Predatory pricing

 

Author Definition

 

Definition

The concept of predatory pricing comes into play when a dominant undertaking deliberately reduces its prices to a loss-making level for a short-term to discipline its existing competitors or foreclose the market to new entrants with a view to strengthening or maintaining its market power later on by way of the foreclosing effect of such predation. To that end, in broad terms, predatory pricing could be defined as the setting of prices at an unreasonably low level (below a cost parameter) to induce a competitor to exit the market or to deter its entry or expansion.

 

Commentary

In general, the starting point of the analysis would be to assess whether the dominant undertaking incurred or is incurring avoidable losses for the relevant time period (i.e. whether the conduct entails a deliberate sacrifice). For such analysis, various cost parameters (in line with the competitive landscape/characteristics of the relevant market) could be taken into account in conjunction with direct evidence (e.g. documents that show a predatory strategy), if any. If sufficient reliable data are available, the equally efficient competitor analysis could also be applied to determine whether the conduct is capable of harming consumers. In general it is considered unlikely that predatory conduct will create efficiencies.

From EU perspective, predatory pricing falls within the scope of Article 102 of the Treaty on the Functioning of the European Union (TFEU). The Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (“Commission’s Guidelines”) provides two elements for predatory pricing: (i) sacrifice and (ii) anti-competitive foreclosure. In terms of the sacrifice element, European Commission (Commission) would assess whether by charging a lower price for its output or by expanding its output over the relevant time period, the dominant undertaking incurred or is incurring losses that could have been avoided. Average avoidable cost (AAC) would be taken into account as a starting point in determining whether sacrifice occurred and if a dominant undertaking charges a price below AAC, this would be viewed in most cases as a clear indication of sacrifice. However, if the Commission establishes that an alleged conduct led to net revenues lower than could have been expected from a reasonable alternative in the short term, or in other words, that the dominant undertaking incurred a loss that could have avoided, this may also indicate predatory strategy. Accordingly, predatory intent should be proven to establish the existence of predatory conduct if the dominant undertaking sets prices higher than AAC.

In terms of anti-competitive foreclosure, the Commission would apply the equally efficient competitor analysis to determine whether the conduct is capable of harming consumers. The Commission acknowledges that, normally, only pricing below long-run average incremental cost (LRAIC) is capable of foreclosing as efficient competitors from the market. The Commission is not required to demonstrate that competitors have exited the market in order to prove anti-competitive foreclosure. The Commission’s Guidelines indicate that consumers are likely to be harmed if the dominant undertaking - after the predatory conduct comes to an end - can reasonably expect its market power to be greater than it would have been had the undertaking not engaged in that conduct in the first place. That being said, it also clarifies that this does not mean that the Commission would only intervene if the dominant undertaking would be likely to be able to increase its prices above the level existing before the conduct and proof of overall profits is not required for identifying consumer harm.

The European Court of Justice (ECJ) assessed predatory pricing for the first time in AKZO case. According to the ECJ, prices below average variable cost (AVC) by a dominant undertaking will be presumed abusive; while prices below average total cost (ATC) but above AVC will be regarded as abusive if they are part of a plan to eliminate competitors. The ECJ further developed its case law in Tetra Pak II and France Télécom v Commission. In Tetra Pak II, where anti-competitive intention of Tetra Pak was particularly clear, as manifested in a series of abusive acts, the ECJ indicated that “in circumstances of the present case” it is not required to show the dominant undertaking had a “realistic chance of recouping its losses”. Additionally in France Télécom v Commission, the ECJ held that the case law of the Court did not require proving the possibility of recoupment of losses as a necessary precondition to establishing that such a pricing policy is abusive. It further noted that the Commission could still consider the possibility of recoupment a relevant factor for predatory pricing analysis.

In the US, a predatory pricing case may be brought under Section 2 of the Sherman Act of 1890 or the Robinson-Patman Act of 1936. While the essence of the predatory pricing claim is the same under either statute, the standard of proof differs. Sherman Act requires proof of a “dangerous probability” of monopolization, while the Robinson-Patman Act requires only a “reasonable possibility” of substantial injury to competition. One of the most important differences between the EU and US approaches regarding predatory pricing is the recoupment requirement. US competition law condemns prices below cost, but only where there is a showing of potential recoupment of those costs in the future. Meanwhile, the EU has a stricter test that condemns below cost prices without a showing of potential recoupment. The US Supreme Court established a new framework for predatory pricing analysis in the Brooke decision. First, predatory pricing required proof of below cost pricing, second, predatory pricing required proof of recoupment. Proof of recoupment requires not only that the below-cost price exclude or discipline the predatory victim, but also proof that the predator will be able to raise price above the competitive level sufficient to compensate the predator for its predatory investment.

Under Turkish competition law, given that Article 6 of Law No. 4054 on the Protection of Competition (“Law No. 4054) and the Turkish Competition Authority’s (Authority) Guidelines on the Assessment of Exclusionary Abusive Conduct by Dominant Undertakings (“Authority’s Guidelines) are closely modelled after Article 102 of TFEU and the Commission’s Guidelines, the Turkish Competition Board’s (Board) analyses in terms of predatory pricing is generally in line with the EU approach. In fact, there are numerous cases where the Board applied the test utilized in AKZO case. In its U.N. RO-RO decision, the Board based its analysis upon three elements; (i) the proof of below-cost pricing, (ii) the existence of intention of elimination and (iii) anti-competitive foreclosure. Although U.N. RO-RO’s prices were below its AAC, the Board nevertheless focused on the existence of predatory intention in order to demonstrate that the only plausible explanation of the undertaking’s pricing strategy was to eliminate its competitor. To that end, the Board also highlighted that U.N. RO-RO also had the possibility to recoup its losses, while indicating that this was not a precondition for finding predatory pricing.

 

Bibliography

Barry E. Hawk, (2020), Antitrust and Competition Laws, Juris Publishing, Inc.

David Bailey and Laura Elizabeth John (eds.), Bellamy and Child: European Union Law of Competition (8th edn, Oxford University Press 2018)

Alison Jones and Brenda Sufrin; (2016), EU Competition Law, Text, Cases and Materials Oxford University Press, 6th Edition

Christopher R. Leslie, (2013), Predatory Pricing And Recoupment, Columbia Law Review, Vol. 113, No. 7 (November 2013), pp. 1695-1771

Patrick Bolton, Joseph F. Brodley and Michael H. Riordan; (2000), Predatory Policy: Strategic Theory and Legal Policy, The Georgetown Law Journal, pp:2239-2330

Authors

  • ELIG Gürkaynak Attorneys-at-Law (Istanbul)
  • ELIG Gürkaynak Attorneys-at-Law (Istanbul)

Quotation

Gönenç Gürkaynak, Onur Özgümüş, Predatory pricing, Global Dictionary of Competition Law, Art. N° 12336

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Institution Definition

A (deliberate) strategy, usually by a dominant firm, of driving competitors out of the market by setting prices below production costs. If the predator succeeds in driving existing competitors out of the market and in deterring future entry of new firms, he can subsequently raise prices and earn higher profits. Predatory pricing by dominant firms is prohibited by EU competition law as abuse of a dominant position. Prices set below average variable costs can be presumed to be predatory, because they have no other economic rationale than to eliminate competitors, since it would otherwise be more rational not to produce and sell a product that cannot be priced above average variable cost. Where prices are set below average total (but above variable) costs, some additional elements proving the predator’s intention need to be established in order to qualify them as predatory, given that other commercial considerations, like a need to clear stocks, may lie at the heart of the pricing policy. European Commission

A deliberate strategy, usually by a dominant firm, of driving competitors out of the market by setting very low prices or selling below the firm’s incremental costs of producing the output (often equated for practical purposes with average variable costs). Once the predator has successfully driven out existing competitors and deterred entry of new firms, it can raise prices and earn higher profits. The economic literature on the rationality and effectiveness of predatory pricing is in a state of flux. Many economists have questioned the rationality of predatory pricing on grounds that: it can be at least as costly to the predator as to the victim; targets of predation are not easily driven out, assuming relatively efficient capital markets; and entry or re-entry of firms in the absence of barriers reduces the predator’s chances of recouping losses incurred during the period of predation. However, other economists have suggested that price predation might be feasible if it is undertaken to "soften" up rivals for future acquisition, or if potential targets of predation or their sources of capital have less information about costs and market demand than the predator. (...) © OECD

 
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