COMPETITION • EUROPEAN LAW ABUSE OF DOMINANT POSITION

The EU authorities, following the example of US courts applying the Areeda-Turner rule, consider that a predatory pricing strategy, i.e. charging abnormally low prices to eliminate a competitor can, under certain conditions, fall within Article 102 TFEU. According to the Court of Justice, prices below the average variable costs must be abusive: a dominant undertaking has no reason to charge such prices other than to eliminate competitors and then to subsequently raise its prices by taking advantage of its monopolistic position, since each sale generates a loss, namely the total amount of the fixed costs and part of the variable costs. By contrast, prices lower than average total costs but higher than average variable costs must be regarded as abusive only insofar as they are set as part of a plan to eliminate a competitor. Since the Brook Group vs Brown Williamson Tobacco Corp. case, the US Supreme Court has also added to the Areeda-Turner rule the “recoupment test”, according to which a predation strategy cannot be considered rational and must therefore be ruled out in the absence of any possibility for the undertaking to recoup its losses. The European authorities have adopted the opposite approach stating expressly that the possibility of recouping losses is not a pre-condition of the finding of predatory pricing.

In its Guidance on enforcement priorities in applying Article 102 TFEU to abusive exclusionary conduct, the Commission recommends as a general rule using the predatory price test with regard to price-based exclusionary conduct, and to predatory pricing in particular. In order to determine whether even a hypothetical competitor as efficient as the dominant undertaking would be likely to be foreclosed by the conduct in question, the Commission will look at whether the dominant undertaking is engaging in below-cost pricing. The predatory price test refers either to the average avoidable cost (AAC), which corresponds to the average of the costs that could have been avoided if the company had not produced a discrete amount of (extra) output, i.e. variable costs plus short-term fixed costs incurred during the period under examination, which is the average of all the (variable and fixed) costs that a company incurs to produce a particular product. The price is exclusionary where the AAC or the LRAIC is not covered by the price charged by the dominant undertaking. In order to establish predatory conduct the Commission will assess the sacrifice the dominant undertaking has incurred and the anticompetitive foreclosure that has resulted from it. The Commission will consider that there has been a sacrifice if by charging a lower price “for all or a particular part of its output over the relevant time period, or by expanding its output over the relevant time period, the dominant undertaking incurred or is incurring losses that could have been avoided”. The charging by the dominant undertaking of prices which are lower than the AAC for all or part of its production is viewed by the Commission as a clear indication of sacrifice. A sacrifice is also established if the alleged predatory conduct led in the short term to net revenues lower than could have been expected from a reasonable alternative conduct. The Commission underlines that in some cases it will be possible to rely upon direct evidence consisting of documents from the dominant undertaking which clearly show a predatory strategy. According to the General Court, the as-efficient-competitor test only makes it possible to verify the hypothesis that access to the market has been made impossible and not to rule out the possibility that it has been made more difficult. Apart from the predatory pricing test, the Commission can also demonstrate anticompetitive foreclosure by assessing whether the alleged predatory conduct will reduce the likelihood that competitors will compete effectively. It is not necessary to show that competitors have exited the market in order to show that there has been anticompetitive foreclosure, the dominant undertaking may prefer to prevent the competitor from competing and have it follow the dominant undertaking’s pricing, rather than eliminate it from the market altogether. The dominant undertaking may (i) distort market signals or (ii) build up  reputation for predatory conduct or (iii) engage in financial predation. In the first case, the predator, due to his knowledge of the conditions of the market or costs, manipulates the information available to its competitors regarding profitability of the market in order to deter them from entering it. In the second, the predator, faced with the entry of several competitors on different markets, selects one of them and behaves in such an aggressive manner towards him by charging below-cost prices that potential competitors will refrain from entering the other markets. In the third scenario, the predator chooses a competitor whose external financing depends on performance and, by its predatory conduct, decreases the performance of the latter so as to discourage investors from providing further financing. With regard to the impact of predatory practices on consumer welfare, the Commission considers that consumers suffer harm if the predator undertaking is likely to be in a position to benefit from the sacrifice.

Where an undertaking charged with a service of general economic interest finds itself in a monopoly situation on one market and in a situation of competition on another, the competition authorities refer to the incremental cost which allows them to measure the additional expenditure incurred by the company for its competitive activity insofar as certain costs (including fixed) are common to its reserved activity, and to establish a practice of predation by cross-subsidization. In a case where the incremental cost was used, the Court of Justice held that a pricing practice could not be characterized as exclusionary abuse merely because the price that undertaking charges one of those customers is lower than the average total costs attributed to the activity concerned, but higher than the average incremental costs pertaining to that activity, subject, however, to ensuring that this pricing policy does not result in the actual or probable foreclosure of the competitor to the detriment of competition and, thereby, of consumers’ interests.