Excess prices

 

Author Definition

 

Definition

Excessive pricing is an antitrust violation that exists in most OECD countries and particularly in EU competition law where a dominant firm charges a price that is excessive relative to an appropriate competitive benchmark in a way that deems it unfair. The violation does not hinge on potential harm to the competitive process, but rather is fulfilled also by mere exploitation of buyers by the dominant firm. The competitive benchmark to which the dominant firm’s price is compared includes either an appropriate measure of costs, or a comparison with a lower price charged in a situation comparable to the dominant firm’s circumstances.

 

Commentary

Article 102 TFEU prohibits any abuse by undertakings of a dominant position, and states in sub-section (a) that such abuse may consist in “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions.” This prohibition has been applied, inter alia, to prices that are too high. In particular, the European Court of Justice in General Motors Continental NV v. Comm’n (1975) held that a dominant firm’s price is unfair if it is “excessive in relation to the economic value of the service provided.” The Court of Justice in United Brands Co. BV v. Comm’n (1978) clarified the unfairness concept further and held that “[i]t is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. […] This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production [...].” (United Brands, paragraphs 249, 251). Hence, the United Brands decision discusses a price-cost comparison as a leading competitive benchmark. It holds that when price is excessive relative to cost, the price may be deemed unfair in itself. The economic rationale behind a price-cost comparison used as a competitive benchmark is that the competitive process, which antitrust laws strive for, drives prices toward the cost of production. Of course, costs, in this respect, should include not only variable costs of supplying the product, but also any costs, investments or risks the dominant firm requires in order to supply the product. The UK Court of Appeals in CMA v. Flynn Pharma Ltd. (2020, paragraph 97) held that a violation can be based solely on a price-cost comparison.

Instead of using a price-cost comparison, a violation can be shown by using a comparative benchmark. A comparative benchmark sheds light on the excessiveness of the dominant firm’s price by comparing it to a lower price taken from a comparable situation. This includes a comparison between the allegedly excessive price and a lower price that the dominant firm charged in a market, segment, or period in which it was subject to stronger competitive pressures, or pressure from price-sensitive consumers, or a regulated price that mimics a competitive price. Another kind of comparative benchmark involves comparison to the lower price charged by other comparable firms that are subject to more intense competition or have less power to raise prices. The rationale for using comparative benchmarks is that if the benchmark price is indeed comparable, it is reasonable to assume, subject to contrary evidence, that it is an upper bound on the competitive price, which is the price that antitrust laws strive for. In Bodson v. Pompes Funèbres (1988), for example, the EU Court of Justice held that the unfairness of an excessive price can be shown by comparing what the dominant firm has charged with lower prices it has charged in markets in which it is subject to more intense competition. In Latvijas Autoru apvienība v. Konkurences padome (2016) the Court of Justice held that if the difference between the price charged by the dominant firm and the comparator price is appreciable, then this is “indicative of abuse of a dominant position and it is for the copyright management organisation holding a dominant position to show that its prices are fair by reference to objective factors that have an impact on management expenses or the remuneration of rightholders.” In this case, the comparator used was the price charged by similar firms in two neighboring countries, or by similar firms in a group of other countries.

After establishing the competitive benchmark (cost-based or comparison based) that the dominant firm’s price is to be compared to, it needs to be determined whether the difference between the price charged by the dominant firm and this competitive benchmark is so excessive that it is deemed unfair. The degree of excessiveness that amounts to a violation is not made clear in the case law. Some cases held that prices exceeding the competitive benchmark by 25% to 40% were excessive, while other violation decisions concerned much larger gaps. Such ambiguity of legal rules is inherent also to other antitrust violations, and in particular those requiring “substantial harm to competition”. “Substantial”, like “excessive” or “unfair” is an ambiguous criterion. Some of the academic literature suggests using rebuttable presumptions that a certain gap above the competitive benchmark is excessive, so as to improve the predictability of the prohibition.

Excessive pricing is not recognized as an antitrust violation in all jurisdictions. Under U.S. case law, for example, an excessive price is not considered a violation. Such holdings were based mainly on three grounds. The first is the notion that excessive prices are self-correcting, since they allegedly attract entry of new competitors. The second ground for non-intervention is that excessive prices are necessary to promote pro-consumer investment, and the third is that it is too difficult to assess whether a price was excessive. There is controversy in the academic literature regarding the justifiability of these three grounds for non-intervention. One strand of the literature agrees with these three considerations, and advocates for a general non-interventionist approach, even in jurisdictions in which antitrust law includes the prohibition. Another strand of the literature questions these grounds for non-intervention and calls for ordinary application of the prohibition on a case-by-case basis. For example, some academic papers show that excessive prices cannot correct themselves. This is because it is the post-entry price that matters for new entrants. If the post-entry price is competitive, this is the price the new entrant will consider before it invests in entry and not the excessive price that prevailed before entry. If the post-entry price is expected to remain excessive, then by definition, entry did not correct it. Similarly, it is claimed that investment considerations can be assessed on a case-by-case basis, rather than constituting an overwhelming justification for non-intervention. Finally, the literature in favor of intervention shows the resemblance between excessive pricing cases and other complex antitrust litigation based on a rule of reason analysis. The latter too is based on complex economic analysis, coupled with a legal policy determination on a vague standard, such as the requirement that the probable harm be “substantial”. Also, many of these other complex antitrust violations also concern pricing, such as predatory pricing, price squeeze, and loyalty discounts, and require assessment of parties’ claim that their practice is necessary to stimulate investment.

 

Bibliography

David Gilo, A Coherent Approach to the Antitrust Prohibition of Excessive Pricing by Dominant Firms, in Excessive Pricing and Competition Law Enforcement 99, 107-112 (Yannis Katsoulacos & Frédéric Jenny eds. Springer, 2018).

Frederic Jenny, Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment, in Excessive Pricing and Competition Law Enforcement (Frédéric Jenny and Yannis Katsoulacos, eds. Springer, 2018).

Behrang Kianzad & Timo Minssen, How Much is Too Much? Defining the Metes and Bounds of Excessive Pricing in the Pharmaceutical Sector, 2 Eur. Pharm.L. Rev. 15 (2018).

Ariel Ezrachi & David Gilo, Are excessive prices really self-correcting?, 5(2) J. Competition L. & Econ. 249 (2009).

This article is being reviewed by the Editors of the Dictionary.

Author

  • Tel Aviv University

Quotation

David Gilo, Excess prices, Global Dictionary of Competition Law, Concurrences, Art. N° 85402

Visites 3247

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Refers to prices set significantly above competitive levels as a result of monopoly or market power. However, in practice, in absence of a conspiracy or price fixing agreement or evidence of market power stemming from high concentration, it is very difficult to establish a threshold beyond which a price may be considered excessive or unreasonable. Because the basic method of organizing production in a market economy is through the price system, price flexibility is critical. Prices fluctuate in order to bring supply and demand into equilibrium. Temporary shortages in supply or increases in demand will cause prices to rise and provide incentives for increased production and entry of new suppliers. Moreover, it should be noted that price and/or profit comparisons between different firms, markets, or countries are fraught with legal and economic problems. Attempts by government to control or force a roll back of prices that are not a result of restrictions on competition are inconsistent with the philosophy underlying competition policy. © OECD

On this topic see the e-Competitions special issue "Excessive prices: An overview of EU and national case law"

 
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