Grobuoniškos kainodaros teisinai aspektai ES (anglų k.)

1. Introduction

Predatory pricing one of the oldest conspiracy methods that competing large

businesses may inflict. The law that started regulating this malign form of

competition is dating back to 19th century nevertheless it is still complex

and controversial. After all, competing on price is the core essence of

competition and firms should not be deterred passing the efficiency – that

they have achieved – on to the price of a product. The law on predatory

pricing is enforced on the very thin ice where underneath is sheer

competition and above is abusing practice and it is important not to break

in. A firm has to raise itself an anxious question if it is dominant and

then to face a dilemma where both a price rise and a price cut might be

considered to be abusive. The dominant firm might simply argue that it is

competing – as it should do – whereas the complainant will argue that it

has departed from beneficial competition and is guilty of abusive


1.2 Elimination

In this assignment I hhave concentrated on EC law dealing with abuse of a

dominant position in relation to predatory pricing. I made some referances

to UK law as it gives some helphul guidelines in the enforcment of EC law.

Even more, some helpful insight on this iissue I found in the practise of US

antitrus authorities (e.g. as for today, the rule of ’recoupment’ has not

been aplied yet by ECJ but its incidense is not a distant future).

1.3 Method

All kinds of sources used in this assignment, such as official EU official

publications, literature and articles on this topic, will be evaluated in

terms of relevance and validity. The size of this paper does not allow me

to go into deep analysis, but hopefully I will provide myself with helpful

insights into this subject.

1.4 Formulation of the problem

In order to show to what extent a dominant undertaking may engage in

predatory pricing practice it is important to define what is considered by

predatory pricing.

To the extent that single market integration has lifted previous legal and

institutional restrictions to entry into a national market, the dominant

firms in that market have no other choice but rely on strategic behaviour;

one of this kind is predatory behaviour towards existing and potential

competitors. It has been aimed at new entrants and firms already operating

in the markets. This usually takes two forms[2].

Firstly, there can be restriction of access to a complimentary asset by a

dominant firm. This asset can be characterised by essential importance in

reaching the end customer, and most importantly – cannot be duplicated –

either because it is in scarce supply or it has a form of statutory or

monopoly. The monopolist controlling an essential complementary asset

naturally will have an incentive to prevent the access of competing firms

by introducing disadvantageous terms. This may be expressed by refusal to

supply an asset, setting supranormal charges, use of vertical restrains

(e.g. exclusive dealing agreements)

Secondly, and of the most importance to this paper, there can be

exclusionary pricing. That is, a dominant firm may preclude the entry of

rivals into the given market directly through its pricing behaviour, by

setting prices for its products in the market below the level of economic

rationality so it is not worth for a rival to compete. This can be done by

introducing non-linear pricing structures such as selective discounts and

fidelity rebates (which reward customers in exchange for not purchasing

from rivals). The other form includes predatory pricing, where the dominant

firm adopts an aggressive prising strategy as a response to entry. Even

more, the dominant firm may implicitly imply of its predatory intents to

potential rival. Due to the constrain of limits to this paper, I

investigate only predatory price-cutting (selling at a loss). Other prising

practices as selective price-cutting to retain customers (but not at loss)

and vertical margin squeezing are excluded.

2 PPredatory price-cutting

Thus, the idea of predatory prising is simple enough: that a dominant firm

that has been charging for its products supra-competitively reduced prices

to a loss making level when faced with competition from an existing

competitor or a new entrant on the market and then having disciplined the

competitors the dominant firm raises its prices again, accumulating

supranormal profits until the next wave of attacks[3].

2.1 Justifications for predatory pricing

In principle, any competing firm may seek to meet possible competition

through conduct which is meant to signal unequivocally that entry would be

met with aggressive retaliation, or that its advantage is such that the

rival would not be able to compete effectively, were it to enter. Mainly

these signals are expressed in pricing behaviour in the market. The

important economic issue is when and under what circumstances these

strategies may be deemed justifiable and pro competitive. Unlike

investment in capacity, R&D or advertising, which may provide the

competitive advantage, pricing is a strategic weapon. This weapon is useful

of its rapid application whereas other means might require considerable

amount of time. Pricing strategy is one of the most viable instruments that

undertakings have in their disposition and they should not be deprived of

possibility of inflicting it, even if it is predatory.

2.3 Proving of predatory pricing

The main pproblem with predation is that this strategy may be detected by

competition authorities. And sometimes it might be legal and sometimes

illegal. If firms could be sure that predatory pricing was always detected

and proved illegal, then such strategy would never be used. However, the

proving of predatory pricing is quite complicated and there is no single

satisfactory test or technique that a firm is predating.

The best-known test is the Areeda-Turner rule, were by prices which are

below a firm’s average variable cost (‘AVC’) are deemed to be predatory. In

fact, there are situations in which pricing below marginal cost is

legitimate, and therefore this test may not be considered safe. To solve

this problem, from 1993 the US Supreme Court has established the recoupment

test[4] that relegated the Areeda-Turner test to ancillary role. But as we

can see the EU competition authorities have declined to adopt the Areeda-

Turner test, according to which pricing above AVC should be presumed

lawfull. Other two rules have been used. Namely, AKZO rule an Incremental

Cost standard.

AKZO test

The crucial problem is the need to identify an appropriate measure of the

firm’s cost – to be compared with the prices. This always contentious issue

in predation cases, where there is a sort ‘indistinguishability problem’

(the dominant firm will always argue that

its pricing conduct is in fact

compatible with keen competition), and therefore much hinges on the level

of cost. These types of difficulties are well exemplified by the case of

AKZO[5] (the largest European supplier of bleaching agents), which was

investigated following a complaint that its conduct threatened to force out

business a smaller UK competitor, Engineering and Chemical Supplies Ltd

(ECS). The Commission here decided that pricing above average variable cost

(‘AVC’) but below average total cost (‘ATC’) could be abusive were the was

evidence of an iintention on the part of the dominant firm to eliminate a

competitor[6]. The Commission suggested that even a price above ATC might

be predatory when assessed in its particular market context. As the ECJ

ruled on the appeal by AKZO, the prices were predatory because there was no

evidence that they were necessary in order to match competitors’ offers and

that there was evidence of an intention to drive ECS out of the market.

Now, rises the question was is meant by “matching competitors’ offers”.

Clear application oof AKZO test is seen in Wanadoo[7] case and can be cited

as a general rule: ‘Community case law applies two tests to establish

whether an abuse in the form of predatory predatory pricing has been

committed: where variable costs are not covered, aan abuse is automatically

presumed; where variable costs are covered, but total costs are not, the

pricing is deemed to constitute an abuse if it forms part of a plan to

eliminate competitors.’

Legitimisation for predatory pricing

In the EC law, there are no clear guidelines on what would be legitimate

meet competition by predatory pricing. Some helpful and more elaborated

insight can be drawn from UK legislation. UK Competition Act of 1998 is in

great conformity with EC regime this enables UK competition authorities to

apply Community competition law when making decisions under the Act[8]. In

this Act, Section 4 of the Guideline Assessment of Individual Agreements

and Conduct [9] deals with predation. The Guideline is more sophisticated

than the case law of ECJ. Here we can find some possible justifications[10]

even wwhen pricing below AVC:

– Loss leading were cutting the price of one product may increase sales

complimentary products;

– Short run promotions often involve selling below AVC for a limited

period and are widely used in many markets. However, a series of

short term promotions could, taken together, amount to a predatory


– Prices that mach inefficient entrant. Some markets are able to support

only one or two undertakings because, for example, there are

significant economies of scale. TThe dominant firm would then have the

choice of remaining in the market, and incurring losses, or exiting

the market, perhaps leaving the market to be supplied by a less

efficient new entrant.

– Mistakes in determining the correct market price. In some cases an

undertaking may find itself selling at below its variable costs

because of unanticipated increases in input costs, or unanticipated

reductions in demand.;

– Low prices that are attributable to network externalities. There are

some services (such as telecommunications networks) where the addition

of more customers adds to the value of the service sold to other

customers. In these circumstances, it can be profitable for the

undertaking to sell part of the service to customers at below average

variable cost;

– The undertaking is making an incremental profit. If the particular

action being complained about is incrementally profitable, it is

unlikely that it is predatory. The competition authorities still need

to be convinced, however, that the reduction in losses will shortly

result in the undertaking covering its average variable costs.

Indeed, the Commission gives attribute to these justifications. In Tetra

Pak II case[11] the Commission did not merely rely on the AKZO presumption

were prices are below AVC, but said that, that it had ‘gathered

sufficiently clear and unequivocal data to be able to conclude that, sales

at loss were the result of a deliberate policy aimed at eliminating

competition’[12]. Commission declined to accept justification that

efficient multi-national company could have indulged in behavior so opposed

to the logic of economic profitability trough management error. Nor did it

could find any exceptional circumstances, independent of Tetra Pak’s free

will, that forced it to make losses. The Commission concluded that there

were no such circumstances and that prices were simply part of an ‘eviction


Recoupment test

As it was pointed out above in US law the proving of price predation hinges

on the fact that predator should have the ability to recoup any losses

incurred. This standard had already played a major in the 1986 Matsushita

Electric Industrial vs. Zenith Radio case[14]. In this case the Supreme

Court, interestingly, acquitted seven Japanese firms from accusations of

dumping and predatory pricing in the USA because of the impossibility to

recoup losses aft6erwards, in spite of the fact that both geographic price

discrimination and injury to US producers had been found. O other hand the

UK law does not give clear guidelines[15] to what extent recoupment must be

proved in EC law. It says that it would not necessarily be required to

establish the feasibility of recoupment where the dominant firm abuses in

the market in which it is dominant; however the issue would arise were the

dominant firm cuts its prices in a neighbouring market in which it is not

dominant. Nor the ECJ has adopted a requirement of recoupment under Article

82. In AKZO V Commission the Court acknowledged the significance of

recoupment in paragraph 71 of its judgement. However it did not expressly

incorporate the need of recoupment as part of the offence. According to the

Court, it must possible to penalise predatory pricing whenever there is a

risk that competitors will be eliminated. The aim pursued, which is to

maintain undistorted competition, rules out waiting until such a strategy

leads to the actual elimination of competition[16]

This gives a notion that firms inflicting predatory pricing in Europe

should not explicitly rely on recoupment clause even though it is a weighty

argument in US law. But of course, the possibility that in future cases

were the evidence of intention to eliminate competition is less clear-cut

and were a predator is not super-dominant, the Court might require proof of

the possibility of recoupment[17].

Prove of intention

It is an important clause were selling below ATC is found predatory only

when there is an evidence to eliminate competition. Though, the


to eliminate competition is quite difficult to prove. After all, the whole

idea about competition is how to eliminate competitors. In EC law practice,

the requirement of intention means that evidence of a ‘smoking gun’ should

be produced, for example written memoranda, email. In Compagnie Maritime

Belge v Commission[18], which deals with selective price cutting, the ECJ

found the evidence of ‘smoking gun’ were appellants had admitted their

practice the ‘fighting ship method’. That is, when facing a cheaper

competitor, the conference would hold a meeting tto undercut him, and ensure

that conference members scheduled their sailing at around the sane time as

those of competitors in order to win over its customers. But not all the

companies will be as obliging as AKZO, which had committed its plans to

paper. In these situations the requisite element of intention can be

inferred from the surrounding evidence, such as the duration, continuity

and scale of losses made. As the Commission pointed out in Tetra Pack

II[19] it ‘gathered sufficiently clear and unequivocal data to be able to

conclude that, in that country at least, sales at a loss were the result of

a deliberate policy aimed at eliminating competition’.

AKZO rule exemption

It may not always be appropriate to apply the standards of AVC and ATC. In

some industries ffixed costs are very high but variable costs are law. An

obvious example is telecommunication industry where much of the cost (ATC)

attributed to establishing infrastructure, maintaining it and the cost

(AVC) of providing one unit of a product (telephony calls, transmitting

data) is very law and sometimes close to zero. So, if the AVC standard

were to be applied there would hardly ever be predatory pricing; and the

ATC standard would require proof of the predator’s intention to eliminate

competition. In this situation an alternative rule is needed. The

Commission stated in Notice on the Application of the Competition Rules to

Access Agreements[20] that instead of AKZO standards a standard based on

long-run incremental cost (‘LRIC’) might be preferable[21]. Again, more

elaborate explanation is given in the UK law[22]. Here LLRIC is defined as a

measure that takes in to account the total long run cost (that is, both

capital and operating cost) of supplying a specified additional unit of

output (‘the increment’). To put it differently, it provides for a

‘combinatorial’ approach towards the assessment of cost, whereby a firm’s

long-run incremental cost is combined with its ‘stand-alone cost’ and the

firm has to demonstrate two things:

– First, that its individual prices are set at the level or above LRIC.

– Secondly, that the ccombined prices of services in groups that share

common costs cover both LRIC and the common costs of supplying those


This rule no the basis of incremental cost we can find in the Commission’s

proceeding against Deutsche Post AG (DPAG)[23]. The Commission found that

for a period of 5 years DPAG in every sale in the mail-order business

represented a loss which comprises all the service provision cost and at

least part of the additional costs (postal services) of providing this

sideline service. In such circumstances, every additional sale not only

entitled the loss of at least part of these additional costs, but made no

contribution toward covering the carrier’s mail-ordering business cost[24].

By remaining in the market without any foreseeable improvement in revenue,

DPAG was considered to have restricted the activities of competitors which

were in position to provide the service at a price that would cover their



Pricing strategy is one of the most viable instruments that undertakings

have in their disposition and they should not be deprived of possibility of

inflicting it, even if it is predatory. Although, the firms should take a

thorough consideration before perusing such strategy because it is not

always legitimate.

To summarize it would be correct to say that:

– Prices above ATC are not considered predatory wwith only exception were

there is selective price cutting.

– Prices between ATC and AVC are allowed under certain circumstances,

such as meeting competition, excess capacity or obsolete products and

never aimed to eliminate competitors. When there is no proof of this

intention, or it is very vague, additional test of recoupment can be

invoked by competition authorities

– Prices below AVC are suspicious but might be justified in special

situations, for example, when promoting a new product.

– In specific industries were AVC is very law, bat capital cost is high

the LRIC standard should be applied.

To have a better view of this I made an attempt to depict it graphically in

the Figure No.1

List of References

1. Brooke Group v Brown Williamson Tobacco decision (113 S. Ct. 2578)

2. C1-71-96-003-EN-C, Single market review. Subseries V, Impact on

competition and scale effects, Volume 3

3. Case (475 U.S. 574)

4. Case C-62/86 AKZO v Commission [1991] ECR I-3359, [1993] 5 CMLR 215

5. Case C-333/94 P Tetra Pak International SA v Commission [1996] ECR I-


6. Compagnie Maritime Belge v Commission, Case C-395/96

7. Commission Press Release IP/03/1025, 16 July 2003

8. OJ [1992] L 72/1, [1992] 4 CCMLR 551, para 147

9. OJ [1992] L 72/1, [1992] 4 CMLR 551, para 149

10. OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147

11. OJ [1998] C 265/2, [1998] 5 CMLR 821

12. OJ [1998] C 265/2, [1998] 5 CMLR 821, paras 113-115

13. OJ [2001] L 125/27, [2001] 5 CMLR 99

14. Office of Fair Trading, Guideline Assessment of Individual Agreements

and Conduct,


15. The Competition Act 1998: Assessment of Individual Agreements and

Conduct (OFT Guideline 414) para 4.19 to 4.27

16. The Competition Act 1998: The application to the telecommunications

sector (OFT Guideline 417) para 7.11.


17. Whish, Richard (2003): “Competition Law”, 5th edition, London:

LexisNexis, p. 197

18. Wyatt and Dashwoods (2000): ”European Union Law”, 4th edition,

London: Sweet & Maxwell, p.607



[1] Whish, Richard (2003): “Competition Law”, 5th edition, London:

LexisNexis, p. 197

[2] C1-71-96-003-EN-C, Single market review. Subseries V, Impact on

competition and scale effects, Volume 3

[3] Whish, Richard (2003): “Competition Law”, 5th edition, London:

LexisNexis, p. 703

[4] Brooke Group v Brown Williamson Tobacco decision (113 S. Ct. 2578)

[5] Case C-62/86 AKZO v Commission [1991] ECR I-3359, [1993] 5 CMLR 215

[6] [1991] ECR I-3359, [1993] 5 CMLR 215, para 72

[7] Commission Press Release

IP/03/1025, 16 July 2003

[8] Whish, Richard (2003): “Competition Law”, 5th edition, London:

LexisNexis, p. 351

[9] Office of Fair Trading, Guideline Assessment of Individual Agreements

and Conduct,

[10] Ibid, para 4.8

[11] Case C-333/94 P Tetra Pak International SA v Commission [1996] ECR I-


[12] OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147

[13] OJ [1992] L 72/1, [1992] 4 CMLR 551, para 149

[14] Case (475 U.S. 574)

[15] The Competition Act 1998: Assessment of Individual Agreements and

Conduct (OFT Guideline 414) para 4.19 to 4.27

[16] Wyatt aand Dashwoods (2000): ”European Union Law”, 4th edition,

London: Sweet & Maxwell, p.607

[17] Whish, Richard (2003): “Competition Law”, 5th edition, London:

LexisNexis, p. 708

[18]Compagnie Maritime Belge v Commission, Case C-395/96

[19] OJ [1992] L 72/1, [1992] 4 CMLR 551, para 147

[20] OJ [1998] C 265/2, [1998] 5 CMLR 821

[21] OJ [1998] C 265/2, [1998] 5 CMLR 821, paras 113-115

[22] The Competition Act 1998: The application to the telecommunications

sector (OFT Guideline 417) para 7.11.

[23] OJ [2001] L 125/27, [2001] 5 CMLR 99

[24] Ibid. para 336


Figure 1

Predatory price-cutting

Long Run Incremental Cost rule (LRIC)

AKZO rule


short run promotions;

prices that mach an inefficient entrant;

mistakes in determining correct market price;

network externalities;

incremental profit.



Presumed to be



Predatory if proved to eliminate competitors

Recoupment proof

Still not


Proof by Course of behavior




Prove of intention to

eliminate competitors

Price above ATC,

no problem unless

selective pricing proved

Predatory price

LRIC Period 1-5 years

Capital Cost


cost for providing

product n+1


cost for providing

product n

Legitimate price level

Dominant undertaking