Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Subversive Thoughts (2) – Excessive Pricing

with 7 comments

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.).

Surely, most of those alleged obstacles are material, and utmost caution is warranted when dealing with the metrics of pricing policies. Yet, the argument that it is impossible to say when a price is excessive strikes me as odd. To take a few daily-life examples, most of us will agree that international roaming charges or the price of certain competition law conferences have reached insanely high levels. More fundamentally, in many other areas, economic operators routinely scrutinize and assess market prices, and take on this basis very critical business decisions (e.g., think for instance to stocks, commodities and real-estate traders).

Besides the complex price-costs analysis applied in conventional antitrust analysis, a possible alternative measurement method may consist in comparing the (i) actual rate of return (ROR) of the dominant firm during the alleged excessive pricing period; with (ii) the ex ante rate of return (ROR) (or discount rate) of investors in this market. Here’s the proposition: only those situations where the actual ROR exceeds by some significant margin the ex ante ROR of investors should deserve regulatory scrutiny. Of course, the crux of the matter lies in defining the notion of “significant margin”. Yet, with this proposed screening device, agencies will not undermine dominant firms’ ex ante incentives to invest/ability to finance on capital markets (this is one of the most frequent argument used to challenge excessive pricing cases under Article 102 TFEU).

A Proposed Institutional Framework –  The application of Article 102 TFEU to excessive pricing claims may trigger a flood of litigation before ordinary courts, who must decide all cases brought before them. This may turn judges into price regulators on a wide range of markets, with angry customers going to court to renegotiate the price of all sorts of purchases. To avoid this, excessive pricing cases should thus be under the sole jurisdiction of competition authorities, who can from the outset dissmiss meritless complaints, set aside trivial cases and focus their resources on priority issues. In addition to this, competition agencies boast expert staff (economists and lawyers) and hold a huge wealth of information on markets. They are therefore arguably better equipped than judges to deal with such cases.

A Proposed Enforcement Target – To conclude this post, it is here submitted that the application of Article 102 TFEU to excessive prices should focus on markets where dominant firms sell directly to end-consumers. This is because on such markets, there are no intermediary players that can absorb part, if not all, of upstream price increases. In contrast, in markets where the supply chain comprises many (p)layers, a dominant firm’s price increase may be absorbed by the market players active at subsequent downstream levels (provided that they do not price at their marginal cost). On those markets, the accumulation of downstream market players acts as a buffering mechanism, which shelters – in part or full – end-consumers from the initial price increase. Those markets should thus not be dealt with as a matter of enforcement priority by competition authorities.

PS1: from now on, our most substantive posts will be re-published in e-competitions. This is great news. Thanks to N. Charbit for offering us this opportunity.

PS2: the idea of this post arose following a discussion with Michal Gal, Ioannis Liannos and Joseph Drexl two weeks ago at the ICN conference.

Written by Nicolas Petit

31 May 2011 at 4:08 pm

7 Responses

Subscribe to comments with RSS.

  1. Nicolas,

    I am sure you know how heretics typically end up 😉

    In addition, I would live prices alone.

    Kind regards,

    Damien

    Damien Geradin

    31 May 2011 at 5:46 pm

  2. Damien,

    Muchas gracias for the comment. It is a great honor to see that we are read by famous AT scholars.

    On what happens to heretics, the picture shows where I am heading to:).

    Now, I would love to leave prices alone. The thing is, they do not leave me alone (in particular when I make a cross-border call :)).

    Nico.

    Nicolas Petit

    1 June 2011 at 10:07 am

  3. I would follow Geradin advice, at least when excessive prices are the outcome of an alleged tacit collusive agreement (re. your example about international roaming).
    Now, the mantra is that enforcement against excessive prices is tricky because it is difficult to figure out a competitive benchmark, but in case of a cartel nobody cares about excessive mark-ups (at least not until follow-on damages actions are brought). Here the focus is instead on forensically establishing the existence of an agreement.
    Why then should tacit collusion be treated differently? In this respect, another mantra is that high prices under collective dominance are not abusive per se (because it is in the nature of a position of collective dominance), they need to be excessively high. Hence we fall back into those tricky questions of how yoy prove it. . .
    I say, provided the existence of a collusive agreement is established (and I admit is a big proviso), then by analogy this should be enough to establish that prices have been unfairly kept above competitive levels.
    So yes, Geradin is right, let’s leave the prices alone and focus on the existence of a position of collective dominace.
    BTW, could anyone quote me any case law supporting this mainstream view (see Whish and Padilla/O’Donoughue) – that in my opinion is more than questionable – that prices above competitive levels are not abusive because high mark-up are inherent in a position of collective dominance?

    Paolo Siciliani

    1 June 2011 at 10:33 am

  4. Thanks Paolo.

    To be clear, the post and our comments do not only relate to collective dominance. They also cover single firm dominance.

    On the mainstream, most scholarship on the issue in recent years has sought to eliminate excessive pricing from the list of abusive conduct caught under 102 TFEU. The Commission itself has, although very indirectly, endorsed this mainstream view, in leaving exploitative abuses out of its Guidance.

    A last point, on which I agree: in collective dominance settings, the concern is NOT the abnormally high price level. Rather the concern is that supra competitive prices (regardless of their level) are sticky and uniform. Again, I wrote this in my phd (in French). But I know from previous posts that you expect my translation in English and the good news is that I am currently working on this.

    Nicolas Petit

    1 June 2011 at 10:44 am

    • I know that scholarship quite well, as put by Röller the “the road to dominance is important” – hence all that scholarship makes sense with respect to unilateral abuse but not very insightful on tacit collusion.
      Please to see that my suspicion was probably right – no case law supporting the mainstream view that above competitive prices are not abusive per se as they are in the nature of collective dominance.
      Looking forward to reading your translation.

      Paolo Siciliani

      1 June 2011 at 10:50 am

  5. […] Nicolas Petit macht in seinem Blog nun Vorschläge zur Revitalisierung des Verbots des Preishöhenmissbrauchs auf Grundlage des EU-Kartellrechts (Art. 102 AEUV). Der […]

  6. Thank you, Nicolas, for your rather interesting than subversive thoughts which can only be welcomed as they will hopefully contribute to a more balanced debate on this topic since non-intervention against excessive pricing seems to have become an axiom, indeed. However, as you know, it is not only the difficulty of defining such prices and the danger of undermining investment incentives that is brought forward in favour of leaving the market to itself, but also the fact that excessive prices attract new entrants and are therefore self-correcting. What would you respond, if confronted with this objection to intervene against unfairly high prices?

    VH

    30 June 2011 at 12:04 am


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: