Pricing Issues under EC Competition Law: A Focus on the Postal Sector, Slides of Competition Law and Policy

Download Pricing Issues under EC Competition Law: A Focus on the Postal Sector and more Slides Competition Law and Policy in PDF only on Docsity! Pricing Issues under EC Competition Law with a special focus on the Postal Sector Docsity.com Pricing – The “core” of Competition Law Ronald Coase [1991 Nobel Prize in economics] said he was tired of competition law because “when the prices went up the judges said it was monopoly, when the prices went down they said it was predatory pricing, and when they stayed the same they said it was tacit collusion” Source: William Landes in "The Fire of Truth: A Remembrance of Law and Econ at Chicago", JLE (1981) p.193. Docsity.com I. Price Regulation • In the absence of a sufficient degree of competition, postal regulators may decide to impose price controls at the: – Upstream level (access pricing) – Downstream level (retail pricing) • A variety of methodologies can be relied upon to control prices (price-cap, rate of return, etc.). Price control generates significant debate which kinds of costs should be taken into account. Docsity.com II. EC Competition Law A. Excessive pricing B. Predatory pricing C. Rebates D. Margin squeeze E. Price Discrimination Docsity.com Important Concepts • Article 82 EC prohibits both exploitative and exclusionary pricing conducts:  “Exploitative” conduct: pricing practices that result in a direct loss of consumer welfare. The dominant firm takes advantage of its market power to extract rents from customers that could not have been obtained by a non dominant firm  “Exclusionary” conduct: pricing practices directed against rivals that indirectly cause a loss to consumer welfare by limiting the rivals’ ability to compete (e.g. predatory pricing) Docsity.com Excessive pricing – Legal Standard • Definition: “[c]harging a price which is excessive because it has no reasonable relation to the economic value of the product supplied” (United Brands); • Test: “determine whether the difference between the costs actually incurred and the price actually charged is excessive; and if the answer […] is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products”; • Commission’s practice: four methods have been used (i) price-cost margin analysis; (ii) price comparisons accross markets or competitors; (iii) geographic price comparisons; (iv) comparisons over time. Docsity.com Excessive Pricing in the Postal Sector – The Deutsche Post II case • Allegation that DP has abused its dominant position by charging an excessive price for the delivery of incoming international mail. DP Post classifies IIM as circumvented domestic mail and charges the full domestic tariff (0,56 €). • Commission confronted with an “information” problem  No cost benchmark available in a monopolistic market: “In a market which is open to competition the normal test to be applied would be to compare the price of the dominant operator with the prices charged by competitors. Due to the existence of DPAG's wide-ranging monopoly, such a price comparison is not possible in the present case”;  No reliable information on costs: DP had not set a “transparent, internal cost accounting system and no reliable data exist for the period of time relevant to this case”. • The Commission assesses the costs on the basis of a proxy: DP had argued in the past that the average cost for the delivery of international mail could be approximated to 80% of the domestic tariff (see REIMS II notification). Other operators say it is up to 70% of the domestic tariff; • By charging the full domestic tariff (0,56€) for delivery of international mail, DP has exceeded by +/– 25% the economic value of the service (0,45€); • Importantly, the Commission indicates that an excess of only 25% may be deemed abusive by virtue of the facts that (i) DP is a monopolist and; (ii) of the special features of the postal sector (e.g. liberalization policy initiatives). Docsity.com B. Predatory Pricing under Article 82 EC • Predatory pricing is a deliberate strategy by a dominant firm of setting very low prices to drive its competitors out of the market. Once the predator has successfully excluded existing competitors and deterred entry of new firms, it can raise prices and earn higher profits • Leading cases are AKZO and recently, in the telecommunications sector, Wanadoo Interactive • In the postal sector, predatory pricing is often sustained through “cross-subsidization”. A situation of this kind arises when a multi-services dominant firm allocates the majority of its costs to its reserved monopolistic activities. It can subsequently set its prices at very low levels on the competitive markets. Docsity.com The Deutsche Post I case (1) • Issue: It was alleged that Deutsche Post charged below costs prices in the business parcel delivery market and funded the losses incurred in this market by a cross- subsidy from the reserved monopoly letter business; • Methodology applied by the Commission: LRAIC benchmark. The Commission excluded from the costs, the various common costs that would have in any event been incurred by the reserved monopoly activities. It only considered DP’s incremental costs of providing the parcel service. Docsity.com The Deutsche Post I case • Commission’s findings: “[i]n the period 1990 to 1995 every sale by DPAG in the mail-order parcel services business represented a loss which comprises all the capacity-maintenance costs and at least part of the additional costs of providing the service. In such circumstances, every additional sale not only entailed the loss of at least part of these additional costs, but made no contribution towards covering the carrier's capacity-maintenance costs. In the medium term, such a pricing policy is not in the carrier's own economic interest. This being so, DPAG had no economic interest in offering such a service in the medium term. DPAG could increase its overall result by either raising prices to cover the additional costs of providing the service or — where there is no demand for this service at a higher price — to discontinue providing the service, because revenue gained from its provision is below the additional costs incurred in providing it.” • Remedy: importantly, in Deutsche Post AG, the firm undertook to structurally separate the mail order business from the letter business activities. Docsity.com Can Above Cost Pricing be Abusive? • Price cuts above ATC are in principle not predatory, as they can only lead to the exclusion of less efficient competitors only or deter inefficient entrants • Yet, the case-law and the Commission’s decisional practice recognize that in “exceptional circumstances” dominant firms may breach Article 82 EC for selectively undercutting the prices charged to certain customers by competitors, with a view to excluding or deterring the entry of such competitors • The Discussion Paper indicates that “exceptional circumstances” will arise where the dominant firm has certain non-replicable advantages or where economies of scale are very important and entrants necessarily will have to operate for an initial period at a significant cost disadvantage. Because entry can practically only take place below the minimum efficient scale. This factor could be relevant for network industries and the postal sector • Commission has stressed that an abuse will only be found in situations where the price cuts have lead or will lead to “substantial” consumer harm Docsity.com Rebates – Legal Standard (2) • Strict approach to All-unit rebates. They produce a “suction effect” by virtue of the fact that reaching the target awards a discount on all units purchased up to that point and not only on purchases above the target. This is problematic when one firm dominates the market: the rebates have the effect of pre-empting a share of the market that may be critical for rivals’ and new entrants’ abilities to compete with the dominant firm. In discouraging customers from placing orders with rival producers, all unit rebates are said to be “fidelity-building”. In the past per se prohibited. The Commission’s discussion paper however promotes a rule of reason approach (assessment of the market share covered by the rebates, size of the rebates, level of the threshold, duration of the reference period, etc.) • More lenient approach to unconditional and incremental rebates. Dominant firms can put forward convincing objective justifications and/or efficiency reasons in response to allegations of abusive unconditional rebates. In particular, dominant suppliers’ unconditional rebates schemes often serve efficiency-enhancing purposes, such as enlarging the customer base to maximize fixed-cost recovery. Firms facing large fixed costs such as firms in the postal sector can offer unconditional rebates to expand their output and thus spread fixed costs over a large number of units. Docsity.com Fidelity Rebates in the Postal Sector – Deutsche Post I Facts: Deutsche Post implemented a long-standing scheme of fidelity rebates in mail order parcel deliveries. The Commission's investigation revealed that from 1974 through 2000, DP gave substantial discounts to its large customers on the condition that the customer sent its entire mail-order parcel business or at least a sizeable proportion thereof via DPAG: Findings: §39 “The systematic agreeing of fidelity rebates with cooperation partners leads, according to the case-law of the European courts, inevitably to the conclusion that DPAG is seeking to tie customers to it and hence is preventing or eliminating competition. It is settled European case-law that rebate arrangements which are linked to meeting a percentage of customer requirements have, solely by reason of the method by which they are calculated, an anti-competitive tying effect. Customers who have entered into such a rebate agreement will generally be inclined to have their parcels distributed exclusively by the company giving that rebate. Rebate arrangements linked to a percentage of customer equipments, moreover, owing to the method by which they are calculated, have an obstructive effect that is not linked to anything actually performed. This can be seen by the fact that competitors are compelled to offer discounts to offset the loss which customers suffer if they have a smaller percentage of their parcels distributed by DPAG and hence fall into a lower rebate bracket”. The fidelity rebate scheme has precluded competitors from reaching the “critical mass” to successfully enter the German mail-order delivery market. Between 1990 through 1999 DP had a stable volume-based share of the mail-order parcel market exceeding 85%. The Commission imposed a 24 million € fine. Docsity.com Other forms of Anticompetitive Rebates – The De Post/Hays Case • The Belgian postal operator De Post La Poste offered a “preferential tariff” for the general letter mail service subject to the acceptance of a supplementary contract covering a new business-to-business ("B2B") mail service • Hays, a competitor active on the B2B document exchange network market, could not compete with the tariff reduction offered by La Poste in the monopoly area and was losing most of its clients in Belgium • By tying the tariff reduction in the monopoly area to the subscription of its B2B service, La Poste made it impossible for Hays to compete on a level playing field because it could not offer a similar advantage • Form of bundled rebates/financial tying typically prohibited under Article 82(d). Docsity.com Margin Squeeze – Other Issues • Incentives to engage into margin squeeze is not clearcut. Trade-off for a dominant input supplier: Limitation of downstream competition vs. loss of upstream revenues • Scope for conflicts with sector specific rules in network industries where both wholesale and retail price may be subject to regulatory control (see below); • For more, see Geradin & O’Donoghue, 2005 Docsity.com E. Price Discrimination under Article 82 EC • Price discrimination occurs whenever two sales of the same product/service produce two different rates of return, i.e. when the ratio of price to marginal cost is different for one sale than it is for the other. • Summa divisio between:  « Primary line injury » price discrimination occasioned by the dominant firm to its competitors by applying different prices to its own customers (not different from rebates, for instance);  « Secondary line injury » price discrimination which is imposed on one of several customers of the dominant firm as against one or several other customers. • Article 82(c) is mainly concerned with secondary line price discrimination. See Geradin & Petit, 2006. Docsity.com Price discrimination • It is only in limited circumstances that a non-vertically integrated firm has the incentives to engage in secondary line injury price discrimination • More frequent circumstances where a vertically integrated firm will engage into secondary line injury price discrimination. Price discriminating in favour of ones’ downstream subsidiaries inflicts a competitive disadvantage to the subsidiaries’ rivals. A monopolist in an input market has a strong incentive to increase the costs of the rivals to its downstream subsidiary as this “softens” downstream competition and increases its profits; • Price discrimination is thus relevant in network industries, where incumbent operators are active on both upstream and downstream levels. Docsity.com III. The « Dangerous Liaisons » of Sector Specific Regulation and Competition Law • On some occasions, the intervention of a regulatory authority fails to eradicate concerns of anticompetitive pricing; • As seen previously, Article 82 EC covers a wide range of pricing policies. Competition authorities may thus be tempted to « step in » so as to eliminate the anticompetitive pricing situation. Article 82 EC is a Treaty provision which prevails over sector specific regulation. Docsity.com An Empirical Example – The Deutsche Telekom Case (1)  Prices charged by DT to its competitors for access to LL  Approval of Tariffs by German Telecoms regulator (RegTP) from 1998-2002  Complaint by competitors (margin squeeze) before the Commission in 1999  Commission open 82 EC procedure in 2002 Docsity.com The Deutsche Telekom Case (2) • DT argued that its conduct could not be held as an infringement of Article 82 EC in that its tariffs had previously been approved by the German telecommunications regulator, the RegTP. DT considered that if there was a violation of EC law, the appropriate course of action was the initiation of Article 226 EC infringement proceedings against Germany in spite of a direct procedure against the undertakings’ whose rates had been approved by the regulator. • DT’s arguments were rebutted by the Commission: “the competition rules may apply where the sector specific legislation does not preclude the undertakings it governs from engaging in autonomous conduct that prevents, restricts or distort competition”. • The Commission observed that the charges for wholesale and retail access to the loop were regulated but that DT was still left with a commercial discretion which allowed it to restructure its tariffs in order to put an end to the margin squeeze. DT could have avoided the price squeeze by increasing the retail charges, which DT actually did but in insufficient volumes. • DT’s behaviour was the main source of the restriction of competition and that Article 82 EC was the appropriate course of action. DT was condemned to a € 12.6 million fine. The previous application of a regulatory remedy was merely taken into account as a mitigating factor for the calculation of the fine. Docsity.com