Art. 102 - Pricing practices Flashcards
Costs concepts
Fixed costs
- Does not vary with the amount of goods produced
Sunk costs
- Cost that the firm has already held, and cannot be recovered
- Advertisement costs
Marginal costs
- The cost of producing one extra unit
Variable costs
- Varies with the amount of products produced
- Raw materials
Avoidable costs
- Cost that can be avoided if ceasing with a given activity
- Includes AVC and reversible, product specific costs
- Larger or equal to AVC
Long-run incremental costs
- Includes AAC and irreversible product specific costs (sunk costs)
- Smaller or equal to ATC
Using AAC and LRAIC makes the span for pricing smaller, since the span between AVC and ATC is larger
Excessive pricing
Against control
- Companies should be able to set their own prices
- The market will regulate itself –> If able to charge excessive prices, new competitors will enter to get a piece
- Makes it lucrative for companies to take risks
When should prices be regulated?
- The market is not capable of correcting itself –> exclusionary behavior (barriers to entry), legal monopoly, simply no effective competition
When does it constitute abuse?
- Does the profit (sales price minus cost) appear unfair (is the price excessive)
- Does the price (taking e.g. the risk into consideration) appear unfair in itself or compared to other prices (is the excessive price unfair)
- Counterfactual –> Which price could the undertaking have charged if not dominant (under normal and effective competition)
OBS! –> Dominant firms are often lazy and ineffective and therefore can have higher costs, why profit comparison does’nt always work
Conditional rebates
Rebates, which have the same effect as exclusive agreements
- Offeres rebates that are conditional of the customer buying most or all of its products form the dominant firm (80% or more)
- Should only be condemned if capable of eliminating an as efficient competitor (looks at the effective price)
No per se rule, since the dominant firm is able to argue on the basis of supporting evidence, that the rebates where not capable of having forclosure effects
If capable of forclosure effects, dominant firm can argue that the rebates are objectively justified or leads to efficiencies
Retroactive rebates –> May foreclose the market, since it makes it less attractive to switch to another supplier
- When you meet certain thresholds, you get a rebate
- Steprebates –> Suck in effect, beceause customers would like to reach the step and will maybe not be able to place orders elsewhere
Effective price
- Below AAC –> Abuse
- Between AAC and LRAIC –> only if anti-competitive intent (effects analysis)
- Above LRAIC –> No abuse
AEC-test
- A tool to assess if conduct is abusive
- Not a requirement for the Commission
- Of no relevance when “the emergence of an as-efficient competitor is practically
impossible”
If the dominant firm uses the test as a defence, the Commission must take it into consideration
Bundling
Mixed bundling where the tying is achieved by a rebate is condemned if considered exclusionary
- By one, get one free
Mixed bundling could be justifiable on the basis of no foreclosure effect provided the competitor could match the effective price
Predatory pricing
Reduces prices to a loss-making level, when faced with competition from competitor or new entrant
- Caution –> the market will normally regulate itself
The AKZO test
- Below AAC –> Abuse, every sale is at a loss
- Between AAC and LRAIC –> only if anti-competitive intent of eliminating competitors (effects analysis)
- Above LRAIC –> No abuse
No requirement of proving recoupment by the dominant firm
- Though it can be a relevant factor, when assessing potentiel abusive pricing
Defences
- Possiblity for defence of prices below LRAIC and AAC if objectively justified (commercial reasons)
- Allowed to meet the competition, but not defeat
Selective price cutting
- Gives favourable prices to firm downstream, to make sure that the firm will not do business with upstream competitor
- If above costs, only anti-competitive effects if evidence of intention to eliminate
Margin squeeze
Dominant firm active in both upstream and downstream market, offers prices that are favourable to its own company in downstream market
- Competitors in the downstream market are offered higher prices and thereby the dominant firm squeezes their margin
Can also be that the dominant firm has the rights to an essecentiel facility and can raise the prices of access, thereby squeezing the margin
- Own company downstream can indur this
- Competitors downstream cannot without rasing prices
- Customers move to the dominant firms company downstream
Margin squeeze and refusal to supply
- Dominant firm may decide not to supply and not infringe art. 102
- If it does supply, it must not do so at a price that squeezes the margin of an as efficient competitor
Price discrimination
Applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage
Assessment
- Dominant position upstream
- Entered into equivilant transactions with other trading parties –> nature of product, costs of supply
- Guilty of applying dissimilar conditions to equivilant transactions
- Discrimination places other trading parties at a competitive disadvantage –> distortion of competition of the business partners in relation to each other
- Objective justification or efficiencies
Allowed to charge different prices to reflect the different economic en competitive conditions in the different markets it operates in
The issue of discounts
