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Abusive excessive pricing

Excessive pricing is considered as one of the most questionable anticompetitive practices, mainly because high prices often trigger new market entry or encourage innovation and due to the methodological complexities pertaining to the proof of excessive prices under Article 102 of the Treaty of the Functioning of the European Union (TFEU).

Recently, in the context of a request for a preliminary ruling to the Court of Justice of the European Union (CJEU) from the Supreme Court of Latvia (Augstākā tiesa) in case C-177/16, Advocate General Wahl has delivered an opinion, which contains an interesting discussion and guidance regarding the methodology that national Competition Authorities across the EUshould apply in order to prove anti-competitive excessive pricing.

In a nutshell, according to AG Wahl, the pricing of a dominant undertaking may be found as excessive according to Article 102(a) TFEU, if the following two conditions are satisfied:

  1. the difference between the actual price charged by the dominant undertaking in the market and the benchmark price, i.e. the price that the undertaking would have – hypothetically – charged had there been effective competition in the market, must be considerableboth in terms of its size and its persistence over time; and
  2. the difference between the actual price and the benchmark price cannot be objectively justified (i.e. due to quality differences or disparities in demand and supply conditions).

The extent to which the difference between the actual price and the benchmark price justifies intervention by a Competition Authority must be assessed on a case-by-case basis, taking into consideration the product/service in question and the distinctive characteristics of the particular market (both from the demand and the supply side). Contrariwise, the absence of an objective justification suggests that there is no reasonable alternative economic explanation for the misalignment between the actual price charged and the benchmark price, other than it is related to the abuse of dominance.

AG Wahl notes that there are several methodologies that may be followed to determine the benchmark price, each of which has its own inherent weaknesses. In order to minimise the risk of errors, AG Wahl has suggested that Competition Authorities should combine different methods. To the extent that the chosen methods are appropriate and sufficient for the case at hand and they are applied with rigour and objectivity, the convergence of results might lead to more reliable inferences.

The comparison of prices across different geographic markets may prove an appropriate method to be used in determining the benchmark price, provided that the reference Member States are selected based on objective, appropriate and verifiable criteria.

AG Wahl has acknowledged two factors that should be taken into consideration in order to enhance the reliability of the results deriving from geographic comparisons. First, the capacity and willingness of the customers of the dominant undertaking to pay for the product/service they receive and second, the economic benefits that the said customers may derive from the use of the product/service. The above two factors could potentially affect the economic value of the product/service in question.

Additionally, as pointed out by AG Wahl, in order to ensure that the geographic comparison of the prices applied for the same product/service across different countries is made on a homogenous basis, the Purchasing Power Parity (PPP) index based on the Gross Domestic Product (GDP) should also be taken into account. Furthermore, all the necessary adjustments have to be made, in order to account for the differences existing between the countries that influence the final price of the product/service. Amongst others, the following factors should be considered: the differences in local economic conditions (e.g. GDP per capita) and consumption habits, costs of production (direct and indirect), the particular characteristics of each national labour market, commercial promotion and advertisement costs, investments in R&D, cost of capital, general costs, local taxation, historical and cultural heritage. Moreover, the differences owning to legitimate business practices, such as pricing with reduced profit margins to achieve market penetration should be factored-in the analysis.

In relation to the necessity of Competition Authorities to intervene in cases of alleged excessive pricing, AG Wahl has stated that this is a matter which depends on the severityof the barriers to entry and/or expansion in the market, the existence of sectoral regulation, the countervailing purchasing power of the buyers,and the necessity of the product/service for the customers of the dominant undertaking. The intervention of Competition Authorities is deemed more urgent, according to AG Wahl, when the difference between the actual price and the benchmark price is so high that there is almost no doubt that it is due to abuse of a dominant position in the market and the market cannot self-correct, such as in cases where there are serious barriers to entry in the market. Under these circumstances, the loss in consumer welfare owing to excessive pricing is substantial and persistent. The above observations by AG Wahl essentially point towards an effects-based approach with regard to excessive pricing (i.e. an approach that focuses more on the effects of the dominant undertaking’s behaviour).

If the non-binding opinion of AG Wahl is adopted by the CJEU, it is expected that there will be a significant step towards the clarification of the methodology in proving excessive pricing. This will subsequently enhance legal certainty, since dominant undertakings will be in a better position to self-assessthe level of their prices, thus avoiding excessive pricing.

 

Dr. Panayiotis Agisilaou (Managing Director)

Stephanie Theodotou (Associate)