Competition law often prohibits suppliers from proscribing the retail price at which their buyers should resell their products or services (see resale price maintenance). However, certain forms of price setting by resellers may be regulated by law, for instance by limiting promotions, discounts or prohibiting reselling below cost.
‘Cost’ is usually defined as the cost incurred by the buyer when acquiring the product, although certain countries (such as Italy) also prohibit buyers from reselling products below the cost of production incurred by the supplier.
In practice, a reseller may for strategic reasons decide to sell below cost temporarily, for example to attract new customers or to launch a new product. Reselling below cost can then promote competition and lead to better prices for consumers.
However, certain jurisdictions see resale below cost as an anti-competitive strategy used by larger companies to the detriment of smaller companies. Similarly, resellers may increase the prices of some products in their range to keep others artificially low.
Prohibitions around below-cost selling may seek to pursue other policy objectives: in recent years, certain countries (e.g. France) have implemented rules on below-cost selling to improve the negotiating position of primary producers and ensure fair remuneration for farmers. Other policy objectives of such types of restrictions may be for instance related to public health: the United Kingdom has banned below-cost selling of alcohol to limit the availability of alcohol at prices which are too low and prevent the effects that has on health.
The OECD has argued that prohibitions on resale below cost are likely to harm consumers and protect inefficient competitors, fail to account adequately for pro-competitive business justifications for loss leader sales and detract from economic dynamism and growth.
Additionally, in relation to non-competition policy goals pursued by below cost selling (e.g. fair remuneration of suppliers, public health), the OECD notes that there may be other means to achieve the same objectives ‘without causing the potential consumer harm associated with’ prohibitions on reselling below cost.
Other antitrust authorities have a similar stance on resale below cost as the OECD. For instance, the United States Federal Trade Commission notes that ‘a firm’s independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition’ and that ‘consumers are harmed only if below-cost pricing allows a dominant competitor to knock its rivals out of the market and then raise prices to above-market levels for a substantial time.’
Similarly, under article 102 of the Treaty on the Functioning of the European Union, predatory pricing (which may include reselling below cost) is only illegal if it is carried out by one or more undertakings which have a dominant position in a market.
The European Commission’s enforcement priorities clarify that the Commission will be to intervene when ‘a dominant undertaking engages in predatory conduct by deliberately incurring losses or foregoing profits in the short term […] so as to foreclose or be likely to foreclose one or more of its actual or potential competitors with a view to strengthening or maintaining its market power, thereby causing consumer harm’ [European Commission Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02)].
As illustrated by the examples below, there is legislation regulating reselling below cost under commercial or competition law in several countries in Europe, in Japan and at state level in the United States.
Several member states of the European Union (including Belgium, Germany, Greece, France, Luxembourg, Hungary, Italy, Spain) prohibit below-cost selling, although the nature of legislation varies widely and the general or specific prohibitions are subject to exceptions. For instance, Belgium prohibits traders from selling at a loss, with exceptions for products sold as part of a promotion, in liquidation or at risk of rapid deterioration. Similar exceptions can be found in other jurisdictions.
In Germany, the law differentiates between food products (which may never be sold below cost) and ‘other products and commercial services’ which may “occasionally” be sold below costs (i.e. for a limited time per year). Objective justifications are possible for food products, such as preventing deterioration or the imminent unsaleability of the goods at the retailer’s premises through a timely sale, or in equally severe cases.
As noted above, certain jurisdictions may also prohibit buyers from purchasing or reselling a product below the supplier’s cost of production (e.g. Italy, Spain) to ensure a fair remuneration of suppliers in the supply chain. However, buyers may encounter practical difficulties with these types of prohibition as they have no means to verify the declaration of costs by producers. In fact, smaller producers may not be aware of their actual costs of production.
In Japan, the Antimonopoly Law prohibits regular below-cost selling without justification as an unfair trading practice.
The United States does not have a federal ban on selling below cost, but there are prohibitions in state law (e.g. California, Minnesota, Arkansas, Wisconsin, Tennessee), usually subject to justifications. For instance, Californian law prohibits selling below cost if it is done ‘for the purpose of injuring competitors or destroying competition’ [California Business and Professions Code 17043]. States also allow resellers to argue a ‘meeting-competition defence’, i.e. to justify an infringement of the relevant provisions if it is one in good faith to meet the legal price of a competitor selling the same article or product [California Business and Professions Code 17050(d)].
The European Union legal regime does not prohibit sales below cost throughout the Union, although EU law does not preclude this type of legislation at national level (provided that they are not discriminatory with regard to their application and their legal and factual effect) [C-267/91 and C-268/91 Keck and Mithouard].
However, certain general national prohibitions of resale below cost have been held incompatible with EU law in a number of specific cases [C-343/12 Euronics Belgium, C-295/16, Europamur].
The matter of a prohibition under EU law was raised during the drafting on the Directive (EU) 2019/633 on unfair trading practices (‘UTP’) in business-to-business relationships in the agricultural and food supply chain, but the stakeholders’ consultation by the European Commission did not identify the issue as a priority and the impact assessment noted that ‘inflationary effects on consumer prices have however been argued in case of UTP rules prohibiting below-cost sales’ [European Commission Staff Working Document Impact Assessment Initiative to improve the food supply chain (unfair trading practices) SWD/2018/092 final - 2018/082 (COD)].