
Even more, some helpful insight on this issue I found in the practise of US
antitrus authorities (e.g. as for today, the rule of ’recoupment’ has not
been aplied yet by ECJ but its incidense is not a distant future).1.3 Method
All kinds of sources used in this assignment, such as official EU official
publications, literature and articles on this topic, will be evaluated in
terms of relevance and validity. The size of this paper does not allow me
to go into deep analysis, but hopefully I will provide myself with helpful
insights into this subject.1.4 Formulation of the problem
In order to show to what extent a dominant undertaking may engage in
predatory pricing practice it is important to define what is considered by
predatory pricing.
To the extent that single market integration has lifted previous legal and
institutional restrictions to entry into a national market, the dominant
firms in that market have no other choice but rely on strategic behaviour;
one of this kind is predatory behaviour towards existing and potential
competitors. It has been aimed at new entrants and firms already operating
in the markets. This usually takes two forms[2].
Firstly, there can be restriction of access to a complimentary asset by a
dominant firm. This asset can be characterised by essential importance in
reaching the end customer, and most importantly – cannot be duplicated –
either because it is in scarce supply or it has a form of statutory or
monopoly. The monopolist controlling an essential complementary asset
naturally will have an incentive to prevent the access of competing firms
by introducing disadvantageous terms. This may be expressed by refusal to
supply an asset, setting supranormal charges, use of vertical restrains
(e.g. exclusive dealing agreements)
Secondly, and of the most importance to this paper, there can be
exclusionary pricing. That is, a dominant firm may preclude the entry of
rivals into the given market directly through its pricing behaviour, by
setting prices for its products in the market below the level of economic
rationality so it is not worth for a rival to compete. This can be done by
introducing non-linear pricing structures such as selective discounts and
fidelity rebates (which reward customers in exchange for not purchasing
from rivals). The other form includes predatory pricing, where the dominant
firm adopts an aggressive prising strategy as a response to entry. Even
more, the dominant firm may implicitly imply of its predatory intents to
potential rival. Due to the constrain of limits to this paper, I
investigate only predatory price-cutting (selling at a loss). Other prising
practices as selective price-cutting to retain customers (but not at loss)
and vertical margin squeezing are excluded.2 Predatory price-cutting
Thus, the idea of predatory prising is simple enough: that a dominant firm
that has been charging for its products supra-competitively reduced prices
to a loss making level when faced with competition from an existing
competitor or a new entrant on the market and then having disciplined the
competitors the dominant firm raises its prices again, accumulating
supranormal profits until the next wave of attacks[3].2.1 Justifications for predatory pricing
In principle, any competing firm may seek to meet possible competition
through conduct which is meant to signal unequivocally that entry would be
met with aggressive retaliation, or that its advantage is such that the
rival would not be able to compete effectively, were it to enter. Mainly
these signals are expressed in pricing behaviour in the market. The
important economic issue is when and under what circumstances these
strategies may be deemed justifiable and pro competitive. Unlike
investment in capacity, R&D or advertising, which may provide the
competitive advantage, pricing is a strategic weapon. This weapon is useful
of its rapid application whereas other means might require considerable
amount of time.
Pricing strategy is one of the most viable instruments that
undertakings have in their disposition and they should not be deprived of
possibility of inflicting it, even if it is predatory.2.3 Proving of predatory pricing
The main problem with predation is that this strategy may be detected by
competition authorities. And sometimes it might be legal and sometimes
illegal. If firms could be sure that predatory pricing was always detected
and proved illegal, then such strategy would never be used. However, the
proving of predatory pricing is quite complicated and there is no single
satisfactory test or technique that a firm is predating.
The best-known test is the Areeda-Turner rule, were by prices which are
below a firm’s average variable cost (‘AVC’) are deemed to be predatory. In
fact, there are situations in which pricing below marginal cost is
legitimate, and therefore this test may not be considered safe. To solve
this problem, from 1993 the US Supreme Court has established the recoupment
test[4] that relegated the Areeda-Turner test to ancillary role. But as we
can see the EU competition authorities have declined to adopt the Areeda-
Turner test, according to which pricing above AVC should be presumed
lawfull. Other two rules have been used. Namely, AKZO rule an Incremental
Cost standard.AKZO test
The crucial problem is the need to identify an appropriate measure of the
firm’s cost – to be compared with the prices. This always contentious issue
in predation cases, where there is a sort ‘indistinguishability problem’
(the dominant firm will always argue that its pricing conduct is in fact
compatible with keen competition), and therefore much hinges on the level
of cost. These types of difficulties are well exemplified by the case of
AKZO[5] (the largest European supplier of bleaching agents), which was
investigated following a complaint that its conduct threatened to force out
business a smaller UK competitor, Engineering and Chemical Supplies Ltd
(ECS). The Commission here decided that pricing above average variable cost
(‘AVC’) but below average total cost (‘ATC’) could be abusive were the was
evidence of an intention on the part of the dominant firm to eliminate a
competitor[6]. The Commission suggested that even a price above ATC might
be predatory when assessed in its particular market context. As the ECJ
ruled on the appeal by AKZO, the prices were predatory because there was no
evidence that they were necessary in order to match competitors’ offers and
that there was evidence of an intention to drive ECS out of the market.
Now, rises the question was is meant by “matching competitors’ offers”.
Clear application of AKZO test is seen in Wanadoo[7] case and can be cited
as a general rule: ‘Community case law applies two tests to establish
whether an abuse in the form of predatory predatory pricing has been
committed: where variable costs are not covered, an abuse is automatically
presumed; where variable costs are covered, but total costs are not, the
pricing is deemed to constitute an abuse if it forms part of a plan to
eliminate competitors.’Legitimisation for predatory pricing
In the EC law, there are no clear guidelines on what would be legitimate
meet competition by predatory pricing. Some helpful and more elaborated
insight can be drawn from UK legislation. UK Competition Act of 1998 is in
great conformity with EC regime this enables UK competition authorities to
apply Community competition law when making decisions under the Act[8]. In
this Act, Section 4 of the Guideline Assessment of Individual Agreements
and Conduct [9] deals with predation. The Guideline is more sophisticated
than the case law of ECJ. Here we can find some possible justifications[10]
even when pricing below AVC:
– Loss leading were cutting the price of one product may increase sales
complimentary products;
– Short run promotions often involve selling below AVC for a limited
period and are widely used in many markets. However, a series of
short term promotions could, taken together, amount to a predatory
strategy;
– Prices that mach inefficient entrant. Some markets are able to support
only one or two undertakings because, for example, there are
significant economies of scale. The dominant firm would then have the
choice of remaining in the market, and incurring losses, or exiting
the market, perhaps leaving the market to be supplied by a less
efficient new entrant.
– Mistakes in determining the correct market price. In some cases an
undertaking may find itself selling at below its variable costs
because of unanticipated increases in input costs, or unanticipated
reductions in demand.;
– Low prices that are attributable to network externalities. There are
some services (such as telecommunications networks) where the addition
of more customers adds to the value of the service sold to other
customers. In these circumstances, it can be profitable for the
undertaking to sell part of the service to customers at below average
variable cost;
– The undertaking is making an incremental profit. If the particular
action
complained about is incrementally profitable, it is
unlikely that it is predatory. The competition authorities still need
to be convinced, however, that the reduction in losses will shortly
result in the undertaking covering its average variable costs.
Indeed, the Commission gives attribute to these justifications. In Tetra