ON PRICE PREDATION

Utkarsh Aditya

Predatory pricing refers to the strategy used by firms and individuals conducting business to
injure their competitors by fixing prices of goods and services at low levels, such that the
competitors have no option but to exit the market. In such situation competitors might be
dissuaded from continuing in the market because they cannot sustain profitability at the price
level on which the predator is selling the goods or services. The regulation of predatory pricing is
quite controversial because of two reasons. There exist a set of belief that opposes any direct
regulation of price and a separate value system which allows for price regulation, however views
predatory pricing as a fair market tactic. The following paper presents how price predation is
regulated in the EU and the US and elucidates the differing effect on the market due to the
different approaches.

Arguments against Price Regulation

Much critique has been presented against any form of pricing regulation that a competition
regulator may impose.1 Classical economists view such regulation as governmental overreach in
a free market. Such economists believe that market forces if left unregulated, would correct any
unjust pricing, provided other barriers to entry and expansion in the relevant market do not exist.
Further, the fact that differing standards for determining ‘competitive pricing’ exists, dissuades
some economists for promoting any regulation. An economic analysis must be carried in a
scientific manner, keeping into account the condition and structure of the relevant market and the
structure of the firm alleged to have carried predatory pricing. To achieve this, different
economists have come up with different models and there exists little consensus on the efficacy
of these models. There also exists a view that any regulation on pricing will result in curbing
innovation. Firms undertake massive research and development costs precisely because such
innovation would result in lowering of costs, increase in profit margin and an overall better
product or service for the consumers. To achieve this many firms may price tactics to get an
edge. Critiques of price regulation have also pointed out problems related to difficulty in drafting
law with sufficient precision to allow enterprises to regulate their conduct.

1
Richard Whish & David Bailey, Competition Law (OUP, 7th ed. 2012) p. 718
The regulation of predatory pricing is also a controversial issue and little consensus remain
between different jurisdictions in the doctrinal application of regulating predatory pricing. 2 This
is because some critics believe that excessive regulation in the garb of stopping predation may
dissuade pro-competitive firms from passing off their efficiency in the form of low prices. A
bona fide attempt to provide lower prices should not be met with the brunt of regulation as it
harms the consumer as well as hampers innovation in the market. 3 Therefore, standards of
regulation must be strict, striking a balance between bona fide encroachment on price predation
and the right of firms to practice innovative and bona fide tactics to get an edge over the
competitor.

Doctrinal Standards and Intent

There has been extensive effort to develop a doctrinal framework to determine whether a price is
predatory. The commonly used test in US law is the Areeda and Turner test, wherein any pricing
below the average variable cost may be considered predatory. 4 In the US the Areeda and Turner
test is often seen as too strict. This has led the court to decree that proof of recoupment has to be
shown as a key component, apart from fulfilment of the Areeda-Turner test. Contrarily, some
people also feel that the test is not as strict as it ought to be as even pricing above the average
variable cost might be exclusionary, especially in situations where the firms intend so. 5 The
problem with insisting on the presence of the ‘mental element’ as a necessary condition to curb
price predation that in the market place all firms intend to dominate the market and increase their
presence. In such a situation intention of firms related to loss of competitors is bound to occur. 6
In jurisdictions where proof of ‘intention’ is deemed important, it is often located using the
‘smoking gun’ principle. ‘Smoking Gun’ refers to any evidence which might be presented that
ex-facie shows certain degree of intention of price predation of the firm in question. 7 These
‘smoking gun’ evidences may include any written memoranda, minutes of the meeting of the
2
Richard Whish & David Bailey, Competition Law (OUP, 7th ed. 2012) p. 740
3
Id.
4
US v American Airlines Inc 355 F 3d 1109 (10th Cir 2003) ; Spirit Airlines Inc v Northwest Airlines Inc 431 F 3d
(6th Cir 2005).
5
Richard Whish & David Bailey, Competition Law (OUP, 7th ed. 2012) p. 741
6
AA Poultry Farms Inc v Rose Acre Farms Inc 881 F 2d 1396, pp 1401–1402 (1989)
7
Richard Whish & David Bailey, Competition Law (OUP, 7th ed. 2012) p. 741
board of directors, documents, email, etc. detailing a systemic policy to exclude the competition
from the market.

Doctrinal Standards in European Jurisprudence

The European Union allows predatory price regulation under section 102(2) as it seen as an
abuse of dominance. Therefore, it is imperative to show that the firm in question is a dominant
player in the market and a non-dominant entity is allowed an unfettered margin of appreciation in
deciding its prices and is allowed to price below costs.8 In AKZO v Commission9, two competing
firms involved in the production of the chemical benzoyl peroxide were involved in a dispute
involving price predation. AKZO, a Dutch firm had a dominant foothold on the polymer market,
wherein the use of the chemical was essential. On the other hand, ECS, a small UK firm involved
in the manufacture of the chemical, sold in the flour refining market. When ECS decided to enter
the polymer market as a supplier of the chemical, AKZO retaliated by selling the chemical in the
flour refining market at very low prices which ECS could not match. Therefore, AKZO tried to
leverage its dominant position in the polymer market to stifle the competition. Moreover, the
conduct of AKZO evidenced its intent to create barriers in the polymer market, as its retaliation
only came after it issued threats to ECS to dissuade it from entering the market. The commission
in its ruling, declined to use the Areeda-Turner test. The commission opined that pricing above
the average variable cost does not prove the innocence of the firm. The conduct and the market
context must be looked in toto to determine whether the conduct was exclusionary. It held that
AKZO’s conduct and the structure of the market for sale of the chemical clearly showed a causal
link between AKZO’s intent to reduce competition and the detrimental consequences of its
pricing policy.10 The Commission held that pricing above average variable cost, however below
the average total cost also indicates a violation in economic terms. The court of Justice has
clarified the position since AKZO in various cases. In France Telecom v Commission11, it was
held that any pricing below the average total cost is prima facie abusive, however such
presumption is rebuttable. Therefore, any pricing below the average total costs is seen as

8
France Telecom v Commission [2007] 4 CMLR 919 para 186.
9
[1986] 3 CMLR 273
10
Id. Para 79.
11
[2009] 4 CMLR 1149.
presumptive violation, however such presumption must be buttressed with evidence of mala fide
conduct by the firm in question to prove price predation. 12 Bona fide conduct falling outside the
scope of regulation may include – an efficient firm passing its efficiency to customers in the
form of lower prices or a firm clearing its old stock through discounted prices. Due to the same
understanding, in European Union jurisprudence, pricing above average variable cost and below
average total cost also does not lead to the presumptive innocence of the firm. The surrounding
factual matrix must be investigated to locate price predation. Moreover, intent of the firm must
be closely monitored. In Tetra Pak v Commission13, it was noted that the predatory pricing policy
of Tetra Pak could be due to reasons on which the firm itself had no control, however, the
conduct of the firm, especially in Italy evidenced that it pursued the predation on its own volition
to exclude competition. Therefore, the commission held against Tetra Pak. The European Union
has also held that the Commission has a considerable margin of appreciation in using a particular
standard to determine competitive pricing and costs in a market. 14 Interestingly, the European
Commission has recommended the use of average avoidable cost as a more economically sound
standard to the average variable cost standard as it takes into account the additional fixed costs
incurred by the firm, thereby allowing for a larger spectrum of acceptable competitive price. 15
The European Commission has also emphasised that other models such as long-run incremental
cost model are much apt for certain industries like telecommunication as such industries incur
negligible average variable cost and exorbitant average fixed costs. Therefore, in such scenarios,
any reliance on the Areeda-Turner test is bound to result in indication of no abuse of dominance
through predatory pricing. Therefore, in the Deutsche Post16 case the Commission held that the
enterprise abused its dominant power, however refused to award dominance as its finding was
based on the long-run incremental cost model which was utilised for the first time.

The Recoupment Debate

12
Tetra Pak International SA v Commission [1996] ECR I- 5951 para 41.
13
OJ [1992] L 72/1, [1992] 4 CMLR 551
14
[2009] 4 CMLR 1149, paras 69–73
15
European Commission, Guidance on Article 102 Enforcement Priorities (OJ C 45 24th February 2009) paras. 20 –
64.
16
[2001] 5 CMLR 99
In the United States, any action under price predation can only be successfully pursued by the
regulator if it shows that the dominant firm recouped its losses incurred during the predation
campaign, after the competition was driven out of the market. 17 Therefore, in the US as well,
failure under the Areeda-Turner test is a mere indication of predatory pricing and the same must
be buttressed with recoupment of losses after the campaign. The reasoning behind such a view of
the law is that any recoupment is a clear indication of the intent of exclusionary behaviour.
Moreover, if a firm fails to recoup it indicates one of two things – the efficiency of the firm is
such that it is able to maintain profitability at the prices it offers and that such pricing is a bona
fide long-term measure and not a transient tactic employed for predation. In the European Union,
recoupment is not seen as essential, and intention is adjudged from the conduct of the firm in
question and the underlying market structure. The effect in the United States jurisprudence,
therefore, is that the reduction of market competition is not a cause of concern for competition
regulation, provided the consumers derive benefits from low pricing. The courts and regulators
are cautious in flagging of aggressive pricing as an inherently abusive measure as doing so can
create a chilling effect, dissuading pro-competitive firms to employ bona fide measures that drive
innovation and uphold consumer welfare. In the EU, while recoupment of losses is seen as a
persuasive indicator of predatory pricing, the same is not essential in any doctrinal analysis
carried by the court.18 In the EU, aggressive pricing may also come under the brunt of the law,
even in situations where there exist facts proving that competitors were eliminated due to price
predation.19

Conclusion

US jurisprudence strikes a balance between the right and interests of the firm to pursue
aggressive tactics in a laissez faire system and the need of healthy competition in the market.
However, it makes competition law more conducive to consumer welfare than to increased
market competition. EU jurisprudence on the other hand aims at striking a balance between
consumer welfare and maintenance of competitors in the market. However, this approach opens
EU jurisprudence to undue encroachment into a free market system. It is evident from the above

17
Brooke Group Ltd. v Brown and Williamson Tobacco Corp. 509 U.S. 209
18
AKZO v Commission [1986] 3 CMLR 273 Para 71
19
Tetra Pak International SA v Commission [1996] ECR I- 5951 para 44.
analysis that adopting strict doctrinal standards which protect the interests of all involved
stakeholders is a difficult task. In my opinion, the EU’s approach indicates a balanced approach.
However, to promote consumer welfare, the EU will benefit from a stricter application of the
recoupment principle, although it should not be made into an essential standard.