MIDDLESEX UNIVERSITY

BUSINESS SCHOOL LONDON

TOPIC: THE NOTION OF CONSUMER WELFARE UNDER

PREDATORY PRICING.

NAME: ELIZABETH SAMUEL KARUA

STUDENT NO: M00235986
MODULE: LEX 4020 (2008-9)
MODULE LEADER: PENNY KENT
DATE: 5 MAY, 2009
INTRODUCTION

“I am tired of competition law because when the prices go up the judges says it is
monopoly, when the prices go down they say it is predatory pricing, and when they stay
the same they say it is tacit collusion”1

The ultimate objective of EC competition law is the protection of competition in the

community, as a result this enhance consumer welfare.2 From the wording of Article 82 EC
treaty, the quintessence of protecting competition is to enhance consumer welfare and ensure
efficient allocation of resources in the community.3 When the community competition policy
was on its infancy, Article 82 was applied on the form of conduct that could obstruct actual or
potential competitors’ capacity to participate in the market,4 rather than its effect on the
competition market and consumer. However, with economist analysis and several decisions
from the European court, the approach to Article 82 has changed to include the effect on the
market and consumer.5

The purpose of this paper is to analyse the concept of predation in relation to consumer
welfare. It is immediately apparent from different researches, that predation is a harm to
consumer. This research paper will illustrate how and why predation cause unfairness to
consumer welfare, in elaborating that, the reader will be introduced to the EC law governing
predation. The analysis will be based of different approaches put forward by scholars from
legal and economic debate. Concluding the discussion, the paper will identify the main
elements of a workable theory by scrutinise the way the EC competition authorities have
incorporated the academic debate in their contemporary decisions.

EC competition law is concerned with ensuring that undertakings do not restrict or distort
competition in the Community by conducting different abusive practice. This paper is
concerned with the abusive practice whereby an undertaking prices its product so low that
competitors cannot live with the price and are driven from the market. According to Jones
1
William Landes in "The Fire of Truth: A Remembrance of Law and Econ at Chicago", JLE
(1981) p.193. words by Ronald Coase [1991 Nobel Prize in economics]
2
[2000] OJ C291/1 (the vertical Guidelines), para 7.
3
EC Commission (2005)
4
Reckon, (2008)
5
Cormsen, L., (2007)
and Sufrin, this practice is known as predatory pricing, 6 the prices is been lowered for only
short term, once the competitors are excluded from the market the undertaking recoup its
losses. Joskow and Klevorick argue that when the undertaking recoups it losses, prices will
rise up drastically, consequently prejudice consumer welfare.7 There is a considerable debate
on the definition of predatory pricing from courts, legal and economic scholars.

Andrew (1998) brought forward that, there is a considerable debate in defining predation, the
extent of how low prices must fall and the extent of how rivals will suffer is ambiguous,8
different scholars have different approach and theories. The doors of this debate were opened
by economist John McGee, from his article in 1958, examining the case of standard oil
antitrust decision he argued that, for predation to occur there must be recoupment foreseeable
and the rate of return must be higher than market rate of interest.9 It is clear, therefore, that
there are three sided approach namely, the economics, business law and business strategy.

6
Jones, A., and Sufrin, B., (2007)
7
Joskow, P.L., and Klevorick, A.K., (1979)
8
Andrew (1998)
9
John McGee (1958)
THE EC LAW
The interpretation of Article 82 EC treaty can clearly be sustained on the basis of wording of
Article 3 (1) (g) of the EC treaty, which stipulates that: one of the activities of the community
shall be, to ensure that competition in the community is not distorted.10 Any practice by a
dominant undertaking, which harms competition, harm consumers, harm competitors or harm
a combination of these entities,11 is prohibited by Article 82 EC treaty.

Article 82 EC treaty; expressly provide prohibition for abuse of a dominant position in the
common market or at the substantial part of it insofar as it may affect trade within
community.12 The prohibition target undertakings with economic strength that prevent
effective competition,13therefore an undertaking alleged of predatory pricing must have
dominant position or be very closely associated to the dominated market14, for Article 82 to
apply. The commission has extended predatory pricing meaning to include predatory pricing
strategies, 15the later may be defined to mean, unlawful pricing strategy aimed at eliminating
an efficient competitor. For infringement of Article 82 to occur it also requires a detail
elaborative of barriers to entry.

Turning now to the pattern of the court’s case law, the traditional predation test started in
Akzo Chemie BV v Commission the European court laid that: in determining whether an
undertaking has practice predatory pricing, there are two principles to be adhered to, first
whether the prices were below the average variable cost and second whether there was
intention to eliminate competitors.16 On the other hand scholars such as Lindberg argue that,

10
Maastriach treaty, 1992
11
Pinar Akmah (2008)
12
DJ Gerber (2007), Pinar Akmah (2008)
13
Paraphrase from the case of united Brands continental BV v. Commission
14
Definition of dominance in the case of Tetra pak II, that even quasi-dominance is
actionable under article 82
15
Lowe Philip (2003)
16
Judgement of court of justice was given on 3 July 1991, case C-62/86, AKZO Chemie BV
v Commission, where by Akzo charged prices above average total cost t its customers, it
offered to the customers of ESC price below average total cost .Akzo set off its losses
from ESC customers by selling above average total cost to large independent and its
customers. This behaviour shows that Akzo was forming strategy to eliminate ESC from
the market.
it is problematic to understand what the management of an undertaking had in mind. 17 While
Article 82 stipulates that ‘abuse’ should be an objective for infringement to transpire.

In the important decision of Tretra Pak Internationa SA v Commission, it was noted that
recoupment is not a necessary element for price predation to occur.18 This shows that the
standard set in Akzo case has been changed. Furthermore the court held that whenever there
is a threat that competitors will be eliminated from the market, then predatory behaviours
should be penalised.19 It is immediately apparent from the judgement above, that it is the
elimination of a particular competitor that the case law is protecting. However, it should be
noted that the purpose of Article 82, is not to protect a particular competitor, but to prevent
distortion of competition and defend the interest of the consumers. Henceforth, where
recoupment is not feasible consumer’s interests are not at harm.20 As in the US recoupment is
a fundamental requirement for predatory pricing to be established.21 22

In the recent predation cases, the commission has introduced new approach to establish
predatory pricing. These developments are dependable with the current enlargement in
economic thinking. First is the marginal incremental test, this is the distinction between
wholesale price and retail price, which does not give the undertaking a reasonable profit.23 In
the case of Deutsche Post AG24 the commission established that, where a dominant
undertaking can cross-subsidies, between a monopoly market and competitive one. The act
will be presumed to be an abuse, if it does not cover the incremental cost. On the other hand,
economist argues that, incremental cost of one particular undertaking does not include all
fixed infrastructure that are commonly used by other undertakings.25

17
Linderberg, R., (2004)
18
C-333 94P [1996] ECR 1
19
Korah (2000) G neils and A. T Kate (2000)
20
Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH &
Co KG (C-7/97) [1998] E.C.R. I-07791, para.58, A.G.'s Opinion
21
Silva, M.M., (2009)
22
Booke Group Ltd. v Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993)
23
Areeda et all (2002)
24
Case Comp/35, 141) O.J. 2001 L125/27.

25
Dr Tilman Lader., (2002)
Finally, it be should noted that, the commission keep on applying traditional predation test as
established in Akzo case. Therefore the essence of variable cost is not covered; pricing will
constitute an abuse if it is a plan to eradicate competitors.26 Consequently, the recoupment
test has not been put into account by the commission.

PREDATORY PRICING VS CONSUMER WELFARE

It seems reasonable to suppose that, low prices are the ultimate for consumer welfare, but at
same time they might be detriment to consumer. This happens when a firm intent is to
exclude competitors from the market and recoup its losses. In interpreting the definition of
predatory pricing, it is immediately apparent that, when the firm is at the initial stage of
predation, the result is hallmark to consumer welfare. Because in order to exclude
competitors the predator has to lower its prices to be exceptionally low.27 Once the predator
has effectively maintain market power, it increase price above the economical price to recoup
its losses throughout predatory period.28Notwithstanding the low prices at the initial stage,
eventually consumer will suffer due to loss of competition.

For the sake of clarity and to put the subsequent discussion into proper perspective, it ought
to be known that recoupment is the only feasible aspect that harms consumer’s interest under
predation. However, economist argues that it is very rarely for recoupment to take place.29
Such assumption is doubtless reinforced by the perception that, when the predator price rise
up to recoup the losses, other competitors will easily penetrate into the market. Although,
writer Richard Zerbe argues to the contrary, that when prices are distorted consumers lose in
long run, even if the recoupment stage has not been reached.30 He supports his argument by
stipulating that, during initial stage of predation there is insufficient waste of resources,
which will adversely affect other market. In commentary, his argument makes sense, since
prices below marginal cost creates wastefulness and harms consumers’ interest.

26
Ordover, Janusz A (2008)
27
Gormsen (2007)
28
OECD., (2005)
29
Daniel Crane, (2005 -2006)
30
Richard Zerbe (2006)
Turning to the pattern of case laws in the case of Irish sugar v Commission it was stipulated
that when an undertaking in a dominant position, implement a practise that its object is to
eliminate competitors and create barriers into entry, the fact that the result hoped for is not
achieved, is not satisfactory to prevent that being an abuse under the implication of article 82
EC treaty.31 It is clear, therefore, that recoupment is not essential element for predation case
to exist

Some economist, such as the propounded of the Chicago school of thought, argue that
predation is so unusual that there should be no laws to restrict it.32 Therefore the restriction
will cause more harm since predation suits can cause scheme collusion. It is worth noting
that, if predation is unsual then at this point in time, there would be no decided case laws on
the subject. Different case laws have ruled out that there is predation. From the case of
France Telecom v the commission33 it was held that, “prices below average variable cost are
ground for presumptuous that they have the aim of eliminating competitors and prices
below average total cost but above average variable cost, are presumed abusive when they
consist part of a plan to eliminate competitor.” Predatory pricing may have anti competitive
effects to consumer even if the rivals are not eliminated out of the market.34 In predatory
pricing the act of distorting price creates long term harm to consumers, due to the waste of
resources.

The rationale of the commission is to protect consumer, when competitors are eliminated
from the market this will have an adverse effect to the consumer. Consumer’s choices will be
limited and the dominant firm will have discretion power on pricing. The European
commission and the European courts ascertain that predation does occur and it contravenes
article 82 EC treaty.35

31
Case T-228/97, [1999] ECR 11- 2969 para 191, the same findings were held in the case
T-203/01 Michelin v Commission [2003] ECR 11-4071 para 241 and 242
32
Daniel Crane, supra
33
At the Court of first Instance, Case T-340/03, the commission used the management
staff documents and formal presentation to establish wether there was predation plan.
Therefore the commission understood what the management had in mind.
34
J. Temple and R. O’Donoghue (2002)
35
Jones and sufrin, supra
CURRENT MEANING OF PREDATION BY EC COMPETITION
AUTHORITIES
On 26th March 2009, the European Parliament approved a resolution white
paper presented by commission on the damages for antitrust actions;
damages claim by victims will be more effective from the national court
level to the court of European community.36 European Parliament shares
the commission view that the victims of antitrust actions are entitled to
damages. Affected consumers now can recover their losses.

The Commission use consumer welfare has the measure for assessing
restrictive practice in the community.37 This has been the approach from
the AKZO case to the case of France Telecom. On the issue of predatory
pricing, the commission does not regard as indispensable to provide
further separate proof of recoupment in order to find an abuse under
Article 82.38 In recent appeal of France Telecom SA v Commission, it was
noted that proof of recoupment of losses is not a pre circumstance of a
predatory pricing existence.39 Therefore, the current meaning of predatory
pricing under article 82 is that “prices below average cost are abusive and
prices below average total cost but above variable cost are abusive if an
intention to eliminate competitor exists.”40

36
Europa press release (2009) words by European Competition Commissioner Neelie
Kroes
37
EC Commission, guidelines on Vertical Restraints (O.J.E.C. C 291 of 13.10.2000, p.1)
38
DG competition Discussion paper on the application of Article 82 on exclusionary
abuses, 2005
39
Case C 202/07 P, 1 Apr 2009 para 110, wanadoo restricted competition, hence harmed
consumers, since the commission decision several internet providers have entered in the
France market and the price of broadband has decrease making the country been the 2nd
cheapest among OECD countries.
40
Europa, press release Antitrust: Commission welcomes judgment of the Court of Justice
in French broadband case , April 2009
From the commission discussion paper41, predatory pricing has been
defined to mean. “dominant undertaking engages in predatory conduct by
deliberately incurring losses or foregoing profits in the short term , so as
to foreclose or be likely to foreclose one or more of its actual or potential
competitors with a view to strengthening or maintaining its market power,
thereby causing consumer harm .”

From the above extract, pricing below average variable cost is an absolute
evidence of predatory pricing, while other categories of pricing constitute
an abuse under Article 82 if they form part of or a plan to eliminate or
create barriers of entry to other competitors. The Commission employ an
economic base approach, this means that there is no need of actual harm
to transpire for a conduct to violate Article 82 EC treaty.

The commission declared that in accessing predation, rules need to be

different in certain industries. From the commission Notice on the
application of competition rules in the telecommunication sector, under
telecommunication sector the commission employ long run incremental
cost to access abuse by price predation.42 The commission weigh up
whether the conduct is likely to cause exclusonarity abuse.

In the market of cross subsidization, It is worth knowing that, cross –

subsidization does not constitute an abuse on itself; the price below cost
and intent to eliminate competitors or deterring entry constitute an abuse
under Article 82.43

41
From a discussion paper by Jindrich Kloub (2009) para 62
42
Europa press release at http://europa.eu/geninfo/query/resultaction.jsp?page=1
14/04/2009
43
Deutsche post AG [2001] 0JLI 25/27 5 CMLR 99
 CONCLUDING REMARKS
Finally, it should be noted that the EC competition authorities markdown
recoupment has a fundamental element for the establishment of price
predation. In these circumstance there is possibility that over enforcement
will increase, since unsuccessful predation is an ultimate to consumer
welfare.44 Initially, however if we weight the benefit to consumer and the
harm that they will suffer after a successful predation, the fact remains
that there is much harm to the economy if the recoupment takes place.
The European Competition authorities should be prudently advised not to
implement the American approach with regard recoupment.

Although, economist and other scholars argue that the evidence of

recoupment is necessary for predatory pricing to happen, and due to the
economic thinking recoupment can not take place since other competitors
will enter into the market. However, all that is a mere speculation
recoupment is rationally.45 The commission endeavour is to protect
consumers and competition not a particular competitor. In that event its
responsibility is to tackle down all conducts that will have an adverse
effect on consumers choice, pioneering goods or services and lower
prices.

BIBLIOGRAPHY

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44
Booke Group Ltd. v Brown & Williamson Tobacco Corp, supra
45
Richard Zerbe, supra, Jones and Sufrin, supra.
Temple and R. O’Donoghue, Defining Legitimate competition: Hoe to
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V. Korah, EC Competition Law and Practice, (Hart Publishing, 2000)

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REPORTS AND SPEECH

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European Parliament’s cross-party support for damages for consumer and
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at http://europa.eu/rapid/pressReleasesAction.do?
reference=MEMO/09/135&format=HTML&aged=0&language=EN&guiLang
uage=en 31/03/2009

Lowe Philip., “introductory address to the seminar prons and cons of low
prices” EU competition practice on predatory pricing, Stockholm 5 Dec,
2003 at
http://ec.europa.eu/competition/speeches/text/sp2003_066_en.pdf
25/03/2009

DG competition Discussion paper on the application of Article 82 on

exclusionarity abuses, 2005 at
http://ec.europa.eu/competition/antitrust/art82/discpaper2005.pdf
10/04/2009
Europa, press release Antitrust: Commission welcomes judgment of the
Court of Justice in French broadband case , April 2009
http://europa.eu/rapid/pressReleasesAction.do?
reference=MEMO/09/147&format=HTML&aged=0&language=EN&guiLang
uage=en 10/04/2009

EC Commission, commission issues guidance paper on application of

Article 82 EC
http://ec.europa.eu/competition/antitrust/art82/index.html
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CASES

United Brands continental BV v. Commission [1978] ECR 207

AKZO Chemie BV v Commission case C-62/86 [1991] ECR 2-3359

Tretra Pak International SA v Commission C-333 94P [1996] ECR 1

Deutsche Post AG /35, 141) O.J. 2001 L125/27

Michelin v Commission T-203/01 [2003] ECR 11-4071

Irish sugar v Commission Case T-228/97, [1999] ECR 11- 2969

France Telecom SA v Commission Case C 202/07 P, 1 Apr 2009

France Telecom SA v Commission case T-340/03 [2007] ECR 11-107

Brooke Group Ltd. v Brown & Williamson Tobacco Corp 509 U.S. 209
(1993)

United Brands Company and United Brand Continental V Commission case

27/76 [1978] ECR 207

Hoffman-La Roche& Co v Commission case 85/76 [1979] ECR 461

Hilti v Commission case T-30/89 [1991] ECR 11-1439

Michelin v Commission case T-203/01 [2003] ECR 11-4071