Rebates and margin squeeze: The equally-efficient competitor test

Law & Economics breakfast organized by Concurrences in partnership with Willkie Farr & Gallagher and Charles River Associates.


Thibaud Vergé (Professor at the Centre for Research in Economics and Statistics (CREST) and at ENSAE)

Unlike some horizontal price cartels, low price practices normally benefit the consumer. The problem only arises when prices are too low and do not allow efficient competitors to develop or maintain themselves on the market. The short-term gains for consumers would then be lost in the long run as a result of the price increases resulting from the exit of competitors. It is therefore questionable what tests can distinguish pro-competitive low pricing from anti-competitive foreclosure practices.

Test of the sacrifice of profit

This test identifies practices in which a dominant undertaking engages in predatory behaviour by incurring avoidable losses or foregoing short-term profits. In order to assess these losses, the European Commission takes as a basis for calculation the average avoidable cost (AAC), which includes only the fixed costs incurred during the period under review. However, the application of this test remains complex because the notion of sacrifice is not limited to prices below the AAC. What happens, for example, if net revenues are lower than those that would have been obtained if some other reasonable behaviour had been adopted? Moreover, the role of competition authorities is not to seek the optimal strategy of a firm, but rather to determine whether it has deliberately chosen a non-profitable practice. The profit sacrifice test thus appears to be weak without direct evidence of the dominant undertaking’s willingness to implement a predatory strategy based on such a sacrifice. The competition authorities therefore prefer the equally effective competitor test.

Photos © Léo-Paul Ridet.

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