Prices

 

Author Definition

 

Definition

Price is the amount of money or other consideration that is required and paid in exchange for a good or service. Economic literature identifies price as one of the outcomes of both market structures and the nature or extent of competitive rivalry in markets. For this reason price competition is one of the most direct considerations when assessing the competitive effects of both prohibited firm conduct and firm consolidation. In South Africa, abusive pricing practices are prohibited under sections eight and nine of the Competition Act while in the European Union similar prohibitions fall under Article 102 TFEU. Notably, for most other jurisdictions these prohibitions are similarly formulated.

 

Commentary

The concept of price in competition enforcement is inclusive of base prices, discounts and rebates granted to customers or consumers. Under a Bertrand (Nash) equilibrium, where firms are of equal or similar size, face identical and constant costs, and produce homogenous products, prices are independently set at marginal cost. However, prices may rise above marginal cost where products are differentiated (Khemani, 1993, p.15). Neoclassical price theory establishes that in competitive markets, rivalry between firms yields an equilibrium of competitive prices, output and trading terms which increase welfare in society (Straddler, 2015, p13). From this perspective, mergers and acquisitions, single firm conduct and agreements between competitors which limit competition and thus result in prices that deviate durably from the ‘competitive’ level (i.e., increases in prices), are generally considered anticompetitive if there are no compelling efficiency, technological or other procompetitive justifications that outweigh the arising harm.

Price can and is used by firms in markets in an exploitative or exclusionary manner. The exploitative use of price typically manifests itself in the context of excessive pricing which can give rise to customer and/or consumer harm. The exclusionary context in which prices can be used includes various pricing strategies such as predatory pricing, conditional rebates, bundling and tying of products and services, margin squeeze, price discrimination and price fixing, all of which can be used to exclude rivals in markets. These abusive price practices fall under unilateral firm conduct and are assessed based on their economic effect in markets. In other instances, competitors agree on the price to be charged (and its components such as discounts etc.) as a means to avoid competition and jointly maximise profit. This is an outright prohibited price practice referred to as price fixing.

For the sake of brevity, the discussion below will focus on two price strategies (excessive pricing and predatory pricing) that give rise to consumer harm (in the form of high prices) and foreclosure of new entry and expansion by rivals in markets. Two principles are critical when evaluating abusive price conduct, (i) the determination of the dominant firm’s costs (allowing for normal economic profit) relative to the price charged and (ii) competitive rivalry will lead to removal of less efficient firms, leaving only those competitors who are as efficient as the dominant firm in the market. This view finds credence in the Intel v EU Commission and Commission v Mittal cases and is also affirmed by the European Commission’s Enforcement Priorities in Applying Article [102 TFEU] to Abusive Exclusionary Conduct by Dominant Undertakings.

While abusive price practices are uniformly prohibited across jurisdictions, differences of opinion remain in respect of excessive prices. While the EU, South Africa and China, for example, prohibit the charging of excessive prices, the US does not expressly outlaw this practice. The charging of excessively high prices (referred to as unfair purchase or selling prices) raises interesting questions for competition enforcement. The key challenge relates to the determination of ‘excessiveness’ and the levels at which such excessiveness can be deemed abusive. The South African Competition Act 89 of 1998 (as amended) defines an excessive price as one that “bears no reasonable relation to the economic value of that good or service; and higher than the value referred to...” The approach taken by the South African competition authorities follows that adopted in United Brands vs Commission and General Motors vs Commission. In Commission vs Mittal, the Competition Appeal Court (CAC) set out a four-step test for determining whether a price is excessive which was later applied in Commission vs Sasol Chemical Industries. The steps include (1) the determination of the actual price charged; (2) the economic value of the good or service must be ascertained; (3) if the actual price exceeds the economic value, it must be determined whether the difference between them is unreasonable; and (4) if so, it must be determined if the charging of the excessive price is to the detriment of consumers.

The determination of economic value remains a challenging task facing competition authorities and litigants alike. United Brands gives guidance on this, indicating that economic value can be determined on the basis of the dominant firm’s production costs or other benchmarks such as the prices of competing products. In Mittal, the CAC defined economic value as the notional price that would be charged in circumstances of long-run competitive equilibrium. The CAC indicated that prices ordinarily charged in other markets by the same or cost-comparable firms may serve as a measure of economic value if the other markets are characterised by effective competition in the long run. Calcagno et al (2019, 169), citing the findings of the Organisation for Economic Cooperation and Development, note that global best practice is to compare the prices charged for the same product or service in different geographic markets, time periods, or prices charged for similar products by other firms. There is also a view that the determination of economic value must expand beyond price and cost and take into account the value derived by customers, for example, elements such as convenience and willingness to pay. In Scandlines, the European Commission (‘EC’) found that convenience was an important consideration while the Court of Appeal for England and Wales, in the British Horseracing Board case, found that willingness to pay was a relevant factor in deriving economic value.

The charging of predatory prices is another example of a prohibited price strategy where a dominant firm engages in below cost pricing in order to undermine or foreclose rivals. Whish (2018) describes the conduct as a deliberate strategy in which a dominant player charges loss-making prices in response to competition from an existing competitor(s) or new entrant(s), with a view to disciplining existing players or foreclosing an entrant. Once the discipline or foreclosure is achieved, the dominant firm raises its prices in order to recoup its losses, thereby causing consumer harm. This type of price conduct is also fraught with challenges relating to the determination of the appropriate cost standard to be applied. The Commission vs Media24 case affirmed marginal or average variable costs as the appropriate cost standards in South Africa. Amendments to the Competition Act have since introduced average avoidable costs as an additional standard that can be used.

 

Bibliography

Calcagno, C., Chapsal, A. and White, J., 2019. Economics of excessive pricing: an application to the pharmaceutical industry. Journal of European Competition Law & Practice, 10(3), pp.166-171.

Khemani, R.S., 1993. Glossary of industrial organisation economics and competition law. Organisation for Economic Co-operation and Development; Washington, DC: OECD Publications and Information Centre.

Meese, A.J., 2003. Price Theory, Competition, and the Rule of Reason. U. Ill. L. Rev., p.77. Meese, Alan J., "Price Theory, Competition, and the Rule of Reason" (2003). Faculty Publications. 553.

Strader, J.M., 2015. The impact of neoclassical price theory on monopolization law: a transatlantic perspective (Doctoral dissertation, UCL (University College London)).

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

Author

Quotation

Yongama Njisane, Prices, Global Dictionary of Competition Law, Concurrences, Art. N° 89143

Visites 863

Publisher Concurrences

Date 1 January 1900

Number of pages 500

 

Institution Definition

Prices cover the consumer price index (inflation) and its forecast, the producer price index, the price level index, housing prices and share prices. Consumer price indices measure changes in average retail prices of a fixed basket of goods and services representing household consumption, whereas producer price indices measure average movements of prices received by the producers of various commodities; these are often seen as advanced indicators of price changes throughout the economy. Comparative price levels measure the differences in the general price levels of countries; they are dependent on exchange rates and should be treated with caution. Share price indices are calculated from the prices of common shares of companies traded on national or foreign stock exchanges. © OECD

 
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