Chillin'Competition

Yesterday, Advocate General Mengozzi delivered an interesting Opinion in the Post Danmark v Konkurrenceradet case (C-209/10) (Not yet available in English).

This case has its origin on a preliminary reference submitted by the Danish Hojesteret which asks the ECJ whether it can be concluded that a dominant company which sets selectively low but non-predarory prices to be applied to three large customers of its main competitor can be held to have abused its dominant position when there is no evidence of any strategy aimed at excluding its competitor. The Danish Court also asked about the relevant additional elements that must be taken into consideration before concluding that selective above-cost pricing is illegal.

One of the main remarkable aspects of this Opinion is that it names Nicolas as authorized doctrine (this reflects the current level of antitrust doctrine.. ) 😉  But we´ll come back to that later.

Mengozzi´s Opinion is interesting in several respects. If you´re interested on a fairly detailed and hastily written identification of its highlights, click here to keep reading.

(Warning: as many cost-related discussions this one can be a bit tedious for some lawyers).

First, the AG endorses the practice of resorting to incremental cost to refine the AKZO test for predatory pricing when an undertaking operates simultaneously in a liberalised market and fulfills universal service obligations in another market closed to competition (in this respect, the case was very similar to the European Commission´s Decision in Deutsche Post; the Opinion is not really much of a novelty in this regard).

Secondly, Mengozzi notes that pursuant to this refined test for predatory pricing PD´s conduct cannot be held as abusive in as much as the prices charged exceeded average incremental costs and, even if below average total costs, there is no proved strategy aimed at eliminating competitors (so far it´s just business as usual). Therefore the Opinion goes on to discuss the circumstances under which selective above-cost pricing can be deemed abusive.

At this stage, recitals 43 to 46 of the Opinion deal with the distinction between “primary-line discriminaton” and “secondary line-discrimination”. Mengozzi endorses this distinction, stating that, in addition to being relevant, it has been proposed by part of the doctrine (this is where Nicola´s paper -coauthored by D.Geradin- comes into play).

Before addressing the main question posed to the Court, Mengozzi summarizes the main arguments of the intervening parties (in essence, PD and the Czech government argued that anticompetitive pricing can only occur when prices are set below a relevant measure of cost whereas everyone else -including the Commission- argued that above-cost selective price cuts aimed at a customer of the dominant firm´s main competitor can be abusive when it is likely to exclude the latter unless those prices can be justified on economic grounds).

The AG then goes on to directly face the question as to when above-cost price cuts can be held abusive. He undertakes a very interesting and detailed analysis of the relevant EU case law namely Akzo, Compagnie Maritime Belge (“ceci n´est pas une fighting ship!”; remind me to tell you about that courtroom anecdote one day) and Irish Sugar.

He attempts to provide a unified and coherent reading of this case-law which, as we will see, he does by narrowing down their scope.

The conclusions of AG Mengozzi´s analysis are that even though Compagnie Maritime Belge and Irish Sugar suggest that above-cost selective price cuts can be abusive even when they do not lead to competitor´s exclusion (there seems to be some confusion with the terminology used under Art. 101 since he actually uses the term “restritive by their object” in recital 89), those Judgments must be confined to very specific factual conditions. The Opinion narrows down the scope of those Judgments to situations where (i) an exclusionary intent could be inferred from other circumstances unrelated to the price level; (ii) the dominant companies are “superdominant” (I never really liked this term; and by the way, it´s also worth noting that both cases related to collectively dominant positions); and (iii) pricing practices were conflated into a series of other price and non-price related abuses. Mengozzi also seems to support a distinction based on whether practices are aimed at maintaining pre-existing customers or at “capturing” new ones (see recital 94). Consequently, the Opinion concludes that those precedents are only “marginally pertinent” with regards to the question at stake.

According to the AG, when the exceptional conditions in those cases don´t concur, selective price cutting can only be assessed by referece to the relevant costs of the dominant firm. He distinguishes two situations:

a) In an scenario where prices remain above average total cost no competitive problems arise from price discrimination between the dominant firm´s  traditional clients and those of its competitors because those prices cannot lead to the exclusion of an as-efficient competitor (any such competitor could in principle cover its fixed and variable prices and therefore compete on prices). There nevertheless remains the possibility that such prices could be condemned as “secondary-line discrimination” (See recitals 97-99).

b) The second scenario takes place when a dominant firm offers a competitor´s customer prices which are below its average incremental cost but above average incremental cost.

The Commission had suggested to follow a AKZO-like reasoning, holding that prices below average total costs can be deemed abusive when the “losses” incurred as a result thereof are offset by the above average cost prices charged to traditional clients and there is no apparent economic justification. However, the Opinion rejects this line of reasoning as “overly simplistic”.

Mengozzi argues, firstly, that in as much as prices remain above incremental costs it´s not accurante to consider them as “loss-making” but rather as “non-profit maximising” and nevertheless profitable. Accordingly, the comparison with the prices charged to other customers would not be appropriate because the dominant firm does not in principle need to resort to them to maintain the prices charged to its competitor´s customer.

Nonetheless, he notes that in situations such as the one in the main proceedings incremental costs do not sufficiently account for the fixed costs common to the activities undertaken in both the market open to competition and the market reserved to it as the universal service provider. As a consequence, a price above incremental costs can nevertheless be charging part of the common fixed costs on the reserved market. It therefore cannot be excluded that prices above incremental cost may lead to exclusionary effects, because such prices can be “subsidised” by the income originating from the reserved market.  The bottomline is that in these cases what would be necessary is to identify the stand-alone cost of providing the universal services and to examine whether those costs are exceeded by the income obtained from them. In case they are, it should probably be concluded that there have been cross subsidies to the benefit of the sales in the market open to competition where price is belos average total costs.

(I admit it took more than one reading to get this right; I´ll buy you a beer if you understand recitals 111 to 114 in just one read).

To conclude the Opinion, the AG summarises its position as favoring the assessment of potential exclusionary effects rathen than the examination of exclusionary intent as the Court did in Akzo and as suggested by the Commission. In his view, such stance would lead to the presumption that any selective price cuts below the average total cost of the dominat firm would be abusive unless objectively justified. Such presumption, he argues, is not legally nor economically warranted, nor can it be automatically inferred from discriminatory pricing amongst the firm´s customers and those of its competitors.

In the unlikely event that this long post has not exhausted you, and if you´re still interested in reading an excellent piece on above-cost selective price cuts, I´ve got two recommendations: (i) have a doctor check you 😉 ; and  (ii) read Einer Elhauge´s excellent piece on Why Above-Cost Price Cuts To Drive Out Entrants Are Not Predatory—and the Implications for Defining Costs and Market Power

Also, and out of curiosity, you may want to check the comments to the Discussion Paper on exclusionary abuses submitted by Post Danmark which unsurprisingly focus exclusively on the issues discussed in this case.