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What is excessive pricing? European, French and Italian case law

Law & Economics workshop organised by Concurrences Review with Frédéric Jenny (OECD) and Alessandra Tonazzi (AGCM), in partnership with Fréget - Tasso de Panafieu and NERA Economic Consulting.

Frédéric Jenny

Excessive pricing is a topical issue at European and national level, as illustrated by the Aspen case which led to a decision by the European Commission and the Italian competition authority, the AGCM. It is both a legal and an economic issue. What are, according to case law, the legal conditions for a price to be excessive? What are the economic criteria or standards for excessive pricing? As pointed out by the US authorities, the practice of excessive pricing could create a risk of discouraging the competitive strategy of companies. If excessive pricing is sanctioned in Europe, a balanced approach must be adopted to avoid, on the one hand, non-compliance with the law and, on the other hand, excessive control. Finally, if competition law proves to be inadequate, what are the possible alternatives?

Alexandre Carbonnel

The United Brands judgment of the Court of Justice established the test to be applied to determine whether a price is excessive. Both tests raise questions. The first test relates to the difference between the selling price and the cost of production, which must be excessive: it is questionable what cost thresholds are used, between average variable cost and average avoidable cost, long-term incremental cost and average total cost.

Beyond the question of costs and price, the degree of competition in the market in question must also be taken into account. Where the company has a strong market power, such as Aspen, the reference price cannot be the same as in the competitive market. The economic methods used are multiple: the profitability analysis, which contains several sub-methods using for example return on capital employed or operating rate of return; or the comparison of the margin rate. A common feature of these different methods is the issue of common cost allocation and joint costs. In particular, there are several allocation keys.

In the Italian Aspen case, the intensity of the use of production factors was chosen: indirect costs were allocated according to the weight of direct costs for each product. In the Pfizer Flynn case, the UK competition authority, the CMA, used several allocation keys. However, there is no indisputable method. The second criterion is the existence of an unfair price in itself or in relation to a comparator. For the comparison, a counterfactual must be determined. If the referent is temporal, it will be necessary to check whether it is the price increase that is excessive. It is also possible to use comparable products as a referent.

In the Aspen and Pfizer Flynn cases, the competition authorities based their analysis on a comparison over time: was the price increase unfair? In Pfizer Flynn, the MCA did not rely on the selling price of the generic sold by TEVA to determine whether the price set by the company was unfair. However, in the appeal against this decision, the Competition Appeal Tribunal held that a direct product comparison would have determined whether the price was unfair.

Photos © Léo-Paul Ridet

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