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Predatory Pricing
Predatory pricing is usually seen as a two-step abuse of dominant position. Firstly, the dominant firm reduces prices to a loss-making level when faced with competition from an existing competitor or a new entrant to the market. Secondly, the existing competitor having been disciplined, or the new entrant having been foreclosed, the dominant firm then raises its prices again, thereby causing consumer harm.

To determine whether a firm sets a price that incurs losses, it is necessary to refer to the relevant cost benchmarks, namely (i) Average Variable Cost (AVC)/ Average Avoidable Cost (AAC) and (ii) Average Total Cost (ATC) / Long Run Average Incremental Cost (LRAIC).

The regulation of predatory pricing varies across jurisdictions. The table below compares the tests for predatory pricing formulated by Areeda-Turner, US courts, EU courts and the European Commission.

(1) Price-cutting: dominant undertaking incurs losses to drive out rivals
In the EU, predatory pricing can occur in three distinct situations, namely where the price charged by the firm is (i) below AVC/AAC, (ii) between AVC/AAC and ATC/LRAIC, and (iii) above ATC/LRAIC.

(i) Below AVC/AAC
In general, pricing below AVC/AAC itself constitutes predation. The commission views this as clear evidence of sacrificing short-term profits in return for long-term monopoly gains. In AKZO, CJEU confirmed that unless objectively justified (for example when an undertaking engages in short-term product or has entered a market based on false assumptions of profitability), pricing below AVC is presumed predatory because the firm is losing money by producing the product and therefore the practice has no commercial justification.

(ii) Between AVC/AAC and ATC/LRAIC
To constitute predation, pricing between AVC/AAC and ATC/LRAIC requires evidence of an actual plan or intention to sacrifice.

In AKZO, CJEU held that prices below ATC, but above AVC, must be regarded as abusive if they are determined as part of a plan for eliminating a competitor. Such prices can drive out undertakings which are perhaps as efficient as the dominant firm but which, because of their smaller financial resources, are incapable of withstanding the competition waged against them. In this case, the firm directly threatened its competitor that it would drop its prices in the flour additives sector if the competitor continued to sell benzoyl peroxide in the plastics sector. The threats aimed at convincing the competitor to withdraw from the market. Furthermore, the firm’s pricing strategy led to unreasonably low prices with the aim of damaging the competitor’s viability. It maintained the prices of some of its products at an artificially low level over a prolonged period without any objective justification. In the end, it survived this pricing strategy because of its superior financial resources compared to those of its competitor.

In France Télécom, a firm was fined by EC for abusing its dominant position in the market for ADSL-based internet access services for the general public by charging predatory prices for its Pack eXtense and ADSL services. The Commission found that this deliberate strategy restricted market entry and development potential for competitors in the market and was part of a plan aimed at pre-empting the market for high-output Internet access services. CJEU held that eliminatory intention could be derived from company documentation, for e.g.‘we will have difficulty in pre-empting this market if our prices are too high’,‘we have gone in too high on the price’ and ‘our competitors will price below us’.

(iii) Above ATC/LRAIC
Normally, pricing above ATC/LRAIC by the market players is deemed a rational and acceptable behavior. In the US, such practice is not objectionable because restriction of above-cost price-cut is believed to “have harmful effects by raising prices and lowering productive efficiency, as well as distorting innovation and price flexibility in response to changing market conditions”.

However, in the EU, such practice is subject to enforcement provided exceptional circumstances showing particular damage to competition or the single market.

(2) Recoupment: dominant undertaking hence makes monopoly profits/gains
In the US, the courts do not find predatory pricing unless the plaintiff demonstrates that the alleged predator can possibly recoup, recover from its investment in below-cost prices. It is not sufficient to show only below-cost prices and an anti-competitive intent.

However, in the EU, the Commission suggests that recoupment may be presumed in most cases. This is confirmed in Tetra Pak II, where CJEU held that it would not be appropriate, in the circumstances of the present case, to require in addition proof that the firm had a realistic chance of recouping its losses. It must be possible to penalise predatory pricing whenever there is a risk that competitors will be eliminated.

Objective justification
In United Brands and France Télécom, the courts held that the defence of  “meeting competition” (i.e. aligning the prices on those of competitors) would only be permissible if it is not aimed at strengthening and abusing dominance of the firm. Other justification that can be advanced are below- costs prices being promotional prices and network prices: for instance, where the low price constitutes a one- off temporary promotion campaign to launch a new product and the duration and extent of the campaign are such that exclusionary effects can be excluded.

Relation with price discrimination
Price discrimination means that treating like cases differently or unlike cases the same. In Post Danmark I, CJEU held that price discrimination cannot of itself establish exclusionary abuse, unless coupled with elements of predatory pricing. In AKZO, price discrimination was seen as evidence of an intent of predation. CJEU held that this behaviour revealed AKZO'S intention not to pursue a general policy of favourable prices, but to adopt a strategy that could damage its competitor. Whereas in Compagnie Maritime Belge, CJEU held that selective discounting constitutes an abuse only with the proof of exclusionary intent.