The rules on abuse of dominance in the EU and most other jurisdictions (apart from the US), protect against excessive pricing, which occurs when an undertaking, holding dominant market power, charges prices above the competitive pricing level.
Promoting consumer welfare is the overarching objective of competition law and, therefore, prohibiting excessive pricing indeed makes sense. Or does it?
This question is surprisingly complex and controversial for a host of economic, practical and ideological reasons. US antitrust law is concerned with exclusionary conduct only, that is, it does not prohibit excessive pricing by dominant position. On the other hand, investigating excessive prices in the EU and other jurisdictions has been rare, although in recent years, the competition community saw a surge in cases dealing with excessive pricing.
In general, excessive pricing can be a slippery slope for competition enforcement authorities. From an ideological point of view, free-market-minded economists believe that excessive pricing behaviour is self-correcting, as it signals profits and, therefore, attracts new entry. Consequently, this limits the scope of intervention.
On the contrary, some argue that prohibiting excessive prices can be counterproductive. The possibility of high profits drives companies to reduce costs and introduce new products and technologies. If these profits are eventually regulated once a dominant position is established, this may disincentivise such pro-competitive efforts.
Hence the dilemma remains – under what market conditions are excessive prices likely to be eroded, and if so, in what time frames?
Consider the case of a monopoly. Even free-market-minded economists believe that monopoly poses a problem. If there is no prospect of that monopoly being removed or undermined through market forces – for example, because it is a statutory or natural monopoly – price capping can improve economic welfare and efficiency.
This is why many countries set up price regulation mechanisms for monopolies in network and utilities sectors such as energy, water, rail and postal services. From a policymaking perspective, this is not straightforward as it involves additional layers of complexity; first, where to draw the line between regulating and not regulating prices and, second, if a price control is deemed appropriate, whether sector-specific regulation is necessary or if competition law can do the trick.
Over time, we have seen that several countries pushed for specific regulatory structures for controlling prices rather than purely relying on competition law.
Landmark cases of excessive pricing have provided greater clarity on what it is not than on what it is
The success of regulatory regimes is twofold. First, undertakings have greater certainty ex ante about whether their price will be regulated, and a regulator with sector-specific knowledge is better placed at balancing between capping prices at competitive levels while allowing sufficient returns to reward innovation and risk taking.
Secondly, literature has shown that competition law lacked consistency and legal certainty on treating excessive pricing. EU case law is not very enlightening, as is the European Commission’s guidance on Article 102.
For this reason, competition law enforcers find it difficult to enforce actions against excessive prices. What should a dominant company do? Act contrary to its commercial objectives by not setting prices at the profit-maximising level? Or do so and hope no competition authority comes after it?
How does one establish whether a price is excessive? Certainly, the landmark cases of excessive pricing have provided greater clarity on what it is not than on what it is.
Economists have long debated the necessary conditions for justifying intervention. An economic rather than a legal consensus was reached on the following conditions:
• The market must be characterised by high and non-transitory barriers to entry leading to a super dominant position;
• The super dominant position must be due to natural characteristics or special rights;
• No sector-specific regulator has jurisdiction to rectify such conduct.
Save for these conditions, it is not considered optimal for a competition authority to curb what may otherwise be seen as excessive prices. Competition authorities should avoid becoming price regulators. However, there is no reason why competition law cannot be applied as long as this is legally sound and backed by rigorous analysis of evidence. As a result, while competition authorities must safeguard consumer welfare against excessive pricing, a balancing act is necessary.
Recently, the Office for Competition at the Malta Competition and Consumer Affairs Authority published the outcomes of its ex-officio investigation regarding the prices of Benna fresh milk products.
An analysis was carried out to determine whether the price increases of Benna fresh milk products are excessive, and therefore, the result of an abuse of a dominant position.
The Office for Competition found no evidence on Malta Dairy Products’ part that it was abusing its dominant position when pricing its fresh milk products.
The report may be accessed at the MCCAA’s website below.
Gilmour Camilleri is director, Communications, Energy, Transport and Financial Services, Office for Competition, MCCAA.