Grobuoniškos kainodaros teisinai aspektai ES (anglų k.)

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 s 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 wi ith 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

f 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, t 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

r 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: th

hat 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. An

nd 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 being 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
Pak II case[11] the Commission did not merely rely on the AKZO presumption
were prices are below AVC, but said that, that it had ‘gathered
sufficiently clear and unequivocal data to be able to conclude that, sales
at loss were the result of a deliberate policy aimed at eliminating
competition’[12]. Commission declined to accept justification that
efficient multi-national company could have indulged in behavior so opposed
to the logic of economic profitability trough management error. Nor did it
could find any exceptional circumstances, independent of Tetra Pak’s free
will, that forced it to make losses. The Commission concluded that there
were no such circumstances and that prices were simply part of an ‘eviction
strategy’[13]

Recoupment test
As it was pointed out above in US law the proving of price predation hinges
on the fact that predator should have the ability to recoup any losses
incurred. This standard had already played a major in the 1986 Matsushita
Electric Industrial vs. Zenith Radio case[14]. In this case the Supreme
Court, interestingly, acquitted seven Japanese firms from accusations of
dumping and predatory pricing in the USA because of the impossibility to
recoup losses aft6erwards, in spite of the fact that both geographic price
discrimination and injury to US producers had been found. O other hand the
UK law does not give clear guidelines[15] to what extent recoupment must be
proved in EC law. It says that it would not necessarily be required to
establish the feasibility of recoupment where the dominant firm abuses in
the market in which it is dominant; however the issue would arise were the
dominant firm cuts its prices in a neighbouring market in which it is not
dominant. Nor the ECJ has adopted a requirement of recoupment under Article
82. In AKZO V Commission the Court acknowledged the significance of
recoupment in paragraph 71 of its judgement. However it did not expressly
incorporate the need of recoupment as part of the offence. According to the
Court, it must possible to penalise predatory pricing whenever there is a
risk that competitors will be eliminated. The aim pursued, which is to
maintain undistorted competition, rules out waiting until such a strategy
leads to the actual elimination of competition[16]
This gives a notion that firms inflicting predatory pricing in Europe
should not explicitly rely on recoupment clause even though it is a weighty
argument in US law. But of course, the possibility that in future cases
were the evidence of intention to eliminate competition is less clear-cut
and were a predator is not super-dominant, the Court might require proof of
the possibility of recoupment[17].

Prove of intention
It is an important clause were selling below ATC is found predatory only
when there is an evidence to eliminate competition. Though, the intention
to eliminate competition is quite difficult to prove. After all, the whole
idea about competition is how to eliminate competitors. In EC law practice,
the requirement of intention means that evidence of a ‘smoking gun’ should
be produced, for example written memoranda, email. In Compagnie Maritime
Belge v Commission[18], which deals with selective price cutting, the ECJ
found the evidence of ‘smoking gun’ were appellants had admitted their
practice the ‘fighting ship method’. That is, when facing a cheaper
competitor, the conference would hold a meeting to undercut him, and ensure
that conference members scheduled their sailing at around the sane time as
those of competitors in order to win over its customers. But not all the
companies will be as obliging as AKZO, which had committed its plans to
paper. In these situations the requisite element of intention can be
inferred from the surrounding evidence, such as the duration, continuity
and scale of losses made. As the Commission pointed out in Tetra Pack
II[19] it ‘gathered sufficiently clear and unequivocal data to be able to
conclude that, in that country at least, sales at a loss were the result of
a deliberate policy aimed at eliminating competition’.

AKZO rule exemption
It may not always be appropriate to apply the standards of AVC and ATC. In
some industries fixed costs are very high but variable costs are law. An
obvious example is telecommunication industry where much of the cost (ATC)
attributed to establishing infrastructure, maintaining it and the cost
(AVC) of providing one unit of a product (telephony calls, transmitting
data) is very law and sometimes close to zero. So, if the AVC standard
were to be applied there would hardly ever be predatory pricing; and the
ATC standard would require proof of the predator’s intention to eliminate
competition. In this situation an alternative rule is needed. The
Commission stated in Notice on the Application of the Competition Rules to
Access Agreements[20] that instead of AKZO standards a standard based on
long-run incremental cost (‘LRIC’) might be preferable[21]. Again, more
elaborate explanation is given in the UK law[22]. Here LRIC is defined as a
measure that takes in to account the total long run cost (that is, both
capital and operating cost) of supplying a specified additional unit of
output (‘the increment’). To put it differently, it provides for a
‘combinatorial’ approach towards the assessment of cost, whereby a firm’s
long-run incremental cost is combined with its ‘stand-alone cost’ and the
firm has to demonstrate two things:

– First, that its individual prices are set at the level or above LRIC.

– Secondly, that the combined prices of services in groups that share

common costs cover both LRIC and the common costs of supplying those

services.
This rule no the basis of incremental cost we can find in the Commission’s
proceeding against Deutsche Post AG (DPAG)[23]. The Commission found that
for a period of 5 years DPAG in every sale in the mail-order business
represented a loss which comprises all the service provision cost and at
least part of the additional costs (postal services) of providing this
sideline service. In such circumstances, every additional sale not only
entitled the loss of at least part of these additional costs, but made no
contribution toward covering the carrier’s mail-ordering business cost[24].

By remaining in the market without any foreseeable improvement in revenue,
DPAG was considered to have restricted the activities of competitors which
were in position to provide the service at a price that would cover their
cost.

Conclusions
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. Although, the firms should take a
thorough consideration before perusing such strategy because it is not
always legitimate.
To summarize it would be correct to say that:

– Prices above ATC are not considered predatory with only exception were

there is selective price cutting.

– Prices between ATC and AVC are allowed under certain circumstances,

such as meeting competition, excess capacity or obsolete products and

never aimed to eliminate competitors. When there is no proof of this

intention, or it is very vague, additional test of recoupment can be

invoked by competition authorities

– Prices below AVC are suspicious but might be justified in special

situations, for example, when promoting a new product.

– In specific industries were AVC is very law, bat capital cost is high

the LRIC standard should be applied.
To have a better view of this I made an attempt to depict it graphically in
the Figure No.1

List of References

1. Brooke Group v Brown Williamson Tobacco decision (113 S. Ct. 2578)

2. C1-71-96-003-EN-C, Single market review. Subseries V, Impact on

competition and scale effects, Volume 3

3. Case (475 U.S. 574)

4. Case C-62/86 AKZO v Commission [1991] ECR I-3359, [1993] 5 CMLR 215

5. Case C-333/94 P Tetra Pak International SA v Commission [1996] ECR I-

5951

6. Compagnie Maritime Belge v Commission, Case C-395/96

7. Commission Press Release IP/03/1025, 16 July 2003

8. OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147

9. OJ [1992] L 72/1, [1992] 4 CMLR 551, para 149

10. OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147

11. OJ [1998] C 265/2, [1998] 5 CMLR 821

12. OJ [1998] C 265/2, [1998] 5 CMLR 821, paras 113-115

13. OJ [2001] L 125/27, [2001] 5 CMLR 99

14. Office of Fair Trading, Guideline Assessment of Individual Agreements

and Conduct, http://www.oft.gov.uk/NR/rdonlyres/6E8FFD45-5EA6-44CB-

A569-197B3BEA9DB8/0/oft414.pdf

15. The Competition Act 1998: Assessment of Individual Agreements and

Conduct (OFT Guideline 414) para 4.19 to 4.27

16. The Competition Act 1998: The application to the telecommunications

sector (OFT Guideline 417) para 7.11.

http://www.oft.gov.uk/NR/rdonlyres/967DA5EE-6D63-48E3-91D4-

D20A5D6263FF/0/oft417.pdf

17. Whish, Richard (2003): “Competition Law”, 5th edition, London:

LexisNexis, p. 197

18. Wyatt and Dashwoods (2000): ”European Union Law”, 4th edition,

London: Sweet & Maxwell, p.607

[pic]
———————–
[1] Whish, Richard (2003): “Competition Law”, 5th edition, London:
LexisNexis, p. 197
[2] C1-71-96-003-EN-C, Single market review. Subseries V, Impact on
competition and scale effects, Volume 3
[3] Whish, Richard (2003): “Competition Law”, 5th edition, London:
LexisNexis, p. 703
[4] Brooke Group v Brown Williamson Tobacco decision (113 S. Ct. 2578)
[5] Case C-62/86 AKZO v Commission [1991] ECR I-3359, [1993] 5 CMLR 215
[6] [1991] ECR I-3359, [1993] 5 CMLR 215, para 72
[7] Commission Press Release IP/03/1025, 16 July 2003
[8] Whish, Richard (2003): “Competition Law”, 5th edition, London:
LexisNexis, p. 351
[9] Office of Fair Trading, Guideline Assessment of Individual Agreements
and Conduct,
[10] Ibid, para 4.8
[11] Case C-333/94 P Tetra Pak International SA v Commission [1996] ECR I-
5951
[12] OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147
[13] OJ [1992] L 72/1, [1992] 4 CMLR 551, para 149
[14] Case (475 U.S. 574)
[15] The Competition Act 1998: Assessment of Individual Agreements and
Conduct (OFT Guideline 414) para 4.19 to 4.27
[16] Wyatt and Dashwoods (2000): ”European Union Law”, 4th edition,
London: Sweet & Maxwell, p.607
[17] Whish, Richard (2003): “Competition Law”, 5th edition, London:
LexisNexis, p. 708
[18]Compagnie Maritime Belge v Commission, Case C-395/96
[19] OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147
[20] OJ [1998] C 265/2, [1998] 5 CMLR 821
[21] OJ [1998] C 265/2, [1998] 5 CMLR 821, paras 113-115
[22] The Competition Act 1998: The application to the telecommunications
sector (OFT Guideline 417) para 7.11.
[23] OJ [2001] L 125/27, [2001] 5 CMLR 99
[24] Ibid. para 36

———————–
Figure 1

Predatory price-cutting

Long Run Incremental Cost rule (LRIC)

AKZO rule

loss-leading;
short run promotions;
prices that mach an inefficient entrant;
mistakes in determining correct market price;
network externalities;
incremental profit.

AVC

ATC

Presumed to be

Predatory

unless

Predatory if proved to eliminate competitors

Recoupment proof

Still not

clear

Proof by Course of behavior
behavior

Documentary

proof

Prove of intention to

eliminate competitors

Price above ATC,

no problem unless

selective pricing proved

Predatory price

LRIC Period 1-5 years

Capital Cost

Operating

cost for providing

product n+1

Operating

cost for providing

product n

Legitimate price level

Dominant undertaking

Leave a Comment