Predatory Pricing Policy under EC and US Law

Predatory pricing poses a dilemma which perplexed and intrigued the competition community for many years. It is one of the most discussed topics in the area of antitrust economics, as the critical issue is to meld economic insights with sound legal rules. Despite the energy devoted to the subject by many distinguished observers from the economic and legal professions and their attempts to find proper rules that can be applied by competition policy authorities, little agreement has emerged. Predatory business behaviour has various forms, p.ex. non-price predation. This paper, however, deals with the particular significant category of predatory conduct, which could be called the ''traditional'' model of predatory pricing. The discussion will further be based on the consensus in modern economics that predatory pricing can be a successful and therefore rational business strategy. The basic concept of predatory pricing can roughly be described as follows. When a company is accused of predatory pricing, its being accused of pricing at levels that are unreasonably low, whether because there are below some measure of cost or because they otherwise generate an inadequate return. So far, there seems nothing wrong with the low pricing, since low prices are apparently beneficient for the customer and in fact usually the result and aim of a free market and healthy competition, low prices being the hallmark of competition. On the other hand, history and economic theory teach that predatory pricing can be an instrument of abuse. The predator offers its goods or services at unrealistically low prices in order to achieve a longer-term objective. The predatory company may be attempting to deter a rivals entry on the market or to drive him out of the market, so that the former attains a monopoly position, then being able to recoup its losses from the below-cost selling period along with making even more profits by holding the prices on high level. This subsequently turns the apparent benefit of the former lower price around into the opposite, hurting the costumer and the rival and thus competition as such by the unfair practice. However, even tough this basic theory seems straight forward, the crux of determining predatory pricing lies in detail. The difficulty of assessing predatory pricing is rooted within the arrangement of the economic elements and the legal aspects, hence to merge economic insights with practically workable rules. The critical issue for antitrust analysis is to distinguish in a practical manner predatory conduct from merely healthy competition. Tests on how to determine the thin line between unlawful conduct and healthy competition are disputed in the academic debate in mind-numbing detail. The only basic agreement in the wide ranging approach suggestions appears to be that scrutinizing a company`s conduct requires careful examination and factual inquiry which has to be guided by a sound legal rule and a thorough economic analysis. However, disagreement is vast concerning the recognition of a proper and workable rule. It ranges from the acknowledgment that predatory pricing occurs rather seldom and any attempt to restrict competition harms more that it helps, to detailed economic analysis tests which seem to overload the courts ability to work efficiently. The concept of predatory pricing has thus been a familiar one for many years. It was not until the last two decades however, that a new literature in economics and law has emerged which re-examines the logic of predatory pricing strategy more general, involving strategic, game-theoretic analyses of imperfectly competitive behaviour in contrast to the more standard economic logic embodied in the Chicago school of though, along with a deeper understanding of imperfect information between competitors. In the United States, predatory pricing has been of concern at least since the perceived activities of J. D. Rockefeller`s Standard Oil Company helped to give birth to the Clayton Act in 1914. In the EC however, it was not until the late 1980s that the ECJ and the Commission had the chance to deal with predatory pricing cases, most prominently the renowned AKZO case. Therefore one may perceive that EC competition law can draw from the US experience. This is not lastly illustrated by the fact that for the most part theories on predatory pricing have been developed by legal and economic scholars in the US. Courts and competition authorities subsequently had the chance to investigate predatory pricing claims and develop their own tests, incorporation the theories which emerged in the academic debate over the last 20 years. In the EC, the Commission and the ECJ in recent times decided on predatory pricing cases involving market dominating companies such as AKZO, Tetra Pak and Irish sugar. The US Supreme Court on the other hand set new standards on identifying the issue in its landmark Brooke Group decision. These decisions were both criticized and welcomed by the competition community, clarifying the approaches on predatory pricing, but at the same time leaving several problems unsolved. The aim of this paper is to illustrate the problem of predatory pricing with a view to both sides of the Atlantic and to analyse the different approaches put forward by the scholary legal and economic debate and their utilization by the competition authorities. To achieve this, the phenomenon of predatory pricing will be described in a general manner followed by a look at the economic situation behind a predatory business strategy. Then the main theories on how to assess predatory pricing will be scrutinised. These theories cover a wide array of approaches, recognising that on the one hand predatory pricing can be an abuse and on the other hand that price reductions are the hallmark of competition. After that, the legal provisions in the EU and US under which predatory pricing is dealt with will be explained. Subsequently, the leading decisions on the topic by the ECJ, the Commission and the US Supreme Court are examined and the different approaches of the competition authorities are compared, illustrating the difficulties they face when dealing with predatory pricing. Concluding the discussion, the paper will identify the main elements of a workable theory by scrutinising the way the competition authorities have incorporated the academic debate in their decisions and how they were able to work with these approaches