CONSULEGIS EUROPEAN REGIONAL CONFERENCE February 12, 2011
PREDATORY PRICING, HOW TO PROVE IT ?
By Henri SAINT-PERE, Partner
CABINET RATHEAUX
Sociét é d'Avocats
Cit é Internationale, 34 quai Charles de Gaulle 69463 LYON cedex 06
 : (33) (0)4 72 61 75 75
 : (33) (0)4 78 60 00 09
 : [email protected]
FOREWORD
What is Predatory pricing? It is an attempt to artificially sale products or services at a so
low price that competitors prefer to quit rather than compete or are deterred from
entering, enabling the predator to raise price in the long run and take a comfortable market
share.
Predatory pricing is seen as a form of anticompetitive conduct and hence is subject to the
competition laws and policies of OECD countries, but with a controversy over what
standards should be applied to control predatory pricing.
Some officials consider that any rule against predatory pricing will do more harm than good
by depriving consumers of the benefit of strong price competition.
Obviously, at first glance consumers will benefit of a price decrease, but after a short while,
the predator will raise its price, having less competitors. Please note that there is a ceiling in
such rise, because it could generate new competitors attempting to enter in the market and
sell products just a little below said high price.
FROM EU REGULATION TO NATIONAL COMPETITION LAW
Provided that the considered market shares are affected at least in two EU countries, From
a EU stand point, article 82 of the Rome Treaty, now known as article 102 TFUE (Treaty on
the Functioning of the European Union), dealing with dominant position, points out that the
mere fact to be in a dominant or monopole situation in a specific market, is not per se
prohibited, but the abuse resulting from such a dominant situation, with unfair selling
prices, shall be condemned to a fine of a maximum of 10 % of the world wide turnover, or
to an injunction to stop the abusive behavior with a penalty per day of delay.
The aim is to restore an arm’s length competition.
Recent examples published in the Official Journal of the EU:
EU Court of Justice 23 April 2009 FRANCE TELECOM v Commission of the EU, Case
C.362/06P: “The possibility of recoupment of losses suffered by the applicant of prices lower
than a level of costs does not constitute a necessary precondition to establishing that a price
policy is abusive. The lack of any possibility of recoupment of losses is not sufficient to
prevent France Telecom reinforcing its dominant position, in particular, following the
withdrawal from the market of competitors, so that the degree of competition is further
reduced… CJCE fined in 2009 € 10,35 million against FRANCE TELECOM.
EU Commission decision 13 May 2009 on a complaint raised by AMD against INTEL (Case
COMP/C-3/37.990-Intel) Statement of objections sent to Intel with infringement of article 82
dominant position with the aim of excluding its main rival AMD from the x86 Computer
Processing Units market:
First, Intel has provided substantial rebates to various Original Equipment
Manufacturers conditional on them of obtaining all of their Computer Processing
Units orders;
Secondly, Intel made payment to induce the Original Equipment Manufacturers to
delay or cancel the launch of a product line incorporating an AMD chip,
Lastly, in the context of bids against AMD chips in the server segment for strategic
customers, Intel offered chips on average below cost.
Fine of € 1 billion and 60 millions.
Same notion of unfair selling prices has been introduced in national legislation of EU
members and local courts try to characterize abusive effects of a dominant situation in a
specific national market and condemn such abusive practices.
Main risk is to have local courts building case law with great variation carving out of what
was provided under article 102 TFUE. For clarification purpose, the European Commission
has enacted in the Official Journal of the European Union dated 24 February 2009, its guide
line for right implementation of former article 82 (now 102 TFUE).
The checking shall demonstrate a significant impediment of effective competition, with the
specific point that, for an abuse of dominant position, there is no possibility to have safety
provided by an individual or category of exemption agreements enacted by a EU Directive,
which remains possible only for concerted practices mentioned in article 101 TFUE (formerly
article 81 of the Rome Treaty).
Predation, could also be an attempt to protect a market share by means of abusive use of
governmental procedures, including long controls by health and building inspectors,
litigation against a competitor not already complying with technical standards, so that an
established firm can impose larger costs on a potential entrant OR delay its access to the
market.
Example: Eurotunnel purchase bid for new trains lost by the French railway company SNCF
and won by DEUTCHSBAN. Litigation made by SNCF before a London court arguing that no
order can be made while potential new trains have not been certified as truly coping with
Eurotunnel technical specifications.
Nowadays, EU and national competition law are driven by economic demonstration.
LEGAL MECHANISMS TO CONTROL PREDATION
HIGHLIGHT ON FRENCH PRACTICE ATTEMPTING TO CONTROL PREDATION
In France, there is no specific rule against predatory pricing, but 2 major law tools can be
used on the basis of:
-
The prohibition by article L 420-5 of the French Commerce Code, of reselling goods
with an abusive low price with intent to eliminate a competitor (except for
perishables, seasonal or obsolete goods), which requires sellers to price at a level
which, at minimum, covers the cost of the goods, tax and transportation. Such
prohibition does concern also sale of services.
-
The prohibition by article L 420-2 of the French Commerce Code, of anticompetitive
practice by abuse of a dominant position or abuse of the economy dependency of
the purchaser, with complaint before the French Competition Authority.
In both matters, Sellers who use abusive low price or anticompetitive practice are subject to
prosecution, and can be condemned by a fine of maximum 3% of its highest worldwide
turnover (article L 462-4).
A victim of predatory pricing in France can claim for damages or bring the case before the
Competition Authority, which will make an investigation in the offices of the predator and
try to seize relevant documents and can, without disclosing the name of the author of the
complaint, engage litigation.
First case law expressly dealing with predatory pricing was rendered on 14th March 2007 by
the French Competition Authority which imposed a € 10 million fine on GlaxoSmithKline for
having abusively hindered the entry of certain generic drugs to hospitals, by means of
selling an injectable product at a price below costs.
One of the most used case reference by French competition Authority is a reference to the
AKZO Chemie v Commission EU precedent case (CJCE 3 July 1991 ref C-62-86), stating that
the fact to sell goods at a price being below the average variable costs is a predatory pricing.
HOW TO PROVE PREDATORY PRICING PRACTICES ?
Example:
A company rents an airplane in Spain for direct flights every day during spring between
Hamburg and Mallorca, its fixed costs correspond to the rent per day of the airplane and
the crew + advertisement in local newspapers, its variable costs correspond to the fuel plus
airport taxes per passenger.
The global amount of fixed costs + variable costs divided by the number of passengers carried
during a flight gives the average global cost:
i.e: if the global fixed costs per day are €20 to be charged on the number of passengers (lets
assume 20 people: €20 divided by 20 people = €1 charged per passenger) plus €5 of variable
costs to be charged per passenger, the average global cost would be €6 per passenger, being
the minimum price for a flight ticket with zero margin.
3 possibilities:
The flight ticket is sold above €6: no claim possible for predatory pricing,
The flight ticket is sold at € 5,50, inducing a small loss, but could be economically
justified by the fact that, during a short troubled time, it is better to try to attract
clients instead of keeping the airplane on ground and bear fixed rental costs,
The flight ticket is sold €4, inducing a large loss, not complying with the rule that you
should at last sell at a price enabling you to cover your fixed costs and there is a risk
that you will be considered as making predatory pricing in order to kill other
competitors in same flight sector.
Establishing that a company is guilty of predation is difficult.
Firstly, because a company, even having a dominant position on its national market sector,
has the right to defend its market share. Moreover, if such company is not in a dominant
share market position (for instance has only a 3% market shares) no predatory pricing
complaint can be made.
Secondly, because a competitor’s lack of success may be driven by its inefficiency or poor
quality products.
The key stone in the investigation on predatory pricing is to investigate and try to
demonstrate the predator is selling products below its costs, hence realizes a negative
profit.
For such study, local Competition Authority contacts other manufacturers of same sector to
benchmark averaged manufacturing costs for a global number of X finished products. It is
extremely important to select one or more manufacturers having the right size (not too
small) in order to have effectively the possibility to compare the short term and long term
manufacturing averaged costs of such competitor with same cost structure of the potential
predator.
In addition, the investigation will be made against the potential predator that will have to
disclose:
Internal documents, which could be used to prove a detailed plan to exclude a
competitor example: Tetra Pak International v Commission ECR II 755.
NOTE/ beware of e-mails exchanged internally between the sale force using a
battling vocabulary “we will kill our competitor X and get him rid of the market”, few
documents are not relevant to characterize a predatory willingness as a general
guideline issued by the management of the company, and could rather be
considered merely as excessive fighting spirit for sales men paid with a bonus on
targeted turnover achieved.
its variable costs and fixed costs data, with justification of their accuracy.
Please note that every sale under cost is not automatically considered as being predatory
pricing. You can start selling under cost in order to reach the number of products effectively
purchased by customers, which will make you passing over the breakeven point and
becoming profitable.
Particularity if the alleged predator is rendering a public service mission such as small
ferries daily connected to a small island, its global cost can be at loss during winter time and
with profit during summer time. Moreover, it has the right to use an average yearly global
cost for checking of its minimum price ticket which cannot be challenged by a competitor
trying to enter into the market only during the summer season.
This has been judged in the French case law Vedettes Vendéennes (Vendée sea crossing)
with a French Competition Authority decision dated 23 December 2004, confirmed by the
French court of appeal and the Supreme Court of cassation on July 10, 2010.
HOW TO CHALLENGE ALLEGATED PREDATORY PRICING ?
1. First defense line: launching new products
For new products it is impossible to make a comparison test with a
competitor
It is necessary to sell under cost (including marketing and advertisement
expenses) during the launching period in order to create a market demand for
such products.
It is the natural job for a company to bet on the success of a new product and
expect future profits.
2. Second defense line: price adaptation on other competitors pricing
Even if such price reduction will generate sales made under cost, it is vital for
a company to try to preserve its market share, offering its range of products
at same price than the one promoted by the competitor.
Such adaptation shall be limited to correspond to the period of promotional
prices offered by the competitor.
During such price adaptation period the manufacturer shall work on the
possibility to reduce its cost structure (use of sub contractors, new plant
abroad…).
3. Third defense line: even during the alleged predatory pricing period, new
competitors entered in the market.
 No detrimental impact.
Thank you for your attention.