COMPETITION • FRENCH LAW • ABUSE OF POSITION DOMINANT
Excessively low pricing practices are distinguished from predatory pricing practices by the fact that, unlike the latter, they are not part of a strategy of short-term sacrifice, even if they also tend to restrict competition through a foreclosure effect. As such, they fall within the scope of article L. 420-2 of the Commercial Code.
Proof of the existence of such an foreclosure effect can be provided by using a cost test. Prices below the average variable costs by which a dominant undertaking seeks to eliminate a competitor must be considered abusive because a dominant undertaking has no interest in applying such prices, other than to eliminate its competitors in order to be able, subsequently, to raise its prices by taking advantage of its monopoly position. Indeed, in this set-up, each sale leads to a loss for the dominant firm, i.e. all the fixed costs and at least part of the variable costs relating to the unit produced. Furthermore, prices below average total costs, which include both fixed and variable costs, but above average variable costs must be considered abusive when they are set as part of a plan to eliminate a competitor.
Such an interpretation is not only relevant for assessing the legality of predatory pricing practices, but also, more broadly, for assessing the legality of any low pricing practice implemented by an undertaking in a dominant position. A low-price practice is therefore considered abusive, either when the prices charged by the dominant undertaking are below average variable costs (“red zone”), irrespective of evidence of an intention to foreclose, or when prices are below average total costs but above average variable costs (“grey zone”), provided, however, that it can be proved that these prices are fixed as part of a plan to eliminate competition. In addition, in order to be abusive, a low-price practice must be sufficiently enduring and widespread so that it can be inferred that it is part of a strategy to take a competitor’s customers and to eliminate it.