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Archive for May 31st, 2011

Subversive Thoughts (2) – Excessive Pricing

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Today, I would like to advance again four heretical propositions, this time in relation to excessive pricing cases under Article 102 TFEU. In essence, they challenge the mainstream view that there are insuperable conceptual and practical hurdles to the control of dominant firms’ pricing policies. No doubt this will again trigger opposition from the mainstream.

A Proposed Theory of Harm for Excessive Pricing Cases, the Foreclosure of Ir-Relevant Markets – To start, I believe that there is a reasonably sound – and overlooked – conceptual basis to challenge monopolists’ excessive pricing policies on the basis of the antitrust rules. Take a monopolist charging excessive prices in market A (the relevant market). With this, the monopolist dries up demand on neighboring markets (B, C, D …). But this is not all. He also dries up a range of unrelated markets (W, X, Y, Z) which include virtually all the markets where customers make purchases of goods/services. To take one example of this, a customer faced with an increase in the price of oil will purchase lesser quantities of milk, cereals, fruits, etc. (assuming finite resources). The monopolist’s pricing policy on market A thus forecloses – possibly unwillingly – the sales opportunities of other producers on a range of ir-relevant markets. In turn, this may force out a number of firms of those markets, increase concentration, decrease entry opportunities and eventually harm market competition. This effect will be particularly acute on markets relating to products/services that do not fulfill basic needs, where customers will simply forego consumption.

But this is not all. With this conduct, the monopolist may even distort, and drive demand up in market A. This is because consumers foregoing consumption of B, C, D, W, X, Y, Z will divert their freed resources towards market A, thereby consuming more of the monopolist’s product (for instance, because they fear a further increase in the price of A). This may give rise to extra-superprofits on the part of the monopolist.

From an economic standpoint, there is nothing truly shocking to my proposition. After all, we know since Walras that markets work altogether in equilibrium. Moreover, it suggests that dominant firms’ excessive prices inflict a collateral damage on other firms which, in the word of economists, is akin to a negative externality. Hence, there is good ground to regulate such pricing practices. Finally, the emphasis of this proposed theory of harm is on foreclosure (and not on exploitation, thereby limiting the risks that agencies will seek to achieve distributional goals).

In practice, the upshot of this first proposition is that competition authorities, who often view markets as silos, should not shy away from thinking outside of the box relevant market. There is nothing wrong to consider the effects that price increases may have on other unrelated markets. After all, competition authorities do this all the time. Think for instance of the complexities involved in the balancing, under Article 101 TFEU, of the anticompetitive effects of an agreement in market 1 with its pro-competitive effects in market 2. Likewise, many theories of harm under Article 102 TFEU involve practices that take place in one market, and that have anticompetitive effects in another market (e.g., predatory pricing, tying, etc.).

A Proposed Practical Benchmark to Screen Excessive Pricing Cases – The most powerful argument against excessive pricing cases is practical in nature. No one, let alone antitrust regulators, can arguably say at what level a price (and a profit margin) becomes excessive. Moreover, price-costs benchmarks would be unpractical, because there would be insuperable cost-measurement problems in a number of areas (e.g. multi-products firms, etc.). Read the rest of this entry »

Written by Nicolas Petit

31 May 2011 at 4:08 pm