Rpm total

"Predatory" describes the pricing policy which occurs when a dominant undertaking sets prices at such a level that a firm which is at least as efficient would make economic losses when operating in the m a r k e t . I t has been rightly remarked that the immediate consequence o f the definition given above is that at such a level o f prices the dominant undertaking must be making losses otherwise a more efficient competitor could undercut his prices and still make a profit. In economic terms predatory pricing must satisfy two conditions: (1) low prices which truly induce the exit o f a competitor; and (2) that the exit o f that entrant or competitor will lead to a recoupment o f the losses

See Abbamonte, supra note IV-76 above, at 417 who notes that in a similar situation the fees will not pass the FDC test. See L. Hancher and J. Buendia Serra, supra note IV-67 above, at 908

W. Bishop, C. Caffarra, K. Kühn, R. Whish, “Liberalising Postal Service: On the Limits o f Competition Policy Intervention, King’s College London, Occasional Papers (1998).

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incurred. The test to be adopted in order to assess the predatory nature o f a pricing policy can be controversial.^^

In the US, many courts have followed the so called Areeda/Tumer*^ test which is based also on a criterion o f efficiency: prices are treated as predatory if they are below Short Run Marginal Costs ("SRMC") or Average Variable Costs ("AVC").^^ The latter are easier to ascertain than the former so that both US and EC courts tend to refer to that test. The rationale o f the test is that sales make no commercial sense without the hope and probability o f eliminating a competitor and raising prices at a subsequent stage.

In the EC, the Average Variable Costs have been used as an important point o f reference in the most authoritative rulings. In AKZO, the first case on predatory pricing, the ECJ concluded that:

'"'’Prices below average variable costs (that is to say those which vary depending on the quantities produced) by means o f which a dominant undertaking seeks to eliminate a competitor must be regarded as abusive. A dominant undertaking has no interest in applying such prices except that o f eliminating competitors so as to enable it subsequently to raise its prices by taking advantage o f its monopolistic position, since each sale generates a loss, namely the total amount o f the fix e d costs (that is to say, those which remain constant regardless o f the quantities produced) and, at least, part o f the variable costs relating to the unit

produced.''^^

The Court recognised that a particular item o f cost is not fixed or variable by nature. It must be determined according to the circumstances whether the relevant cost varies

For a summary o f the main arguments see E. P. Mastromanolis, “Predatory Pricing Strategies in the European Union: a Case for Legal Reform”, 19 ECLR (1998), 211; for a comprehensive analysis see P. G'vid\c\, Iprezzi predatori, (Giufïrè, 2000).

P. Areeda and D.F. Turner, "Predatory Pricing and Related Practices under Section 2 o f the Sherman Act", 88 Harv. L. Rev. (1975), 697.

AVC is the sum o f all variable costs (costs that vary with changes in input) divided by output (e.g. raw materials). Average Fixed Costs are those that do not vary as production increases or decreases (e.g. rent o f a factory). Average Total Costs (ATC) encompasses AVC and AFC.

AKZO, supra note 11-89 above, para 71.

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labour costs should be treated as fixed rather than variable. The time horizon can be crucial in this respect as almost all costs are variable over the long term and almost no cost are variable over the short term.^^ Areeda-Tumer refer to the short term. It has been argued that the relevant time horizon is that over which the price in question prevailed or could reasonably have been expected to p r e v a i l ,^2 even though this might be hard to judge.^^

In Tetra Pak the Commission, confirmed by both the CFI and, on appeal, by the ECJ accepted that carrying on an activity which did not cover total costs may be economically justified in the short term if the activity contributes in part to covering fixed costs, but that activities whose profits remain permanently inadequate to cover variable costs must normally be given up.

Economic and legal literature has not failed to stress that this assumption is not always true as undertakings frequently do not cover even their variable costs when first introducing a product into a market. Conversely when products become technically obsolescent they are not always worth what they historically cost.^"^ Moreover, a cost based test has a number o f other drawbacks. It is not always possible to identify which costs are variable and the average variable cost o f a by product may be arbitrary. There is also the problem o f information in the sense that very often neither the alleged predator nor the victim are likely to know what their AVCs are. Finally this cost based test is increasingly inappropriate in sectors such as communications where there are enormous sunk costs and variable costs tend to zero.

The Commission decision in AKZO was largely based on evidence which consisted o f internal memoranda and threats by the dominant company. Although abuse under Article 82 is considered an objective concept which presupposes dominance, the Court

V. Korah, “Compagnie Maritime Beige collective dominant position and exclusionary pricing”, in Dony and De Walsche (Eds.), Liber Amicorum Michel Waelbroeck, (Bruylant, 1999), note 50.

^2 w . Baumol, “Predation and the Logic o f the Average Variable Cost”, (23) Journal o f Law and Economics (1996), at 62. J. Vickers, supra note IV-82 above, at 21.

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appeared to apply a stricter test in the context o f an intentional plan to drive out a competitor. The Court in fact stated that:

"’’’Moreover, prices below average total costs, that is to say, fix e d costs plus variable costs, but above average variable costs, m ust be regarded as abusive i f they are determined as p a rt o f a plan to eliminate a competitor. Such prices can drive fro m the market undertakings which are perhaps as efficient as the dominant undertaking but which, because o f their smaller financial resources, are incapable o f withstanding the competition waged against them.''^^

Again this two tier approach based on intent is not immune from criticism. There might be legitimate reasons for selling below total costs. As put by Korah, “investment in sunk costs is water under the bridge, and even if turned out badly, it would be silly to prevent a dominant firm from reducing price and selling, making at least some contribution to the overhead.”^^ Apart from the inconsistencies with the concept o f abuse as an objective concept as interpreted in Hojfmann-La Roche, the approach o f the Court which considers predatory pricing below ATCs only if intent is proven seems appropriate. The main critique to this approach is that intent is difficult to prove and sometimes evidence o f intent might be misleading. It would therefore be more advisable to re-introduce or attach more importance to an “objective” evaluation which is widely recognised by economic theory as one o f the necessary elements o f predation: recoupment o f losses.

In the US, Section 2 o f the Sherman Act makes it a criminal offence to monopolize or attempt to monopolize any part o f the trade or commerce between several states. Discriminatory pricing in general and in particular predatory pricing fall within the prohibition o f the Act. Furthermore under the US legislation the Clayton Act, as amended by the Robinson-Patman Act, provides further safeguards against price discrimination. The US Supreme Court considered that the alleged future flow of

V. Korah, supra note IV-66 above, at 127 ff. AKZO, supra note 11-89 above, para 72.

plaintiff in a predatory pricing claim must prove not only that an undertaking has achieved monopoly power but also that it will be able to maintain monopoly for long enough both to recoup the losses and to obtain additional gain. According to the US Supreme Court^^ predation would also not occur when there is insufficient monopoly power to recoup losses.

This issue seems to be much more weakly recognised in Europe. In AKZO the ECJ condemned predatory pricing when a dominant firm expects to be able to recoup its price reductions when the new entrant has left.^* Although we have seen above that in Tetra Pak some attention was paid to the period during which the predation occurred, the ECJ concluded that in the circumstances it would have not been appropriate to require additional proof that Tetra Pak had a realistic chance o f recouping its losses. Despite the ambiguity o f the statement, it appears that the issue at stake in Tetra Pak was the onus o f proof rather than the relevance o f recoupment o f losses.