Predatory Pricing

Predatory pricing is a strategy that entails a temporary price below the cost of production in order to injure competition and thereby reap higher profits in the long run[i]. Predatory pricing is a strategy adopted to enhance market power. Predatory pricing has to be distinguished from a competitive pro-consumer pricing. There is a difference between pricing to meet and beat the competition; in predatory pricing the object is to hamper competition. The pricing scheme may be for elimination of a competitor or restriction of a potential entrant or reducing the cost of acquisition of a competitor.

The preliminary object of predatory pricing is to capture and dictate the terms of market. Predatory pricing occurs when a company cuts its price in order to drive out or discipline a competitor and enjoy higher profits from reduced competition [ii]. Though there is a chance of recoupment on long-run, the predator has to sacrifice a lot initially, further the returns of such arrangement are also uncertain. Practically speaking this strategy involves a high risk and is feasible for dominant players alone. Thus majority of the jurisdictions view predatory pricing as a form of abuse of dominance.

The task of this paper is to analyze the relevance of dominance in predatory pricing claims. The discussion will be based on the legal principles and practice in Canada, European Union and United States.

Essential features of Predatory Pricing

Predatory pricing is a market specific strategy that can be adopted only by some of the players. Thus in predatory pricing claims, the real analysis is to look at the suitability of market structure and position of the alleged player in that market. The elements that are material in predatory pricing cases are Market concentration: Market concentration refers to the number and size of the participants in the market. Predatory pricing is one of the means through which market power is raised. Practically speaking, in competitive markets, attaining market power through artificial means is a myth. Combination is the general means advocated to attain dominance in concentrated markets, but in majority of the instance it is implausible for the simple reason that competitors least agree to merge. Thus predatory pricing though illegal preferred than mergers, further detecting predatory pricing is a complex issue [iii].

Entry barriers: Concentrated markets are also characterized by entry barriers. In the absence of entry barriers, the threat of entry or the impact of frequent entries acts as a check to the adoption of predatory pricing. De-concentrated markets are Competitive and are not compatible for any type of anticompetitive practice.

Excess capacity: Absorption of rival sales is the intended object of every predatory pricing policy. With the reduction of price, the demand for the predator's product increases with a decrease in the demand for the product of the competitors. In the absence of excess capacity, the predator would not be able to absorb the intended rival's sales. Further if the there is no additional production it does not pressurize the rivals and their survival.

Deep-pocket: Only firms possessing sufficient financial reserves can be successful in engaging predatory pricing. "Financial reserves may in turn be possessed by firms with large market shares with relative efficiencies and competitive costs or other advantages over their rivals or with operations in independent relative markets. A firm with multi market operations would have easier access to funds derived from profits of other markets in which it successfully operates..."[iv] Since in the first phase of a predatory scheme, i.e. when selling at artificially low prices, the predator will incur losses over a substantial period of time, it becomes clear that the predator's financial resources must be greater than the ones of his rival and the latter will may not be as able as the predator to withstand losses.

Recoupment: In the absence of recoupment of the short-run loses, predation pricing becomes a senseless operation. There is a difference between jurisdictions in the understanding and proof of recoupment. Recoupment in this sense does not limit itself to the regaining of monetary loses suffered in short term, it includes the acquisition of reputation, market power, etc.. In most the instance recoupment is inferred or presumed from the presence of other attributes. Structural examination is the valuable tool for identifying the markets likely to be vulnerable to recoupment [v].

Practically speaking, it is possible only for a dominant entity to possess the said attributes. Market Dominance is a multifaceted aspect and it is also quite possible for a non-dominant entity to adopt predatory pricing provided it has sound financial position. Let us briefly look in to legal practice in Canada, European Union and United States with respect to the requirements in predatory pricing claims.

United States
The American courts are much influenced by Chicago school. Scholars of this school challenge the notion that predatory pricing is a means to monopoly. For them predatory pricing is an implausible and irrational strategy. They don't say that predatory pricing as an impossible event. Their main concern is about the probability of occurrence and possibility of detection. The present position in US is governed by the ratio of the Supreme Court in Brook's case[vi]. As per the decision the plaintiff has to show that:
1. That the alleged predatory prices are below an appropriate measure of the defendant's cost and A dangerous probability that the defendant would be able to recoup its investment in below cost price.

2. The position before this case was little different, were proof of price discrimination with an exclusionary intent is sufficient to succeed a predatory pricing claim [vii].

At present recoupment is the prime essential, in the absence of which competition remains unharmed even if other competitors suffer. Thus recoupment is the sinquonon and sufferings of a competitor is immaterial for preventing a below cost pricing. Further, American courts repeatedly held that anti trust laws are concerned about competition and not competitors[viii]. Though the courts recently agreed that predatory pricing is a rational strategy[ix] they still stick on to the requirement of Brook's ratio [x].

In the assessment of recoupment, American courts adopt a structural approach and significance is given to market concentration, capacity constraints of the competitors and entry barriers of the market. Even in Brook's[xi] decision the court refused the predation claim on the ground that the market is "highly diffuse, competitive and new entry is easy," recoupment is unlikely, and a predatory pricing claim should fail. Thus primarily importance is given to market structure, on satisfaction of which court compares the short term loss and long term gain. In this analysis dominance of the entity might influence the claim but it is not a formal requirement.

European Union

The position of EU law in respect our issue is very clear. Predation is an anticompetitive practice under abuse of dominance provision [Art.82] thus dominance is a pre-condition for predatory pricing. Europeans accept predatory pricing as a practical and profitable strategy.

European law is much influenced by Strategic theory which rests on the notions of asymmetric information or asymmetric access to financial resources. The theory explains how a dominant entity can use its market power to exclude its rivals and prolong its market power. Greater degree of demand side information and independence from outside financing makes it possible for a market leader to mislead and harm the growth of a rival. To succeed the predatory pricing claim under this theory one has to show the presence of the following:
(1) facilitating market structure,
(2) a scheme of predation and supporting evidence,
(3) probable recoupment,
(4) price below cost and
(5) absence of a business justification or efficiencies defense [xii].

Unlike United States, EU has a relaxed requirement for predation and the liability for predatory pricing is under two scenarios. Firstly, any price below the average variable cost is per se illegal. Predatory intent is presumed here since such arrangement can not be for reason other than to hamper competition. Secondly, a price above average variable cost but below average total cost is illegal if it is proved that the intent of such pricing is to eliminate a competitor[xiii]. But in both the above instance dominance is a precondition. In case the charge is under the second scenario the intent of the predator shall be proved with sound and consistent evidence[xiv], however there is no requirement of showing the likely market impact of the pricing scheme.

Canada
In Canada, predatory pricing is an offence under section 50 and a civil abuse of dominance under section 78 and 79 of the Competition act 1985. In Canada there is no requirement of dominance to charge a person under section 50 of the act but for fixing the civil liability you have to prove dominance of the entity.
In respect of civil action for abuse of dominance, as per the decision of the competition tribunal in Nutrasweet case [xv], the pricing scheme shall have the following two elements. Firstly, the pricing is below marginal cost. Secondly, there is some prospect of recoupment or the firm is trying to build a reputation for predation in one market by engaging in predatory conduct in another market.

Further the competition bureau has clarified that recoupment is the essential ingredient of predatory pricing. Though recoupment is considered to be an essential element of predatory pricing, it is presumed on the existence of dominance [xvi]. However this is a rebuttable presumption which can be disproved on the submission of evidence to the contrary.

The 2007 draft guidelines on predatory pricing enforcement [xvii] say that recoupment is achieved by "charging prices above competitive levels or achieving another anti-competitive objective". The anticompetitive practices include preserving the long-term stability of an existing market structure, raising barriers to entry by acquiring a "reputation for predation," coercing participation in an illegal conspiracy, or establishing an industry standard to exclude others or maintain market control. Thus the aspect recoupment in Canada is very broad.

Indian Position

Competition Act 2002 says that "predatory price" means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors[xviii]. The act declares predatory pricing as a means of abuse of dominance, thus dominance is a precondition to sustain a predatory pricing claim under our law. However this Act is not yet notified, at present The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act) is the law regulating competition in India, under which predatory pricing is a restrictive trade practice under S. 2(o) and 33(j). Under MRTP Act, dominance is not a pre-condition for predatory pricing rather the conduct and intent of the predator is material and needs to be proved with clear and cogent evidence [xix].

Conclusion
There is a clear difference of approach between the three jurisdictions with respect to the requirement of dominance in predatory pricing claims. Though dominance is not a formal condition in U.S, it matters for the purpose of showing probable recoupment[xx]. In EU dominance is a precondition but no need to prove recoupment as such. In Canada both dominance and recoupment are pre-requisites but the latter is presumed from the presence of former.

If the object of predatory pricing law is to restrict harm to competition then dominance shall not be a pre condition. It may be validly argued that recoupment is the essential element in all predation claims, which may be inferred from dominance, but what recoupment really means again requires a serious investigation. There are probabilities even for a non-dominant entity to adopt predatory pricing strategy to capture market. Especially a new entrant who is financially sound and dominant in other market may well adopt this strategy to monopolize the new market with his reputation. It is because of this reason under section 4(e) of our Act declares, uses of dominant position in one relevant market to enter into, or protect, other relevant market as a form of abuse of dominance. Thus our legislation explicitly addresses the lacuna that is not addressed by other three jurisdictions.

Practically speaking the position in EU is very sound but technically speaking a law should foresee all possible future instances that it should address[xxi]. The author personally feels that the law shall not be as tough as US to prove the claim, at the same time it shall not preclude a non-dominant entity from the rigors of predatory pricing law.

References
[i] Ritter: Recent Developments in Predatory Pricing Law: [2005] E.C.L.R at pg.48.
[ii] Scott Hamphill, The role Recoupment in Predatory Pricing analysis, Stanford Law Review, Vol. 53, No. 6, (Jul., 2001), at Pg. 1581.
[iii] Matsushita Electric Industrial Co. v Zenith Radio Corp., 457 U.S. 576 (1986); the claim was rejected on the ground that the TV market is a De-concentrated industry.
[iv] Aditi Gopalakrishnan, Abuse of Dominance, Examining Issues in Predatory Pricing, project done on behalf of Competition Commission of India [unpublished].
[v] Supra 2, at Pg. 1583.
[vi] Brooke group ltd., petitioner v Brown & Williamson tobacco corporation, 113 S. Ct. 2578.
[vii] Utah pie Co. v Continental Banking Co., 386 U.S. 685.
[viii] Brown Shoe Co. v United States, 370 U.S. 294, 320 (1962).
[ix] US V. AMR, 353 F.3D 1109.
[x] Weyerhaeuser Co. v Ross-Simmons Hardwood Lumber Co., Inc. 127 S. Ct. 1069.
[xi] Supra 4.
[xii] Elzinga, Kenneth G, Mills, David E, Predatory pricing and strategic theory, Aug 2001, Georgetown Law Journal. Available at http://findarticles.com/p/articles/mi_qa3805/is_200108/ai_n8992779/pg_11 (accessed on June 12th, 2008)
[xiii] AKZO Chemie BV v Commission, [1991] ECR I-3359.
[xiv] Tetra Park International SA v Commission [1996] ECR I-5951
[xv] Canada (Director of Investigation and Research) v NutraSweet Co., [1990] 32 C.P.R. (3d) 1 (Comp. Trib).
[xvi] S.4.3 of the enforcement guidelines on the abuse of dominance provisions, 2001.
[xvii] Available at http://www.competitionbureau.gc.ca/epic/site/cb-bc.nsf/vwapj/Pred_price_e.pdf/$FILE/Pred_price_e.pdf (Accessed on May 15, 2008).
[xviii] Explanation (b) to Section 4 (2) Competition Act, 2002.
[xix] (Modern Food Industries Ltd. (MRTP Commission) 1996 3 Comp LJ 154, New Delhi, 1996 case).
[xx] In J&S Oil Inc. v Irving Oil Corp., 63 F.Supp.2d 62 (D. Me . 1999): it was held that the purpose of proving recoupment the plaintiff shall (a) define the relevant market (b) show that the defendant enjoys a dominant share and lastly (c) there are significant barriers to the entry in the market.
[xxi] In Tetra park case, thought the defendant is a non-dominant entity in the market where predation is alleged, the EC held it liable on the ground that it had dominance in an adjacent industry. Thus dominance for the purpose of predatory pricing is interpreted in a broad sense.

Also Read:
Predatory Pricing:
In common parlance, Predatory pricing may be defined as pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run. It is a practice that harms both competitors and competition.

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