Excessive Pricing and Competition Law Enforcement

This volume examines the controversy surrounding the use of competition law to combat excessive pricing. While high or monopolistic pricing is not regarded as an antitrust violation in the US, employing abuse of dominance provisions in competition laws to fight excessive pricing has gained popularity in some BRICS jurisdictions and a number of EU-member states in recent years. The book begins by discussing the economic arguments for and against the prohibition of excessive or unfair prices by firms with market power. It then presents various country studies, focusing on developed countries (such as the UK and Israel) and on the BRICS countries, to highlight various practical challenges involved in recognizing excessive prices as abusive conduct on the part of dominant firms, including how to define, measure and identify excessive prices. The contributors also discuss other policy options that can be used to fight excessive prices in order to protect consumer welfare.

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International Law and Economics

Yannis Katsoulacos · Frédéric Jenny Editors

Excessive Pricing and Competition Law Enforcement

International Law and Economics

Series editors Stefan Voigt, Germany Anne van Aaken, Switzerland Andrew T. Guzman, USA Stefan Oeter, Germany Joel P. Trachtman, USA Naigen Zhang, China

More information about this series at http://www.springer.com/series/13428

Yannis Katsoulacos • Frédéric Jenny Editors

Excessive Pricing and Competition Law Enforcement

Editors Yannis Katsoulacos Athens University of Economics and Business Athens, Greece

Frédéric Jenny École Supérieure des Sciences Économique Cergy-Pontoise, France

ISSN 2364-1851 ISSN 2364-186X (electronic) International Law and Economics ISBN 978-3-319-92830-2 ISBN 978-3-319-92831-9 (eBook) https://doi.org/10.1007/978-3-319-92831-9 Library of Congress Control Number: 2018953180 © Springer International Publishing AG, part of Springer Nature 2018 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Frederic Jenny and Yannis Katsoulacos Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Frederic Jenny Another Look at the Economics of the UK CMA’s Phenytoin Case . . . . John Davies and Jorge Padilla A Coherent Approach to the Antitrust Prohibition of Excessive Pricing by Dominant Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . David Gilo

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Antitrust Enforcement of the Prohibition of Excessive Prices: The Israeli Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Yossi Spiegel Working Out the Standards for Excessive Pricing in South Africa . . . . . 159 Liberty Mncube and Mfundo Ngobese The Brazilian Experience with Excessive Pricing Cases: Hello, Goodbye . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 E. P. Ribeiro and C. Mattos Enforcement Against Excessive Pricing in the Russian Federation . . . . . 189 Svetlana Avdasheva and Dina Korneeva Anti-monopoly Cases on Unfair Pricing in China . . . . . . . . . . . . . . . . . . 211 Xiao Fu and Heng Ju Excessiveness of Prices as an Abuse of Dominant Position: The Case of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 Augustine Peter and Neha Singh v

Introduction Frederic Jenny and Yannis Katsoulacos

This book contains contributions based mainly on presentations made in a Special Policy Session on Excessive Prices organized during the 12th CRESSE Conference on Competition and Regulation that took place in July 2017.1 Exploitative conduct in the form of “excessive prices” constitutes perhaps the most controversial category of business conduct that can be potentially prohibited by competition law (CL). This is reflected in the very significant divergence in the approach that has been and that is currently followed in different jurisdictions around the world towards excessive prices. In summary, it is a conduct category that is non-existent in the law of the North America jurisdictions (of the United States and Canada); it is present in EU’s Article 102 but has had, until recently, very rarely led to investigations, while it is present and actively enforced in the BRICS jurisdictions (with the exception of Brazil after 2012) and those of the developing countries. The North America attitude towards excessive prices, explicitly excluding them from the realm of CL, as well as the traditional lack of interest in the EU in actively enforcing CL in this area, reflects the strongly held view that such ex post regulation of prices will have the undesirable outcome of turning competition authorities into

1 CRESSE is an informal network of academics and professionals with an interest in competition policy and sectoral regulation. It was initiated in 2005, and since then, it organizes an annual conference in Greece with the support of a scientific committee composed of Joe Harrington, Yannis Katsoulacos, Pierre Regibeau, Patrick Rey, Tom Ross, and David Ulph. Since its inception, CRESSE (www.cresse.info) has grown to become one of the most important annual events worldwide in the competition and regulation conferences’ calendar. The 2017 Special Policy Session on Excessive Prices was chaired by Prof. Frederic Jenny.

F. Jenny (*) École Supérieure des Sciences Économique, Cergy-Pontoise, France Y. Katsoulacos Athens University of Economics and Business, Athens, Greece © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_1

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price regulators. Also, the view, supported over the years by many economists, that evidentiary difficulties for proving that some prices constitute “abuse of dominance” is so great that it is almost impossible to satisfy the standard of proof under which competition authorities normally reach decisions, while it is likely that the authorities will be making too many type I errors. Specifically, three interrelated problems have to be dealt with in assessing whether a price is abusive. The first is the problem of definition: when can we say that a price is unfair or excessive—how much higher than some competitive counterfactual must a price be in order to be considered “excessive” under the specific circumstances of the case investigated? The second problem is the problem of measurement: even if we have decided what should be considered as excessive, how do we measure “excessiveness?” While various comparator analyses have been proposed in the economic literature, none of these are without problems—some would say very significant problems. Third, there is the problem of identification: how do we distinguish between truly abusive prices and prices that are excessive due to “innocent” reasons—such as that the firm under consideration has to set high prices for a period of time (often under the protection of intellectual property rights) in order to recoup significant investments, for example, in research and development. In addition to these problems, another very serious issue that has to be considered with is that of active enforcement leading to adverse incentive (or chilling) effects with negative impact on welfare. Firms’ incentives to undertake investments that may well create long-term consumer benefits can be impaired if the firms are uncertain about whether they will be able to set prices high enough to allow them to make a satisfactory return on these investments. Finally, active enforcement in the area of exploitative conduct must take into account the implications of and repercussions to other aspects and areas of enforcement. For example, it is not clear whether the fining policies that competition authorities utilize in other areas of antitrust are equally applicable in the area of exploitative conduct.2 The CRESSE 2017 session on excessive prices and the present book were motivated by the widespread adoption of enforcement in the area of excessive prices in jurisdictions that are becoming very significant worldwide, such as those of China, India, Russia, and South Africa, and also, this being equally important, by the resurgence in the enforcement in this area in EU in recent years. The book brings together authors that provide a comprehensive coverage of experience with enforcement in the area of excessive prices in EU, all the countries in BRICS and in Israel. It also provides an overview of the debate by Frederic Jenny, over the use of competition law enforcement to fight high prices by dominant firms or monopolies.

2 See United Kingdom and European Union contributions to OECD Roundtable Excessive Prices (2011) http://www.oecd.org/competition/abuse/49604207.pdf.

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This overview describes the practices of competition authorities in this regard, analyses the arguments in favour and against the use of the enforcement of competition law to address the issue of high prices and reviews the policy options of competition authorities. January 2018

Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment Frederic Jenny

Abstract This chapter surveys a controversial but topical aspect of competition law: i.e. the prohibition of excessive or unfair prices. In the first part, we examine the diversity of competition laws across the world when it comes to exploitative abuses of dominance and look at the case law on this issue in a number of jurisdictions. We review and discuss the validity of the main reasons which have been put forward in the academic literature in favour of or against the use of competition law to fight abusively high prices. We then analyse in detail the EU Commission and court jurisprudence as well as national jurisprudences in some member states to get a view of how the EU courts and competition authorities define the terms “excessive” and “unfair”, what tests are used or recommended by courts to make such an assessment and how these tests have been implemented. In the third part, we present a methodological criticism of the legal tests which have been proposed for establishing the “excessiveness” or the “unfairness” of prices arguing that they are neither justified economically nor likely to provide dominant firms with the requisite level of legal predictability. We then turn to the economic literature to examine the main circumstances in which competition authorities should, according to the economists, refrain from using competition law to fight high prices. Finally, we examine a number of recent cases in the EU to assess whether the cases which have been dealt with by competition authorities conform to the economist’s recommendations. We conclude that, except in exceptional circumstances, competition authorities should use their enforcement or advocacy powers to eliminate the obstacles to competition which lead to supra-competitive prices rather than using competition law to make high prices illegal.

F. Jenny (*) ESSEC Business School, Paris, France French Supreme Court (Cour de cassation), Paris, France OECD Competition Committee, Paris, France © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_2

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Competition authorities throughout the world are under pressure from government officials and the general public to intervene against high prices. Because the goal of competition law is widely recognized as being the protection of consumer welfare, competition authorities seem to be ideally placed to lead the fight against exploitative practices by dominant firms or firms having market power, and charging high prices to consumers seems to be one such practice. Competition authorities in a number of countries have the legal means to intervene against “excessive” or “unfair” prices by dominant firms and have used this power in the past. In the countries in which excessive prices can be sanctioned as a violation of competition law, the case law is neither abundant nor very clear as to the conditions under which high prices can be considered to be violations of the competition law. However the competition authorities in these countries seem to be satisfied with their power to intervene against high prices. In other countries, the Courts and the competition authorities have categorically excluded the possibility that charging a high or monopolistic price could qualify as a competition law violation under their law, and they are adamant that their perspective is the only one consistent with the goals of competition law. In addition to this difference among competition authorities, a number of economists and legal scholars have criticized the enforcement practices of competition authorities that intervene against pricing abuses of dominant firms or monopolies and have argued that, for theoretical and practical reasons, competition authorities should refrain, except in rare cases, from enforcing such provisions. One important element of the debate is whether charging a monopolistic price as a competition violation necessarily implies that profit maximization (which leads monopolists or dominant firms to charge comparatively higher prices than if they were subject to competition) can be a violation of competition law. Yet profit maximization (and the perspective of enjoying high profits if one successfully overcomes the competition) is key to the competitive process. Any restriction to this process can have the possibility of lessening competition in the long run. Competition economists critical of the enforcement of provisions on abuse of dominant position through “excessive” or “unfair prices” do not ignore that high prices hurt consumers and do not ignore the pressure under which competition authorities are to address the problem of high prices charged by monopolies or firms with a dominant position, but they suggest that alternative means of competition law enforcement are at the disposal of competition authorities to deal with this problem and that these alternative means are better able to address on a lasting basis the causes of the competition failure which has led to the high prices. This chapter tries to shed some light on the debate over the use of competition law enforcement to fight high prices by dominant firms or monopolies. It describes the practices of competition authorities in this regard, analyses the arguments in favour and against the use of competition law to address the issue of high prices and reviews the policy options of competition authorities. It is organized as follows: Section 1 takes stock of the enforcement activities of competition authorities against high prices (or the lack of enforcement) in a number of countries; Section 2 analyses the general arguments in favour or against the enforcement of provisions sanctioning

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pricing abuses by dominant positions or monopolies; Section 3 examines the risks associated with wrongful decisions by competition authorities in this area and the cost of such errors; Section 4 analyses the economic screens which have been proposed by various economists to minimize the cost of enforcement of provisions prohibiting pricing abuses by dominant firms; and Section 5 comments on the alternative solutions at the disposal of competition authorities and is followed by a brief conclusion.1

1 Section I: The Practices of Competition Authorities and Courts with Respect to High Prices by Monopolies or Dominant Firms In some countries, such as Australia, Mexico or the USA, competition laws do not cover excessive pricing by monopolies or firms holding a dominant position. In the USA, the fact that the Sherman Act allows lawful monopolists, and a fortiori other market participants, to set their prices as high as they choose has been stated on numerous occasions by the Courts. For example, in Berkey Photo, Inc. v Eastman Kodak Co,2 the Court of Appeals for the Second Circuit stated: “[a] pristine monopolist . . . may charge as high a rate as the market will bear”. Similarly in Blue Cross and Blue Shield United of Wisconsin v. Marshfield Clinic, the Seventh Circuit Court stated: “[a] natural monopolist that acquired and maintained its monopoly without excluding competitors by improper means is not guilty of ‘monopolizing’ in violation of the Sherman Act. . .and can therefore charge any price that it wants, . . . for the antitrust laws are not a price-control statute or a public utility or commoncarrier rate-regulation statute”.3 Similarly, in its unanimous Trinko decision,4 the Supreme Court stated: “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important

1 This contribution, however, does not address the question of whether competition authorities can and should impose FRAND obligations on the owners of standard-essential patent (SEP). Indeed the problems raised by the interface between intellectual property rights and competition law are specific in the sense that they try to resolve a conflict between the desire to limit competition in order to promote innovation and the goal of promoting competition on markets. Also it does not deal with the cases where a high price charged by a monopoly can have an exclusionary effect as it is concerned exclusively with the treatment of exploitative pricing practices of dominant positions or monopolies. 2 1 Berkey Photo, Inc. v Eastman Kodak Co., 603 F.2d 263, 297 (2d Cir. 1979). 3 Blue Cross and Blue Shield United of Wisconsin v. Marshfield Clinic, 65 F.3d 1406, 1413 (7th Cir. 1995), citing National Reporting Co. v. Alderson Reporting Co., 763 F.2d 1020, 1023–24 (8th Cir. 1985); U.S. v. Aluminum Co. of America, 148 F.2d 416, 430 (2d Cir. 1945); Ball Memorial Hospital, Inc. v. Mutual Hospital Ins., Inc., 784 F.2d at 1325, 1339 (7th Cir. 1986); Berkey Photo, 603 F.2d at 296–98 (2nd Cir. 1979). 4 Verizon Communications, Inc. v Law Offices of Curtis V. Trinko, 124 S. Ct. 872, 875, 879 (2004).

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element of the free market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct”. This does not mean, however, that the federal competition authorities in the USA (the Antitrust Division of Department of Justice and the Federal Trade Commission) are not concerned with high prices due to a lack of competition. For example, the question of whether or not a merger might lead to an increase in price can be grounds to block a merger. Thus, the FTC’s objection in 1997 to a proposed merger of Staples and Office Depot5 was based on a “competitive problem that would lead to . . . higher prices” and on data showing that “in markets where three superstores compete, prices are significantly lower than in two chain markets”. But, according to the US contribution to the debate at the 2011 OECD Competition Committee on excessive prices,6 this means that US competition authorities will tend to treat high prices as an indicator of underlying competition problems which need to be addressed through appropriate means rather than as a variable on which they should intervene directly. US authorities thus rely, among other means, on sectoral regulators which are deemed able to develop a deep understanding of the regulated firm’s cost structure to control prices in industries such as electricity or gas which have the features of natural monopolies. The FTC also undertakes industry studies to understand the causes of high prices in some industries such as petroleum distribution. By contrast, the EU Commission offers7 three reasons to justify the fact that excessive pricing can be a violation of EU competition law. The first reason is that Article 102 explicitly states that an abuse may consist in “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions”, which the European Court of Justice has confirmed on various occasions8 covers conduct such as charging excessive prices. The second reason is that where there are two types of intervention possible to protect consumer welfare (indirect intervention on the exclusionary practices which allow a firm to enjoy a monopolistic position or direct intervention on the price): “it is highly unlikely that under all circumstances

See “FTC Rejects Proposed Settlement in Staples/Office Depot Merger,” Press Release, available at http://www.ftc.gov/opa/1997/04/stapdep.shtm 6 US Contribution to the 2011 OECD Competition Committee roundtable on excessive prices, paragraph 3 and 4. 7 European Union: Article 102 and Excessive Prices, Contribution to the 2011 OECD Competition Committee roundtable on excessive prices, paragraph 2. 8 See, e.g. the ECJ decisions in Sierna v. Eda [1971] ECR 69; Case 26/75 General Motors. v. Commission [1975] ECR 1367; Case 27/76 United Brands v. Commission [1978] ECR 207; Case 30/87 Corinne Bodson v. Pompes Funebres [1998] ECR 2479; Case 110/99 Lucazeau v. SACEM [1989] ECR 2811; see also Commission Decisions: COMP/C-1/36.915 British Post Office v. Deutsche Post AG [2001] OJ L331/40, COMP/A 36.568/D3 Scandlines Sverige AB v. Port of Helsingborg [Jul 23, 2004]. 5

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one type of intervention is superior to achieve the aim”. The third reason is that Article 102 does not prohibit the acquisition of dominance, unlike the US Sherman act which prohibits the monopolization or attempts to monopolize. As a result, “there may be cases where intervention against unilateral exclusionary conduct is legally not possible” and where intervention against exploitative conduct may be the only possibility to effectively protect consumers. The legal basis on which the Commission can intervene against high prices is Article 102 of the TFEU (e.g. Article 82 TEC) which states inter alia: “Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; . . .”. However, even in the EU, the number of cases of pricing abuses by a dominant firm remains quite limited because the EU Commission recognizes that intervening directly against unfairly high prices may, in many cases, be costly or difficult. Thus between 1980 and 2010, a period during which there were 40 decisions by the Commission regarding exclusionary practices by dominant firms (Hubert and Combet 2011), there were only 11 decisions regarding exploitative abuses of a dominant position with 4 violation decisions by the EC Commission.9 Two of the four violation decisions were overturned by the European Court (the General Motors Decision and the United Brands Decision). It should be added, however, that some decisions of the Commission on excessive pricing have been commitment decisions. For example, in 1997, the European Commission made an inquiry into charges set by Belgacom for access to telephony subscriber data. Belgacom subsequently agreed to charge on an average cost basis rather than as a function of the purchaser’s turnover (European Commission 1998). The XXIVth Commission Report on Competition Policy (1994)10 expressed the view that pursuits against excessive prices of dominant position should remain rare. It stated: “. . . the existence of a dominant position is not in itself against the rules of competition. Consumers can suffer from a dominant company exploiting this position, the most likely way being through prices higher than would be found if the

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(1) EC Comm. Dec. IV/28.851, 19 December 1974, General Motors Continental OJ 1975 L2 l/ 14 and ECJ, 13 November 1975, General Motors v. Commission, case 26/75, ECR 1975 p. 01367; (2) EC Comm. Dec. 76/353/EEC, 17 December 1975 Chiquita, OJ 1976 L95/1 and ECJ, 14 February 1978, United Brands Company and United Brands Continental BV v. Commission, case 27/76, ECR 1978 p. 00207; EC Comm. Dec. 84/379/EEC, 2 July 1984, (3) British Leyland Public Limited, OJ 1984, L207/11 and ECJ, 11 November 1986, British Leyland Public Limited Company v. Commission, case 226/84, ECR 1986 p.03263 (4) EC Comm. Dec. 2001/463/EC and ECJ, 16 July 2009, Der Grüne Punkt–Duales System Deutschland GmbH v. Commission, case C-385/07P, ECR 2009 p. I-06155) 10 XXVIIth Commission Report on Competition Policy (1997), para. 77.

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market were subject to effective competition. The Commission in its decisionmaking practice does not normally control or condemn the high level of prices as such. Rather it examines the behaviour of the dominant company designed to preserve its dominance, usually directly against competitors or new entrants who would normally bring about effective competition and the price level associated with it”. Similarly, the EU contribution to the 2011 OECD Discussion on exploitative abuses11 states: “. . . the balance in the EU over the last 50 years has been tilted towards addressing exclusionary conduct, to prevent that exclusionary conduct leads to market conditions which allow exploitation of consumers, rather than intervening directly against exploitative conduct. This has resulted in a rather limited case law concerning excessive prices”. Furthermore a number of the leading cases on abusive pricing (General Motors, United Brands, British Leyland and Deutsche Post II) are mixed cases where the Commission was concerned about a combination of exploitative and exclusionary conducts. The caution of the European Commission in dealing with cases of abuses of dominance through excessive prices is also confirmed by the Guidance on the enforcement priorities in applying Article 82 of the EC Treaty12 which deals exclusively with exclusionary abuses of dominance. Indeed the Guidance states: “Conduct which is directly exploitative of consumers, for example charging excessively high prices or certain behavior that undermines the efforts to achieve an integrated internal market, is also liable to infringe Article 82. The Commission may decide to intervene in relation to such conduct, in particular where the protection of consumers and the proper functioning of the internal market cannot otherwise be adequately ensured. For the purpose of providing guidance on its enforcement priorities the Commission at this stage limits itself to exclusionary conduct and, in particular, certain specific types of exclusionary conduct which, based on its experience, appear to be the most common” (para. 7). The first case in which the European Court of Justice (ECJ) considered the issue of unfair pricing is the General Motors13 case in which GM was accused of charging a fee to parallel importers of its cars in Belgium for the inspection of the vehicles entering the country and the issuance of certificates of conformity (a service which had been delegated by the Belgian government to the automobile manufacturers) which was 2400% higher than the fee charged for cars that it sold in the EU. The Court considered that “the imposition of a price which is excessive in relation to the economic value of the service provided could amount to an abuse of dominance” but it did not elaborate on how one could assess the excessiveness of the price.

11 Contribution from the European Union to the OECD Competition Committee discussion on Excessive pricing, “Article 102 and excessive pricing”, paragraph 3. 12 Communication from the Commission—Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings (2009/C 45/02). 13 Case 26/75 General Motors v Commission [1975] ECR 1367, [1976] 1 CMLR 95.

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In its United Brands Judgement, the ECJ went one step further and gave some indication of how the rule should be applied to excessive pricing by dominant firms. It stated that: 249. It is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. 250. In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product would be an abuse.

The Court also proposed a test to establish a violation for excessive pricing: 251. This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its costs of production, which would disclose the amount of the profit margin . . . . 252. The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is on the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products. 253. Other ways may be devised—and economic theorists have not failed to think up several—of selecting the rules for determining whether the price of a product is unfair.

Thus the ECJ is generally considered14 to suggest a two-step test including, first, a comparison between the price of the product and its cost and, second, the determination of whether the price is excessive in itself or in comparison to competitors’ products. The European Commission in subsequent cases, most notably in its Scandline Port of Helsingborg decision,15 explained that the assessment of the fairness of a price could not come from a simple comparison of the price-cost margin of two similar services on different markets. Indeed the intensity of demand by consumers may influence the economic value of the product or the service and must be taken into consideration. As the Commission has stated in its decision: “227 the demandside is relevant mainly because customers are notably willing to pay more for something specific attached to the product/service that they consider valuable. This specific feature does not necessarily imply higher production costs for the provider.

Note that Massimo Motta and Alexandre de Streel in “Excessive Pricing in Competition Law: Never say Never?” (in The pros and cons of high prices, Konkurrensverket Swedish Competition Authority, 2007) argue that the court did not impose a cumulative two-step test but a one-step. They argue that the test imposed by the Court is not necessarily cumulative and both parts of the test aimed to prove the same thing: that a price is above its competitive level in spite of the (clear) wording of paragraph 252 of the ECJ United Brands judgment. They argue that the Court is very pragmatic in its standard of proof requiring a price cost analysis when feasible but also suggests relying on other indicators to prove excessive prices. A number of commentators disagree with this view and find that there is an inconsistent application of its test by the Court which in the United Brands case made a clear distinction between the test for the excessiveness of the price and the test for the unfairness of the price. 15 Case COMP/A.36.568/D3—Scandlines Sverige AB v Port of Helsingborg. 14

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However, it is valuable for the customer and also for the provider, and thereby increases the economic value of the product/service”. The debate over the approaches of the EU Commission and the ECJ to unfair pricing abuses by dominant firms has dealt with four questions: First, is the test proposed economically sound?; second, is the test legally predictable?; third, is the enforcement consistent?; and fourth, do national competition authorities follow the lead of the EU Commission and Courts? With respect to the first question, in Section 2 we will discuss the reasons for which a test relying on the consideration of price-cost margins is, from an economic standpoint, at best, difficult to implement and possibly misleading in some cases. With respect to whether the test is legally predictable, one should note that the European Court of Justice did not explain how one should determine that a price-cost margin was excessive in the first step of the test or that a price was “unfair” in the second part of the test. Furthermore, as noted by Damien Geradin (2007): “Unfortunately, subsequent cases referred to the ECJ only led to sporadic pronouncements on the methods applicable for establishing an excessive price within the meaning of Article 82 EC”. With respect to the question of the consistency of the approach of the ECJ, whereas in most cases the Court has stuck to the methodology laid out in the United Brands case, it has accepted that there are cases where cost benchmarks cannot be used.16 In such cases, the Court seems to have favoured an approach based simply on a single step of benchmarking. As Damien Geradin observes, “In a first strand of cases, the ECJ directly compared the pricing policy of a dominant firm with the prices of equivalent firms active on neighboring geographic markets. In a second strand of cases, the Court undertook to make comparisons between the prices charged by the same dominant firm (i) to various customers and (ii) over time”. For example, in the Lucazeau and others v. SACEM case,17 the Court stated: “When an undertaking holding a dominant position imposes scales of fees for its services which are appreciably higher than those charged in other Member States and where a comparison of the fee levels has been made on a consistent basis, that difference must be regarded as indicative of an abuse of a dominant position”. In the Corinne Bodson v. SA Pompes funèbres des régions libérées judgement,18 the Court stated that to determine whether prices are unfair, “[i]t must be possible to make a comparison between the prices charged by the group of undertakings which hold concessions and prices charged elsewhere”.

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See, for example, the Joined Opinion of Mr. Advocate General Jacobs on Lucazeau and Tournier cases, “[t]here is a consensus in the observations made to the Court in these cases that the test laid down in Case 27/76 United Brands v Commission [1978] ECR 207 for determining whether a price is excessive in relation to the economic value of the benefit conferred is inapplicable in the present context . . . It is pointed out that it is inappropriate in the present context to proceed on the basis of a comparison between the costs of production and the selling price because it is impossible to determine the cost of the creation of a work of the imagination such as a musical work” (para 53). 17 Lucazeau and others v. SACEM case, and others, 110/88 [1989] ECR-2811 at §25. 18 Corinne Bodson v. SA Pompes funèbres des régions libérées, 30/87 [1988] ECR-2479.

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Even in some cases where price-cost margin comparisons were possible, the European Commission has considered that such comparisons were not adequate to compare the price and the “economic value” of the service rendered. One such case concerned the Port of Helsingborg,19 which was accused by ferry operators of setting excessive charges. The European Commission rejected the complaint. In its decision, the European Commission first had a sharp disagreement with the Port of Helsingborg (HHAB) over the proper allocation of the fixed costs of the port between its ferry activity and other services. The disagreement mostly touched on three issues: (1) whether the port of Helsingborg (a wholly owned subsidiary of the City of Helsingborg) which was the owner of all assets on land such as gangways, ferry ramps, cranes and buildings and the City of Helsingborg (which owned the land, quays, docks, breakwaters and terminal areas and leased them to HHAB which was responsible for their maintenance) should be considered as one entity, (2) whether the depreciation costs of the assets of HHAB should be based on the replacement cost of these assets (as HHAB argued) or the historical value cost of these assets (as the Commission chose) and (3) what should the allocation of fixed costs be between the ferry services and the other services. The European Commission decision acknowledges the difficulty of the task it faced and the subjective choices it made to allocate the fixed costs of HHAB. It states: 116. As HHAB did not provide a realistic allocation of its costs to the ferry-operators, the Commission has sought to make an approximate calculation and allocation of these costs, based on data made available by the port, mainly from the audited financial reports. 117. It must be stressed that this is only an approximate cost allocation made for the purposes of addressing the present complaint. In particular, it has not been possible to determine with certainty all relevant incurred costs. The Court has recognised in United Brands the considerable and at times very great difficulties in working out production costs which may sometimes include a discretionary apportionment of indirect costs and general expenditure and which may vary significantly according to the size of the undertaking, its object, the complex nature of its setup, its territorial area of operations, whether it manufactures one or several products, the number of its subsidiaries and their relationship with each other. 118. It should be noted that most of the costs of the port are fixed costs and that the variable costs (i.e. costs that would vary with the number of calls by the ferry operators or the number of passengers/vehicles transported onboard the ferries) are minor. Furthermore, most costs (the overhead costs, the maintenance costs of the fixed assets leased from the City of Helsingborg and the leasehold paid by HHAB to the City of Helsingborg) had to be treated as distributed costs. These indirect costs are not allocated by HHAB between the different categories of users of the port and the Commission and this renders the task of allocating these costs very difficult. The Commission has applied a key of repartition of those costs between the different users of the port. However, . . . the choice of which key to apply is not evident and that choice naturally affects the outcome. However, for the purposes of the present decision, the Commission has proceeded based on assumptions that are in any event more favourable to the complainant. 119. In addition, due to a lack of precise data and to the intricacy existing between the services and facilities provided by HHAB within the port charges and those provided within

19

Case COMP/A.36.568/D3—Scandlines Sverige AB v Port of Helsingborg.

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F. Jenny specific agreements, it has not been possible to segregate out of the approximate total costs (all costs incurred by HHAB which have been attributed to all services provided to the ferryoperators active on the Helsingborg-Elsinore route), the costs incurred attributable to services covered by the port charges.

The European Commission found that contrary to what HHAB had submitted, it made a profit and that on the basis of its approximate price-cost analysis, HHAB’s revenues (from port charges) derived from the ferry operations would seem to exceed the costs actually incurred by the port to provide services and facilities to these users, but it stopped short of qualifying these prices as excessive. The European Commission then examined the profitability of the port but faced some difficulties with the choice of a suitable benchmark. Finally, the European Commission examined the question of the relationship between the price and the economic value of the service rendered. It stated: “102. It is important to note that the decisive test in United Brands focuses on the price charged, and its relation to the economic value of the product. While a comparison of prices and costs, which reveals the profit margin, of a particular company may serve as a first step in the analysis (if at all possible to calculate), this in itself cannot be conclusive as regards the existence of an abuse under Article 82”, thus arguing that unfair prices could not be established through a simple cost-plus approach. The Commission took into account various non-cost-related factors to assess the economic value of the services rendered. Among those factors were factors related to the value to consumers of the services and, in particular, the fact that “the ferryoperators benefit from the fact that the location of the port of Helsingborg meets their needs perfectly”. It stated that “this represents an intangible value in itself, which must be taken into account as part of the assessment of the economic value of the services provided by HHAB, and which is not reflected in the costs actually incurred by HHAB, based on the approximate calculation made by the Commission”.

1.1

Leading Recent Cases

The competition laws of most EU member states have a provision similar to Article 102 allowing the sanctioning of unfair prices of a firm holding a dominant position. There are a number of cases of excessive prices which have been examined by the European Commission or competition authorities or courts in recent years. These cases fall under three categories: cases where it is alleged that a monopoly provider of a product or service (such as Gazprom at the EU level) has abused its monopoly power by charging unfair prices, cases where the holder of a standard essential patent has refused to abide by its commitment to licence at fair reasonable and non-discriminatory conditions and pharmaceutical cases where the owner of an off-patent drug has increased considerably the price of the drug. Falling in the first category of cases is the Gazprom case initiated in 2012 by the EU Commission against the provider of natural gas to a number of eastern European

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countries. The Commission’s investigation concerned the prices that Gazprom’s customers, such as gas wholesalers and industrial customers, paid for their gas. The Commission’s preliminary conclusion, as outlined in the Statement of Objections (sent to Gazprom in April 2015), was that Gazprom was dominant in eight eastern European countries and that it may have implemented an overall abusive strategy by imposing territorial restrictions in its supply agreements in the CEE countries. These restrictions included export bans and equivalent measures that may have prevented the cross-border flow of gas. In order to assess whether individual price levels in a particular country were unfair, the different member state prices were compared to a number of different benchmarks, such as Gazprom’s costs, prices in different geographic markets or market prices. On the basis of this analysis, the Commission came to the preliminary conclusion in its Statement of Objections that “[t]hese territorial restrictions may have allowed Gazprom to pursue unfair pricing policy in five Member states, namely Bulgaria, Estonia, Latvia, Lithuania and Poland by charging prices to wholesalers that were significantly higher than competitive western European gas prices”. Following this statement of objection, Gazprom, while not recognizing that it had violated European competition law, offered to the European Commission various commitments and, in particular, the commitment that “it will not apply and will not introduce any contractual provisions in its CEE gas supply contracts that may directly or indirectly, prohibit, restrict, or make economically less attractive the customer’s ability to re-export or re-sell gas and will not introduce any such measures in its future gas contracts”.20 With respect to the unfair pricing charges, the Commission explained in its press release21 that generally, Gazprom pegs the price of the natural gas it sells to a number of oil products (so-called oil indexation). It goes on to say that “[t]he Commission does not consider that indexing a product’s price to oil products or any other product is in itself illegal and does not take issue with the fact that gas prices are different in different countries since competitive conditions may vary in Member States, such as the importance of gas as an energy source in a country’s ‘energy mix’. However, in order to assess whether individual price levels in a country are unfair, the different Member State prices were compared to a number of different benchmarks, such as Gazprom’s costs, prices in different geographic markets or market prices. On the basis of this analysis, the Commission has come to the preliminary conclusion in its Statement of Objections that the specific price formulae, as applied in Gazprom’s contracts with its customers, have contributed to the unfairness of Gazprom’s prices”.

20 See Communication from the Commission published pursuant to Article 27(4) of the Council Regulation EC N 1/2003 in case AT.39816 Upstream gas supplies in central and eastern Europe 2017/C 81/09 OJEU 16.3.2017. 21 Antitrust: Commission sends Statement of Objections to Gazprom—Factsheet Brussels, 22 April 2015.

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In the UK, in the 2007 Attheraces case, the Court of Appeal overturned what had been the first final judgment by the High Court finding an abuse of dominant position for unfair pricing in prohibition of Article 82 E and of the Chapter II prohibition. The Attheraces case involved a challenge, on competition law grounds, to the lawfulness of the financial and other terms on which the British Horseracing Board (BHB), in sole possession of valuable information (prerace data about British horse races) that could be used in broadcast services overseas, was selling this information to Attheraces (ATR), a broadcaster. The trial judge had decided that the competitive price would be one where BHB would recoup the cost of producing its database together with a reasonable return on that cost and that the actual price was excessive because it was higher than this competitive price. The Court of Appeal overturned the trial judge. The Court of Appeal argued, first, that prices exceeding costs plus a reasonable margin were not in themselves excessive. It thus distinguished the abuse of fair pricing by dominant firms under competition law from the sort of rate-of-return regulation carried out by sector-specific regulators with respect to natural monopolies. Second, the Court of Appeal held, along the lines of the Commission’s decision in Scandlines vs. the Port of Helsingborg case, that, when assessing a claim of excessive pricing, it was necessary to consider all the relevant circumstances including the economic value of the product to the purchaser and that demand-side considerations were thus relevant factors in excessive price inquiries. It held that the value of the prerace data was high for ATR, which had shown a willingness to pay substantial amounts for other media rights, because it was related to British horseracing which represented a core part of the broadcasting service offered by ATR. Thus there was a huge gap between the value of the data to ATR and the cost of producing it for BHB which was relatively modest, and the Court of Appeal held that BHB was entitled to reflect a price that reflected the value (willingness to pay) of ATR. The Court of Appeal stated22: 216. Attheraces response to a hypothetical case put by the Court—a monopoly wholesale supplier of a delicacy to a supermarket who charges to the supermarket his cost plus a moderate margin but finds that the supermarket is marking up his product by 500%—was that the supplier would be abusing his dominant position if he raised his price to more than he could get in a competitive market, if there was one, however much the supermarket was charging the public for it. (BHB)’s answer was that the supermarket had established the economic value of the product and there was nothing to stop the producer securing as much as he was able to. This seems to us more consonant with Article 82 and its jurisprudence. The consumer might well need protection, albeit from the supermarket rather than from the producer; but if neither solution is going to provide it, the central purpose of Article 82 would not be accomplished and the Courts would not be justified in intervening. The control on the monopoly producer would be the wholesale price: if he raised the price too high he would lose his business.

22

Attheraces v British Horseracing Board [2007] EWCA Civ 38, February 2nd 2007, para 217.

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217. We appreciate that this theoretical answer leaves the realistic possibility of a monopoly supplier not quite killing the goose that lays the golden eggs, but coming close to throttling her. We do not exclude the possibility that this could be held to be abusive, not least because of its potential impact on the consumer. But Article 82, as we said earlier, is not a general provision for the regulation of prices. It seeks to prevent the abuse of dominant market positions with the object of protecting and promoting competition. The evidence and findings here do not show ATR’s competitiveness to have been, or to be at risk of being, materially compromised by the terms of the arrangements with or specified by BHB.

Two decisions of the Italian Competition Authority concerning the tariffs of airport services are worth mentioning because they raise the question of the articulation between competition law and sectoral regulations (Giannino 2012). The Italian Competition Authority held in the ADR-Tariffe aeroportuali and in the SEA-Tariffe aeroportuali cases that the airports had charged excessive and unfair prices. To arrive at this conclusion, the Italian Competition Authority applied the United Brands excessive price test. The regulated costs, determined by the civil aviation regulator (ENAC), were taken as a proxy for the economic value of the services supplied by each of the airports to implement the price-cost comparison limb of the test. With respect to the provision of common and individual refuelling facilities, the Italian Competition Authority considered that the fees levied by ADR and SEA were excessive because they were significantly higher than the economic value of the service as determined in the investigations of ENAC (the airport regulator). With respect to the charges for subletting airport space for freight handling activities, the Italian Competition Authority used as a proxy for the economic value of this service, the rent charged to independent freight handlers. The Italian Competition Authority found that the rents charged by ADR and SEA were as much as twice the cost benchmark and thus in breach of Article 102 TFEU. With respect to charges for access to common and exclusive facilities for catering services, the Italian Competition Authority found the SEA charges to be excessive prices in that they amounted to 9% of yearly revenues, whereas the regulated costs were in the region of 3% of annual revenues. The decisions of the Italian Competition Authority were confirmed by the Administrative Courts, but the sanctions were reduced because the Italian Competition Authority had failed to take into consideration the respect by the airports of the regulatory framework as a mitigating circumstance. The second category of cases in which the question of the fairness or excessiveness of a price may be dealt with by competition authorities concerns the setting of licence fees for patents which are an essential part of a standard. The EU Commission has published in November 2017 a communication setting out the EU approach to Standard Essential Patents,23 and there have been public enforcement cases (e.g. Case C-170/13 Huawei Technologies, EU:C:2015:4) as well

23

See Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee setting out the EU approach to Standards essential Patents, 29 November 2017.

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as civil enforcement cases in the member states (such as the Unwired Planet International Ltd. Claimant/Huawei Technologies Co. Ltd. case adjudicated by the England and Wales High Court of 5 April 2017). The underlying issue is that the development of standards by Standard Setting Organizations (SSOs) (i.e. the process of determining a common set of characteristics for a good or service) is considered to generally be pro-competitive but creates a challenge because standards often rely on patented technologies which must then be used by anyone wishing to meet the standard. Thus there is a risk that once a patent is incorporated into a technological standard, the owner of such patent will either refuse to licence its technology or (more frequently) impose unfair licensing fees to potential licensees who need such a licence to meet the standard (the hold-up problem). This is why firms whose patents are incorporated in a standard must offer an undertaking to the Standard Setting Organization that they will give licences for their technology at FRAND (fair, reasonable and non-discriminatory) conditions to the implementers of the standard. As Justice Birrs stated in the Unwired Planet/Huawei case (24 paragraph 83), “The point of FRAND in standard setting is fairly easy to understand. Standards exist so that different manufacturers can produce equipment which is interoperable with the result that the manufacturers compete with one another. So the phone makers compete in the market for phones and the public can select a phone from any supplier and be sure (for example) that if it is a 4G phone, it will work with any 4G network. As a society we want the best, most up to date technology to be incorporated into the latest standards and that will involve incorporating patented inventions. While the inventor must be entitled to a fair return for the use of their invention, in order for the standard to permit interoperability the inventor must not be able to prevent others from using the patented invention incorporated in the standard as long as implementers take an appropriate licence and pay a fair royalty. In this way a balance is struck, in the public interest, between the inventor and the implementers. The appropriate licence is one which is fair, reasonable and non-discriminatory. That way a standard can safely incorporate the invention claimed in a patent without giving the inventor or his successors in title unwarranted power over those who implement the standard. Thus the public interest is served because telecommunication standards can be set using the best and most up-to-date technical expedients available and the inventor’s private interest is served because the FRAND undertaking ensures they or their successors will obtain a fair reward for their invention”. The questions which then have been debated are that of whether the offer made by the patent owner or by the potential licensee was a “fair” and “reasonable” and “nondiscriminatory” licensing fee and that of the conditions under which, in case of a lack of agreement on a fair reasonable and non-discriminatory licensing fee, the patent

24 Case No: HP-2014-000005, Unwired Planet International/ Huawei Technologies LLC [2017] EWHC 711 (Pat).

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owner can sue the potential licensee for infringement of the patent or seek an injunction to prevent the other party from infringing on his licence. Two elements arising from the discussion of fairness in SEP cases are of interest here. First the EU communication states (see paragraph 2.1): “It should be stressed . . . that there is no one-size-fit-all solution to what FRAND is: what can be considered fair and reasonable differs from sector to sector and over time. For this reason, the Commission encourages stakeholders to pursue sectoral discussions with a view to establishing common licensing practices, based on the principles reflected in this Communication”. Thus the Commission states that with respect to patents in standards, there is no simple, across the board, definition of what is fair and what is not fair. The Commission continues by elaborating on the principles to be followed to define fairness: Licensing terms have to bear a clear relationship to the economic value of the patented technology. That value primarily needs to focus on the technology itself and in principle should not include any element resulting from the decision to include the technology in the standard. In cases where the technology is developed mainly for the standard and has little market value outside the standard, alternative evaluation methods, such as the relative importance of the technology in the standard compared to other contributions in the standard, should be considered. ... —FRAND valuation should ensure continued incentives for SEP holders to contribute their best available technology to standards.

The third type of cases where competition authorities in Europe have recently undertaken proceedings against dominant firms for excessive or unfair pricing concerns pharmaceutical companies. One such case is the Aspen case in Italy. On 14 October 2016, the Italian Competition Authority imposed a 5 million euros fine on the multinational Aspen for having increased the price of off-patent life-saving and irreplaceable drugs in the treatment of oncohaematological patients, especially children and elderly people, by amounts ranging from 300% to 1500%. According to the press release from the Italian Competition Agency: “After purchasing the antitumor drug package from GlaxoSmithKline—whose patent expired decades ago—Aspen started negotiations with the Italian Medicines Agency (Agenzia Italiana del Farmaco—AIFA) with the sole aim to obtain a high increase in prices, even in the absence of any necessary economic justifications. The negotiation strategy adopted by Aspen was so aggressive as to reach the credible threat of interrupting the direct supply of the drugs to the Italian market. The mentioned products are based on the following active ingredients: chlorambucil, melphalan, mercaptopurine and tioguanine, in which only Aspen is present with the so-called Cosmos drugs, that is the medical products Leukeran (chlorambucil), Alkeran—both injectable and in tablets—(melphalan), Purinethol (mercaptopurine) and Tioguanine (tioguanine). Through this negotiation strategy, Aspen obtained an extremely high increase in prices, ranging between 300% and 1500% of the initial prices”.

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In its decision the Italian Competition Authority took into consideration a number of structural factors. First the drugs were used to treat very serious cancers (leukaemia, myeloma, etc.) and were part of the A drug class, a group of medicine which are 100% reimbursed by the National Health Service. Second, Aspen had a monopoly on each of the markets involved, and there was no chance of entry, even though there were no barriers to entry, because demand for this medicine was very limited, exposing entrants to the risk of not recovering their entry costs. Also there were no generic manufacturers interested in developing generic products. Third, no economic justifications for the increase in price were presented. Aspen did not document an increase in the production or distribution costs of this medicine or argue that non-cost-related factor leading to an improvement in quality or in the level of service to the NHS or patients was present. Fourth, and importantly, the ICA took into consideration the fact that the drug had no substitutes and that there was therefore no possibility for patients to shift to an alternative medical life-saving treatment which meant that they had a high willingness to pay and a very inelastic demand curve. Fifth, the Italian Competition Authority also considered that the health regulator had been in a weak position in its negotiation with Aspen, partly in reason of the negotiating techniques used by Aspen which included a threat to leave the Italian market altogether if its price increases were not accepted and the organization of an artificial scarcity on the Italian market through an oncology stock allocation mechanism. Finally to find the increased prices abusive, the ICA used the standard methodology derived from the United Brands test including a price-cost analysis (which revealed that the prices were from 100% to 400% higher than the costs). For reasons specific to the case, the Italian Competition Authority could not use the yardstick competitor technique to assess whether the excessive prices were unfair but used a number of other considerations. Subsequently Aspen lost its appeal against the decisions of the ICA, and a new procedure for non-compliance with the previous decision was started by the ICA. In May 2016, the European Commission launched a formal investigation into Aspen Pharma’s pricing of the same cancer drugs. The investigation will cover the entire European Union except for Italy. In February 2017 the Spanish competition authority announced that it was also investigating Aspen’s price increases in relation to several of its anticancer drugs. It also opened an investigation of Aspen and its Spanish distributor Deco Pharma SL over alleged abuses of market power, including denial of supply of certain drugs and agreements to limit distribution and cause deliberate shortages. Similar proceedings were started in South Africa. In the UK, Chapter II of the Competition Act 1998 is based on Article 102 TFUE and prohibits abusive conduct by one or more undertakings which, either singly or collectively, hold a dominant position in a market and which may affect trade within the UK. Both Article 82 TFUE and the Chapter II prohibition provide, in similar terms, that conduct may constitute an abuse if it consists of directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions.

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The UK’s Competition and Markets Authority (CMA) and its predecessor the Office of Fair Trading have looked into multiple allegations of excessive pricing in the pharmaceutical sector. In 2001, the OFT received a complaint in which the complainant alleged that through the use of discounts of over 90% to hospitals, Napp Pharmaceutical Holdings Limited had prevented its competitors from gaining a foothold in the market for the supply of sustained release morphine to hospitals and to pharmacies in the community (i.e. patients under the care of their General Practitioner). In 1980 Napp had launched the first sustained release morphine product to appear on the market under the name MST CONTINUS (“MST”). Napp had held a patent on MST between 1980 and 1992, but the MST remained “the gold standard for the treatment of severe chronic pain” after the patent expired. On the product market for sustained release morphine tablets and capsules, MST had in 2001 a market share of 90% both on the hospital and the community segments. This constituted a dominant position and was referred to as a “superdominant position”. The OFT found that while charging high prices to customers in the community segment of the market, Napp supplied sustained release morphine tablets and capsules to hospitals at discounts which had the object and effect of hindering competition in the market for the supply of sustained release morphine tablets and capsules in the UK. With respect to the “community segment”, the OFT found that the prices of sustained release morphine tablets (“MST”) charged by Napp Pharmaceuticals Holdings Limited to the “community segment” were excessive. The OFT’s finding of excessive price was based on various facts. First, on average, the wholesale community price for MST130 was in excess of 1000% of the average hospital prices for MST on 10 mg, 30 mg, 60 mg and 100 mg from March to May 2000. Second, Napp’s prices to the community were between 33% and 67% higher than those of its competitors and typically around 40% higher. The prices for the community segment in the UK were between 100% and 700% higher than the export prices. The OFT also based itself on a comparison of the profit margin earned by Napp on sales of MST in the community segment with the profits earned on sales of MST to other markets (e.g. sales to the hospitals, export sales) and on sales of other products to the community. The OFT found that MST community sales achieved a gross margin in excess of 80%, whereas Napp’s NHS sales other than MST earned a margin of 30–50%. The OFT also sought to find a proxy for the competitive price of MST by looking at the prices of competitors and the price Napp charged over time. On 15 January 2002, the Competition Commission Appeal Tribunal (Tribunal) confirmed the findings of the Office of Fair Trading (OFT) that Napp’s pricing policies for morphine pain killer MST had been in abuse of its dominant position and in breach of the Competition Act 1998. Napp was the first company to launch a sustained release morphine product (MST) in the UK in 1980 and held a patent on the drug through 1992. At one point there were three other suppliers in the market besides Napp, and two remained in the market at the time of the case. MSTs are sold on two market segments: the community (or general practitioner) segment and the hospital segment. The OFT

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found that Napp had a very strong market share, in excess of 90%, on both segments and that there were considerable barriers to entry on the market with the result that Napp was considered to have a dominant position on the relevant market. The OFT analysed Napp’s pricing policies for MST and found it to be predatory in the hospital segment and excessive in the community/general practitioner segment. The OFT stated that, under the UK Competition Act of 1998, a price is considered excessive if it is above that which would exist in a competitive market and where it is clear that high profits will not stimulate successful new entry within a reasonable period. In order to assess whether Napp’s price was excessive, the OFT used both a comparison of price-cost margins (by comparing Napp’s profit margins across two consumer segments and with the profit margins of competitors) and a comparison between Napp’s prices and those of its competitors. The OFT found that Napp earned in excess of 80% profit margins for the community segment, whereas its competitors earned “less than 70%”. It was also found that Napp’s prices were 33–67% higher than those of its competitors in 2000 and did not change for 10 years after the expiration of its patent. The OFT also found that Napp’s community segment charges were over ten times more than hospital prices and between four and seven times higher than export prices. On the basis of these elements, the OFT fined Napp for abuse of dominance. Its decision was upheld on appeal to the UK Competition Appeal Tribunal (CCAT) in 2001, but the fine was reduced. As noted by David Evans and Jorge Padilla (2004) in this case, the OFT did not adopt the two stage test of the ECJ but adopted a “preponderance-of-the-evidence” approach to excessive pricing (a method which was explained in more details in the 2004 OFT Assessment of Conduct Draft competition law guideline). The CAT also seems to have approved the OFT’s “preponderance-of-the-evidence” standard as it stated (): “in our view those [price and margin] comparisons, taken together, amply support the Director’s conclusions that Napp’s prices were . . . well above what would have been expected in competitive conditions”. Some commentators have suggested that this approach could also be accepted by the EC Court of Justice (in a departure of its two-step test in the United Brands case). As in the previously discussed Italian Aspen case, important aspects of the Napp case are the definition of the relevant market and the importance of the dominant position of Napp on the relevant market. As the Competition Tribunal stated, the situation of Napp on the market was a position of superdominance in the sense that consumers had practically no other option but to consume NST if they have severe pains. The OFT observed first that “. . . the market at issue is at its widest that for strong opioids, used for the treatment and prevention of severe pain, in which morphine is the drug of first choice. Further analysis shows that the relevant product market is, in fact, narrower than this”. The OFT first examined the non-morphine opioid analgesics available in the UK, such as fentanyl, hydromorphone, oxycodone and diamorphine. Basing itself on medical opinions, it concluded that, “while non-morphine strong opioids could, in principle, substitute for morphine to control severe pain, they would only be used as a substitute for morphine where there was a perceived clinical problem with the

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patient’s use of morphine. Non-morphine drugs such as fentanyl, diamorphine, hydromorphone or oxycodone are only to be used when the patient is sensitive to the side effects of morphine and cannot tolerate the drug or when the drug cannot be administered orally”. In addition the price of those possible alternatives was significantly higher than the price of MST, and their conditions of use are more cumbersome than the MST. Turning to other morphine opioids on the market, the OFT considered that: “For reasons similar to those discussed in relation to non-morphine products, morphine that is not administered orally is also not an effective demand side substitute for oral morphine”. Indeed, “The oral route of administration is preferred as it is convenient, safe, reduces dependence on medical personnel and also offers pharmacokinetic advantages: when medications, particularly morphine, are given orally their duration of action is prolonged, an advantage for chronic pain”. Third, turning to the question of the substitutability between immediate release morphine preparations and sustained release preparations, the OFT considers that “immediate release morphine is primarily administered for short acting, immediate relief from pain. If there is ‘breakthrough pain’, immediate release preparations are given. By contrast, sustained release morphine is administered for on-going control of stable pain. Given that they are used for such different purposes the two are unlikely to be substitutable”. Finally, on the question of brand substitutability, the OFT expressed the view that: “As regards the substitutability of other brands of sustained release morphine for MST (which do not exhibit significant clinical difference), it is admittedly not possible in the case of a technically complex product such as sustained release morphine for consumers to assess readily whether two similar products are in fact substitutes. GPs, unlike hospital specialists and pharmacists, often lack the time and expertise to assess the substitutability of different products, and this leads to a degree of switching inertia. Indeed these factors contribute to Napp’s market power in the community segment of the market. However, there is no reason why rival brands should not be competitive substitutes for MST in the eyes of GPs, in the same way as they have already become in the hospital segment of the market”. It is worth mentioning that in 2002 the OFT also began an investigation into excessive pricing by the makers of Durex condoms. Condoms had been the subject of various monopoly inquiries, and resultant price regulation, during the 1970s and 1980s. In 1994, the price of condoms was liberalized in light of new entry and the fall in Durex’s market share from 95% to around 75% during the 1980s. The OFT terminated the case in 2005 without finding an abuse, noting that it found “evidence of emerging competition”—Durex’s market share had fallen further (although slowly) to around 60% in 2002, and several new brands had entered the UK market, including Trojan, the market leader in the USA. The OFT observed that in such circumstances “any potential remedies such as a price cap could stifle such entry and hinder rather than help the competitive process”. More recently, in August 2015, the UK Competition and Markets Authority (CMA) issued a Statement of Objections to pharmaceutical suppliers Pfizer and Flynn Pharma for a breach of UK and European competition law by selling an

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epilepsy drug at an excessive price after 2012. The CMA alleges that Pfizer sold the drug to Flynn at prices 8–17 times higher than those Pfizer had charged customers for the drug before it sold the distribution rights to Flynn in September 2012. In turn, Flynn sold the drug at prices between 25 and 27 times higher than those Pfizer had previously charged. In 2016 the Competition and Markets Authority (CMA) imposed a sanction on the pharmaceutical manufacturer Pfizer and on the distributor Flynn Pharma after finding that each broke competition law by charging excessive and unfair prices in the UK for phenytoin sodium capsules, an antiepilepsy drug. Phenytoin sodium capsules are used in the treatment of epilepsy to prevent and control seizures and are an important drug for an estimated 48,000 patients in the UK. Pfizer’s phenytoin sodium capsules were sold under the brand name Epanutin up to and including 23 September 2012. Epanutin was first marketed in 1938 and was acquired by Pfizer in 2000 by which time it was off-patent. Although there is another provider of phenytoin sodium capsules in the UK, the CMA considered that the relevant markets were (1) the manufacture of Pfizermanufactured phenytoin sodium capsules that are distributed in the UK (which includes parallel imports as they are distributed in the UK) and (2) the distribution of Pfizer-manufactured phenytoin sodium capsules in the UK (which includes parallel imports as they are also Pfizer-manufactured phenytoin sodium capsules). Indeed neither Pfizer nor Flynn was subject to competitive constraints in their sales of phenytoin sodium capsules. Epilepsy patients who are already taking phenytoin sodium capsules should not usually be switched to other products, including another manufacturer’s version of the product, due to the risk of loss of seizure control which can have serious health consequences. As mentioned in the CMA decision: “. . . great care needs to be taken in switching a patient from an ongoing therapy treatment. Given the potentially severe health and economic consequences associated with epileptic seizures, discontinuation of supply was considered not to be appropriate for the benefit of patients”. As a result, patients could not switch to another medicine, and the NHS had no alternative to paying the increased prices for the drug. Before September 2012, the price of Epanutin (the previous brand name for phenytoin capsules) was regulated under the Pharmaceutical Price Regulation Scheme (PPRS). In 2012, Pfizer and Flynn entered into agreements transferring Pfizer’s Marketing Authorizations for Epanutin to Flynn for a nominal fee, while Pfizer continued to manufacture the capsules and exclusively supply them to Flynn. Following the transfer, Flynn genericized Epanutin, and the product was withdrawn from the PPRS, meaning it was no longer subject to price regulation. From September 2012 on, Pfizer has continued to manufacture phenytoin sodium capsules and has supplied them to Flynn Pharma at prices that were significantly higher than those at which it previously sold Epanutin in the UK—between 780% and 1600% higher than Pfizer’s previous prices. Flynn Pharma then sold the products to UK wholesalers and pharmacies charging them prices which were between 2300% and 2600% higher than those they had previously paid for the drug. This case is similar to the previous cases. Pfizer and Flynn were super dominant on their markets and protected by barriers to entry because patients taking their

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products could not be switched to another medicine and they sought to avoid the regulation of their prices through an artificial strategy in order to increase these prices without cause by up to 1600% in the case of Pfizer and 2300–2600% in the case of Flynn Pharma when patients had no other option but to pay higher prices. However, on 7 June 2018, the UK Competition Appeal Tribunal (CAT) overturned the CMA’s decision on the grounds that it failed to properly evaluate the drug’s economy and to sufficiently analyze the prices of comparable products, which contradicted the allegations of unfairness. In December 2016, the CMA issued a statement of objection provisionally finding that Actavis UK had violated the competition law by charging excessive prices to the National Health Service (NHS) for hydrocortisone tablets. Hydrocortisone tablets are used as the primary replacement therapy for people whose adrenal glands do not produce sufficient amounts of natural steroid hormones (adrenal insufficiency), for example, with Addison’s disease. The condition is lifethreatening. Approximately 943,000 packs were dispensed for hydrocortisone tablets in the UK in 2015. The CMA noted that pharmaceutical company Actavis UK (formerly Auden Mckenzie) has increased the price of 10 mg hydrocortisone tablets by over 12,000% compared to the branded version of the drug, which was sold by a different company, prior to April 2008. The company also increased the price of 20 mg hydrocortisone tablets by nearly 9500% compared to the previous branded price, equating to charges to the NHS of £102.74 per pack by March 2016, when it had previously paid £1.07 for the branded drug. De-branded (genericized) drugs are not subject to price regulation. Prior to April 2008, the NHS spent approximately £522,000 a year on hydrocortisone tablets. By 2015, NHS spend on the tablets had risen to £70 million a year. Andrew Groves, CMA Senior Responsible Officer, said: “This is a lifesaving drug relied on by company has taken advantage of this situation and the removal of the drug from price regulation, leaving the NHS—and ultimately the taxpayer— footing the bill for the substantial price rises”.

1.2

Other Cases

We will comment on a few other examples of national experience. In Germany, two sections of the Act against Restraints of Competition (the ARC) deal with pricing abuses by dominant firms: Section 19 (4) which is the general prohibition and Section 29 which was added to the ARC in 2007 to facilitate the prosecution of excessive pricing in the energy sector. Section 19 (4) no. 2 the Act against Restraints of Competition (ARC) prohibits dominant players from engaging in business practices which deviate substantially from those expected to occur if they were in “effective competition”. This provision applies to their pricing strategy. This article stipulates that “in particular, the conduct of undertakings in comparable markets where effective competition prevails shall be taken into account”. The

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price that such a competitor would charge if he were on the investigated market is then computed, and an abuse can be found if the actual price of the investigated firm substantially differs from the benchmark price that the competitor would charge on the investigated market. Thus the prevailing test in Germany under this provision is different from the test at the EU level (the price-cost test) even if the Courts in Germany have recognized the validity of other methods such as price-cost analysis. The enforcement of Section 19 (4) n 2 of the ARC is complicated by the difficulty in finding suitable comparators, i.e. comparable markets where effective competition prevails, as the Bundeskartellamt (BKA) found out in the Valium case25 when the German Federal Court of Justice (Bundesgerichtshof) concluded that the market used as a benchmark and the hypothetical competitive price established by the Higher Regional Court of Berlin (Kammergericht) were not adequate for a number of reasons. Section 29 ARC differs from the general antiabuse provision of Section 19 ARC in several respects.26 This section was added to the law following an investigation of the EU Commission in the gas and electricity sectors which showed that the German market was characterized by high concentration, vertical integration and high prices. Unlike what is stipulated in Section 19, the price of the investigated energy provider can be compared with the price of other firms even if these other firms are not in a situation of competition. Second, and very importantly, “the dominant firm investigated has to demonstrate why the rejected behaviour was not abusive or that the comparative market concept applied by the Bundeskartellamt was erroneous, i.e. that the alleged deviation of their prices is objectively justified”.27 Furthermore, Section 29 s. 1 no. 2 ARC explicitly states that the abuse of dominance can also be constituted by demanding prices that unreasonably exceed the costs. Finally, the decisions of the Bundeskartellamt with respect to the energy sector are immediately enforceable, irrespective of whether the decision is appealed. The contribution from Germany to the 2011 OECD Roundtable Competition Committee on excessive prices states: “After the introduction of the new provision Section 29 ARC in 2007 and the establishment of a specific decision division with a focus on cases of abuse of a dominant position in the energy sector in 2008, the Bundeskartellamt successfully initiated a number of proceedings against companies in the energy sector on account of alleged abusive practices”. And it concludes: 25

BGH [Federal Court of Justice], decision of 16. 12. 1976, KVR 2/76—Valium; BGH [Federal Court of Justice], WuW/E 1445 ff., 1454 Valium II. 26 German contribution to the OECD Competition Committee Roundtable on excessive prices part 2. 27 A similar mechanism, putting the burden of proof that large deviations from prices charged by similar firms in other contexts are either non-existent or justified was mentioned by the ECJ in its Sacem II decision when it stated: “25 When an undertaking holding a dominant position imposes scales of fees for its services which are appreciably higher than those charged in other Member States and where a comparison of the fee levels has been made on a consistent basis, that difference must be regarded as indicative of an abuse of a dominant position. In such a case it is for the undertaking in question to justify the difference by reference to objective dissimilarities between the situation in the Member State concerned and the situation prevailing in all the other Member States.”

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“Despite the difficulties raised by complex excessive pricing cases, the experience in Germany shows that by pursuing such abusive practices, even when cautiously focusing only on the most exorbitant excessive pricing cases, benefits for consumers can be achieved reasonably quickly and other tools available to competition authorities can be deployed to foster the emergence of competition in dominated markets”. Furthermore, the Bundeskartellamt has closely examined drinking water markets in Germany, a country where drinking water prices vary greatly from one city to another.28 Between 2012 and 2014, the Bundeskartellamt successfully concluded proceedings against several suppliers of water in Berlin, Mainz, and Wuppertal for charging abusively high prices.29 In 2016, it published a report on the framework conditions of drinking water supply and the control of fees charged by water suppliers.30 Besides calling for a revision of the ARC,31 the report advocates other measures which could increase the ability of water suppliers to improve the efficiency of their operations and could prevent the charging of excessive prices. In view of the monopoly positions in the sector, the Bundeskartellamt suggests that further development and implementation of benchmarking projects, for example, would be worth considering, since they could inform water suppliers about their relative ranking among other water suppliers, identify cost-saving possibilities and trigger improvement processes. It also suggests that measures to make prices and charges more transparent could enable consumers to better assess their supplier’s price level.

28 For example, in 2013, the average net revenue of the water suppliers in Germany’s 38 largest cities varied between 1.40 and 2.60 euros/m3. According to the Bundeskartellamt, these significant differences can be explained partly by the different conditions of supply, such as e.g. density of supply or differences in altitude in the supply areas. However, in individual cases an efficient control of water fees by the authority is necessary to prevent suppliers from abusing their monopoly position to the detriment of consumers. 29 See press releases of 24.02.2014 and 05.06.2012 Berlin, 09.05.2012 Mainz and 19.10.2015 Wuppertal. 30 The report is available at [http://plus.google.com/share?url¼http%3A%2F%2Fwww. bundeskartellamt.de%2FSharedDocs%2FMeldung%2FEN%2FPressemitteilungen%2F2016% 2F30_06_2016_Wasserbericcht.html%3Fnn%3D3591568&t¼Homepage++Bundeskartellamt% 26%23039%3Bs+report+on+public+drinking+water+supply+in+German+cities+%0ALarge +price+differences++lack+of+transparency]. 31 A 2013 amendment to the ARC excluded water charges levied by a public law entity from abuse control under competition law. As a result such charges were only subject to the supervision of municipal authorities exercised by the individual Länder, which is based on less stringent criteria than those which apply to abuse control under the ARC. This gave municipal water suppliers the possibility to switch from water prices to charges if they wished to avoid price abuse control. Some companies against which the competition authority had opened proceedings had switched to charges in the past. Andreas Mundt, President of the Bundeskartellamt, said, “In recent years the Bundeskartellamt and individual competition authorities of the Länder have successfully conducted proceedings against water suppliers which charged excessive prices. It is regrettable that in 2013 the legislator decided to exclude water charges levied by municipal suppliers from competition law control. The resulting division of control does not make economic sense. It is certainly of no difference to the consumer whether he pays excessive prices or excessive charges for his drinking water.”

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In the Netherlands, Article 24 of the Dutch Competition Act provides that “undertakings are prohibited from abusing a dominant position”. The Nederlandse Mededingingsautoriteit (the NMa), which was the Dutch competition authority until 2013 and has been replaced by the Autoriteit Consument en Markt (the ACM), conducted nine excessive price investigations, but only one led to a finding of excessive prices. The decision in question was, however, abandoned following an appeal by the investigated firms. To determine whether a price was excessive, the NMa first computed the costs of the firm after a proper allocation of the common costs to different products or services and then compared the return on invested capital of the firm with its weighted average cost of capital. It was only if the return was durably and significantly above the cost of capital that the NMa considered that prices were excessive. In 2004, the NMa imposed a fine of 30 million euros on Interpay, at the time the provider of network services for transactions on the PIN debit card network in the Netherlands, for excessively charging retailers for these services.32 The PIN network had achieved a strong position among the various payment methods. The NMa determined the existence of excessive pricing by analysing the profitability of Interpay. It commissioned an accounting firm to measure the return on capital employed (ROCE) for PIN services over the period 1998–2001. The NMa found that the ROCEs over this period were well in excess of the cost of capital which it had estimated and concluded that an abuse had taken place over that period. As Gunnar Niels (2014) observes, “The main shortcoming of the NMa’s approach was that the returns over the period 1998–2001 did not provide an accurate picture of the economic profitability of the PIN network services. The test should take account of any investments and risks incurred by the capital providers (in this case the banks that owned the PIN system) before 1998. The PIN system was set up in 1989 under conditions of uncertainty. Until the mid-1990s, it was not guaranteed that the system would become successful (it had to gain a critical mass of users among both retailers and consumers, and faced some competition from rival card networks). Start-up losses were made for a number of years. From an economic (as opposed to accounting) perspective, these start-up losses should also be treated as investments. An analysis of profitability over the whole period 1989–2001, incorporating the earlier start-up losses, demonstrated that the PIN network services had achieved an internal rate of return (IRR) in line with the appropriate cost of capital”. In 2005, following the appeal stage, the NMa withdrew the fine it had imposed. On 31 January 2018, the Danish Competition and Consumer Authority (“DCC”) decided that CD Pharma’s (a pharmaceutical distributor) which had an exclusive distribution contract in Denmark for the drug Syntocinon had abused its dominant position by charging unfair prices.33

NMa (2004), “Besluit van de directeur-generaal van de Nederlandse Mededingingsautoriteit als bedoeld in artikel 62 van de Mededingingswet, nummer 2910/63”, April 28th. 33 See “CD Pharma has abuse its dominant position by increasing their price by 2000%”, Press release, Danish Competition and Consumer Authority, 31 January 2018. 32

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Syntocinon contains oxytocin, which is an active substance given to pregnant women in connection with childbirth. Syntocinon, which is used by public hospitals in Denmark, has existed since the 1950s, and the patent expired long ago. During the 2007–2014 period, the price of Syntocinon was stable around DKK 44 (5.9 euros). Amgros (a wholesale buyer for hospitals) had a tender on Syntocinon for the period of 1 April 2014–31 March 2015, which Orifarm—a parallel importer and competitor to CD Pharma—won. During the period of the contract, Orifarm tried to provide Syntocinon in accordance with the contract, but it was not possible for Orifarm to get enough Syntocinon to cover Amgros’ full demand. Indeed, parallel importers usually do not have a stable source of delivery, e.g. in the form of an exclusive agreement with the relevant producer or own production. Due to CD its exclusive distribution agreement with the producer of Syntocinon, CD Pharma, was the only firm guaranteed supply, contrary to parallel importers such as Orifarm. Amgros had no choice but to buy the residual amount from CD Pharma who was the only alternative supplier of Syntocinon on the Danish market. From 28 April 2014 until 27 October 2014, CD Pharma increased the price on Syntocinon from DKK 45 (6 euros) to DKK 945 (127 euros) corresponding to a price increase of 2000%. According to the Danish Competition and Consumer Authority, CD Pharma was not able to justify the increase in price with, for instance, increased costs or special considerations for research and development. The Danish Competition and Consumer Authority thus considered that CD Pharma had exploited its dominant position making Amgros pay an “unfair price” on the drug Syntocinon. It calculated that Amgros ended up paying a little less than DKK six million (approximately 780,000 euros) more than the price in the original contract with the parallel importer, during a period of 6 months. Consequently the DCC ordered CD Pharma to refrain from similar abusive behaviour in the future, and it decided to submit the case to the Danish State Prosecutor for Serious Economic and International Crime. In Spain, Article 6.2 (a) of the Law 16/1989 prohibits the abuse of a dominant position consisting in the imposition of prices or other unfair trading or service conditions. In Spain, the national competition authority has actively pursued excessive prices by dominant firms in recent years. The three-part test used by the Comisión Nacional de los Mercados y de la Competencia (CNMC) was established and validated by the Spanish Supreme Court in the Explosivos case.34 1. First, in order to enforce Article 6.2 (a), the CNMC must establish that the investigated firm has the ability to impose different prices. In other words it must establish that the investigated firm has market power, thanks to the existence of high barriers to entry, a monopolistic or near monopolistic structure of the market and/or a relatively inelastic demand curve. 34 Resolution of 12 February 2008, Expte. 626/, Canarias de Explosivos. and Judgment of the Supreme Court of 29 May 2013.

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2. Second, the CNMC must establish whether the dominant firm is “reaping trading benefits which it would not have reaped if there had been normal and sufficiently effective competition”. Comparative methods (either a comparison with prices on more competitive markets or on the same market across regions or across time) or price-cost comparison can be used. 3. If the two preceding conditions are met, the burden of proof shifts to the investigated firm, in order to demonstrate the existence of an objective justification for the difference in price. The Court has explicitly rejected as a valid objective justification the intention of the dominant firm to maximize its profits. Thus in Spain, the definition of excessive prices covers any price substantially above the competitive level (a much looser test than the ECJ test which considers that to be excessive the price must bear no reasonable relation to the economic value of the product) and does not have to establish the unfairness of the excessive price.35 Also, similarly to the system in Germany for the energy sector, but with a general application in the case of Spain, once the competition authority has established that a firm has market power and charges a supra-competitive price, the burden of proof is shifted to the investigated firm to prove the existence of an objective justification for this high price. This considerably simplifies the task of the CNMC. The Czech Republic offers an interesting contrast to the case of Germany or Spain. Article 11 of the Act on the Protection of Competition prohibits abuse of dominant position and lists a few abusive practices. These include “direct or indirect enforcement of unfair conditions in agreements with other participants in the market, especially enforcement of performance, which is at the time of conclusion of contract conspicuously inadequate to the counter-performance provided”. According to the Czech submission to the OECD Competition Committee roundtable on excessive prices in 2011, the Czech competition law is fully harmonized with the EU competition rules and has to be interpreted in accordance with EU law. Therefore, Article 11 of the Competition Act ought to be interpreted in accordance with Article 102 TFEU and the relevant case law of the Court of Justice. The Czech contribution stated that it very rarely opened investigations on excessive pricing by firms having a dominant position. Its last case of this nature before the 2011 roundtable was a case in 2000. In that year the Office for the Protection of Competition received numerous complaints from consumers about the pricing behaviour of Dattelkabel, a cable TV operator. The complaints were about a brutal and substantial increase in the price of a number of cable TV packages. The Office for the Protection of Competition issued a decision finding Dattelkabel guilty of having engaged in pricing below cost in 1998 and 1999 and having recouped its losses in 2000 through substantial price increases leading to an excessive price.

35 It has been argued that, unlike at the European level, the Spanish test is an “as if” test, inspired by the Ordoliberal concept of competition law, which requires firms to behave as if they did not have market power. See, for example, Antonio Robles, Exploitative prices in European Competition Law, ASCOLA Conference –Tokyo, May 2015.

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One of the reasons for the very small number of cases of excessive pricing accepted by the competition authority of the Czech Republic lies in its approach regarding when its intervention on this ground is justifiable. It considers that intervention against exploitative excessive pricing should be taken only in exceptional circumstances and it will only investigate cases if a number of cumulative structural conditions on the market are met. There must be high and non-transitory barriers to entry, a monopoly situation or a situation of superdominance, market power must not have been acquired through competition on the merits, the market must be such that risky investment and innovation are insignificant, there must not be a sector regulator or a regulated price ceiling and, finally, an efficient structural remedy must be available. Finally as at the EU level, a number of national competition authorities in Europe have been able to end investigations on excessive prices by receiving price commitments from the dominant firms investigated which are often in partly regulated network industries. For example, the London Stock Exchange offered price commitments in 2004 following the OFT inquiry into the fees it charged; Enel, the Italian electricity incumbent, offered commitments in 2010, following an inquiry by the Italian Competition Authority into excessive prices in Sicily; six regional gas suppliers belonging to E.On offered price commitments following an inquiry by the German Federal Cartel Office in 2008; a monopoly gas supplier offered price commitments following an investigation by the Romanian competition authority. Various countries outside the European Union have competition law provisions which are similar to the EU competition law or follow European jurisprudence in interpreting their own domestic law. Turkey is an example of such a country and stated in its contribution to the 2011 OECD debate on excessive practices that “the Act on the Protection of Competition No. 4054 (the Competition Act) sets the basic framework in terms of antitrust rules. The provisions of the Competition Act are generally compatible with Articles 101 and 102 of the Treaty on the Functioning of the EU (TFEU) and Merger Regulation of the EU as part of Turkey’s aim and commitments towards becoming a member of the EU. Moreover, the principles contained in the case-law of the European Commission, General Court (former Court of First Instance) and the European Court of Justice are taken into account as precedent in the decisions of the Competition Board, the decision making body of the Turkish Competition Authority”. Taking into consideration the fact that Article 102(a) of the TFEU explicitly prohibits a dominant firm from directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions, the Competition Board, which is the decision-making body of the Turkish competition authority, considers that Article 6 of its law which prohibits abuse of dominance applies to excessive prices, even though excessive prices are not explicitly mentioned by Article 6. The Turkish competition authority has however been reluctant to sanction dominant firms for excessive pricing and has in general preferred to act against firms charging excessive prices through competition advocacy rather than through competition law enforcement.

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The contribution from Turkey to the Competition Committee 2011 discussion on excessive prices refers to only two cases over an 11-year period from 2000 to 2011. One of those cases is particularly interesting because it shows some of the practical difficulties that competition authorities which enforce competition law against excessive prices face. This case concerns Belko,36 a public company owned by the municipality of Ankara, which has a legal monopoly on the distribution of coal consumed for house-heating in Ankara. In this case, where the competition board adopted the first decision regarding an excessive price violation, the investigation had established that the prices charged by Belko were on average 50–60% higher than the prices on competitive markets. However, the investigation also attempted to make a price-cost comparison and found that the costs of Belko were actually quite high due to losses from irrelevant activities and ineffective management of its operations, particularly with respect to the purchase of coal, with the result that its profit margin was low or even negative. The Competition Board ruled that “. . . while, along with high prices, a large margin between the sale price and the total cost (excessive profit) could be considered a sign of excessive pricing, monopolistic pricing is also possible in situations where the profit margin turns out low or even negative due to establishment of real or fictitious costs in excessively large magnitudes (along with prices set at relatively high levels)”. The Competition Board considered that a firm in a dominant position has special responsibilities and cited prudent and efficient management as important responsibilities. It thus considered that the 50–60% higher price charged by Belko for the coal sales due to increased costs resulting from inefficient management was an abuse of dominance under the Competition Act. The Competition Board used the opportunity given by this case to advocate for a removal of the special rights conferred to Belko arguing that competition could lead to better results on the market and the exclusive rights granted to Belko were effectively removed. The Belko decision of the Turkish competition authority is aligned with the Sacem II decision of the ECJ. Indeed in Sacem II, Sacem argued that the higher collection fees if charged compared to other collecting societies were due to its higher level of operating expenses. The ECJ rejected this argument by stating: 29. That argument cannot be accepted. It is apparent from the documents before the Court that one of the most marked differences between the copyright-management societies in the various Member States lies in the level of operating expenses. Where—as appears to be the case here, according to the record of the proceedings before the national Court—the staff of a management society is much larger than that of its counterparts in other Member States and, moreover, the proportion of receipts taken up by collection, administration and distribution expenses rather than by payments to copyright holders is considerably higher, the possibility cannot be ruled out that it is precisely the lack of competition on the market in question that accounts for the heavy burden of administration and hence the high level of royalties. 30. It must therefore be concluded that a comparison with the situation in other Member States may provide useful indications regarding the possible abuse of a dominant position by

36

1 Belko, dated 6.4.2001 and numbered 01-17/150-39.

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a national copyright-management society. Accordingly, the answer to the question as formulated by the national Courts must be in the affirmative.

In other words if a dominant firm’s costs were higher than those of firms providing the same service elsewhere, prices might be excessive, even if profits were not. This brief review of some of the leading cases of the enforcement of abuse of dominance with respect to excessive pricing in European jurisdictions or in jurisdictions which adopted the European approach to excessive pricing in competition law is incomplete and does not cover jurisdictions such as Chile or South Africa which also have provisions against excessive pricing. However it suggests a number of comments or questions: First, in most of the countries which follow the EU approach to excessive pricing by firms having a dominant position, the level of enforcement is usually quite modest. The reason for this low level of enforcement is that, in general, there is recognition by the competition authorities of these countries that they are not well equipped to assess whether prices are excessive or unfair. The price-cost comparisons or the comparison of the alleged excessive price with the price in comparable competitive markets to be used to establish the existence of excessive pricing is difficult to implement (see, e.g. the Scandline Port of Helsingborg case in Europe or the Belko case of Turkey), and competition authorities should intervene only as a last resort where there is little or no hope that the market will correct itself, in the most extreme cases (see the quote by the German delegation to the OECD Competition Committee referred to above or the screens used by the competition authority of the Czech Republic), and/or if there is no alternative mechanism to bring price in line with costs (see Turkey). Second, both in the EU and in the Netherlands, it seems that a number of investigations of excessive prices have been abandoned some months or years after they have been opened, possibly because of the complexity of these investigations. Given their cost, one may wonder whether these investigations are cost effective for competition authorities or if some form of action (other than an attempt to enforce the excessive pricing violation) could allow the competition authority to reach the same goals at a lower cost. Third, there is controversy among the national competition authorities (NCAs) and the Courts about whether the legal test laid out by the ECJ makes economic sense, is administrable and is consistently used and whether it leads to sufficient legal predictability (see the discussion of the ECJ jurisprudence). Some competition authorities use different tests than the test of the ECJ (see the Napp case in the UK) even when they apply EU law, which raises additional issues of legal predictability. Fourth, there are significantly different opinions about what constitutes an excessive and/or an unfair price: whether it is a price which is such that the profit rate of the company is in excess of its costs plus a competitive profit rate or whether it is a price which is in excess of the economic value of the product or the service (see the discussion of the Attheraces case in the UK) and, if this is the case, whether

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observed prices can ever be excessive is in debate. Finally, if an excessive price is a price which provides a rate of return to the firm above the weighted cost of its capital, what is the threshold beyond which one should consider that the price is excessive? (see, e.g. the discussion of the decisions on excessive airport prices in Italy). Fifth, price-cost comparisons, which are usually a first step in an investigation of excessive prices, may be misleading indicators of excessive prices, particularly in dynamic industries where R&D investment outlays are repaid over a number of years (see the discussion of the Scandline/Port of Helsingborg EU decision). They may also be misleading because monopolist with high prices may have higher costs than they would have if they were under competitive pressure (and therefore low or negative margins) (see the example of the Czech Republic or the Sacem II case of the European Union). Those price-cost comparisons can also be particularly complex (and open to criticism) because of the difficulty of assessing the relevant costs to be taken into consideration and of choosing the relevant measure of those costs (see the discussion of the Scandline vs Port of Helsingborg case). Sixth, the procedural arrangements vary from one country to another and may influence the intensity of enforcement of the provisions against excessive pricing. For example, in some countries, once the competition authority has established that the price-cost margin or the price is larger than some benchmarks, it is up to firms to establish why such a difference is not excessive (see the example of Germany for the fuel sector and the example of Spain). This reversal of the burden of proof can be considered to be problematic, particularly in the face of concerns about the fact that competition authorities’ interventions can sometimes stifle competition rather than promote it (see the Durex case in the UK). A number of these questions will be debated more systematically and thoroughly in the remainder of this contribution. We now turn to the pros and the cons of having competition authorities intervene to enforce the prohibition of excessive prices by dominant firms.

2 Section II: The Pros and the Cons of the Prohibition Against Excessive or Unfair Prices A number of arguments have been proposed in support of the idea that competition authorities should not intervene against high (unfair or excessive or both) prices or in support of the idea that an intervention by competition authorities in this domain was justified. Those arguments are somewhat confusing because they partially contradict one another and are a mixed bag of general statements as to whether competition authorities should ever control high prices and of more limited statements offering views about specific cases where competition authorities should or should not

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intervene. Rather than reviewing all the arguments, we will concentrate on the most relevant ones.

2.1

Self-Correcting Markets

The most frequently invoked argument opposing the intervention of competition authorities against excessive prices relates to the fact that high prices (or high margins) may be important market signals attracting entry and that, therefore, excessive prices or profits are often self-correcting. This argument suggests that as excessive prices or abnormally high profit rates are purely transitory, they do not necessitate government intervention. This argument was referred to, among others, by the US Court of Appeals, Second Circuit in the landmark Berkey Photo case37 in the USA. The Court stated: “(. . .) although a monopolist may be expected to charge a somewhat higher price than would prevail in a competitive market, there is probably no better way for it to guarantee that its dominance will be challenged than by greedily extracting the highest price it can”. Equally, Richard Whish (2003) has alluded to this argument by stating: “If normal market forces have their way, the fact that a monopolist is able to earn large profits should inevitably, in the absence of barriers to entry, attract new entrants to the market. In this case the extraction of monopoly profits will be self-deterring in the long run and can act as an important economic indicator to potential entrants to enter the market. If one accepts this view of the way that markets operate, one should accept with equanimity periods during which a firm earns monopoly profit: the market will in due course correct itself and intervention by the competition authorities will have the effect of undesirably distorting this process”. As a an argument in favour of generalized non-intervention of competition authorities against excessive prices, this argument is not as strong as some of the other arguments and has been criticized by several authors (see, e.g. Ariel Ezrachi and David Gilo (2008) and Michal Gal (2013)). There are at least three weaknesses in this argument which is based on a static rather dynamic view of markets. First, in the best of cases, if barriers to entry are not impossible to overcome and if the potential entrants are confident that they will make high profits if they enter the market where a dominant firm is charging high prices, they will enter the industry and bring down prices. But economic theory tells us very little about the time frame in which this might happen. What we do know is that in the medium or long run, it is likely to happen. But being able to predict that an event that is going to take place in the future will correct the high prices and high margin observed in the short run may or may not be a reason for non-intervention. Whether or not the competition authority should intervene very much depends on when such an event is likely to happen and what discount rate is applicable to future events on the one hand and the

37

Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263,294 (2nd. Cir., 1979).

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social cost of the intervention by the competition authority on the other hand. Drawing a general conclusion that this provides an overall case for non-intervention is clearly unwarranted. Second, where high margins or high prices are implemented because of the existence of high barriers to entry, it is far from obvious that entry will take place, and if there are low barriers to entry, it is fairly unlikely that a firm will have a dominant position and be in a position to charge supra-competitive prices in the first place. Motta and de Streel (2007), in their discussion of why there may be a case for non-intervention, assume that competition authorities do not intervene in sectors with high barriers to entry. They state: “(. . .) competition law applies to sectors where in principle market forces are free to operate. Unlike sectors characterised by legal barriers to entry or where market failures are such that one cannot assume that competition works, competition authorities deal therefore with sectors where one can presume that free entry should be able to erode over time dominant positions”. Such a statement is not confirmed by the facts. As we saw in reviewing enforcement by competition authorities of excessive pricing provision in several jurisdictions, the concern of competition authorities is often with markets such as energy, postal services, collecting societies, cable TV and telecom and with firms to which a legal monopoly has been conferred whether it is for the issuance of certificates of conformity of its product or for the distribution of coal. In all those markets, it cannot be assumed that entrants will easily chip away at the monopolistic power of the incumbent. Third, it is in any case not the pre-entry price or profit which will attract entry but the possibility of enjoying a high post-entry price. However, pre-entry prices might not be good proxies for post-entry prices in concentrated markets. When they are not well protected by technical or legal barriers to entry, dominant firms have numerous ways to develop strategies (such as most favoured nation clauses in their contracts with their customers or predatory pricing) to either protect themselves against aggressive post-entry competition or to build up a reputation for aggressiveness if challenged. This means that high prices today may not necessarily attract entry even when technical or legal barriers to entry are moderate. Finally, the case to which Richard Whish alludes (a monopolist with high prices and low barriers to entry) is clearly an exceptional case. Overall, it is far from obvious that the automatic self-correcting mechanism referred to in this argument for non-intervention against excessive prices is sufficiently general to warrant a pronouncement on what competition authorities should do. However, to the extent that it suggests that competition authorities should refrain from intervening in the specific cases where self-correcting mechanisms are likely to work in the short run, this argument has some validity.

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Harmonization Versus Gap Cases

A second argument against the intervention of competition authorities in excessive pricing cases relates to the fact that there is a big transatlantic divide over this issue and that there is a need to harmonize national practices in competition law enforcement as differences increase the transaction costs of transnational businesses. The argument then goes on to suggest that since US law focuses solely on exclusionary abuses and does not intervene in case of mere exploitative abuses, EU law should then ignore exploitative pricing abuses. Even if all countries had the same law, one of the weaknesses of the harmonization argument is that it does not explain why the alignment of enforcement practices with regard to high prices should be on the benign neglect typical of the USA rather than on the type of enforcement against high prices found in Europe. There are two competing considerations. On the one hand, the prospect of being able to charge high prices is an important reason for which firms try to acquire market power through superior performance and compete on the merits, which clearly benefits consumer welfare in the long run; on the other hand, the charging of prices above the competitive level by firms which have acquired market power, through competition on the merit (or through other means), clearly reduces the consumer surplus in the short run. The net balance between these two effects depends on the speed with which firms with market power are challenged by new competitors. This is an empirical matter. Thus the harmonization argument is in itself incomplete. It makes sense only if one can assume that markets self-correct sufficiently rapidly (a hypothesis which is hardly justified, as we saw previously). Furthermore, all countries do not have the same competition law, and some authors have suggested that differences in the substance of competition laws across countries may explain and justify differences in their practices with respect to excessive pricing. In particular, it has been argued that one of the justifications for the intervention of the EU Commission in cases of excessive prices is the fact that such interventions help solve the “gap cases” or the “second-shot cases” existing in competition laws which prohibit abuses of dominance. The existence of “gap cases” is alleged to come from the fact that the acquisition of dominance through anticompetitive means cannot be covered by laws, like the European competition law which limits interventions against single firms to cases where those firms already have a dominant position whether such a dominant position has been acquired through competition on the merits or through anticompetitive means. Röller, an adept of the “gap case” rationale for the enforcement against excessive dominant position in the EU, states (Röller 2007): “In principle, an abuse case must identify anticompetitive conduct that results in increased market power, relative to the counterfactual. As was mentioned above, it is the road to dominance that is important in order to identify pro- from anticompetitive conduct. If dominance (or for that matter any kind of market power) is obtained through competition on the merits, then this is good for consumers; otherwise, not. By contrast, Article

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82 only applies to firms that are already dominant. In other words, anticompetitive conduct that leads to a dominant position cannot be caught in Europe under exclusionary abuse. This is an enforcement ‘gap’, since it is precisely the way in which dominance is acquired that matters in terms of economic effects. I like to suggest that antitrust enforcement through exploitative abuse can be used to close this important gap. That is, exploitative abuse cases should be based on acquiring a dominant position through anti-competitive exclusionary conduct. In this way, exploitative abuse cases are back to investigating exclusionary conduct, which is in fact the proper way to identify anticompetitive conduct. By focusing on the road to dominance through anticompetitive behavior, exploitative abuse cases are firmly grounded in the way markets work, rather than deciding on what is ‘excessive’ from an ex post point of view. Note that this approach is very much in line with the observation that many exploitative cases exist in sectors with former state owned monopolies. Perhaps this observation has something to do with the fact that these firms did not get their dominant positions based on merit alone, but rather by a public policy decision usually based on a natural monopoly policy. To the extent that the road to dominance matters, these should in fact be considered gap cases, even though dominance is not achieved by anticompetitive exclusionary conduct. Overall, there appear to be three main advantages in defining exploitative abuse as acquiring dominance as a result of an exclusionary abuse: First, it is in line with sound economics, second it avoids the standard debate on what is ‘excessive’ (which, I believe, is impossible to define operationally), and third it closes a gap in Article 82”. The gap theory of enforcement of competition law against excessive pricing in countries which prohibit abuse of dominance but not anticompetitive means to acquire dominance thus suggests that such enforcement is a way to remedy a defect in those competition laws. But in the process, Röller proposes a definition of exploitative abuse which is quite different from that given by the Courts in the United Brands case and quite different from the likely interpretation that Courts could give to excessive pricing provisions. Accepting the Röller “gap” theory to justify interventions against excessive pricing by firms having a dominant position is a very convoluted way to remedy a weakness of competition laws prohibiting abuse of dominance, and it raises numerous questions regarding the consistency of the economic approach with the legal approach taken by the European Courts. Rather than trying to use such an esoteric mean to bridge the gap between EU-inspired laws and US law, it would be much preferable to modify the substance of those laws (by abandoning the concept of dominance and replacing it with the concept of monopolization) to bring them in line with economic reasoning and to harmonize them better with US law. It is usually beyond the powers of a national competition authority to redraft the domestic competition law of its country or to change the interpretation by the Courts of the excessive pricing provision of its domestic law. Thus the formal legal harmonization of European and other competition laws which prohibit abuse of

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dominance, on one side, and the US and US-inspired laws which prohibit monopolization, on the other side, is unlikely to occur soon. The next best then may be for national competition authorities to exercise restraint in their enforcement of those provisions by carefully choosing the cases which are least likely to lead to undesired results rather than adopting an interpretation of the excessive pricing provisions of their law which has little chance of being followed by the Courts. Overall, the validity of the harmonization argument against the enforcement of excessive pricing provisions in competition law rests on whether or not one can make economic sense of the excessive pricing provisions. We will return to this issue later on.

2.3

Protecting Consumer Welfare Versus Distorting Incentives to Compete

A third argument, this time in favour of the intervention of competition authorities against excessive pricing, is that monopoly profits clearly disadvantage consumers by reducing their surplus and that it is incomprehensible that competition authorities which claim to be protecting consumer surplus would not act against monopolistic pricing. One problem with this argument is that it implicitly describes the competitive process in very static terms, whereas, in real life, competition is a dynamic process. Thus, for example, the monopoly profits enjoyed by a dominant firm may be the result of the fact that the firm previously undertook efforts to improve the quality of its product or invested in R&D to make its manufacturing processes more efficient and to lower its costs and may explain why the firm passed those benefits on to its consumers in order to acquire the market dominance that it now enjoys. In such a case, it is not clear that consumers have been disadvantaged by the dominant firm’s strategy. The counterfactual indeed would be that the firm would not invest in improving the quality of its product and/or reduce its cost if it knew that its monopoly profits would be eliminated by antitrust enforcement. Along similar lines, a contrary argument (i.e. an argument against the intervention of competition authorities in excessive pricing cases) is that such interventions may discourage innovation or investment both by the firms having the dominant position and for the potential entrants. This argument was implicitly referred to by Judge Scalia in the Verizon judgment when he stated38: “The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free market system. The opportunity to charge monopoly prices—at least for a short period—is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth”. Motta and de Streel (2007), for example, explain: “Excessive price actions 38

Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP.

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may undermine the investment incentives of new entrants. . . . Excessive pricing actions . . . while in the short run they might be beneficial in that they could reduce prices, in a long run perspective they would be detrimental because they may impede entry that could otherwise take place (the objection is all the more important if one considers that excessive price actions are unlikely to be repeated over time). Furthermore, this may also have the effect of depriving consumers of more variety, to the extent that new entrants would supply substitutable but different products and services with respect to those of the dominant firm”. They add: “Excessive price actions may also undermine the investment incentives of the dominant firms. High prices and profits should be seen in general as the reward for a firm’s efforts, innovations and investments, and firms indeed invest and innovate precisely because they are able to appropriate the benefits from their risky investments. Hence, however beneficial excessive price interventions may be ex post, if a competition authority pursued a policy of resorting to excessive pricing actions, this policy would have important negative effects ex ante, by lowering expected returns, and therefore discouraging firms’ investments in all the economy. This objection is particularly relevant in highly dynamic industries where innovation plays a crucial role”. As Motta and de Streel recognize, their argument suggests that competition authorities should exercise restraint when they consider intervening against high prices. They should balance the benefit of acting against high prices which may in the short run benefit the interests of consumers (assuming that there is a conceptual and practical way of defining excessive prices, a topic which we will examine later on) against the cost of diminishing the incentives of dominant firms and potential entrants in all markets due to their intervention. Michal Gal (2013) argues that “this challenge does not necessarily lead to the abolishment of the prohibition, but rather might limit its scope in cases in which harm to dynamic efficiency is not offset by static efficiency gains”. However, since balancing the benefits in the form of static efficiencies and the costs in the form of disincentives to invest seems to be impossible to do on a case-bycase basis, the argument really suggests that competition authorities should not enforce excessive pricing prohibitions in dynamic industries.

2.4

Regulation Versus Competition

A fourth argument against the intervention of competition authorities against excessive prices is that competition authorities are not equipped to be price regulators. Motta and de Streel, for example, state: “An additional common objection against excessive price action is that it would lead to price regulation, which is difficult to implement. Indeed, intervening in an occasional way on the price set by a dominant firm does not solve the problem forever (on the contrary, to the extent that it may discourage entry, it may even exacerbate it and make it permanent). As a result, either the competition authority or the Court continues to monitor the industry—but in this way it would convert itself into a de facto regulator and would have to

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sacrifice important resources—or would have to resign to see its intervention as ineffective, since market conditions change over time and the dominant firm would adjust its prices to them. Moreover competition authorities—unlike sectoral regulators—have no experience and no role in telling firms which prices they should charge”. This argument is definitely an argument against all interventions of competition authorities against excessive prices. As Motta and de Streel themselves state: “. . . the objection is not always convincing as the finding of an abuse and the choice of remedy should be kept separate. Indeed, there are other ways—and often more easily implemented and efficient ways- to deal with an excessive price abuse”. Indeed solving an excessive price case with a behavioural remedy enjoining the firm to reduce its price amounts to suppressing the symptoms rather than curing the disease. However there is a stronger argument related to the difficulty for a competition agency to exercise the role of a regulator by imposing behavioural remedies in cases of excessive prices. Indeed, just as establishing the proof of excessive price raises considerable conceptual and practical difficulties (as we shall see below), the monitoring of any injunction to limit price to a “non-excessive” level will raise equally complex questions. Indeed, any modification of the costs of the firm or any technological development or any change in the demand for the product or service considered will require the competition authority to consider the impact of such changes on the level of the price considered to be excessive. This means that the monitoring of a price injunction will require the active involvement of the competition authority and will not be easily delegated to a trustee paid by the dominant firm. Thus the complex debate over the appropriate benchmark, the discussion as to the benchmark cost and the interpretation of what is excessive will be a recurring issue absorbing a lot of the competition authority’s resources.

3 Section III: The Cost and the Risks of Errors 3.1

The Cost of Errors

The debate on the pros and cons of having competition law enforcers intervene against high prices of dominant firms would not be so important if the social cost of mistakes by competition authorities or by Courts is limited. Let us focus, first, on the relative costs of type I and type II errors in the case of mistakes by a competition authority. A type I error would lead the competition authority to sanction a price for being excessive or unfair when, in fact, the intervention of the competition authority reduces the static and dynamic efficiency of the market to the detriment of consumers, i.e. when it causes consumer harm in the long run. A type II error would lead the competition authority to fail to recognize that a price was such that a lowering of this price would increase static and dynamic efficiency to the benefit of consumers.

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In the case of interventions against excessive pricing, the cost of a type I error (lowering of a price leading to a reduction of the static and dynamic efficiency of the market) is likely to be higher than a type II error (lack of recognition that the lowering of the price would increase the static and dynamic efficiency of the market). Indeed, if the competition authority erroneously fails to recognize that a price is such that its lowering would increase the static and dynamic efficiency to the benefits of consumers, its erroneous judgement will have an impact on the allocative efficiency (a higher price and profit margin resulting in a lower consumer surplus will be the result) but will not affect the dynamic aspect of competition (it will not discourage potential entrants from trying to enter the industry, and it will not distort the incentives of the dominant firm and the potential entrants to invest). Furthermore it will not distort the incentives of potential entrants and dominant firms in other industries. If, on the other hand, the competition authority erroneously considers that a price is abusively high, its decision will increase the surplus of the consumers of the product, but it will have a negative impact on static efficiency and on the dynamic dimension of competition. As we saw earlier, entrants on the market examined might have less of an incentive to enter since low pre-entry prices will not suggest to them that they will be able to enjoy high-profit margins post-entry and the incentives both of the dominant firm and the potential entrants in the market will be distorted by what they will consider is a cap on the expected profitability of their investments. As Evans and Padilla state: “The cost of a type I error is likely to be large in dynamic industries where firms compete for the market launching new products and services,39 in emerging industries where firms are contemplating whether to start up,40 and in those mature industries where, due to technological change, firms have the opportunity to upgrade their services. The cost of this type of error is bound to be large in industries where trial and error is common, in which the cost of experimentation is high, but the return to success is potentially huge. The music recording industry is an example in which the profits for a few blockbuster albums pay for the vast majority of unprofitable acts. In all those cases, the size of area A is likely to be large, whereas it will be small in mature or declining industries where investment is no longer a factor”. Furthermore, the effect of the decision may affect dynamic effects in other markets as well because of the value of the (wrong) decision as a legal precedent. Because the dynamic efficiencies are more important than static allocative efficiencies for the long-term welfare effect of consumers, the social cost of type I errors (resulting from interventions against excessive prices) is likely to be higher than the social cost of type II errors (resulting from non-intervention).

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For example, according to the authors, the software and pharmaceutical industries. For example, according to the authors, the biotechnology sector.

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The Risks of Errors

Knowing the costs of type I and type II errors then begs the question of whether those errors are likely or not. This will depend among other things on whether it is simple or difficult to define clear rules about “excessive pricing”. As Evans and Padilla state: “. . . the likelihood and cost of the type I and II errors under a rule of reason approach crucially depend on the actual formulation of the price-cost test . . .: i.e., on the value of X that is finally chosen and on the precise definition of the terms ‘price’ and ‘cost’ to be used in practice. . . . economic theory provides no guidance in this respect. Neither does the available case law. The only unambiguous conclusion that emerges from the economic literature and the case law is that distinguishing between competitive and supra-competitive prices is a daunting . . .”. The question of why economic theory does not provide us with a clear definition of what is an excessive price deserves elaboration first, and, afterwards, the question of why there is little possibility for competition authorities to practically use a pricecost measure or a profit rate comparison to assess the existence of an excessive price will be discussed. The first and possibly most important conceptual difficulty in the enforcement of excessive or unfair price provisions in competition law is that the concepts of “excessive price” or “unfair price” which suppose the existence of a threshold beyond which prices should be illegal is alien to economic thinking. For this reason using an economic methodology to solve the problem of excessive prices is at best challenging. In economic analysis the market price, which is the result of a clearing mechanism between supply and demand, is neither good nor bad. A monopolistic price means that competition is lacking and that the market mechanism does not perform as well as it would if there was more competition (i.e. it generates a welfare loss). The monopolistic price plays the same role as the temperature of a patient which reflects his underlying state of health. When the temperature of a patient is high, it is a sign that his organism is affected by a disease. With a high fever comes the fact that the patient is weak and cannot perform as well as he would if his temperature was lower. His body requires treatment. As a result of forces affecting both supply and demand, in economic theory the market price is simply an indicator of the fact that the underlying conditions of the market need to be fixed. If one tries to define an “excessive” price in the legal sense as a price above what the competitive price would be, one is faced with major conceptual and practical difficulties. Indeed, in most real-life cases, there is no unique or easily identifiable “competitive price”. In single face markets characterized by static pure and perfect competition (which assumes a perfect homogeneity of the products or services supplied, a constant marginal and average cost and therefore the ability of any firm to serve the entire demand, a large number of firms and no barriers to entry), the competitive price is equal to the incremental cost of production, and firms earn no “economic rent”, that

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is, no profit over and beyond the opportunity cost of the factors they use. A similar result is found in Bertrand oligopolies (oligopolies in which competitors compete on prices) if the oligopolists have constant marginal and average costs. However, these results crucially depend on the assumptions, and these assumptions practically never reflect the real conditions of markets. In the classical real economy, on single face markets, the number of firms is limited, products are differentiated, barriers to entry exist due to the need for fixed investment to enter production, marginal costs may be increasing if firms have capacity constraints or may be decreasing in industries which have large fixed costs and firms may compete in quantity rather than compete in prices. In these circumstances the equilibrium price of these (imperfectly) competitive markets will not be equal to the marginal (or incremental) cost. It will depend, among other things, on the number of competitors and the shape of the demand curve (Allen and Hellwig 1986; Dufwenberga and Gneezyb 2000). Moving from the static to the dynamic vision of real markets, Padilla and Evans observe (2004): “In dynamic industries, where typically fixed costs are high and incremental costs are low, the ‘competitive’ price is not given by marginal costs. Rather, it is efficient to charge prices according to customers’ willingness to pay so as to cover fixed costs in the least output restricting way. In short in these industries it is impossible to define ‘competitive’ prices using only information on costs”. Finally in multisided markets, the competitive level of the price on each side may bear no relationship to the cost of delivering the service to the consumers on that side. Indeed decisions on the price on one side are based not only on the cost of delivering services on this side of the market but also on the price elasticity of demand on this side of the market, the interaction with the demands of consumers on the other sides of the market and the cost of servicing the consumers on these other sides. Different combinations of prices may be optimal. Altogether, except in the wholly unrealistic case of pure and perfect static competition in the long run, the competitive price cannot de defined without making assumptions about the structure of the market, the type of interaction between the competitors or the shape of the demand curve. As a result, depending on what these assumptions are, different level of prices may be considered to be competitive prices for a given market. Thus, what is an excessive price will depend on the hypothesis retained to define the competitive price rather than on an objective definition. Furthermore, even if the hypothesis of pure and perfect competition applies to a real-life market, it does not follow that the observation on this market of a price higher than the marginal cost necessarily implies that the price is excessive. Indeed, the equality of the competitive price and the marginal cost is a long-run relationship once the firms have adjusted their decisions to the market environment and/or once the mechanism of entry and exit has run its course. But in a real-life market, firms are constantly adjusting to changes in costs and demand conditions, and the long-run price may never be observed. A price higher than the marginal cost may mean that there is a competition failure or may mean that firms are in the process of adjusting

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towards the long-run competitive equilibrium. Thus no definitive conclusion can be drawn on whether the price is excessive or not. We then have to turn to the Courts to understand what they mean by an excessive or an unfair price. The ECJ early on recognized the need to give a definition of what would be an excessive price in its General Motors case. It stated that: “12 . . . an abuse might lie, inter alia, in the imposition of a price which is excessive in relation to the economic value of the service provided”. The ambiguity in the formulation comes from the fact that we do not know whether the Court had in mind the economic value of the product from the point of view of the consumers or the economic value of the product to the producer or the economic value of the product from the point of view of society. If what the Court had in mind was the economic value of the product to consumers, its attempt at defining what an abusive price is fails from the point of view of economic analysis. Indeed, one of the tenets of market theory is that consumers maximize their own welfare, under their revenue constraint, in their consumption activities by buying units of goods or services only if the satisfaction they derive from these units is greater than the satisfaction they could derive from spending the price of these units on any other good or service. In other words, they will only buy a unit of a good or a service if this transaction increases their satisfaction. Even if a monopolist reduces its output and increases its price, for the limited quantity of the monopolized good produced, the price of each unit will be equal or inferior to the value assigned to these units by the consumers. This means that even in the case of a monopolistic price, the value to the consumers (who buy the goods or the service) of the units consumed is greater or equal to their price. Thus, if the Court refers to the economic value to consumers of the units of the good or service they buy, its definition cannot help us establish what an excessive price is. Likewise, if the Court had in mind the value of the product or service for consumers who do not buy it (or who restrict their consumption of the good or service because of its high price), its definition of what an excessive price fails. Indeed, by definition, if a consumer abstains from buying a unit of a good or a service, it means that the value to him of this unit is below its price. Otherwise the consumer would buy the unit to maximize his welfare. In other words, from an economic point of view, whatever the price charged for the units bought by the consumers, the price is below the value of these units for the consumers who bought them and, for the units not bought by consumers, the price is above the value to consumers of these units. From the economic standpoint, a reference to the value to consumers of the good or the service cannot help us define what is an excessive price. If what the Court had in mind was the value of the service to the producer, the definition it gave also fails to establish what an excessive price is. Indeed, the value to a producer of a unit produced is the maximum amount for which it can be sold. Thus if a monopolist can sell the (limited) number of units it produces at a monopolistic price, this price represents the value of each unit for the producer.

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If what the Court had in mind was that the value of the service was its opportunity cost (i.e. its incremental cost), the Court was implicitly referring to the static competition model discussed previously. But for the reasons mentioned above, the incremental cost of a good or a service may not represent the competitive price of this product on real markets. In its United Brands judgment, however, the ECJ went further than in the General Motors judgment. Even though it still failed to define the concept of “excessive” price, it gave an indication of how to go about establishing it. The Court stated: 250. “In this case charging a price which is excessive because it has no reasonable relation to the economic value of the product would be an abuse”, but it added: 251. This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin; however the Commission has not done this since it has not analysed UBC’s costs structure. 252. The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products. 253. Other ways may be devised—and economic theorists have not failed to think up several—of selecting the rules for determining whether the price of a product is unfair. 254. While appreciating the considerable and at times very great difficulties in working out production costs which may sometimes include a discretionary apportionment of indirect costs and general expenditure and which may vary significantly according to the size of the undertaking, its object, the complex nature of its set up, its territorial area of operations, whether it manufactures one or several products, the number of its subsidiaries and their relationship with each other, the production costs of the banana do not seem to present any insuperable problems.

The Court thus expressed a preference for an analysis of price-cost margin if at all possible because it considered that taking into account the price-cost margin was an “objective” way to define an excessive price. It also opened the way for alternative methodologies suggested by economists if price-cost margins could not be computed. Besides the fact that they have no conceptual basis, the methods suggested by the ECJ and used by competition authorities to assess whether prices are “excessive” are also extremely complex to implement. The most common method for assessing the existence of excessive prices used in the EU context is price-cost comparison. A large difference between the price charged by the dominant firm and its costs is presumed to be an indication of supra-competitive profits. The prevalence of this method is due to the pronouncement of the European Court of Justice in the United Brands case according to which: “252. The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products”. Indeed, in this case the ECJ also criticized the Commission for not having undertaken such a method while it was feasible. The Court stated: “UBC claimed it had made losses

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in Ireland during the period under analysis. It also claimed that it had failed to earn any profits on the relevant market in the period from 1973 to 1978 (save in 1975). The Court determined, among other things, that the fair price could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin; however, the Commission has not done this since it has not analyzed UBC’s costs structure”. Implementing price-cost comparisons is fraught with practical difficulties related to the type of costs that should be considered. As the OECD background document prepared for the 2011 discussion of the Competition Committee on excessive prices observes “the application of price-cost margins may be very difficult in practice. Complications are unavoidable when considering pricing strategies designed to maximize the sales of a group of related goods and services rather than a single product or when the product is manufactured by multiple company divisions, possibly across multiple countries, over several years and possibly also relying on IPR based on considerable past R&D efforts related to a different product. The reason for the difficulty lies in the fact that the profit maximizing pricing decisions of such firms involve setting prices such that the overall cost of production including all common or joint costs are covered. This implies different price-cost margins for products facing demands of different elasticities. As a result, it has been suggested that the pricing policy of a multiproduct firm should be analyzed in its entirety”. For example, in the case of a firm producing two products and facing different demand elasticities for these two products, an optimal pricing strategy may require that the price of product x be used to cover costs associated with product y. The price of product y, as it is cross-subsidized by x, may not contribute to common or joint cost at all, and the price of product x, covering all joint and common cost, could be found excessive based on a “traditional” cost analysis. Another difficulty is that of knowing which of the firm’s costs the competition authority should consider. For example, is it the cost of the dominant firm alleged to practice excessive pricing or the cost of an efficient firm on the same market? The question deserves attention since, as we saw in the Turkish case regarding Belko, the costs of the dominant firm may be those of an inefficient firm precisely because it is not challenged by competition. If, therefore, the answer is that it must be the cost of an efficient firm, the question will be to know on which data the competition authority is going to base its analysis to find the cost of an efficient firm in markets characterized by the existence of a dominant firm which may not be efficient itself even though it is much larger and possibly much more diversified than smaller competitors. The fact that the incremental cost of an efficient firm is in any case difficult to assess explains why a number of competition authorities have also used other methods to assess excessive prices. A second method used by competition authorities to assess excessive prices is the “profitability analysis”. Competition authorities compare the weighted cost of capital of the dominant firm (considered to approximate the competitive return on capital)

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and its return on capital employed to assess whether its returns are excessive. This method is fairly standard in the regulation of public utilities, but the OECD background paper prepared for the 2011 Competition Committee discussion on excessive pricing points to an important difference between the use of this method to regulate utilities and its use to assess excessive prices in markets open to competition. It states: “While this so-called rate-of-return regulation can also be employed in the context of excessive prices, there is an important difference between investments made by state utilities or utilities in protected markets and investments made in a competitive market environment facing substantial ex ante risk of failure. While ex ante risks can probably be ignored in a utility setting, where monopoly positions may even have been legally granted, any existing ex ante risk of failing has to be rewarded ex post in a competitive market environment”. More generally this OECD background paper identifies at least four reasons for which profitability analysis is not straightforward to assess excessive returns in the context of competition law (Maier-Rigaud 2011): (1) accounting profits are often sensitive to different approaches to depreciation; (2) cost and revenue allocation for multiproduct companies operating multiple lines of business is particularly difficult; (3) company accounts of international companies depend on transfer price arrangements; and (4) risk factors are highly dependent on assessments of investors that can fluctuate substantially. Along the same lines, Evans and Padilla state: “Even if one could devise meaningful accounting rules for approximating the return on capital and the weighted average cost of capital, deciding among the various available options would always be arbitrary. . . . Accounting procedures do not provide for capitalization of R&D and advertising, do not address inflation, and do not properly adjust rates of return for risk. Thus accounting profits do not reflect economic profits except under the most unrealistic assumptions. The relationship between accounting and economic rates of return hinges on the time shape of net revenues, something that varies across industries, across firms within an industry, and even across time for a given firm. Nor can the divergence between the two rates be assumed away as small. As Fisher and McGowan illustrate with their calculations, ‘there is no way in which one can look at accounting rates of return and infer anything about relative economic profitability or, a fortiori, about the presence or absence of monopoly profits’. These problems become particularly severe in industries where firms invest and innovate regularly. In those industries a few companies succeed but the winners typically obtain enormous profits. Those profits would appear excessive ex post, when the innovations are commercialized. However, from an ex-ante perspective and once the cost of capital is adequately adjusted for risk, competitors may earn normal profits: the huge profits earned by the winner(s) may compensate for the huge losses made by all those who fail”. Recognizing the limitations of this method, the OFT Draft Guidelines on the Assessment of Conduct stated “[a] profitability assessment [of excessive pricing] can require an element of judgment about the relevant rates of return, the valuation of assets, the appropriate cost of capital, and the appropriate cost and revenue allocation methods”.

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The use of “profitability analysis” by competition authorities for assessing excessive prices is thus just as controversial as the price-cost comparison and equally likely to lead to intense disagreements between the firm investigated and the competition authority or the Court. Price comparisons are a third method employed by competition authorities to assess the existence of excessive prices. Three types of comparisons can be made: comparisons across geographic markets, comparisons of the price charged by the dominant firm across time or comparisons of prices within the same market across competitors. In 2006 the OECD discussed geographic comparisons in the context of market power (OECD 2006), stating: “Using excessive prices as indicator of market power suffers from some of the same problems as profitability measurements. It will typically be difficult to determine a benchmark competitive price level against which the allegedly competitive prices could be measured. One commentator has noted, however, that in some cases it might be possible to find a reasonable benchmark by way of cross-sectional comparison, i.e., when the same product is sold in separate markets and one of the markets appears to be structurally competitive while the other is not. In this situation it might be possible to compare a competitive price with the price charged by a firm in a market where market characteristics suggest that a firm has substantial market power. Such cross-sectional comparison might produce useful evidence of market power where relevant markets tend to be local, such as, for example, retail markets. Simply comparing prices that two firms charge, or that the same firm charges in separate markets, however, will not produce reliable evidence of substantial market power. It will not always be obvious whether higher prices in one market can be attributed to the exercise of market power by a firm, or whether they might be caused by other factors as well such as higher costs”. It is precisely a concern of that type which led the European Court of Justice to overturn the EC decision in the United Brands case. The Court expressed doubts about the relevance of the price practiced in Ireland as a proper benchmark to assess whether United Brands had charged excessive prices in Denmark, the Netherlands, Belgium, Luxembourg and Germany where United Brands charged prices which were twice as high as in Ireland. United Brands had indeed argued that it was losing money in Ireland. The Court stated: 262. The applicant also states that the prices charged on the relevant market did not allow it to make any profits during the last five years, except in 1975. 263. These assertions by the applicant are not supported by any accounting documents which prove the consolidated accounts of the UBC group or even by the consolidated accounts for the relevant market. 264. However unreliable the particulars supplied by UBC may be (and in particular the document mentioned previously which works out the ‘losses’ on the Irish market in 1974 without any supporting evidence), the fact remains that it is for the Commission to prove that the applicant charged unfair prices. 265. UBC’s retractation, which the Commission has not effectively refuted, establishes beyond doubt that the basis for the calculation adopted by the latter to prove that UBC’s prices are excessive is open to criticism and on this particular point there is doubt which must

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F. Jenny benefit the applicant, especially as for nearly 20 years banana prices, in real terms, have not risen on the relevant market. 266. Although it is also true that the price of Chiquita bananas and those of its principal competitors is different, that difference is about 7%, a percentage which has not been challenged and which cannot automatically be regarded as excessive and consequently unfair. 267. In these circumstances it appears that the Commission has not adduced adequate legal proof of the facts and evaluations which formed the foundation of its finding that UBC had infringed Article 86 of the Treaty by directly and indirectly imposing unfair selling prices for bananas.

Similarly Advocate General Nils Wahl’s recent opinion on the Latvian collecting society case stated41: 39. . . . comparing prices across different geographic markets, competitors and/or time periods also presents risks. Markets are rarely so homogenous that a meaningful comparison can be made immediately and automatically. A number of ‘adjustments’ to the data which emerges from the market(s) used as a point of comparison may be necessary before that data can be used to determine the benchmark price. 40. To start with, so far as concerns geographic comparisons, elements such as—to name but a few—domestic taxes, the particular characteristics of the national labour market and local consumers’ preferences may significantly affect the final prices of the relevant product or service. . . . . 42. Because of those limitations, antitrust authorities and economists generally agree that the exercise consisting of determining the benchmark price in a case of possible excessive pricing carries a high risk of producing both type I errors (or false positives: a price is mistakenly considered to be above the competitive price) and type II errors (or false negatives: a price is mistakenly considered not to be above the competitive price). The theoretical and practical difficulties encountered to define what is an excessive price and to assess whether a price is unfair have led Advocate General Nils Wahl to recommend that a multiplicity of tests be used to assess whether or not a price is excessive. In his opinion he states: 43. . . . in the absence of an ubiquitous test and given the limitations inherent in all existing methods, it is in my view crucial that in order to avoid (or, more correctly, to minimise) the risk of errors, competition authorities should strive to examine a case by combining several methods among those which are accepted by standard economic thinking and which appear suitable and available in the specific situation. It seems to me that those which can be found in the Court’s case-law (and that have been illustrated in points 18 and 19 above) may serve that purpose. 44. The choice to combine several methods is, in fact, the approach that a number of antitrust authorities have followed worldwide: for example, the UK Office of Fair Trading (OFT) has done so in the Napp case.42 It is also consistent with suggestions made in international discussion fora of those authorities43 as well as in contemporary economic literature (Röller 2008).

41

Opinion of Advocate General Wahl, delivered on 6 April 2017, Case C 177/16 Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra—Latvijas Autoru apvienība’ v Konkurences padome. 42 On appeal, that approach was also endorsed by the UK Competition Appeal Tribunal; see the judgment of 15 January 2002 in Napp Pharmaceutical Holdings Limited and Subsidiaries v Director General of Fair Trading [2002] CAT 1, paragraphs 56 to 69 and 390 to 405. 43 See the OECD Report, p. 12.

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45. It is true that such an approach has been criticised on the ground that the combined application of several imprecise methodologies, even where producing mutually consistent results, may not lead to a more reliable conclusion (Evans and Padilla 2005). Admittedly, the weaknesses of one method are not necessarily remedied by applying another equally weak method. Yet, if the methods are applied independently of each other, a given limitation inherent to one of them would not affect the results obtained through the use of other methods. Accordingly, provided that the methodologies used are, in themselves, not flawed, and that they are all applied with rigour and objectivity, the convergence of results may be taken as an indicator of the possible benchmark price in a given case.

Finally, in the 14 September 2017 judgment of the ECJ in the Latvian collection society,44 the ECJ followed the opinion of the Advocate General and gave useful guidance on the conditions under which comparisons of price across geographical markets could be useful to assess whether a price on one of those markets was excessive. The Court stated: 35. The abuse of a dominant position within the meaning of that article might lie in the imposition of a price which is excessive in relation to the economic value of the service provided (see, to that effect, judgment of 11 December 2008, Kanal 5 and TV 4, C 52/07, EU:C:2008:703, paragraph 28 and the case-law cited). 36. In that regard, the questions to be determined are whether the difference between the cost actually incurred and the price actually charged is excessive, and, if the answer to that question is in the affirmative, whether a price has been imposed which is either unfair in itself or unfair when compared with competing products (judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22, paragraph 252). 37. Nonetheless, as observed in essence by the Advocate General in point 36 of his Opinion, and as the Court has also recognised (see, to that effect, judgment of 14 February 1978, United Brands and United Brands Continentaal v Commission, 27/76, EU:C:1978:22, paragraph 253), there are other methods by which it can be determined whether a price may be excessive. 38. Thus, according to the case-law of the Court, a method based on a comparison of prices applied in the Member State concerned with those applied in other Member States must be considered valid. It is apparent from that case-law that, when an undertaking holding a dominant position imposes scales of fees for its services which are appreciably higher than those charged in other Member States, and where a comparison of the fee levels has been made on a consistent basis, that difference must be regarded as indicative of an abuse of a dominant position (judgments of 13 July 1989, Tournier, 395/87, EU:C:1989:319, paragraph 38, and of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU: C:1989:326, paragraph 25). ... 40. . . . it should first be noted that a comparison cannot be considered to be insufficiently representative merely because it takes a limited number of Member States into account. 41. On the contrary, such a comparison may prove relevant, on condition, as observed by the Advocate General in point 61 of his Opinion, that the reference Member States are selected in accordance with objective, appropriate and verifiable criteria. Therefore, there can be no minimum number of markets to compare and the choice of appropriate analogue markets depends on the circumstances specific to each case.

44 Judgment of the Court (Second Chamber) 14 September 2017, Case C 177/16, Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība v Konkurences padome.

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F. Jenny 42. Those criteria may include, inter alia, consumption habits and other economic and sociocultural factors, such as gross domestic product per capita and cultural and historical heritage. It will be for the referring court to assess the relevance of the criteria applied in the case in the main proceedings, while taking into account all the circumstances of the case. ... 44. Next, it should be borne in mind that a comparison between the prices applied in the Member State concerned and those applied in other Member States must be made on a consistent basis (judgments of 13 July 1989, Tournier, 395/87, EU:C:1989:319, paragraph 38, and of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU:C:1989:326, paragraph 25). 45. In the present case, it is for the referring court to verify whether, in the reference Member States selected, the method of calculating rates, based on the surface area of the shop or service centre concerned, is analogous to the method of calculation applicable in Latvia. If this were the case, it would be permissible for that court to conclude that the basis for the comparison was consistent, on condition, however, that the PPP index had been taken into account in the comparison with the rates charged in Member States in which the economic conditions differ from those in Latvia. 46. In that last regard, it should be noted, as pointed out by the Advocate General in point 85 of his Opinion, that there are, as a general rule, significant differences in price levels between Member States for identical services, those differences being closely linked with the differences in citizens’ purchasing power, as expressed by the PPP index. The ability of shop or service center operators to pay for the services of the copyright management organisation is influenced by living standards and purchasing power. Thus the comparison, for an identical service, of the rates in force in several Member States in which living standards differ necessarily implies that the PPP index must be taken into account.

But in this judgment, the ECJ again failed to give precise guidance on the threshold beyond which a difference in prices between geographic markets (in this particular case a difference in the rates charged by copyright organizations) could be considered to reveal an excessive price on one of the markets. It clarified however that the difference in prices must be “persistent”. It stated: 55. . . . There is in fact no minimum threshold above which a rate must be regarded as ‘appreciably higher’, given that the circumstances specific to each case are decisive in that regard. Thus, a difference between rates may be qualified as ‘appreciable’ if it is both significant and persistent on the facts, with respect, in particular, to the market in question, this being a matter for the referring court to verify. 56. It should be emphasized in this regard that, as observed by the Advocate General in point 107 of his Opinion, the difference must be significant for the rates concerned to be regarded as ‘abusive’. Furthermore, that difference must persist for a certain length of time and must not be temporary or episodic.

The question of the threshold beyond which a price higher than its benchmark can be considered to be unfair was extensively discussed in the conclusions of Advocate General Wahl in the Latvian collecting society case.45 Indeed in its request for a preliminary ruling, the Latvian Supreme Court had raised the following question:

45

Opinion of Advocate General Wahl, delivered on 6 April 2017, Case C 177/16 Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra—Latvijas Autoru apvienība’ v Konkurences padome.

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“When must it be considered that the difference in the rates examined in connection with the concept of unfair prices used in [point] (a) of [the second paragraph] of Article 102 [TFEU] is appreciable, with the result that it is incumbent upon the economic operator enjoying a dominant position to demonstrate that its rates are fair?” In conclusion Advocate General Wahl stated: 101. At the outset, let us start by recalling the economic rationale of the unfair pricing abuse: when a dominant undertaking applies prices above competitive levels, there is an inefficient allocation of resources and consumer welfare is reduced (part of the welfare is transferred to the dominant company, whereas part is simply lost). Accordingly, from a theoretical point of view, any deviation from the competitive price in a regulated market might justify an intervention of the competition authorities. Indeed, any difference between the benchmark price and the actual price implies a certain loss in consumer welfare that would not have been there had the market been competitive. 102. However, such an approach would, for a competition authority, neither be realistic nor advisable. 103. First, as explained in points 36 to 42 above, the calculation of a benchmark price is a rather complex and uncertain exercise. Were a competition authority to intervene in respect of any difference—however small—between those two prices, the risk of having false positives would simply be too high. That is not only a problem because a large fine may be imposed on the undertaking responsible, but also because neutral—or possibly pro-competitive—conduct might be prohibited. In that regard, it has been correctly argued that type I errors in competition decisions concerning unilateral conduct involve a much larger cost for the society than type II errors: ‘the economic system corrects monopolies more readily than it corrects judicial errors . . . A practice once condemned is likely to stay condemned, no matter its benefits. A monopolistic practice wrongly excused will eventually yield to competition though, as the monopolist’s higher prices attract rivalry.’ (46) 104. Second, because of those difficulties and uncertainties, it must also be acknowledged that it may often be difficult for a dominant undertaking to estimate in advance, with a sufficient degree of likelihood, where the line between a legitimate competitive price and a prohibited excessive price may be drawn. Thus, for reasons of legal certainty, that threshold cannot be set too close to the benchmark price. 105. Third, a strict approach would require competition authorities essentially to become price regulators which ought continuously to monitor and intervene in (potentially all) regulated markets. Clearly, unlike sectoral authorities, competition authorities have neither the resources nor the expertise to do that. (47) Moreover, the loss of consumer welfare may at times be minor and not justify a complex, time-consuming and costly intervention by the public authorities. Indeed, how consumers react to a price increase differs widely from market to market, and not even a monopolist can set prices independently of its customers. Thus, the degree of damage made to consumers’ welfare by high prices may vary. 106. That is why—in line with the approach adopted by the relevant authorities and courts both at the EU level and at the Member States level, and as suggested in economic writings—I take the view that a price can be qualified as excessive under Article 102 TFEU only if two conditions are fulfilled: it ought to be both significantly and persistently above the benchmark price. 107. As regards the first aspect, I would emphasise that not any price difference should be regarded as relevant under Article 102 TFEU but only important deviations. That approach has been expressly endorsed by the Court: for example, in Tournier and Lucazeau, the Court referred to scales of fees ‘appreciably higher’ than those to which they are compared. That viewpoint is also widely supported in economic writings. 108. As concerns the second aspect, the fact that the price of a given product or service is sporadically above the benchmark price is, to my mind, of little relevance. The existence of

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F. Jenny periods of high prices alongside periods of low prices is, in economic writings, considered ‘consistent with a well-oiled competitive market’. Thus, a price which varies continuously and is only from time to time above competitive levels is, in my view, unlikely to raise serious competition concerns. Only when a price remains (or is recurrently) above the benchmark price for a substantial period of time may that price be abusive under Article 102 TFEU. Support for that approach can be found in General Motors. 109. All the above raises the question: how significant and how persistent must that difference be to justify an intervention under Article 102 TFEU? 110. That is by no means an easy question to answer. Existing case-law of the Court does not give very precise guidance on this issue. Nor can clear patterns be found in the practice of national authorities or in economic literature. 111. That is not at all surprising. Indeed, as the German Government and the Commission argue, it is impossible to set, a priori and in abstracto, precise thresholds which could be applicable to all circumstances. A given difference in price could be more or less significant, under Article 102 TFEU, depending on the product or service in question and the characteristics of the market. 112. On that point, I would only add the following two considerations. On the one hand, an authority should intervene under Article 102 TFEU only when it feels sure that, regardless of the limitations and uncertainties surrounding the calculation of the benchmark price, the difference between that price and the actual price is of such a magnitude that almost no doubt remains as to the latter’s abusive nature. On the other hand, the more significant the difference between the benchmark price and the actual price, and the longer the period in which that high price is applied, the easier it should be for an authority to discharge its burden of proof. (53). 113. The answer to the fifth question should thus be as follows: only prices which are significantly and persistently above the benchmark price may be considered to fall foul of Article 102 TFEU.

One should note that the ECJ in its judgment on the Latvian Collecting Society46 largely endorsed the opinion of the Advocate General and stated: 55 . . . There is in fact no minimum threshold above which a rate must be regarded as ‘appreciably higher’, given that the circumstances specific to each case are decisive in that regard. Thus, a difference between rates may be qualified as ‘appreciable’ if it is both significant and persistent on the facts, with respect, in particular, to the market in question, this being a matter for the referring court to verify. 56 It should be emphasised in this regard that, as observed by the Advocate General in point 107 of his Opinion, the difference must be significant for the rates concerned to be regarded as ‘abusive’. Furthermore, that difference must persist for a certain length of time and must not be temporary or episodic. 57 Next, it should be noted that these factors are merely indicative of abuse of a dominant position. It may be possible for the copyright management organisation to justify the difference . . . . ... 61 It follows that the answer to the fifth and sixth questions is that the difference between the rates compared must be regarded as appreciable if that difference is significant and persistent. Such a difference is indicative of abuse of a dominant position and it is for the copyright management organisation holding a dominant position to show that its prices are fair by reference to objective factors that have an impact on management expenses or the remuneration of rightholders.

46 Judgment of the Court (Second Chamber) 14 September 2017, Case C 177/16, Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība v Konkurences padome.

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It results from the previous analysis that the first two methods used by competition authorities to establish if a price is excessive (price-cost comparisons and profitability analysis) are both problematic from a conceptual standpoint and that all three techniques raise extremely complex problems of implementation. This explains partly the fact that a number of economists have expressed great reservations about the enforcement of excessive pricing provisions in competition laws. Thus, for example, Evans and Padilla (2004) argue: “Several firms have been found to abuse their dominant positions by charging excessive prices in cases brought by the European Commission and the competition authorities of several Member States. Those cases show that the assessment of excessive pricing is subject to substantial conceptual and practical difficulties, and that any policy that seeks to detect and prohibit excessive prices is likely to yield incorrect predictions in numerous instances”. Röller (2007) states that it is impossible to define operationally that a price is excessive compared to the competitive price, and the OECD background note written by Frank Maier Rigaud states that all the methods to assess excessive prices are fraught with difficulties. Because the methodologies available to assess excessive prices do not have a strong conceptual basis and because they are so complex to implement the risk of type I errors by competition authorities when assessing whether a price is excessive are quite important and, as we saw earlier, the cost of such errors can be very significant. Furthermore because these methods are very complex to implement, the cost to the competition authorities of taking up excessive price cases will itself be very high both in terms of investigatory resources and in terms of confrontation with the legal advisers of the party investigated. Indeed, because of the uncertainties regarding their methodological basis and because of the fact that the implementation of these methodologies requires many subjective judgments, each one of the assertions of the competition authorities will be seen as challengeable. Finally the skills which are necessary to implement those methodologies are typically not those found in the staff of competition authorities. Whereas most of the activities of competition authorities require an expertise with respect to market mechanisms or the construction or the testing of predictive models (in the case of mergers), excessive abuse cases also require expertise in accounting, finance and the technology of the industry considered. Those skills are more easily found in specialized regulatory agencies which set up ex ante regulation in the markets they oversee and monitor the behaviour of industry participants on a permanent basis. One counterargument which has been voiced by proponents of an active policy of fighting excessive prices by dominant firms is that some of the complexities referred to earlier are similar to those encountered when competition authorities deal with exclusionary practices such as, for example, predatory pricing. In such cases, the competition authority has to decide whether a price is too low compared to its longrun average incremental costs. Thus these critics argue that there is nothing different from excessive price cases and the concerns about the ability of competition authorities to implement price-cost comparisons are exaggerated.

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Cases of errors in the implementation of competition law to predatory pricing cases are not unknown. An example would be a recent decision by the French competition authority finding that the French public railway company (SNCF), the incumbent, had abused its dominant position by charging prices below its long-run incremental cost on the market for freight transportation by whole trains, while the decision explains that the new entrants have costs which are about 30% lower than the incumbent because by law the incumbent is forced to provide advantages to its (public sector) employees that the private competitors do not have to offer to their employees (in the private sector).47 However, one of the many differences between excessive price cases and predatory pricing cases is that in predatory pricing cases, a misguided finding of violation (a type I error) will not have the same consequences as a misguided finding of an excessive price will. As we saw earlier, a type I error in an excessive price case can discourage investment and R&D expenditures both by the dominant firm and by potential entrants and reduce dynamic competition. A misguided finding by a competition authority that the price of a dominant firm is predatory will, if anything, improve the investment prospects of potential entrants (in the industry and because of the value of the decision as precedent in other markets as well) and lead to more dynamic competition on their part rather than less competition. So the social cost of errors in the case of predatory cases is lower than the social cost of errors in excessive pricing cases. In the above-mentioned French case, the mistaken decision has, if anything, increased the incentives of the entrants to invest in this activity as their expected profit tended to be greater after the decision than before it. The fact that the social cost of type I errors is significantly more important in excessive price cases than in other cases (e.g. predation cases) should lead us to be much more cautious about the excessive price cases. The complementary concept of “fairness” is again a concept alien to economic analysis. It is a legal construct which has been analysed in some detail by Patrick Hubert and Marie Laure Combet (2011). The authors consider that this concept encompasses “different balancing tests between the legitimate interests at stake” such as the consideration of proportionality, reasonableness and indispensability. They conclude: “balancing tests are, by definition, relatively subjective and thus rather unclear from a practitioner’s viewpoint”. For example, in the Kanal 5/TV IV AB, judgment,48 the court answered a set of prejudicial questions sent by a Swedish referring court which had a case opposing STIM, an association of composers and music publishers which enjoys a de facto monopoly in Sweden for making available copyright-protected music for television broadcasting and two broadcasters Kanal 5 and TV IV. One question put to the ECJ was, first, whether the fact that a copyright management organization, which enjoys

Autorité de la concurrence, Décision n 12-D-25 du 18 décembre 2012 relative à des pratiques mises en œuvre dans le secteur du transport ferroviaire de marchandises. 48 Case C‑52/07. 47

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a de facto monopoly in a member state on the market for making music protected by copyright available for television broadcasts, applies with respect to the remuneration paid for that service, using a remuneration model according to which the amount of royalties is calculated on the basis of the revenue of companies broadcasting those works and the amount of music broadcast, constitutes an abuse of a dominant position prohibited by Article 82. The ECJ, following the precedent of United Brands, assessed whether the royalties were reasonable in relation to the economic value of the service provided by STIM. In doing so, it struck a balance between the interests of composers of music protected by copyright and those of the television broadcasting companies, whereas economists, if they had to consider both the consumer surplus and the producer surplus, would have chosen a total welfare criterion. Thus the concept of “unfair” price also lacks a conceptual basis in economics. Altogether, not only do the concepts of “excessive” or “unfair” price lack a sound economic basis, but their use to sanction pricing practices of dominant firms may cause serious economic harm as we saw in the analysis of the risks associated with wrongful decisions in this area.

4 Section IV: The Use of Screens and Prioritization Criteria by Competition Authorities A number of competition economists have proposed screens designed to limit the use of excessive price provisions in competition laws so as to limit the risk of type I errors by competition authorities. Although they differ somewhat, they have lots of elements in common as one can see from the following table: Conditions for intervention of CA

Motta/de Streel

Evans/Padilla

Fletcher/Jardine

Roller

Paulis

High barriers to entry

High and non-transitory barriers to entry leading to a monopoly or near monopoly (superdominance)

Insurmountable legal barriers to entry

Interventions only if there are significant entry barriers The market is unlikely to self-correct

Presence of very high and longlasting barriers to entry and expansion

Near monopoly which should not be the result of past investment or innovations but be due to past

Near monopoly being due to current or past exclusive or special rights; or the superdominance should be caused

The firm enjoys a (near) monopoly position in the market, which is not the result of past

There should be no intervention against high prices if one expects such prices to stimulate successful new entry within a reasonable period No intervention under article 82 against the high prices of an innovative product within its patent period

The dominant position is due to exclusionary abuse or government actions (“gap case”)

(continued)

58 Conditions for intervention of CA exclusionary practices

Market power which is due to IP rights should not be subjected to excessive price prohibitions

No competent sector regulator

F. Jenny

Motta/de Streel

Evans/Padilla

by un-condemned past exclusionary practices However, analysing whether the superdominance was due to past exclusionary abuses should remain exceptional as it is extremely difficult to do In most cases, IPR laws protect worthy investments made by a firm, which in exchange enjoys a monopoly over the product or process for a certain length of time. Allowing excessive price action would undermine the very object of those IPR

investments or innovations

The high price may prevent the emergence of new goods and service in adjacent markets

(We do not require that the excessive prices prevent the emergence of a new product or service. To us, this

Roller

Paulis

Any good or service protected by intellectual property rights should in principle not be subject to an excessive price action. Even the antitrust authority thinks that the IPR is not justified at allowing an excessive price action is not appropriate given the high risk and cost of type I error

No sector regulator being competent to regulate the excessive prices

Wide difference between the price and the average cost

Fletcher/Jardine

There is no regulator or there is a regulatory failure Prices charged by the firm widely exceed its average total costs There is a risk that the high price may prevent the emergence of new goods and

(continued)

Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment Conditions for intervention of CA

Consideration of the pricing of the different elements of a portfolio of products in risky dynamic industries

The high price is not transmitted as a low price to other side of the market (case of multisided markets) Consideration of the effect of ex post intervention on ex ante investment in the CA’s analysis

No fines, no civil damages may be imposed in cases of excessive prices

Motta/de Streel

Evans/Padilla

condition would be extremely difficult to implement and its restrictive role is not justified)

services in adjacent markets

Fletcher/Jardine

Roller

59

Paulis

In examining high prices for one element of a firm’s product portfolio, it is important also to consider carefully the pricing of other elements of its portfolio, the competition the firm faces in those other markets and the impact on consumers’ choices The high price is not transmitted as a low price to other side of the market (case of multisided markets) Competition authorities should consider carefully the effect of any ex post intervention on ex ante investment incentives Firms should not face fines for excessive pricing and should not face the risk of private damage actions in respect of such behaviour

(continued)

60 Conditions for intervention of CA Remedies should not be price regulation but remedies against the causes of the high price

F. Jenny

Motta/de Streel

Evans/Padilla

Fletcher/Jardine

Roller

Competition authorities should seek alternative remedies to price regulation, which are designed to address demand-side problems and thereby to activate competition in the market

No (structural) remedy is available (otherwise advocacy)

Paulis

These conditions aim to achieve five complementary goals: (1) to remind competition authorities that as long as markets can self-correct, high prices and profit margins will be transitory phenomena which may not justify a competition intervention; (2) to promote the idea that profit maximization, even by a firm having a dominant position, as long as it is the result of competition on the merits, should not be considered as a violation of competition law; (3) to ensure that competition authorities do not enforce excessive price provisions in dynamic industries where the risks of errors and the cost of errors are the most important; (4) to steer competition authorities away from the analysis of the price level to the analysis of the causes of the competition failure; and (5) to restrict the use of price regulation as a remedy to cases where there are no other options. Indeed, regulating the price addresses the symptoms but does not address the underlying causes which provoked this symptom. If the price was “excessive” in the first place, it must mean that there was a competition failure on the market due to legal or technical barriers to entry or exclusionary practices on the part of the dominant firm or the inability of consumers to make competition work. It is only if this competition failure is remedied that the market will spontaneously generate “non-excessive prices”. Thus choosing price regulation as a remedy to an excessive price case implies that the competition authority will monitor and control the dominant firm on a continuous basis. One could add that if there are no structural remedies that can be implemented, it would be advisable for the competition authority to advocate the creation of a specialized regulator whose function would be to monitor the price charged by the dominant firm. Such a regulator would be in a better position to ensure the continuous oversight of the price of the dominant firm.49

See US contribution to the OECD debate on excessive prices: “Historically, when legislative bodies in the U.S. have chosen regulation over competition, they have established regulatory agencies or commissions staffed with employees that develop substantial expertise in the industry. This expertise includes a deep understanding of the regulated firm’s cost structure, which is

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Having discussed the conditions that economists suggest to constrain the enforcement of the prohibition of unfair or excessive prices in competition law, it is useful to look at the recent leading cases which have been initiated by the European Commission and some of the competition authorities of EU member states to see whether their enforcement practice is consistent with the economic view. The broad answer is that most of the cases which have been initiated conform to the economist’s advice. For example, in the Gazprom case, barriers to trade which prevented the flow of gas across countries and strengthened the dominant position of Gazprom in each territorial market were not the results of past investments or innovations by Gazprom but the result of exclusionary practices by the gas supplier which contractually prohibited its customers from reselling in other countries the gas it delivered to them. This situation is therefore not one of the situations for which economists advised against unfair price intervention. Similarly, if we consider the standard essential patent cases discussed earlier, the main reason the fairness criteria are applied in these cases is that when a patent is part of a standard, the patent holder has the possibility through the charging of a very high license fee to exclude competitors from producing goods or services which will conform to the standard. This power will come to the patent owner not because of its innovation (which led it to obtain the patent in the first place) but because this patent has been selected to be part of a standard which will modify the framework in which competition intervenes on the market. It is thus the exclusionary power of the unfair pricing of a SEP which is the source of concern rather than its exploitative potential. It is equally clear that fairness should be defined in a way which is not going to disincentivize patent holders from volunteering to allow their patents from being part of a standard. This reminds us of the economists’s call to exercise the utmost restraint with respect to the enforcement of the excessive price provisions in competition law when there is a risk that such enforcement could discourage innovation and technical progress. Among the common features of most of the pharmaceutical cases (such as the Napp case) are the fact that the abuse takes place after the drug has gone off-patent and that the price of the drug is de-regulated, the fact that patients have no choice but to continue consuming the drug either because there is no alternative (case of the Alpen drug for children and the elderly following domiciliary therapies) or because switching from one drug to a competing drug may be dangerous to their health (case of the phenytoin sodium capsules for epilepsy patients in the Pfizer/Flynn case or case of hydrocortisone tablets in the Actavis case) and the fact that the increases in price are of a very high order of magnitude. Thus most of the cases, concern situations of monopoly or near monopoly not based on the exercise of intellectual

important for determining the prices that encourage continued investment and provide maximum benefits to consumers. Although regulatory agencies face some of the same difficulties determining prices that antitrust authorities would face if they enforce rules prohibiting excessive pricing, regulators are in a better position to do this because of their specialized expertise.”

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property right, where there is no competent regulator and where the very wide increases in prices are unlikely to bring entry do not involve a limitation of the rights of patent holders. A slightly different case is the Aspen Italian case where there is a regulator but where the regulator is seen as ineffective and powerless to prevent large price increases. The question then becomes whether the competition authority is in a better position to prevent collective damage.

4.1

Priority Setting Criteria

In most countries, competition authorities have to set their enforcement priorities in relation to the limited resources they have at their disposal. Across countries a great number of different criteria are used. For example, these criteria may be related to the likely cost of the case, the ability of the authority to close the case rapidly, the legal strength of the case, the impact of the case on consumer surplus or on efficiencies, the need to establish a legal precedent, the capacity to impose effective remedies, the reputational value of the case for the competition authority, the social or economic significance of the case, etc.50 Some of the criteria commonly used by competition authorities suggest that “excessive price” cases should have a low priority for these competition authorities. First and foremost, “excessive price” cases are very expensive in terms of the level of skills required and the amount of staff time to collect and treat the data. There will be also long and intensive legal challenges to the decisions that the authority makes to implement the methods used to investigate such cases (be it the benchmark prices chosen or the hypothesis done to compute the long-run average incremental cost of an efficient firm). Thus taking on an “excessive price” case is a major commitment of the economic and legal resources for the authority (particularly if it is relatively small) and means that a number of other cases (such as cartel cases or exclusionary abuses of dominance) will have to be foregone. Second, excessive price cases are unlikely to contribute significantly to legal predictability for dominant firms or for their competitors. As we saw previously, each case will involve subjective judgments made by the competition authority (such as what is the limit between an excessive price and a “non-excessive” price in a particular case) which will not easily be adaptable in other cases. Furthermore, the

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For example, in the UK, the CMA’s prioritization principles are (i) expected impact on consumer welfare and the expected additional economic impact on efficiency, productivity and the wider economy; (ii) strategic significance—in the sense that it ties in with its strategy and objectives and the possible impact on other lines of work is considered; (iii) likelihood of a successful outcome; and (iv) resource implications, namely, whether the human and financial resource requirements of the work are proportionate to the benefits it is likely to yield.

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search for the cost of an efficient firm as an element of comparison will entail extremely complex computations that other firms or their counsels are unlikely to be able to duplicate. Finally, as seen previously, the trade-offs taken into consideration for the establishment of the fairness criteria offer little legal transparency or predictability. For these reasons, it will be quite difficult for a dominant firm to predict whether or not it is acting within the law with respect to excessive prices. Excessive price decisions therefore have little precedential value. Third, there is a high risk for the competition authority of error which will actually reduce efficiency in the long run. As we saw, the gains in consumer surplus in the short run brought about by a lowering of the price may be more than compensated by the efficiency effects of the disincentives of firms due to the fear of regulation of their prices or their profit margins. Competition authorities can limit this risk by limiting their intervention following the economic screens suggested above which will make their interventions against high prices exceptional but that is akin to giving a low priority to excessive price cases.

5 Section V: Alternative Tools at the Disposal of Competition Authorities to Deal with Excessive Pricing There is one prioritization criterion, however, which is likely to push competition authorities to take up excessive pricing cases. It is the desire to promote the reputation of the authority. Indeed it is common knowledge that competition authorities are under constant pressure in many countries by both politicians and consumers to “do something” against high prices. Being reluctant to take up excessive price cases and to go after dominant firms or monopolists charging high prices is unlikely to make competition authorities popular (or understood) and competition authorities may be tempted to give in to this pressure (even if they have misgivings about their chance of success) in order to get necessary support for their other enforcement activities. However, there are alternative ways for competition authorities to be at the forefront of the fight against excessive prices. What economic analysis suggests is not that competition authorities should be disengaged from trying to alleviate the problem of high prices charged by monopolists or firms with dominant positions but that intervening by using an enforcement tool such as the pursuit of violations for excessive prices or imposing remedies in the form of price regulations are dangerous ways to go about it because these tools are clumsy, costly and risk failing or doing more harm than good to economic efficiency. However competition authorities usually have a variety of tools at their disposal. Enforcement of the provisions of the laws is one tool. Competition authorities often also have other tools which do not require them to look for violations of the law but allow them to “advocate for competition” or to “impose conditions to improve the functioning of markets” following a market investigation. The provision of

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“advisory opinions” or the “undertaking of a market investigation” is usually referred to as the “non-enforcement tools” of competition authorities. Thus, one of the ways through which competition authorities can deal with concerns regarding high prices is by investigating markets where there is a dominant position and high prices to determine the source of the competition failure in those sectors and either adopt remedies (if they have the power to do so) or advocate for relevant remedies.

5.1

Market Investigations

If they have market investigation powers, following a thorough examination of the functioning of the market and of the reasons for the competition failure leading to high prices, competition authorities may be able to impose wide-ranging remedies (such as the breaking up of the dominant firm into several competing entities on the supply side or measures to improve the information of consumers on the demand side) to eliminate the source of the market failure. In the UK, the Competition and Markets Authority (CMA) can investigate and remedy problems in markets which do not appear to be working well. The CMA first carries out a market study, after which it can either make recommendations to the industry or to government (e.g. for regulatory action), or it can decide to carry out a full market investigation. In that case, the CMA is required to decide whether there is an adverse effect on competition (“AEC”) arising out of an identifiable feature or features of the market and it can impose remedies on the participants in the market. For example, in April 2012, the Competition Commission, which was a predecessor of the Competition and Markets Authority (CMA), started a market investigation into private health care. In its provisional findings report, published in November 2015, the CMA found an adverse effect on competition due to the fact that HCA (Hospital Corporation of America) was facing weak competitive constraints which led to it charging higher prices than would be expected in a wellfunctioning market to private medical insurers and to patients who self-pay in central London. Roger Whitcomb, Chairman of the Private Healthcare Market Remittal Group, stated: “(we have) evidence of probable entry into the central London market, which we consider will provide a competitive constraint on HCA in this market within the next 4–6 years. This means that benefits to consumers of a divestment would be short-lived and not large enough to outweigh the cost of divestment, and we have found no other remedy which is both effective and proportionate”. In Mexico, (Mena-Labarthe 2016) market investigation powers were given to the competition authorities (COFECE and IFT) in 2013. They are based on Article 94 of the Federal Law on Economic Competition and are conducted by the investigating authorities of the Competition Commissions that can use all the powers granted by the Federal Law on Economic Competition to conduct enforcement investigations, with the objective of determining the existence of barriers to competition or essential

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facilities that may generate anticompetitive effects. Following the market investigation, they can issue “(i) recommendations to the Public Authorities so that, in the case of legal provisions impeding or distorting free competition in the market, within its competence and in accordance with the procedures provided by law they determine what is appropriate; (ii) issue an order to the corresponding Economic Agent to remove a barrier that unduly affects the process of free competition; (iii) determine the existence of essential facilities and issue guidelines to regulate, as applicable, the access modes, prices or rates, technical and quality conditions, as well as an implementation schedule; or (iv) order the divestiture of assets, rights, partnership interests or shares of the Economic Agent involved to eliminate the anticompetitive effects in the needed proportions, when other remedies are not sufficient to address the identified competition issues”. The success of the UK market investigation system has provided the inspiration for a nearly similar regime in Iceland. This regime is based on Art. 16 of the Icelandic Competition Act, which authorizes the competition authority to take measures against circumstances or conducts that prevent, limit or affect competition in the detriment of the public interest, even in cases when the provisions of the Competition Act have not been violated.

5.2

Market Studies for Advocacy Purposes

When competition authorities do not have the powers to undertake market investigations and to impose remedies, they may nevertheless undertake market studies and use them as the basis on which they advocate with regulatory authorities, government officials and the public opinion at large for the appropriate measures to be taken to improve competition in the market studied. As defined by the Market Studies Good Practice Handbook prepared by the International Competition Network,51 market studies are research projects aimed at gaining an in-depth understanding of how sectors, markets or market practices are working. They are conducted primarily in relation to concerns about the functioning of markets arising from one or more of the following: (i) firm behaviour, (ii) market structure, (iii) information failure, (iv) consumer conduct, (v) public sector intervention in markets and (vi) other factors which may give rise to consumer detriment. The output of a market study is a report containing findings based on the research, which may conclude that the market is working satisfactorily or set out the problems found. Market studies can be used to understand why prices seem to be high on some markets compared to other markets. For example, the Australian Competition and Consumer Commission recently started producing “micro” market studies

51 Market Studies Good Practice Handbook Prepared by ICN Advocacy Working Group, April 2012.

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examining petrol price drivers in regional markets. Starting with Darwin (Northern Territory) and Launceston (Tasmania), the regional studies aim to shine a light on why petrol prices are higher in some regional locations. Market studies can also be used to advocate for regulatory or legislative changes in order to increase competition. For example, In 2007, the Canadian Competition Bureau, alerted by the fact that retail prices of generic drugs in Canada were high in relation to those of other developed countries, undertook a study of generic drug pricing to look into the possible causes for these high prices.52 It examined the sector starting from the acquisition of ingredients for manufacturing generics and proceeding through their production, approval process, distribution and wholesaling, dispensing and reimbursement or payment by public and private insurance plans and persons paying out of pocket. To perform the study, the Canadian Competition Bureau acquired and analysed data, retained outside experts and conducted interviews with participants and interested parties at all levels of the sector. Before finalization, a draft of the report was circulated to over 100 sector participants and interested parties for fact-checking purposes. The final report, following completion of Phase 1 of the study, found that more than ten generic drug manufacturers were competing for shelf space in Canadian pharmacies by offering rebates of up to 40% of the retail price of generics. However, in many provinces, the benefits of this competition were not passed on to provincial drug plans, consumers or insurance companies. A key contributing factor to this finding was the design of public drug plans which gives pharmacies limited incentive to pass rebates on to consumers. The second phase of the project made concrete recommendations to regulators on ways to design provincial drug programs that would allow passing the benefits of competition among generic manufacturers on to consumers. In the case of Israel, the Director General of the Israeli Antitrust Authority was successful in advocating the introduction of debit cards into the Israeli credit card market, so as to substantially reduce the costs of merchants and raise the efficiency of payment systems in Israel. The IAA’s market study on this subject was, for the most part, adopted by the Bank of Israel and the Israeli Cabinet, and reforms were planned. Market studies can also be used to propose structural changes which will improve the functioning of the market. For example, in June 2007 the Italian Competition Authority concluded an extensive sector enquiry into food product distribution in order to ascertain the effect on prices of the structure and organization of the sector’s distribution chain. According to the report of the Italian Competition Authority to the roundtable of the OECD Competition Committee on market studies, “the enquiry identified several inefficiencies in the distribution process, such as a very fragmented structure at the production level, the existence of several ‘micro’ markets, a long distribution chain, elements that, although not immediately connected to specific anticompetitive behaviour, determined high prices to final consumers. The Authority

52 The study is available on the Competition Bureau’s website at www.competitionbureau.gc.ca/ epic/site/cb-bc.nsf/en/02495e.html

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suggested improvements in the organization of the distribution chain (such as a reform in the organization of wholesale markets) that might eliminate some of the inefficiencies”. Finally market studies can reveal the possible existence of competition law violations. After joining the EU, in 2004 Lithuania experienced quite a sharp rise of food prices that occurred again during the summer of 2007.53 There was a lot of concern expressed about the repercussions of these food prices on consumers, and especially on the low-income households, and the Government ordered the concerned ministries to determine what factors caused price changes in the food sector. Simultaneously, the Competition Council started a study to “establish if the price changes in various levels of supply chain were more likely to be explained by the changes in economic environment, such as increased costs, lower reserves or supply (e.g. due to increased exports) or by anticompetitive behaviour of undertakings in the markets”. The analysis revealed parallelism in the pricing of certain milk products as well as the fact that the relevant undertakings were regularly and frequently exchanging confidential and detailed information about their sales through their trade association. The Competition Council then initiated an investigation into possible collusive behaviour in the milk market. Finally, in rare cases, where the market investigation finds that a lack of competition conducive to the high prices cannot be corrected by any remedy other than price regulation, the competition authority should either defer to the established regulator or publicly call for the establishment of such a regulator. There are some advantages of entrusting price regulation to a sectoral regulator rather than to the competition authority.54 First, even when regulators’ decisions are subject to judicial review, their decisions are typically accorded greater deference than rulings by competition authorities. This difference in treatment could come from the fact that competition agencies are charged with enforcing a law of general application, as opposed to drawing up and enforcing industry or even firm-specific rules, presumably based on information and expertise extending beyond what a court could appreciate and apply. Second, with their focus on regulating entry and lines of business, setting prices, ensuring appropriate levels of product quality and policing universal service obligations, regulators clearly require technological and accounting expertise. Competition agencies would have relatively fewer resources in terms of accounting expertise since, except for predatory pricing cases, they are not normally involved in judging the appropriateness of particular prices. Third, regulators may also have the power to specify accounting systems to ensure they have relevant, understandable information, especially if they wish to engage in comparison, or “yardstick” regulation, whereas competition authorities typically do not have a

53 See the Lithuanian contribution to the 2011 OECD contribution to the roundtable on excessive prices. 54 This discussion is based on the background paper of the Secretariat prepared for the OECD Competition Committee Roundtable on the Relationship between Regulators and Competition Authorities, 1998.

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power to specify accounting systems for the dominant firms they investigate. Fourth, because they have often a wider set of objectives, sectoral regulators will have access to a greater variety of information on the market than competition authorities which are not specialized. Fifth, sectoral regulators are in a better position to undertake the continuous close monitoring required in the case of price regulation, because regulators define the rules of the game ex ante and, continuously, dominant firms and their competitors will benefit from more legal security and previsibility than if their price regulation is the result of an ex post, discrete competition law enforcement intervention.

6 Conclusion There is a consensus on the fact that a low-quantity high-price equilibrium on a market resulting from a profit maximization by a dominant firm or a monopoly entails a lower level of consumer welfare than a purely competitive equilibrium. There is also a consensus that the goal of competition law is to protect consumer surplus. In a significant number of countries inspired by EU competition law, competition authorities can sanction “abuses of dominance”, and one example of abuse of dominance mentioned in a number of national laws is “unfair” or “excessive” pricing. In many of these jurisdictions, there are a number of instances of decisions which have been taken by competition authorities and/or courts to sanction “excessive” or “unfair” prices due to a dominant position even if it is also clear that most competition authorities will only exceptionally enforce this type of provision, preferring to focus on exclusionary practices. The use of competition law provisions on abuse of dominance to sanction dominant firms which practice “excessive” and “unfair” prices remains a highly controversial tool. Indeed, first of all, the concepts of “excessive” or “unfair” prices are not grounded in economic analysis. From the economic standpoint, price levels reflect the underlying conditions of technology and competition among firms on the supply side and the characteristics of demand. Therefore, high prices are a symptom rather than the cause of a competition failure and the issue that competition authorities should focus on, and remedy is the cause or causes of the competition failure. Second, decisions on excessive or unfair prices necessarily require elements of subjectivity not only in the interpretation of the concepts of “excessive” or “unfair” prices but also when comparing the price-cost margin or the profitability of the dominant firms to what would be the price-cost margin or profitability of an efficient firm in competitive conditions. Such comparisons can be misleading, among other reasons, because accounting practices do not give an accurate description of economic costs. Third, making profit maximization by a dominant firm a violation of competition law when profit maximization is the driver of competition runs the risk of distorting the incentives of competitors on markets. Because they put an implicit or explicit cap

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on the price that can be charged by the dominant firm (and because they reduce the profitability prospects of potential entrants), decisions of competition authorities sanctioning “excessive” or “unfair” prices can decrease the incentives to invest or to innovate for both the dominant firms and for their competitors or potential entrants, leading to an overall reduced efficiency in spite of the direct gains of consumers. This means that competition authorities should assess the indirect effect of their decisions on “unfair” or “excessive” prices, which is a task particularly daunting. Fourth, even if not they do not reduce efficiency, competition authorities decisions on “excessive” or “unfair” prices, because of the complexity of the analysis that they require, will generally not provide legal predictability to dominant firms which want to stay within the limits of the law. Finally, competition authorities should try to remedy the causes of high prices rather than focus on the prices themselves. If they regulate prices, they are bound to have to reconsider their (complex and partly subjective) analysis whenever cost or demand conditions change. In the rare cases where no structural or behavioural remedy is available and price control is the only possible remedy, competition authorities should advocate the creation of a sectoral regulator or the extension of the powers of an existing regulator. In a number of countries, competition authorities and sectoral regulators must consult one another on subjects of common interest. Their consultations with the other institution or institutions are made public, and although they are not binding, they must be taken into consideration by the requesting institutions. These mechanisms ensure that the competition authority’s voice will be heard by the sectoral regulator. When competition authorities have discretion with respect to the cases they pursue, there can be several reasons why taking up cases of abuse of dominant position through excessive or unfair price should be given a low priority. Indeed, they entail serious risks of costly errors for the competition authority; they are very resource intensive and require, among other things, certain skills which the staff of the competition commission may not have; and competition authorities have alternative tools to deal with markets which are malfunctioning. If the intervention of competition authorities in excessive or unfair price cases cannot be ruled out in countries where the law explicitly provide for the possibility of such interventions, competition authorities should exercise self-restraint by using this tool only in the limited number of cases where the dominant firm’s position has not been acquired through the granting of an intellectual property right or through competition on the merits but results from past legal protection or past anticompetitive practices, where the dominant firm has either a monopoly or a superdominant position, where the dominant firm is protected by insurmountable barriers to entry, where the dominant firm is not and cannot be regulated by a sectoral regulator, where the dominant firm charges prices or exhibits price-cost margins which are much higher than in the benchmark industries and where no structural remedy to reinvigorate competition is conceivable.

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Rather than enforcing provisions against excessive or unfair prices which are blunt and unwieldy, competition authorities can be (and can be seen to be) at the forefront of the fight against high prices due to competition failures either if they have powers to undertake market investigations or if they have the power to advocate on the basis of market studies. Those two forms of action allow the competition authority to concentrate on the causes of the market failure rather than on prices and to propose a wider range of remedies (e.g. remedies directed at making consumers more active agents of competition) than is generally the case with enforcement decisions.

References Allen, B., & Hellwig, M. (1986). Price-setting firms and the oligopolistic foundations of perfect competition. The American Economic Review, 76(2), 387–392. Dufwenberga, M., & Gneezyb, U. (2000). Price competition and market concentration: An experimental study. International Journal of Industrial Organization, 18, 7–22. European Commission. (1998). XXVIIth Report on competition policy (1997) (p. 26). Brussels: European Commission. Evans, D. S., & Padilla, J. A. (2004, September). Excessive prices: Using economics to define administrable legal rules (CEMFI working paper no. 0416). Evans, D. S., & Padilla, J. A. (2005). Excessive prices: Using economics to define administrable legal rules. Journal of Competition Law and Economics, 1(1), 97–122. Ezrachi, A., & Gilo, D. (2008). Are excessive prices really self-correcting? Journal of Competition Law and Economics, 5(2), 249–268. Gal, M. (2013). Abuse of dominance- exploitative abuses (Chapter 9). In L. Lianos & D. Geradin (Eds.), Handbook on European competition law (pp. 385–422). Cheltenham: Edward Elgar. Geradin, D. (2007, October). The necessary limits to the control of ‘excessive’ prices by competition authorities—A view from Europe. TILEC discussion paper. Giannino, M. (2012, June 9). Enforcement of excessive price competition provisions in the airport sector: An overview. SSRN paper. Hubert, P., & Combet, M.-L. (2011, February). Exploitative abuse: The end of the paradox? Doctrines l Concurrences Review N 1-2011, pp. 44–51. Maier-Rigaud, F. (2011). Excessive prices. Background paper by the Secretariat for Competition Committee the Round Table on Excessive Prices, DAF/COMP(2011)18. Mena-Labarthe, C. (2016, March). Market investigations as a new tool for competition agencies: The Mexican experience. CPI Antitrust Chronicle. Motta, M., & de Streel, A. (2007). Excessive pricing in competition law: Never say never? In The pros and cons of high prices. Kalmar: Konkurrensverket Swedish Competition Authority. Niels, G. (2014). Excessive prices: An overview of EU and national case law (Concurrences, e-Competitions Bulletin Excessive prices N 62463). Accessed January 21, 2014, from www. concurrences.com OECD. (2006). Competition committee best practice roundtable: Evidentiary issues in proving dominance, p 42. Röller, L.-H. (2007). Exploitative abuses (ESMT business brief, no. BB-107-002). ESMT European School of Management and Technology. Röller, L.-H. (2008). Exploitative abuses. In M. Ehlermann (Ed.), European competition law annual 2007: A reformed approach to Article 82 (pp. 525–532). Oxford: Hart Publishing. Whish, R. (2003). Competition law (5th ed.pp. 688–689). New York: LexisNexis.

Another Look at the Economics of the UK CMA’s Phenytoin Case John Davies and Jorge Padilla

Abstract Davies and Padilla examine the UK Competition and Markets Authority’s 2016 decision to penalise Pfizer and Flynn Pharma for excessive pricing of phenytoin, an off-patent anti-epilepsy drug. The authors describe the CMA’s assessment of the gap between prices and cost and note that this same evidence is used in assessment of each of market definition, dominance and abuse. The CMA properly considered other evidence too, but this could serve as a precedent for a fragile and unreliable approach to assessing excessive pricing. The CMA found the price excessive ‘in itself’, rather than placing weight on comparator prices: a more appropriate measure of value. The authority imposed a fine uplifted by 400% for ‘deterrence’, and the authors question how realistic such deterrence objectives are, for excessive pricing provisions.

1 Introduction In 2016, the UK Competition and Markets Authority (CMA) issued its decision in ‘Unfair pricing in respect of the supply of phenytoin sodium capsules in the UK’,1 finding two companies, Pfizer and Flynn Pharmaceutical, to have breached Article 102 TFEU and the equivalent Chapter II of the UK Competition Act 1998.2

1 Decision of the Competition and Market Authority. Unfair pricing in respect of the supply of phenytoin sodium capsules in the UK, Case CE/9742-13 (hereafter “Phenytoin”). In this chapter, we use only this document to assess the CMA’s approach; we have no independent sources of evidence on the facts of the case. 2 Both Pfizer and Flynn appealed the CMA decision. At the time of writing, their appeals had been heard in the UK Competition Appeal Tribunal, but no decision had been issued.

J. Davies (*) Compass Lexecon, Paris, France e-mail: [email protected] J. Padilla Compass Lexecon, Madrid, Spain e-mail: [email protected] © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_3

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This was an unusual and important decision, because it was a ‘pure’ excessive pricing case. This was only the second excessive pricing decision by the UK competition authorities under the Competition Act. The previous one, Napp Pharmaceutical, in the same sector, had been issued 15 years before and was very different, in that exclusionary conduct was also alleged. However, although novel when it started, Phenytoin might be a harbinger of things to come, as the CMA went on to launch at least three more excessive prices investigations in pharmaceuticals and other EU competition authorities have also recently issued decisions or opened cases relating to excessive pricing in the sector.3 The CMA’s decision is also important for the light it sheds on how competition authorities should approach excessive pricing cases. The CMA cited the same piece of evidence—a gap between prices and costs—several times, including in its assessment of market definition and several aspects of dominance. It then did not corroborate that finding by comparing prices with other products, instead conducting a search for justifications for the gap and—finding none—concluding it was unfair. The CMA did not exclusively rely on this one piece of evidence at each of these stages, but its decision could provide support for future cases to be decided, in effect, solely on a price-cost test. Furthermore, that price-cost test itself was conducted on the basis of a narrow assessment of costs and allowed returns, leading to a very low ‘cost-plus’ benchmark. It seems to us likely that many, perhaps most, firms across the economy could be considered to be abusing dominance, following this analytical approach. The case also raises important questions of when a competition authority should bring an excessive pricing case, especially in a heavily regulated sector. The CMA found that there was a gap in regulation allowing the products to be priced as they were. The parties disputed this, but if there were any doubt about the UK health authorities’ ability to control such prices, they have now been laid to rest with new legislation specifically prompted by this and other cases. This, it seems to us, is how concerns about excessive pricing should be met. High prices can be a signal of a lack of competition, and the appropriate response is to investigate the reason for that lack and either deal with it or deal with the consequences. The CMA itself has frequently deployed its ‘market investigation’ powers in precisely this manner. If investigation reveals a problem with regulation, then regulation needs to be changed—and it has been. Yet on this occasion, the CMA imposed a financial penalty. It is very hard to see what behaviour the CMA expects to deter through its decision or how companies can be expected to comply to avoid such penalties in the future. In this contribution, we first describe the framework for assessing excessive pricing under the European law (and its British equivalent) in Sect. 2 and discuss 3 All opinions expressed here are those of the authors, who are both economists at Compass Lexecon, and do not necessarily represent the views of Compass Lexecon’s other experts or clients. The authors have advised and still advise pharmaceutical firms under investigation by the European Commission, the CMA and the competition authorities of other EU member states. Neither author has advised any party in the Phenytoin case. The authors would like to thank Gianmarco Calanchi for his help in researching and writing this piece.

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the meaning of the phrase ‘economic value’. In Sect. 3 we set out the facts of the case, as presented by the CMA itself in Phenytoin, focusing particularly on the relevant regulatory regime for pharmaceuticals in the UK, as well as describing the background to the case. Section 4 is our assessment of the CMA’s approach as set out in its decision. We describe and comment upon, in turn, the CMA’s approach to assessing each of market definition, dominance, measurement of the excess, whether the prices were ‘unfair’ and finally remedies and penalties. Section 5 concludes.

2 Framework for Assessment of Excessive Pricing in the European Union Article 102 TFEU at letter (a) prohibits abuses of dominance consisting of ‘directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions’. Although the wording of Article 102 TFEU has been interpreted as referring inter alia to ‘excessive’ pricing abuses, these are not clearly defined. A definition of what may constitute such a pricing abuse is provided by the European Court of Justice (ECJ) in its famous United Brands4 judgement, where the ECJ explains that ‘charging a price which is excessive because it has no reasonable relation to the economic value of the product would be an abuse’. As the ECJ explained in Scandlines,5 ‘the decisive test in United Brands focuses on the price charged, and its relation to the economic value of the product’. In particular, the test seeks to establish whether the price exceeds the ‘economic value’ of the product and whether it does so to such an extent that the price bears ‘no reasonable relation’ with it. In United Brands, the Commission based its finding that prices were excessive on a comparison between the (lower) prices for Chiquita bananas charged in Ireland and those charged in other member states. The ECJ annulled the Commission’s decision on the grounds that the Irish price could not be adopted as a reliable benchmark, as ‘the Commission ha[d] not adduced adequate legal proof of the facts and evaluations which formed the foundations of its [excessive pricing] finding’, including demonstrating that products in Ireland were profitable. In United Brands, the ECJ therefore established a test based on comparator prices and a price-cost test to rule out the possibility that such comparators could be lossmaking: ‘The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products’.

4

ECJ Judgement of 14 February 1978—Case 27/76: United Brands v Commission (“United Brands”) 5 T-399/04—Scandlines Sverige AB v Commission (“Scandlines”)

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The first limb of the test consists of comparing the price with all the ‘costs actually incurred’ by the firm, including (1) the costs directly incurred in supplying the product or service, (2) an ‘apportionment of indirect costs and general expenditure’ as well as (3) a ‘reasonable return’. Together, these are commonly referred to as the ‘cost-plus’. Where prices are in excess of the cost-plus, competition authorities should proceed to the second limb of the test. The ECJ proposes two alternative approaches for the second limb. First, competition authorities may show that a price is higher ‘when compared to competing products’. The context makes clear that this does not (necessarily) refer to products in competition in the markets under investigation, but rather to comparators. ‘The underlying idea is that if the selected products or geographic markets are sufficiently homogenous, a comparison of the prices can be meaningful. Likewise, the pricing patterns of an undertaking over time may also provide useful clues’. Secondly, competition authorities may show that a price is unfair ‘in itself’. This concept is explained by the Commission in Scandlines6: the ‘economic value’ of a product may be significantly in excess of the cost-plus, as customers may attach a particular value to certain characteristics which increase the value of the product. In Scandlines these characteristics included the proximity of the port of Helsingborg to the port of Elsinore in Denmark, which increased the value of the services provided by the port of Helsingborg which therefore commanded a premium on port charges. In the words of the Commission: The ‘Cost Plus approach’ suggested by Scandlines only takes into account the conditions of supply of the product/service. The determination of the economic value of the product/ service should also take account of other non-cost related factors, especially as regards the demand-side aspects of the product/service concerned. The demand-side is relevant mainly because customers are notably willing to pay more for something specific attached to the product/service that they consider valuable. This specific feature does not necessarily imply higher production costs for the provider. However it is valuable for the customer and also for the provider, and thereby increases the economic value of the product/service.

These two approaches are alternatives, as the second limb of the United Brands test requires that a price be either unfair ‘in itself’ or when compared with other products. However, they should not be seen as equally valid options. It would be perverse for a competition authority to rely on the ‘in itself’ test if any reasonable comparator prices are available, as if the investigated prices are not excessive against those comparators, it is hard to see how they could be excessive ‘in themselves’. In both Albion Water7 and Scandlines, the ‘in itself’ approach was adopted only after establishing that no good comparators exist. Within this analysis, competition authorities should apply the approach that is the most appropriate to determine the ‘economic value’ of the product under investigation in that specific case—or multiple approaches—in line with the principle of

6 7

Case COMP A 36.568.D3 Scandlines Sverige AB v Port of Helsingborg. UK CAT Case 1046/2/4/04.

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‘preponderance of evidence’. Indeed, the United Brands judgement itself indicates that ‘[o]ther ways may be devised—and economic theorists have not failed to think up several—of selecting the rules for determining whether the price of a product is unfair’ (United Brands, 253). But what is the ‘economic value’ that must be assessed in the second limb of the test? Competition law often uses established terms from economics, and some might assume that ‘economic value’ is one such phrase. However, it is not: economists today rarely if ever consider such matters. It was not always so. Classical economists (those writing before, say, 1900) were often preoccupied with identifying ‘value’ and its sources. The physiocrat movement, for example, identified value as arising from land and agriculture, dismissing the idea that manufacturing could truly create value.8 Classical economists produced competing theories of where value arose, the most famous being Marx’s labour theory of value. However, all of these schemes were flawed. In the case of the labour theory of value, for example, a highly talented painter might effortlessly produce something that most people would recognise as valuable, while those of us with less talent could labour at the easel for years without producing anything of value whatsoever.9 When considering the relationship between value and price, all such schemes ran up against the problem of scarcity: gold is almost useless yet expensive, while water is essential and so cheap as to be practically free. There is a simple solution, which is to consider value only ‘at the margin’: the value of additional supply. However, this value will change depending on the availability of that product. Water is cheap despite being essential because the additional ‘value’ provided by increased availability of water is very low, because there is so much water already available. Gold, in contrast, is usually very scarce, and so an addition to supply is valuable. However, this means there is no inherent, constant value underlying the price. A gold coin is more expensive than thousands of gallons of water under ‘normal’ conditions of supply and demand, but it might not buy the last bottle of water in a lifeboat. There is only a highly contingent, variable assessment of value that reflects the supply at that moment and the demand at that moment. Most economists would simply identify this as the ‘price’. Thus, we would suggest that if there is any meaning to the term ‘economic value’, it means the price in a competitive market—as is implied in the examination of comparators in the second limb of the United Brands test. Importantly, such a ‘competitive benchmark price’ should not be set at such a level as to reflect the outcome of a very (or perfectly) competitive market, but rather that of a reasonably competitive one. Indeed, in Albion Water II the UK Competition 8

Ironically, their modern equivalents obsess over manufacturing: regarding the service sector as being somehow less valuable than bashing metal. 9 Indeed, the Soviet Union, in implementing a version of Marxism, managed to demonstrate this point on a large scale. Some factories in Eastern Europe were value-destroying: taking perfectly good iron, rubber and aluminium and then adding a lot of labour to turn them into cars no one wanted.

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Appeal Tribunal (CAT) explains that ‘[t]here is no mandate to equate “normal and effective competition” in paragraph [249] of United Brands with the concept of perfect competition’. Advocate General Nils Wahl (Wahl 2007) has gone as far as arguing that the ‘competitive benchmark price’ should in fact not be ‘competitive’ at all: the threshold for excessive pricing should be higher than the monopoly price, as ‘if the prohibition would catch also monopoly prices it would seem clear that Article [102] would be concerned not only with abuse of a dominant position, but also with the fact of someone being in a dominant position as such. If it is logical and expected from an economic point of view that the market conditions, that is the competitive conditions, have an influence over the market price it would seem natural to expect a monopolist to charge the monopoly price. Interfering with such a pricing policy would be tantamount to interfere with dominance as such’. We do not intend to argue that for prices to be excessive, they need to exceed monopoly prices. However, it is clear that if the purpose of an excessive pricing action is to prosecute prices that are so high as to be unrelated with the ‘economic value’ of a product, then the threshold for determining whether a price is excessive needs to be set well above the price that prevails in a reasonably competitive market.

3 Facts of the Case Phenytoin sodium is a prescription drug used to treat epilepsy. It is an old drug, first formulated in 1908 and is no longer recommended in most cases. The CMA reports that only about 10% of the 500,000 or so epilepsy patients in the UK take phenytoin and demand is falling. Phenytoin comes in tablets and capsules. This case concerned supply in capsules. Importantly, phenytoin has a narrow therapeutic index (small differences in dose can lead to adverse drug reactions) and non-linear pharmacokinetics (the drug is not absorbed at a constant rate). Consequently, small changes to the dose can give rise to disproportionate and unpredictable effects, harming the patient. As a result, clinical guidance in the UK is for ‘continuity of supply’: patients who have been stabilised on one manufacturer’s capsule should remain on that manufacturer’s capsule and not switch to another supplier. This guidance has been in place in one form or another at least since 2004, but in November 2013, the UK’s Medical Health Regulatory Authority published guidance which ‘repeated and reinforced’ this advice, following recommendations by the Committee on Human Medicines. Because of this clinical guidance, the scope for substitution by existing patients is limited or none, while the obsolescence of the drug implies there are very few new patients: only 2–5% of patients each year are new, according to Pfizer (between 1 and 3% according to the CMA) (Phenytoin 3.44 (f)). About 48,000 patients in the UK take phenytoin capsules, 10% of all epileptic patients, and this number has been steadily declining.

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There were two companies manufacturing and supplying phenytoin sodium capsules to the UK: Pfizer and NRIM Limited. Pfizer’s product, called Epanutin, was first marketed in 1938 and has long been off-patent. Epanutin is available in four strengths: 25 mg, 50 mg, 100 mg (which accounts for about 70% of sales) and 300 mg. NRIM began supplying phenytoin sodium capsules in 2013 and only supplies the 100 mg strength.

3.1

The UK Regulatory Regime and the Role of the National Health Service

The economics of pharmaceutical products are profoundly affected by the regulatory and institutional characteristics of the markets in which they are sold, and these characteristics differ significantly between countries. Most importantly, the economics of a pharmaceutical product depend on whether it is sold within the scope of a patent or off-patent. In this case, the phenytoin sodium products were long off-patent (though Epanutin was an important brand name, as the market leader since its introduction as a patented product in 1938). It is important to understand three aspects of regulation and state involvement in the sector: authorisation of new products for entry, price controls and purchasing. Member states of the European Union operate a common approach to approving new drugs (although speed and individual decisions can vary between different member states) but typically have very different arrangements when it comes to pricing regulation and purchasing. Selling a pharmaceutical product requires a market authorisation (or MA). The applicant is required to submit a dossier describing the product and the tests demonstrating its suitability and then engage with the relevant regulatory authority—the MHRA in the UK—for approval. A separate MA must be sought for each formulation (e.g. strength) of the product. A dossier can be completed relatively quickly if the product is already marketed in a developed country, but the iterative process with the MHRA could be lengthy, particularly if patients are likely to be sensitive to the very precise composition of the product, as in this case. The CMA noted that NRIM’s 100 mg product took 6 years to be approved (Phenytoin 4.264) and NRIM abandoned its plans to seek authorisation for other strengths. There are arrangements within the European Union for faster approvals of MAs for products already authorised in other member states. Furthermore, the MHRA can grant licences to import products from other member states. We do not describe the MA system in as much detail as might be appropriate were it the only potential clinical/regulatory barrier to entry, because in this case the ‘continuity of supply’ principle seems more likely to have acted as a constraint rendering it uneconomic for new suppliers profitably to enter the market.

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The system of price regulation for off-patent drugs in the UK is very complex. In this case the CMA and parties disagreed as to whether the UK authorities had the legal power effectively to control the prices of phenytoin capsules and tablets. In brief, the UK’s Pharmaceutical Price Regulation Scheme (PPRS) is a voluntary arrangement under which participating companies agree to price their products to achieve no more than an agreed maximum profit for sales to the National Health Service (NHS): a 21% return on capital employed or a 6% return on sales (ROS). The PPRS exerts a cap only on the overall returns achieved by participating firms. The cap therefore applies across the portfolio: multi-product firms can set the initial price of individual products freely, although they are then constrained in their ability subsequently to increase those prices. The PPRS covers only branded products. Pfizer is a member of the PPRS and Epanutin had long been part of the PPRS scheme. When Flynn took over the MA for Epanutin and de-branded (genericised) it, it was removed from the scheme. However, Flynn itself remained a member of the scheme. Suppliers which are outside the scheme are subject to ‘statutory regulation’. Suppliers can choose to be outside the scheme or can be excluded by the Secretary of State for Health (‘Department of Health’ or ‘DH’ hereafter) if the PPRS is ‘ineffective’ for that company. The CMA and the parties disagreed on how realistic this option was, as a potential route to placing a product under statutory price controls. Under another voluntary scheme—Scheme M—suppliers report prices of their drugs, so that drug tariff prices can be set to provide pharmacies with adequate margins. The CMA emphasised that this was not a scheme to regulate drug prices as such, but it does contain one paragraph stating that the DH ‘may intervene to ensure that the NHS pays a reasonable price for the medicine(s) concerned’ if it identifies ‘any significant events or trends in expenditure that indicate the normal market mechanisms have failed to protect the NHS from significant increases in expenditure’ (DH, quoted at Phenytoin 3.144). Again, the parties and the CMA disagreed as to whether this power could be expected to be used effectively to control prices. Section 261 of the NHS Act grants the DH the power to enter into voluntary schemes with industry members (such as the PPRS) for the purpose of controlling the cost of pharmaceutical medicines. In addition, Sections 262 and 263 of the NHS Act grant the Secretary of State the power to, respectively: 1. Impose direct price controls on specific medicines. 2. Introduce an industry-wide statutory scheme to control the price of medicines not covered by a voluntary scheme (Phenytoin 3.150 and 3.151). Again, there was considerable disagreement as to whether these sections provided effective price control powers for the DH, as we shall discuss below when considering dominance. The pricing of generic drugs supplied on prescription operates through the drug tariff, set monthly. There are three approaches to setting this tariff: • Category A, based on average prices from several sources

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• Category C for drugs with few or no generic competitors, negotiated by the DH and the Pharmaceutical Services Negotiating Committee, on the basis of the list price based on the supplier’s list price • Category M, for widely available drugs, based on weighted average prices from many suppliers As Pfizer’s phenytoin capsules were the leading brand as Epanutin, they have been reimbursed even when de-branded under Flynn’s ownership under ‘category C’. However, this is not a price control on the product; rather it is a means to reimburse retail pharmacies in a manner that is intended to incentivise them to supply cheaper alternative products where possible. As NRIM’s product was considerably cheaper than Pfizer’s and Flynn’s product, a retail pharmacy would normally have made a larger margin supplying NRIM’s product. Phenytoin is a prescription drug in the UK: patients pay a fixed sum for each prescription (or in some cases pay reduced or no prescription charges), so are not directly exposed to the price. Doctors are encouraged to write ‘open’ prescriptions, which allow a pharmacist to choose which brand of the prescribed generic to supply. It appears that in this case, most did so (Phenytoin 3.86–3.88) despite the clinical guidance for continuity of supply. However, pharmacies confirmed to the CMA that they themselves respected the principle of continuity of supply (Phenytoin 3.95). Pharmacies do not seem to have dispensed NRIM’s product to patients stabilised on Pfizer’s product, despite the financial incentives to so do noted above. The cost of these prescription drugs is primarily borne by the National Health Service (NHS). The NHS comprises many different organisations, each of which typically has a budgetary constraint. The relevant NHS organisations for the purchase of phenytoin, at least in England (there are similar arrangements in Wales, Scotland and Northern Ireland), are the local Clinical Commissioning Groups (CCGs). There are about 200 CCGs in England, which together control about 75% of the NHS England budget. It was a point of contention between the parties and the CMA whether these CCGs—or the NHS more generally—could exert effective buyer power.

3.2

Market Developments up to and During the CMA’s Investigation

Pfizer became the owner of the Epanutin phenytoin brand in 2000 and sold it under that brand name in the UK until September 2012. In March 2012, Flynn Pharmaceutical acquired the MA for Epanutin from Pfizer, for what the CMA describes as a nominal payment. In September 2012, Flynn de-branded Epanutin and began selling it in the UK. Flynn purchases all of its supplies of phenytoin capsules from Pfizer, through an exclusive supply agreement. Initially, Flynn operated a ‘traditional wholesaler model’ in which its phenytoin capsules were available to all wholesalers at the standard industry discount rate of

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Table 1 Drug tariff prices for phenytoin sodium capsules

25 mg 50 mg 100 mg 300 mg

PreSeptember 2012 £0.66 £0.67 £2.83 £2.83

October 2012 to April 2014 £15.74 £15.98 £67.50 £67.50

% Change 2285 2285 2285 2285

May 2014 to [CMA publication date, 2016] £15.74 £15.98 £54.00 £57.38

% Change 0 0 20 15

% Increase since pre-September 2012 2285 2285 1808 1928

Source: Phenytoin, Table 3.3

12.5%. From May 2014, Flynn moved to a ‘restricted wholesaler model’, in which it supplies only to a few wholesalers at individually negotiated discounts (which are confidential but are presumably smaller than 12.5%). The CMA notes at several points in the decision that Flynn’s physical involvement in supplying phenytoin capsules is limited. Pfizer manufactures the capsules in Germany and delivers them to a distributor (identity confidential) in the UK. The CMA noted that final drug tariff prices increased markedly for Pfizermanufactured phenytoin capsules after Flynn took over the product. It ascribed this increase both to higher prices charged by Pfizer to Flynn and to the mark-ups that Flynn itself added, together constituting the final price to wholesalers or wholesale price. Although not necessarily directly equivalent to the wholesale price, the drug tariff price reflects wholesale prices and therefore provides an indication of these price increases (and a measure of the effect of those increases on the NHS). We illustrate this in Table 1. The drug tariff price increased by just over 2285% for all of Flynn’s phenytoin capsule strengths initially, followed by a modest reduction in the higher strengths (including the 100 mg strength, which accounted for the majority of supply) from May 2014. The details of how this price increase derived from Pfizer’s price to Flynn and Flynn’s mark-up (and the adjustments then made to derive the drug tariff price) are confidential so the CMA reports only ranges. However, it seems clear that the CMA found that both contributed. Pfizer’s average selling price for 100 mg from October 2012 onward, for example, is reported in the non-confidential version of the decision as lying between £31 and £41 per pack, compared to £2.21 before that date. Flynn’s prices per 100 mg pack are reported as lying between £51 and £61 per pack from October 2012 to April 2014 and between £41 and £51 from May 2014 onward. A similar pattern exists for the other strengths. Thus, both the price charged by Pfizer to Flynn and the mark-up added by Flynn appear to be considerably larger than the price Pfizer charged when it supplied the product before October 2012, although Flynn cut its mark-up from May 2014 onward.

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4 The CMA’s Assessment The CMA needed to assess: 1. Market definition 2. Dominance 3. Excessive pricing, through the two limbs of the United Brands test, namely: (a) Was the difference between prices and costs excessive? (b) Was this excess unfair, either by reference to ‘competing products’ or ‘in itself’? 4. Remedies and penalties We now describe and critically assess how the CMA went about each of these stages. The authors are both economists, not lawyers. We emphasise now (and will occasionally remind the reader below) that in our assessment, we are not necessarily taking a view on whether the CMA’s approach was lawful. We believe that the existing ‘excessive pricing’ framework provides competition authorities with considerable scope for discretion. We suspect that an interventionist interpretation of the existing jurisprudence could allow a competition authority to find excessive pricing in a great many products, across the economy. However, we think it obvious that would be a bad policy. Where we criticise the CMA’s approach, therefore, this should be taken more as a policy critique: either of the law itself or the CMA’s discretionary application of it.

4.1

Market Definition

The CMA adopted unusually narrow product market definitions10 in this case: • ‘The manufacture of Pfizer-manufactured phenytoin sodium capsules that are distributed in the UK’ • ‘The distribution of Pfizer-manufactured phenytoin sodium capsules that are distributed in the UK’ These are remarkably narrow market definitions, as the CMA itself acknowledged. In pharmaceutical cases, the debate is often between whether the market is as narrow as a particular chemical substance11 or can be broadened to alternative

10 The CMA emphasised that there was scope for parallel imports of Pfizer-manufactured phenytoin capsules within its product market definition. It also considered an ‘alternative’ market definition before the MHRA advice in November 2013, in which it dropped the requirement for competing products to be supplied by Pfizer. 11 ‘ATC 5’ under the Anatomical Therapeutic Chemical Classification System.

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treatments. However, in this case the CMA adopted a still narrower definition, defining the product market simply as Pfizer-manufactured phenytoin capsules. This excludes phenytoin tablets and also excludes phenytoin capsules made by rival firms, specifically NRIM’s product. Obviously, Pfizer must by definition ultimately be a monopolist of that market, even if there are potentially imports that could affect competition in the UK further down the supply chain. However, the CMA noted that this unusual definition reflects the unusual circumstances of the case: the clinical for continuity of supply makes it unlikely that alternative products of any sort could constrain the pricing of Pfizer and Flynn for this particular product. It was also based on the empirical observation that NRIM’s product had not succeeded in gaining a large market share, despite its lower price and the incentives on pharmacists to prescribe the cheaper product (Phenytoin 4.11). The CMA also cited additional evidence on market definition: that Pfizer and Flynn ‘profitably sustained supra-competitive prices for a prolonged period’. This is the first substantive point cited by the CMA in its section on market definition and dominance, at paragraph 4.4. It strikes us as potentially circular to cite evidence about excessive pricing in a section on market definition, as we shall explain. Following the du Pont ‘cellophane’ case,12 it is recognised ‘in principle’ that the hypothetical monopolist test for market definition (or SSNIP test) needs to be conducted by considering whether a 5–10% price rise from competitive price levels would be rendered unprofitable by substitution. Considering a price rise from existing price levels could lead to a spuriously wide market definition: some products might act as substitutes only because the existing price of the product under examination is unduly high. We write ‘in principle’ because it is rarely clear how to do that in a way that is not trivial and circular. The CMA calculated competitive price levels from its cost analysis, it observed that existing prices are already well in excess of 5–10% above those levels and therefore concluded that nothing constrained those prices from increasing above the competitive level. It therefore concluded that the product was in a market by itself. This is logical but rather pointless. Following this logic, in any case where prices are found to be at least 10% above competitive levels, as they will be in any adverse finding of excessive pricing, the market will always be defined to include only the products of the dominant company, thus removing the value of market definition (and, as we shall see, dominance) as potential checks on a cost analysis that is incorrect. Quite apart from its circularity, this approach fails to recognise that the competitive price level need not be cost-reflective. Any product will price up to the nearest pricing constraint. Different oil wells, for example, have very different marginal costs of production (the cheapest in Saudi Arabia, the most expensive being unconventional shale or deep sea production) and price up to the marginal cost of the highest-cost field actually producing. This marginal field sets the world price and makes zero margin; other fields that produce at lower costs make margins as ‘infra12

US vs. E.I. du Pont: 351 US 377, 76 S.Ct. 994, 100 L.Ed.1264.

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marginal rents’. Defining a cost-based competitive price level would lead one to conclude that a cheap field is excessively-priced and—by the logic above—is therefore in a market by itself, with a 100% market share and probably dominant. However, this is obvious nonsense. There is a world market for oil and there are necessarily going to be infra-marginal fields which earn positive margins, possibly substantial margins. Almost all markets work like this (but it is particularly obvious in the case of oil).13 In this case, the parties claimed that they were pricing up to a constraint set by phenytoin tablets, citing internal documents. The parties’ case (a) that prices were not excessive and (b) that capsules and tablets were in the same market is therefore logically consistent, just as is the CMA’s case that prices were excessive and that the two were in separate markets. Our concerns about the CMA’s decision in this case do not hinge on a specific market definition, but we do believe there is a problem in using ‘competitive’ prices to define markets (or indeed to perform alternative tests of competitive constraints, as Kaplow (2011) among others has suggested), when those ‘competitive’ prices emerge from the price-cost evidence. The CMA rightly did not base its market definition solely on the price-cost evidence. However, by repeatedly citing the cost data at different stages of the analysis, it risks setting a precedent in which all of those stages of the analysis collapse into one observation of how price relates to cost.

4.2

Dominance

The CMA’s assessment of dominance suffered from the same problem. Dominance did indeed need to be addressed—even for a supplier with a 100% share of the CMA’s preferred market definition—because there could be a constraint on dominance from entry or from the negotiating power of buyers. The CMA dealt with both of these points: listing the weak competitive constraints from parallel imports and NRIM, the existence of significant barriers to entry and insufficient countervailing buyer power. However, before doing so, it again cited the profitability of the gap between prices and costs. In effect, the same price-cost evidence was cited as part of the dominance assessment as had been cited in market definition and (as we shall see) was also cited in the CMA’s assessment of both limbs of the United Brands test for excessive pricing.

13

This principle could be seen as being behind the Commission’s logic in Scandlines. The port of Helsingborg offered a product equivalent to a port with a locational advantage in a competitive market. A consumer choosing between Helsingborg and another, less convenient, port would be prepared to pay extra for Helsingborg.

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Barriers to Entry

The section on ‘potential competition’ in the CMA’s decision is very short. Given the CMA’s product market definition, entry in manufacturing is clearly impossible because only Pfizer can manufacture Pfizer-manufactured capsules and Flynn had an exclusive distribution agreement with Pfizer in the UK. The CMA also observes that there has been little new entry of phenytoin capsules by other manufactures, noting that the drug tariff price has been high, providing a strong incentive to do so, and that NRIM has been unable to constrain either Pfizer or Flynn’s ability to price the capsules above competitive levels (Phenytoin 4.258). Again, this uses the same piece of evidence—the price-cost gap—this time as part of the assessment of entry. Again, it is circular, and it would be entirely possible to construct an equally consistent argument that there were no insurmountable barriers to entry and that the fact that little entry occurred demonstrates that prices were not above competitive levels, i.e. they were sufficiently low as to discourage profitable entry. So, does the absence of entry indicate some kind of barrier, or does it in fact demonstrate that prices were not excessive? We note in passing that this raises the question of whether a price that triggers new entry can be considered a valid benchmark for the competitive price. Phenytoin is not a good case in which to assess that, because of the unusual circumstances created by clinical advice not to switch patients to new brands, so we do not discuss it here.

4.2.2

Buyer Power (Including Regulation)

Perhaps the single most contentious issue between the CMA and the parties to this case was whether the state—in its various roles within the UK health system—could have exercised buyer power or regulatory powers to control Pfizer and Flynn’s pricing. The parties disputed both the CMA’s assessment of the power of the DH to control prices and the strength of any buyer power as evidenced in negotiations with the DH. We do not propose to assess this debate in any detail.14 However, we do note that the interplay of regulation and competition law enforcement has played an important role in recent excessive pricing cases in the pharmaceutical sector. In this case, it was disputed whether the UK authorities had the legal power to control prices. The CMA argued that they did not, in that there is a ‘gap’ which prevents unbranded drugs that are marketed by firms that are also members of the PPRS voluntary scheme from being subjected to statutory regulation, even though the PPRS does not constrain the prices of such drugs. In reply, the parties suggested that the DH could have used its

14 We note that these issues were taken up extensively in the parties’ appeal to the CAT, which had not issued its judgement at the time of writing.

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powers to remove Flynn from the PPRS, but the CMA concluded that the DH would not have had grounds to do so (Phenytoin, Section IV.C.6.). If there is a loophole in the system, so that the regulator cannot intervene (and that is one interpretation of the situation in the UK at the time of the phenytoin case), then it seems reasonable that the competition authority could investigate, although a change in the law to close the loophole would make more sense than a financial penalty, as we shall discuss below. However, in addition to its view that they could not control prices, the CMA also notes that the DH did not do so, for example, noting that the DH’s ‘stated policy is to refer such cases to the CMA’. If it is true that the DH had the power to control prices, but chose not to use it, that raises a policy question for competition authorities. A.G. Wahl (2017) noted that excessive pricing cases can be justified when regulators do not act: Sectoral authorities are clearly better-equipped than competition authorities to oversee prices and, where necessary, act to remedy possible abuses. It would seem, therefore, that antitrust infringements in those situations should be mainly confined to cases of error or, more generally, to regulatory failures: cases where the sectoral authority should have intervened and erroneously failed to do so.

If a regulator did not act at all, this seems entirely reasonable, but if by ‘failed to do so’ Wahl includes the case of a regulator acting in a manner the competition authority considers insufficiently tough, then we respectfully disagree.15 It is established that a competition authority might investigate a competition law breach by a regulated firm within boundaries established by a regulator (see, e.g. the Deutsche Telecom16 or Telefonica17 decisions), but ‘reopening’ a price control is different from investigating whether a regulated firm is conducting a margin squeeze, for example. It is a second opinion on the regulator’s own decision, rather than a competition regulator properly having concerns different from those the regulator considered. It creates uncertainty, harming investment incentives and increasing the cost of capital. If the DH did indeed have the power to intervene but did not use it (as the parties to the Phenytoin case argued), that raises the question of whether it is the existence alone of the effective use of buyer power that can prevent dominance. As a matter of economics, it seems to us that buyer power need not be exercised in order to have its effects; indeed the most powerful buyers might never need to exercise it because the threat is so credible. If suppliers face a powerful buyer, who has the ability to exercise alternative options, then they might reasonably conclude that they are not dominant and if they find that the buyer is prepared to allow them to raise the price, they would presumably take the opportunity to do so. It seems unlikely that they would be deterred by the thought that a competition authority could step in to apply the buyer’s power—in a sense—on that buyer’s behalf. 15

As a matter of policy or principle—not as a matter of law. C-280/08P Deutsche Telekom AG v Commission. 17 T-398/07 Kingdom of Spain v Commission. 16

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In this section the CMA also cited the parties’ allegedly excessive prices yet again, this time as evidence that there was no buyer power (Phenytoin 4.278). Whether or not the DH had the power to control prices during the CMA’s investigation, the government has since moved decisively to give it the power to do so (or to clarify that it does have this power), through the Health Service Medical Supplies (Costs) Act 2017. We discuss this further below, when we consider whether the CMA’s decision to impose financial penalties in this case was justified, given that the law has been changed to remedy the regulatory gap that allowed high prices to occur.

4.3

Excessive Pricing

The CMA assessed the alleged exploitative abuse of dominance using the United Brands framework, citing that case as well as subsequent developments, notably Albion Water II.

4.3.1

United Brands First Limb: Excess

The CMA devoted considerable attention in its decision to an assessment of the ‘first limb’ of the United Brands test: assessing whether prices were excessive in relation to costs. The specific details of this assessment were mostly redacted for confidentiality reasons, so we cannot comment on them. In this section, we will briefly describe the CMA’s approach in general terms and then consider two issues of principle: (a) The CMA’s treatment of indirect cost allocation and how the CMA dealt with the fact that these products were part of a broader portfolio; and (b) Its approach to establishing benchmarks for profitability. Multi-product firms incur some costs that are directly attributable to specific products and others that are common across ranges of products or even across the firm as a whole (and a similar distinction can be made for the geographic specificity of costs). For long-run viability, firms must cover all of their costs, including indirect costs and also including returns to investors or lenders to the business. Shorter-term prices might dip down towards marginal costs, but this is not sustainable in the longer term and would not be a reasonable benchmark for any assessment of excessive pricing. The proportions of costs in different categories in this case were confidential. However, it is common in pharmaceutical cases for indirect costs to be a very significant part of the total. The CMA therefore sought to include an allowance for such costs, in effect creating a unit cost measure equal to long-run average cost. It did so by seeking to allocate indirect costs, using indicators of output. In its main case, it allocated indirect costs according to the number of packs sold, which tends to reduce

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margins on the cheaper lower capsule strength products compared to higher strengths. As a check, therefore it also conducted sensitivities in which costs were allocated according to the number of capsules or the dosage. However, these alternatives seem only to have affected the distribution of indirect costs within the products under investigation, rather than the more important question of how much to allocate to phenytoin overall. Cost allocation is a rather artificial exercise. It is common to seek to identify ‘drivers’ of indirect cost, but the use of this term does not usually imply that those indirect costs are variable in the long term in proportion to any such driver. Many such costs are fixed, for example. Different approaches are appropriate depending on the question under examination. Clearly costs allocated for the purpose of assessing excess must at an absolute minimum include all of the incremental costs that the product under investigation requires in the long run: if Flynn did not supply phenytoin, how much lower would its costs be in the long run, all else being equal? However, that benchmark is surely too low. At the other extreme, one could construct a stand-alone business supplying only the product in question, which would therefore have to cover all fixed costs just from the sale of the products. Such a stand-alone cost measure is not so obviously unreasonable (not least because competition authorities would have no cause to oppose the creation of such an enterprise, e.g. as a demerger). It would be odd if the identity of the supplier of a product and the range of other products that supplier sells were to affect a competition authority’s determination of whether prices were excessive or not, yet that inevitably happens unless the stand-alone measure is used. However, such a stand-alone supplier’s unit costs could be very high in some cases, and it might be unrealistic, in that any real firm would in fact supply more products in order to take advantage of economies of scale and scope. However, between these two extremes is what may be a very large range, within which economic theory provides little guidance as to how much cost to allocate. Suppliers themselves often simply do not allocate such costs. Instead, multiproduct firms often report costs only at the ‘level’ within the business when they become truly incremental. For example, a company with a European headquarters building might recognise that cost only at a European level and not seek to share the cost between different countries. Instead of reporting profitability against some fully allocated cost measure for all products, many firms instead consider ‘contribution’ to whatever costs are incurred as fixed at that level, with contribution margins reducing further ‘up’ the company structure. This matters because firms doing this will often not consider—or even know— whether or not a given product’s price is in excess of ‘its fully allocated cost’ because they will not have calculated that. Some products will have higher contributions than others, but that is all. Allocating common costs by some simple measure such as volumes is therefore a way of assessing whether the products under investigation contribute more or less than average to a firm’s profitability. This raises an obvious difficulty, which is that multi-product firms will almost always experience a wide range of profitability across their products. For a firm, typically, what matters is the profitability of the

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portfolio of its products. Indeed, when there are significant fixed costs to be covered, to seek to earn higher margins on those products that would face a lower price elasticity is efficient, as it will raise revenue in a manner that requires the smallest reductions in sales compared to the allocative efficient ideal of setting each price equal to marginal cost (which might not be possible, if the firm needs to recover fixed costs through those prices). This efficient outcome, termed ‘Ramsey pricing’, can be approximated by constant margins above cost, where common costs are allocated not by outputs, but by revenue or gross margins. It is effectively precluded if the firm faces a threat of being judged to have breached competition law through excessive pricing if ever a single product or small group of products are priced well above average cost. The CMA dismisses both a ‘portfolio’ approach to assessing returns and the cost allocation approaches that would approximate it, describing the latter as ‘circular’ in that excessive prices would result in higher revenues and profits and therefore a larger allocation of cost. However, this is no more circular than the CMA’s approach, which in an excessive pricing case attributes cost to higher margin and lower margin products equally, and thus is bound to find that the higher margin products under investigation have price-cost margins well above the firm’s average and most likely above the market average. The CMA’s approach does not reflect the way businesses behave in reality, as there is no reason for them to price on the basis that each unit sold must cover exactly the same share of overhead costs. The CMA established a reasonable return as a 6% return on sales (ROS), rather than the return on capital employed more commonly used (especially for regulated industries) because of difficulties involved in properly measuring the cost of capital. This may be justified, as the correct measure of capital can be very different from the accounting measures unregulated firms have on their books. The disadvantage of ROS is that there is no benchmark for what constitutes a reasonable level. The 6% figure determined by the CMA as a reasonable return, however, certainly strikes us, as it struck the parties and many observers of the case, as being low. The CMA noted that this is the cap available for a branded product portfolio under the PPRS (Phenytoin 5.93)—although it recognised that a margin of tolerance can be applied within the PPRS increasing it under some circumstances to 9%—and that it exceeded Pfizer’s own internal profit margin in the UK (Phenytoin 5.89). The CMA rejected Pfizer’s submissions that a relevant benchmark is provided by other generic pharmaceutical companies (Phenytoin 5.103). All of these measures suffer from the problem that they apply portfolio profit rates to profitability calculated for a single group of products. The CMA recognised this (Phenytoin 5.94 et seq. Especially 5.102) and suggested that it accepted that generic pharmaceuticals could earn margins above 6%, for example, to recover significant investment or if there were significant commercial risks but that in this case no such factors applied. This seems an inadequate treatment of a fundamental point. Prices of individual products can vary not merely because the costs and risks vary, but because the margins above those costs must necessarily vary to recover fixed and sunk costs. It should not be for firms to justify variations in prices across their portfolio of products by reference to varying costs because that is not how they set prices. The

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CMA is not in the position of a regulator of a natural monopoly, who can typically correct for under- as well as over-recovery. If on average, a company’s ROS is 6%, then some products will earn more than that and some less. If 6% is a cap on any one product’s return, then the average return will necessarily be less than 6%. We recognise that there is a dilemma for competition authorities here. European law does forbid excessive pricing abuses, and it must be possible to assess such abuse at a level below that of an entire firm. If profits are only assessed for the entire firm, the price of a product sold by a sufficiently large firm could never be found to be excessive, no matter how high it was, because it would always be a drop in the ocean. Indeed, the UK CAT has explicitly rejected the portfolio approach to setting prices.18 Equally, however, it cannot be the case that each and every product must be constrained to earn no more than the same; ‘reasonable’ margin on some allocation of costs or business would be impossible. We see no perfect solution, but we recommend that competition authorities should always: • Consider the profitability of prices of a ‘stand-alone’ firm only supplying the products in question and assess the sustainability of such an enterprise. • Avoid using the price-cost excess calculated for a single product also to support market definition and dominance findings—but instead treat those as independent filters to ensure that cost allocation does not determine the whole case. The CMA found that Pfizer was earning an excess return equal to 443% of costplus. The CMA also found that Flynn was earning an excess of 41% on average.19

4.3.2

United Brands Second Limb: Is the Excess Unfair?

The CMA went on to consider the second limb of the United Brands test: whether this excess is unfair. This is an additional test, not an alternative to the first: both must be satisfied. However, within the second limb, two alternative approaches are available: the excess could be assessed as unfair in relation to the price of ‘competing products’ or unfair ‘in itself’. The CMA opted to place almost the entirety of this test on the ‘in itself’ option. Our greatest concern about the CMA’s approach arises from this decision. Again, we do not wish to dispute the precedents that the CMA cites (particularly Albion Water II for this aspect of the case). We do not claim the CMA’s approach was unlawful. However, the approach seems most unwise, for two reasons:

18 Napp Pharmaceutical Holdings Limited and Subsidiaries v Director General of Fair Trading [2002] CompAR 13, para. 413. 19 We do not discuss the CMA’s approach to assessing Flynn’s profitability extensively here, but it applied the same 6% noting that it believed this to be generous given the limited role that Flynn played in the supply chain.

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• The only meaningful benchmark for ‘economic value’ in our opinion is the price of a similar product in a reasonably competitive market, so the ‘comparator’ version of the second limb test has a compelling logic in economic theory. • In contrast, the concepts of ‘economic value’ that are advanced under the CMA ‘in itself’ version of the test seem incoherent, and in practice the CMA ‘in itself’ approach simply defaults back to citing the price-cost analysis. The CMA, to analyse whether prices were unfair ‘in themselves’ (Phenytoin Section 5.D.): 1. Sought and did not find any ‘additional’ factors that might justify the excess of prices over cost. 2. Noted that the ‘substantial’ gap between prices and costs makes the prices unfair in themselves. This is merely the first limb, reprised. 3. Noted that the prices could only be sustained because the companies were shielded from competition. This is essentially the finding of dominance, restated. 4. Noted that the excessive prices had adverse effects on the NHS and its resources. We do not see the relevance of this. High prices—indeed any price above zero— will take up NHS resources and make it worse off. Of these, therefore, only the first criterion adds new information, but this search for ‘plus factors’ that could justify prices above costs is troubling. It reverses the burden of proof: not in a legal sense, perhaps, but in a policy sense. It presumes that companies need to explain to the regulator precisely why their prices are higher than the cost. This is appropriate in price-regulated industries, but it is not appropriate for the vast majority of products in a market economy. Most suppliers have no reason to consider whether there are ‘factors’ that justify their prices being above cost and competition authorities should not require them to produce them unless they can show that they exceed comparators’ prices or are unfair in themselves. This time the CMA seems to be conflating the second limb of the United Brands test with the objective justification criterion in Article 102. It could be argued that not all firms will be required to do this: only those that are dominant. However, as we discussed above, using price-cost tests in the market definition and dominance assessments can find any price that is more than 10% above cost to be the excessive price of a dominant monopolist. We do not recognise the concept of ‘economic value’ that the CMA is seeking, other than by looking at prices of comparators in a reasonably competitive market. Yet this is precisely what the ‘comparator’ version of the second limb of the United Brands test prescribes—which is why we believe it should be strongly preferred over the rather incoherent notion of a price being unfair ‘in itself’—and therefore the latter approach should be taken only if comparators are entirely unavailable.20

We note that AG Wahl has also criticised the notion of a price being unfair ‘in itself’, writing ‘However, the difficulties now sketched out would seem minor as compared to an assessment of whether a price is unfair in itself. If one would—as the Commission in Scandlines—take into account also other non-cost related factors, it would seem less likely that monopoly pricing or any

20

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We find the CMA’s reluctance to consider the pricing of comparators puzzling. The CMA claims that in this case that there simply are none. If the test depended on finding identical products in other, more competitive markets, this could be true, given the CMA’s definition limiting the market to Pfizer-produced phenytoin capsules. However, a comparator would be valid as long as cost and demand conditions are somewhat similar. The economics of producing generic medicines can be similar for different products, because production costs are often a small part of the total cost of the supply chain. Consequently, the price of a similar capsule that has an entirely unrelated clinical use might be of interest, if such a product can be found priced under conditions of competition. However, the CMA did not examine such comparators. It seems quite possible in this case that assessing such comparators would still result in prices being found to be excessive. However, from what we know of pharmaceutical prices from other cases in which we have been involved, we suspect that the benchmark would be considerably higher than that found by the CMA using its purely cost-based approach. It would also be much more soundly based than that approach. Finally, we note here that the CMA does examine one comparator—and that is the pricing of Pfizer’s Epanutin phenytoin capsule before the sale to Flynn. This intertemporal comparison seems entirely consistent with the United Brands approach. Indeed, the parallel is very precise. The Court accepted United Brands’ argument that prices in Ireland were below cost and therefore that this comparison could not demonstrate excessive pricing. Similarly, in this case the parties argued that Epanutin had been loss-making. Because data are confidential, we are not in a position to judge the validity of these arguments, but this seems to us the right discussion to have, as opposed to the incoherence of attempting to assess whether prices are unfair ‘in themselves’.

4.4 4.4.1

Remedies and Penalties Direction on Pricing: ‘Try to Guess the Number I Am Thinking of’

The CMA found that Pfizer and Flynn had each committed four separate infringements (for the four different strength capsules). The parties were directed to set noninfringing prices, but ‘[t]he Directions do not specify a specific price that the Parties must each respectively charge as the CMA is not a price regulator and it is for an undertaking to self-assess their own compliance with competition law’ (Phenytoin 7.5).

price less than that would be considered excessive. Assuming that the primary objective of the pricing strategy of any firm (on a free market) is to extract the maximum from its customers, it is respectfully submitted that I fail to see that any price would be excessive in itself’ (Wahl 2007).

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The CMA cited the General Court’s judgement upholding the Commission’s decision penalising Microsoft for non-compliance21 as a precedent for not specifying a price, but in an excessive pricing case, it seems unnecessarily to add to business uncertainty not to do so. The Microsoft case did not involve consideration of whether Microsoft’s prices for access were reasonable; setting such prices was simply a part of the remedy. In an excessive pricing case, the competition authority presumably has assessed what a noninfringing price should be, so it is hard to see why it should not publish it. In the face of uncertainty, suppliers will play safe, seeking to set a price that is clearly below levels that might induce investigation for non-compliance. The CMA at various points in the decision emphasised that the 6% ROS it had used in its cost-plus assessment need not be taken as a noninfringing price, but it is hard to see what other benchmark the parties or others in the industry could use. As we have noted, the 6% figure seems low, particularly if it is interpreted as a cap on individual products’ pricing, as the average return across a firm’s portfolio must then inevitably be less than 6% as some products will not be able to make this return.

4.4.2

Financial Penalties for Excessive Pricing? To What Purpose?

Pfizer was required to pay a penalty of £84 million and Flynn a penalty of £5 million. Pfizer’s penalty was by far the largest fine in UK competition law history. The CMA applied a 400% uplift to Pfizer’s initial penalty for ‘deterrence’, citing the need ‘to ensure that other dominant firms with captive customers are deterred from engaging in such conduct in the future’ (Phenytoin 7.70). It is interesting to note that the CMA’s decision contains as an annex the EU’s submission to a 2011 OECD roundtable on excessive prices but does not reference the UK’s own contribution, a paper by the OFT’s then Chief Economist, Amelia Fletcher, together with Alina Goad (OECD 2011a). This concludes, among other things, that financial penalties are inappropriate in excessive pricing cases. We agree. There are alternatives. In the UK, the competition authority has powers unique in Europe to investigate and remedy markets in which competition is not working well. Similar to the Commission’s sector inquiries in scope, but with formal informationgathering and remedial powers, the UK’s ‘market investigation regime’ allows the CMA to investigate whether any ‘adverse effects on competition’ exist in a market or markets. Such adverse effects arise from ‘features of the market’ that could include firm conduct but could also include structural factors, regulation or consumer behaviour. The CMA has emphasised that adverse findings in such investigations do not imply that market participants have broken competition law and no financial penalties are possible (except for procedural matters during the investigation). Strong remedial powers are available, including enforced divestments to create a more competitive market structure. When government actions, especially regulation,

21

Microsoft v Commission (‘Microsoft’), Case T-167/08, EU:T:2012:323, paragraphs 84–91.

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cause the adverse effects on competition, the CMA can recommend changes—and the government or relevant regulatory body must provide a public response. In almost all of these market investigations, the CMA and its predecessors determined that prices were excessive, usually on the basis of profitability analysis similar to that undertaken in this case. Details vary from case to case but, for example, in Home Credit, the Competition Commission found that ‘we estimated, based on the number and value of loans issued during the period we analysed and on our estimate of profits in excess of the typical cost of capital, that the price of an average loan was approximately £20 higher than could have been expected in a market in which competition ensured that prices reflected only the costs of provision’ (CMA 2006a). The CMA has identified £345 million annually in customer savings arising from its predecessor bodies’ market inquiries and market investigations (Coscelli and Horrocks 2014) and has noted that its remedies and recommendations have led to prices falling towards competitive levels. It is hard to see a distinction between those cases and the recent excessive pricing cases under the Competition Act. In Phenytoin the lack of competition was not a result of the investigated firms’ conduct but rather the clinical advice that limited scope for competition from other suppliers of the drug. Furthermore, as the UK Government itself acknowledged, there was a failure on the part of the Department of Health to act. If indeed it could not do so, then there was a regulatory ‘gap’, but this has now been closed. Thus, a market investigation leading to a recommendation for legislative reform to close that gap would have been a possible alternative to this case. One reason (not the only one) to impose penalty fines is deterrence. The CMA cited other objectives in its decision, but the largest single component of the larger of the two fines related explicitly to deterrence. ‘The CMA has a statutory responsibility to have regard to the desirability of deterring infringing undertakings (and others) from engaging in conduct which infringes the Chapter II prohibition and or Article 102’ and increased Pfizer’s fine by 400% for deterrence (Phenytoin 7.100 et. seq.). How likely is it that a penalty for excessive pricing will deter similar abusive behaviour in the future, and how great is the danger that effective deterrence of abusively high prices will also deter normal and pro-competitive business behaviour? To take the first question first, we are not aware of any studies of the deterrent effect of financial penalties on excessive pricing cases. However, deterrence is likely to be most effective when the abusive behaviour is clearly distinct from normal business behaviour. All businesses seek the best prices they can get. The message about compliance with the excessive pricing prohibition is therefore rather fuzzy: ‘sell products for as much as you can, but not too much’. How much is too much? Are all products sold at a return on sales greater than 6% potentially risking an excessive pricing case? A firm considering how to avoid a possible investigation will get little help in this area from competition authorities. The CMA’s ‘at-a-glance’ guidance for business does not mention excessive pricing. Businesses are encouraged to ‘watch out for’ three forms of collusive behaviour and in a smaller box ‘abuse of a dominant

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position’, the latter leading only to discussion of exclusionary abuses (CMA 2015). The chapter on abuse of a dominant position in the CMA’s Competition Law Risk makes no mention of excessive pricing. The most formal and detailed CMA guidance on abuse of dominance briefly mentions excessive pricing without discussion (CMA 2004). The European Commission’s Guidance Paper on its enforcement priorities in applying Article 102 explicitly excludes exploitative abuse. And so on. We are not aware of any meaningful guidance from any major jurisdiction on excessive pricing. None of the contributions to the OECD roundtable on promoting compliance specifically mention how to promote compliance with excessive pricing rules (OECD 2011b). The EU’s contribution lists many actions the Commission has taken to clarify its approach to competition law. None relate to exploitative abuse. At an OECD roundtable on ‘Guidance to Business on Monopolisation and Abuse of Dominance’, only the Dutch and South African contributions mention exploitative abuse (OECD 2007). Indeed, the UK’s contribution notes ‘[p]ricing behaviour which is not capable of excluding a competitor which is no less efficient than the dominant firm is unlikely to be abusive or to cause appreciable consumer harm’. Obviously, it means ‘unlikely to be found to be predatory’, but the statement merely demonstrates that competition authorities rarely remember to mention exploitative abuse. There is, it seems, almost no guidance to business on how to avoid excessive pricing. Of course, ignorance is no defence, and businesses and their advisors can look to the case law. Nor are we proposing that competition authorities put out detailed guidance. On the contrary, the complexity and diversity of pricing conditions surely imply that no meaningful guidance can be produced. Yet this same complexity also implies that deterrence is likely to be completely ineffective. We do therefore strongly question the likelihood that a financial penalty for excessive pricing will meaningfully act to deter any future abusive behaviour. Ironically enough, the UK itself provides the best empirical evidence of this as the competition authority there has repeatedly found excessive pricing, in multiple sectors, by firms apparently undeterred by this provision in the law. As we noted earlier, the CMA has found excessive pricing by major businesses and sectors in most of the 16 market investigations it has conducted under the Enterprise Act. In the very first such investigation, Storecards, it concluded ‘Based on all the evidence, we found that the detriment to customers in terms of the excess prices paid has been substantial: over the period since 1999, the customer detriment has been at least £55 million a year and possibly significantly more’ (CMA 2006b). At least six companies were considered main providers of store cards, presumably setting excessive prices. The last to be published at the time of writing, Energy, concluded ‘we estimated the detriment from excessive prices to the domestic customers of the Six Large Energy Firms to be about £1.4 billion a year on average over 2012–2015, the entire period for which we had data, with an upwards trend, reaching almost £2 billion in 2015’ (CMA 2016).

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Not one of these firms had been deterred from excessive pricing by the provisions of the Competition Act or Article 102. This suggests those provisions have no deterrent effect. Secondly, even if competition authorities can deter abusive excessive pricing, what would be the consequences of that deterrence? In our view, almost any firm making high profits could find itself the target of an excessive pricing case. The margins that have been found to be ‘excessive’ are well within normal business ranges. As we have noted, ‘dominance’ can be found for any product priced more than 10% above cost. It seems to us obvious that many products earn an ROS of 6% or more. So, on the face of it, deterring companies from pricing at such levels would produce many more market distortions than it prevents. In short, we expect that the financial penalty, including the CMA’s 400% uplift for deterrence, will not in fact deter excessive pricing, but if we are wrong and deterrence does have an effect, it would surely do more harm than good. If private actions for damages follow, of course, then any such distortionary effect would be significantly amplified.

5 Conclusion The Phenytoin case provides an important piece of evidence in the ongoing debate as to whether ‘excessive pricing’ should be considered an abuse and if so how to assess it. The case has some unusual features that to some extent limit its applicability to other markets. In particular, clinical advice not to ‘switch’ patients from one supplier to another clearly has the potential to constrain competition very directly. The CMA cited this fact but also used its price-cost comparison in each of the steps of the analysis. In doing so, it ran the risk of establishing a very narrow approach that could be used to ‘prove’ excessive pricing solely on a price-cost analysis, in the following way: • Define markets narrowly as being limited to the specific products: there were no substitutes preventing prices rising, so the products are in a market by themselves. • Conclude that they are dominant, since no in-market competition exists and clearly neither entry nor buyer power was, in fact, able to constrain them from raising prices. • Conduct the price-cost analysis as the first limb of the United Brands test. • Conduct the second limb by noting that a large enough gap can be unfair in itself, by noting that no competitors prevented the price rises and by failing to find any specific reasons why prices should be higher than costs—all of which relies on the first limb. Thus, what should be a test with several checks and balances in it can become a single exercise in measuring whether prices exceed cost. This represents rather a low evidential threshold, whether applied as here to single-firm dominance or even to

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collective dominance. On this basis, there could be a great many markets in which prices could be found to be ‘excessive’, apparently enabling widespread regulatory intervention that would surely be harmful to the European economy. We emphasise again that the CMA itself did not rely entirely on its price-cost analysis for market definition and dominance in this case. However, it did collapse the two limbs of the excessive pricing test into one, as its examination of whether prices were unfair ‘in themselves’ relied heavily upon this analysis and did not significantly add to it. Better, we would suggest, focusing on the only measure of ‘economic value’ that makes any sense: the price of similar products in a reasonably competitive market. By not doing so (except for a brief consideration of past prices in the past), the CMA was led to a benchmark which seems unduly low. Many firms’ products, in the pharmaceutical sector and elsewhere, will make returns very substantially exceeding the CMA’s 6% ROS. The CMA might argue that in such cases, the suppliers can plead that they do have plus factors—such as R&D investment costs—that justify the price. But this is not how things should work in a market economy. It is unfeasible, and it should not be necessary for companies to justify the prices of each of their products to a state regulator. Individual products will often be priced at levels above—sometimes very substantially above—their ‘share’ of total costs. This is normal and forbidding it would be economically harmful. We also strongly doubt whether financial penalties were appropriate. The parties under investigation were not accused of any exclusionary conduct; they did not create any market power they possessed; it arose from clinical advice. We find it implausible that in these circumstances, a private firm should be expected not to increase prices. The largest component of Pfizer’s fine was for ‘deterrence’, but we see no evidence that excessive pricing laws deter excessive pricing; indeed it is hard to imagine what an internal compliance programme to avoid such outcomes would say. Competition authorities including the CMA have been unable to provide any such guidance so how can private firms? In our view, using an instrument that implies fines and penalties and is quasicriminal in nature in these circumstances was fundamentally misconceived. High prices and high profits can be a signal that competitive pressures are very weak. Clinical guidance by a state body allegedly gave a supplier market power. Normally, such high prices would attract entry, but in this case, the clinical guidance prevented that. The high prices were not restrained by regulation, signalling a gap in the regulatory system. The signal was observed, and the government responded: legislating to give itself powers (or reaffirm its power) to control prices in such circumstances. That seems to us a sensible way to respond, if the best solution of all—to remove constraints on competition—was not available on clinical grounds. If this had resulted from a market investigation, the CMA would be congratulating itself on a job well done. It is hard to see what additional benefit arises from deciding that the firms involved behaved badly and penalising them for it.

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References CMA. (2004). Abuse of a dominant position: OFT402. CMA. (2006a). Final Report, CMA Home Credit Investigation. CMA. (2006b). Final Report, Store Card Credit Services. CMA. (2015). Competing fairly in business: At-a-glance guide to competition law. CMA. (2016). Final Report, Energy Market Investigation. Coscelli, A., & Horrocks, A. (2014). Making markets work well: The U.K. market investigations regime. Competition Policy International, 10. Kaplow, L. (2011). Why (ever) define markets? (Harvard Law and Economics Discussion Paper No. 666). Available at SSRN: https://ssrn.com/abstract¼1750302 OECD. (2007). Roundtable on guidance to business on monopolisation and abuse of dominance. Available at http://www.oecd.org/daf/competition/abuse/40880976.pdf OECD. (2011a). Roundtable on excessive prices. Available at http://www.oecd.org/competition/ abuse/49604207.pdf OECD. (2011b). Roundtable on promoting compliance with competition law. Available at www. oecd.org/daf/competition/Promotingcompliancewithcompetitionlaw2011.pdf Wahl, N. (2007). Exploitative high prices and European competition law: A personal reflection. In Swedish Competition Authority (Ed.), The pros and cons of high prices (pp. 47–64). Stockholm: Konkurrensverket. Wahl, N. (2017). Opinion in Case C-177/16, Biedrība ‘Autortiesību un komunicēšanās konsultāciju aģentūra – Latvijas Autoru apvienība’ v Konkurences padome. Available at http://curia.europa. eu/juris/document/document.jsf?text¼&docid¼189662&pageIndex¼0&doclang¼EN& mode¼lst&dir¼&occ¼first&part¼1&cid¼1273145

A Coherent Approach to the Antitrust Prohibition of Excessive Pricing by Dominant Firms David Gilo

Abstract The aim of this chapter is to provide a coherent approach to the prohibition of excessive pricing by dominant firms as an antitrust violation. It first highlights the rationale for the prohibition and shows that the prohibition exists and is also enforced in many countries. It then shows why investment considerations should be assessed on a case-by-case basis, rather than as an overreaching reason for a lenient approach toward all cases. Next the contribution provides a three-step framework that should be used to assess an excessive pricing case: The first step is to establish a “more competitive price” to which the price charged should be compared (this involves economic analysis); the second step is to assess whether the challenged price is allegedly excessive compared to this more competitive price (this does not involve economic analysis but rather a legal policy decision); the third and final step is to assess the dominant firm’s efficiency claims, according to which the allegedly excessive price was necessary in order to establish a pro-consumer benefit that outweighs the harm to consumers (this step involves economic analysis). This study then makes three particular policy claims: First, liability for excessive pricing should not be limited to cases that mix exploitative and exclusionary behavior; second, antitrust liability should be for past behavior, regardless of the prospects of future competition. Finally, excessive prices are not self-correcting.

1 Introduction The purpose of this chapter is to introduce a coherent approach to the prohibition of excessive pricing by dominant firms under competition law. I first show that the ultimate rationale behind competition law, preventing deadweight loss caused by high prices (or low quality or variety) and preventing transfer of value from consumers to firms, demands that the antitrust prohibition of excessive pricing by D. Gilo (*) Buchmann Faculty of Law, Tel Aviv University, Tel Aviv-Yafo, Israel e-mail: [email protected] © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_4

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dominant firms be enforced with the same vigor as the rules that are aimed to promote competition. Competition is a tool to achieve these ultimate pro-consumer goals, but competition law in most countries is equipped to deal with situations in which the competitive process did not work in achieving this ultimate goal: the prohibition of excessive exploitation of consumers by a dominant firm. I also show that that not only is this prohibition the norm in the vast majority of OECD countries, the enforcement of this prohibition around the world, de facto, is not smaller than a few other antitrust violations. This shows that the claim that the prohibition is hardly enforced is de facto inaccurate. These issues are all discussed in Sects. 2 and 3. Section 4 shows why considerations related to the stimulation of ex ante investment by the dominant firm should be assessed on a case-by-case basis, rather than using them as a justification for an overall “hands-off” or almost “hands-off” approach to the prohibition of excessive pricing by dominant firms. Section 5 deals with the related claim according to which the social cost of erroneously holding that a price was excessive when it was needed for valuable investment is not necessarily larger than the cost of erroneously holding that a price was not excessive even though it was not needed for valuable investment. Section 6 shows my proposal (which is consistent with the case law but makes enforcement more coherent) regarding how to assess an excessive pricing case. The proposed method of assessment proceeds in three steps. First, the price to which the allegedly excessive price should be compared needs to be calculated. This is a price that is “more competitive” than the challenged price charged by the dominant firm. The “more competitive” price is either a price from a suitably comparable market, segment, or period, which is lower than the challenged price, or a measure of the relevant average cost for supplying the dominant firm’s product. I explain why the comparison method, which may be enough in order to complete this stage of the assessment, is more warranted than the cost-based method. Nevertheless, I stress why the cost comparison method is a legitimate method, as a last resort, when there is no good comparative benchmark. I also show how the vast majority of cases and literature on the subject see the competitive benchmark as the sole benchmark, rather than a benchmark that is affected by consumers’ willingness to pay for the product. The second stage of the analysis is determining whether the challenged price charged by the dominant firm is excessive compared to the more competitive price determined in stage 1. I show how this second stage (determining what is excessively above the more competitive price) involves a legal policy question and not an economic question, while the first stage (determining the more competitive price) involves economic analysis. I show how this method for assessment is identical to the method used with antitrust violations demanding a risk of substantial harm to competition: Here too, there is a first stage (economic analysis), determining the level of expected harm to competition, and a second stage (a legal policy question) determining what is “substantial harm.” Finally, there should be a third stage of the assessment, in which the dominant firm could show that the allegedly excessive price determined in stages 1 and 2 is nevertheless justified due to pro-consumer efficiencies, such as the need to stimulate valuable investment. I claim that while the

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measure of what is excessive for the second stage should ideally be fixed and predictable, in the third stage that deals with efficiencies, the special characteristics of the dominant firm can be taken into account. Section 7 shows that it is not justified to limit intervention to cases in which the dominant firm not only exploited consumers but also excluded rivals. Section 8 emphasizes that antitrust liability for charging excessive prices is for past behavior of the dominant firm and does not depend on the question whether future competition is expected to lower prices or not. Section 9 clarifies that excessive prices are not self-correcting, and the next section concludes.

2 Is Excessive Pricing by Dominant Firms an Antitrust Violation and Why? The first thing a competition authority, or a court enforcing competition laws, needs to determine when a case of alleged excessive pricing by a dominant firm is to be considered by them is whether under their competition laws, excessive pricing by dominant firms is an antitrust violation. If it is a violation, it means the legislator wishes that the antitrust authority and courts under antitrust law enforce the prohibition. Not enforcing it, or adopting so many qualifications and proviso’s that de facto the prohibition is hardly enforced, would be against the intent of the legislator and the rule of law. According to the round table on excessive pricing conducted by the OECD Competition Committee in 2011, excessive pricing by dominant firms is considered a violation of competition law in all OECD countries but five (the USA, Canada, Mexico, Australia, and New Zealand).1 The abundance of a prohibition of excessive pricing by dominant firms, and more generally classifying behavior by a dominant firm that exploits consumers excessively as an abuse of a dominant position, is natural and justified. After all, the ultimate aim of competition law is to fight the abuse of market power, which is precisely the power to exploit consumers. The reason competition law wishes to fight market power is the fact that market power—the power to set prices (or other trading terms) that are above competitive levels, harms consumers and social welfare. The harm to social welfare arises because prices that are higher than the marginal cost of supplying a product create deadweight loss: Consumers’ loss from such high prices is higher than the firm’s profit from these high prices, because the high price causes consumers who value the product at more than it’s marginal cost, but less than the excessive price, not to purchase the product. From a social welfare perspective, given that the product exists and investments had been made (a consideration that we will address below), we would want consumers who benefit from the product by more than the marginal cost of supplying it to purchase the 1

See OECD.

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product. Of course, a price somewhat higher than the marginal cost of producing the product is usually essential in order to stimulate entry into the market- and welfareenhancing investments. But if the price is excessively high above marginal cost, then the premise is that the dominant firm earns more than is necessary to stimulate such investment, and social welfare is harmed due to excessive deadweight loss.2 Another rationale for competition law’s battle against the abuse of market power is the exclusive weight most competition laws place on consumer welfare: Since in most jurisdictions, competition law is focused solely on the promotion of consumer welfare, competition law is concerned not only with the deadweight loss caused by market power but also with the transfer of value from consumers to the firms. One major tool that competition law uses in order to achieve this main goal of fighting market power is by promoting as much competition as possible. The premise is that when the competitive process works, firms will lower prices and improve their products and variety, in order to snatch consumers from one another, and that ultimately this process would erode the ability to exploit consumers. It is well-known, however, that at times, despite the efforts of competition law and its enforcers to promote competition, the competitive process does not succeed in preventing exploitation of consumers. This is why competition law in most OECD countries supplements its norms regarding promotion of competition with a prohibition of excessive exploitation of consumers by dominant firms. The reasoning behind such a prohibition is that if a firm holds a dominant position in a market, and it uses this position to excessively exploit consumers, by definition the competitive process did not achieve its aim during the time that the dominant firm excessively exploited consumers. This raises the need to forbid such excessive exploitation directly and deter dominant firms from engaging in such exploitation. Furthermore, this prohibition is aimed at promoting the ultimate goal of competition law, which is, as noted, the prevention of market power.

3 The Prohibition of Excessive Pricing by Dominant Firms Is Enforced While in my view competition agencies are still more reluctant to enforce the prohibition of excessive pricing than what is justified, it should be noted that this prohibition is nevertheless enforced in practice. I am aware of 21 excessive pricing cases initiated by mature competition agencies around the world, and dozens of cases initiated by newer competition agencies, particularly in Eastern European countries. In order to receive some perspective on whether this level of enforcement of the prohibition of excessive pricing is high or low, we can make a comparison between

As I will claim below, a dominant firm would always have the opportunity to show in its defense that the allegedly excessive price it has charged is justified by the need to stimulate investment that is valuable to consumers.

2

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the enforcement of the prohibition of excessive pricing and the enforcement of two noncontroversial antitrust prohibitions. First, consider the prohibition of predatory pricing (i.e., a dominant firm charging a price for all of the units it sells that is so low that it may harm competition, such as a price below its own cost). To the best of my knowledge, the EU Commission made four decisions regarding predatory pricing,3 and there is one pending investigation.4 Second, consider the textbook practice of a most-favored-consumer clause, where a supplier promises one buyer that the supplier will not give other buyers better terms.5 Like the prohibition of predatory pricing, when a most-favored-consumer clause may substantially harm competition, it is uncontroversial that it is an antitrust violation. Nevertheless, the number of cases is extremely small. To the best of my knowledge, the EU Commission has two decisions concerning such a practice and one ongoing investigation.6 In this light, it is not accurate to say that competition agencies seldom initiate proceedings regarding excessive pricing or that the prohibition is hardly enforced. It is true that the number of decisions in which the price of a dominant firm was eventually found to be excessive is small (probably too small, in my view, from a policy perspective), but as we can see, there are other noncontroversial antitrust violations in which the number of decisions condemning the practice is quite similar.7 In any case, one of the aims of this work, and my previous papers on the subject, is to show that the reasons often claimed to justify reluctance of antitrust agencies to enforce the prohibition are often flawed.

3

These are Decision 85/609/EEC 1985; Decision 92/163/EEC 1991; PostDanmarkA/Sv Konkurrencerådet; France Télecom 2003. 4 See Qualcomm Case COMP/39.711. 5 This is unlike the lately relatively abundant claim of competition agencies concerning price parity, where a hotel, for example, promises a platform, such as Booking.com, not to give end consumers a price that is lower than that posted for that hotel by Booking.com 6 See Case COMP/38.427 PO Pay; Case COMP/39.847/E-Books Case and the ongoing inquiry into E-book MFNs and related matters: See (European Commission). Note that even if I am underestimating the number of such cases by 50%, we can still see that the number of challenges by mature competition agencies against excessive pricing by dominant firms is not necessarily smaller than the number of challenges in the case of these two undisputed antitrust violations. 7 To be sure, one reason why there are only a few cases is that there are only a few incidents of infringements to begin with. This claim, however, implies that the number of agency decisions is an imperfect proxy in order to determine whether agencies are reluctant to enforce a prohibition— whether it is the prohibition of excessive pricing or that of, say, most-favored-consumer clauses. That being said, there is no particular reason to assume that the incidence of excessive pricing infringements is more abundant than the incidents of most-favored-consumer clause infringements.

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4 Investment Considerations Should Be Examined on a Case-by-Case Basis The wish to stimulate ex ante investment cannot, in itself, justify not prohibiting excessive pricing by dominant firms under competition law, nor can it justify systematic reluctance to enforce the prohibition. Investment considerations could justify an allegedly excessive price in a particular case, however. Had high prices been inherently advantageous in that they are always necessary to stimulate valuable ex ante investment, competition agencies should have not been concerned, for example, with mergers or restraints of trade that may raise prices. But as Fred Jenny mentions in his contribution on the subject, competition agencies commonly block mergers or restraints of trade that may cause prices to rise.8 Had high prices been always necessary in order to stimulate valuable investment, a merger that is likely to raise prices should never be blocked. Another possible claim regarding the benefits of high prices ex post and their relationship to investment ex ante is that a firm supposedly invests and competes in order to snatch market share from its competitors, with the hope of monopolizing the market and then charging a high price. But this notion is based on the naïve notion that the firm expects to be the only one who competes in this manor, in a way that causes it eventually to be dominant. Any firm that is not as naïve knows that its rivals are likely to invest and compete themselves, so that dominance would be achieved only with a relatively small probability. The only clear exception is the rare case where competition is for the market and not in the market, that is, the rare case where firms compete ex ante in order to become the market monopoly ex post. Otherwise, firms are expected to invest in their products and compete not necessarily because they expect to eventually be monopolies, but rather because if they do not invest and compete, their rivals will, and they will lose market share.9 Moreover, the notion that excessive pricing by a dominant firm is always beneficial due to stimulation of investment stands in contrast to the premise behind competition law, according to which a competitive market structure is better for welfare than a monopoly. According to this premise, promoting competition as much as possible is welfare-enhancing. Thus, competitive profits are assumed by competition law to usually suffice to stimulate valuable investment. Had that not been the case, a dominant firm would have been able to claim that investment considerations also justify exclusionary behavior: According to such a claim, if the dominant firm drives rivals out of the market, or blocks entry, it could always claim in its defense that then it would be able to make higher profits that would stimulate ex

See Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume. 9 See, e.g., p. 701–728 in Aghion et al. (2005), who show that with intermediate levels of imperfect competition, firms tend to invest more as the market becomes more competitive. This point was also raised by Yossi Spiegel in a policy paper submitted to the Israeli Antitrust Authority. See Spiegel (2016). 8

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ante investment. Clearly, there is no such “investment defense” for exclusionary conduct under current competition law. With excessive pricing claims, on the other hand, I propose to allow such an “investment defense.” Accordingly, while investment considerations do not create across-the-board permission to charge excessive prices, the dominant firm could claim that although its price is allegedly excessive, it is nevertheless justified in a particular case by efficiency or investment considerations. In such a case, the dominant firm’s claim should be treated like any other claim for an efficiency defense. Such an efficiency defense is similar to an efficiency defense raised by a dominant firm who engaged in exclusionary conduct that amounts to an alleged violation. The dominant firm could then prove that there are pro-consumer efficiencies that nevertheless justify the exclusionary conduct. The same applies to efficiencies claimed to justify mergers that may raise prices. It is often claimed, in a particular case, that although the merger is allegedly likely to raise prices, it is necessary in order to achieve pro-consumer benefits or pro-consumer efficiencies or to stimulate valuable investment. In the same vein, a dominant firm may claim that an allegedly excessive price is justified by efficiencies, including the need to stimulate valuable investment, which benefits consumers in a way that offsets the harm imposed by the allegedly excessive price.

5 A Note on the Cost of Errors The purpose of this section is to rebut the claim that the social cost of erroneously condemning an excessive price that was necessary to stimulate valuable investment is inherently larger than the social cost of an error of not condemning an excessive price that was not necessary to stimulate valuable investment.10 We have no real knowledge of the actual sizes of the costs stemming from each of these kinds of errors. One thing that is clear is that when the decision-maker condemns an allegedly excessive price that was necessary to stimulate valuable investment, at least consumers gain from the lower price. On the other hand, when the decisionmaker makes the opposite error, and fails to condemn an excessive price that was not necessary to stimulate valuable investment, consumers’ loss is total: There is no offsetting gain for consumers. Similarly, it has been claimed that the cost of erroneously condemning a dominant firm’s price as predatory (i.e., too low, in a way that may exclude competitors) is lower than the cost of erroneously condemning an excessive price.11 This claim too overlooks, however, the fact that when mistakenly condemning a price as predatory,

See Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume. 11 See Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume. 10

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the decision-maker causes prices charged by both the dominant firm and its rivals or new entrants to be higher, in a way that harms consumers. It is true that such higher prices can, in turn, stimulate investment. But first, even if they do stimulate investment, at the same time they harm consumers by unnecessarily making prices higher: The dominant firm is trying to compete on the merits with regard to price, and its rivals are expected to respond by lower prices as well. The erroneous finding that this behavior by the dominant firm is predatory prevents this behavior. Second, it is not obvious that in all cases these artificially higher prices would stimulate investment. Accordingly, the cost of erroneously condemning a price as excessive may well be lower than the cost of mistakenly condemning prices as predatory: Due to erroneously condemning a price as excessive, at least consumers enjoy a lower price, and the cost of the error lays only with regard to investment. The difference between these two violations with respect to the cost of errors depends on the question what is more harmful: an excessive price or less investment, and the answer to this question is not straightforward and depends on the circumstances of each case.

6 How to Assess Whether a Dominant Firm’s Price Is Excessive One of the main objections to the prohibition of excessive pricing by dominant firms is based on the allegation that whether the price was excessive is too difficult to assess. The purpose of this section is to rebut this claim. First, it should be noted that unlike price controls imposed by the government of a sector-specific regulator, the prohibition of excessive pricing by a dominant firm is normally applied ex post, after excessive pricing occurred. Hence, the administrative costs involved in the antitrust prohibition of excessive pricing are inherently smaller than those of price regulation by an industry-specific regulator. Once the antitrust prohibition is in place, if its deterrent effect is strong enough, it need not be actually expended, as dominant firms would refrain from charging excessive prices to begin with. Due to the ongoing deterrence created by the prohibition, the dominant firm is expected to restrain itself on an ongoing basis, with no need for monitoring its behavior. It should be noted, in this context, that the typical remedy in an excessive pricing antitrust case should not be ordering the dominant firm to charge a new, lower price, as an industry regulator does. It should involve either damages (in a private action) fines or structural remedies (in an action brought by a competition agency). These remedies should be primarily intended to deter the dominant firm from charging an excessive price in the first place. This is particularly the case with fines and damages as remedies. Of course, a structural remedy, such as demanding divestiture of one of the dominant firm’s assets, has both a deterrent effect and an effect that can promote competition in the future. Still, antitrust agencies and courts need to be willing and able to determine what an excessive price is and enforce the prohibition. This brings us to a related

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objection, according to which there are no clear guidelines on how to assess whether the price in a particular case is excessive or not and raising the concern that the norm is not predictable enough for the dominant firm to comply with. In the following paragraphs, I will give an outline on how I believe excessive pricing cases should be assessed and why, in this light, the assessment of an excessive pricing claim is not more difficult than many other antitrust inquiries. Furthermore, my proposal does not contradict the case law on the matter. As a preview to my suggestion, let me start with a sketch of the way I propose to assess an excessive pricing case. It involves three steps. The first step is to determine the “competitive price” or an upper threshold to the competitive price. The second step is to check whether the price charged by the dominant firm is excessively above the competitive price (or the upper threshold of the competitive price). The third step is to allow the dominant firm to show an efficiency defense for the allegedly excessive price it has charged, such as a claim that this price was necessary in order to make an investment or improve the product so that as a whole, consumers were not substantially harmed. This three-step analysis resembles the three steps recently approved by the Spanish Supreme Court in the Explosivos case.12 This third step, regarding efficiencies, is not different from what is required in any other abuse of a dominance case. In exclusionary abuse cases too, after establishing a prima facie case for a violation, e.g., based on the degree of harm to competition stemming from the conduct, the dominant firm may raise the burden that pro-consumer efficiencies nevertheless justify the behavior. Let me now elaborate on these three proposed steps:

6.1

Step 1: What Is the “Competitive Price” or an Upper Threshold of the Competitive Price

The purpose of this sub-chapter is to establish the first step of the assessment of an excessive pricing case, of determining a “competitive price” or an upper threshold of the competitive price. There are two possible benchmarks that can be used: comparative benchmarks and cost-based benchmarks.

6.1.1

Comparative Benchmarks

The first thing to note, in this respect, is that from a policy perspective, in order to serve the aim of antitrust law, the only relevant benchmark to assess whether price is excessive is the competitive benchmark. That is, the court or antitrust agency needs to determine an upper bound to the so-called competitive price (rather than, e.g.,

12 See Resolution of 12 February 2008 (2013) and Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume.

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demand-based benchmarks, hinging on consumers’ willingness to pay for the product). It is true that while perfect competition brings price all the way down to the marginal cost of production (the cost of producing or supplying the marginal unit), imperfect competition in the market could produce different prices. This fact does not imply, however, that we should not strive for a competitive benchmark. It just means that we should use this benchmark wisely, being aware of the fact that the “competitive price” under imperfect competition, is ambiguous. As I will show below, the task is much easier if the plaintiff, court, or antitrust agency has a good comparative competitive benchmark. A good comparative benchmark exists, for example, when there is information about the price the dominant firm itself charged in a more competitive market, segment, or period. When a comparison to a more competitive market exists, the court or antitrust agency need not pin down what the actual or ideal “competitive price” is. It only needs to check whether the price the dominant firm charged is excessively above the more competitive price that was found. Hence, once the legal policy decision as to what is “excessive” is made (and as will be shown below, this is indeed a legal policy question and not an economic question), all that remains for assessment of the case is inquiring whether this level of excessiveness was reached compared to the more competitive price found. Since the more competitive price is higher than the ideal “competitive price” we are striving for, then if the price charged was excessive compared to the more competitive price, it was a fortiori higher than the ideal “competitive price.” In particular, if the dominant firm reduced prices following entry into its market, the pre-entry price could be compared to the dominant firm’s post-entry price.13 If the price difference is excessive, this can imply a violation, subject to the efficiency defense to be discussed in Sect. 6.3. A similar benchmark can be invoked if the dominant firm reduced prices because consumers became more sensitive to price. For example, one of the benchmarks used in the Israeli class action against the leading dairy Tnuva, alleging excessive pricing of cottage cheese, is the lower price that the monopoly charged following a consumer boycott of cottage cheese.14 Another intertemporal benchmark involves cases where the dominant firm raised prices following deregulation or following a new strategy to exploit consumers more. A few recent examples involve the excessive pricing of drugs by pharmaceutical companies: Pfizer was held to charge an excessive price by the UK’s CMA, which imposed a $84.2 million fine on Pfizer and a $5.2 million fine on its distributor, Flynn Pharma, for charging an excessive price for

13

See in this respect, Ezrachi and Gilo (2009) and Gilo and Spiegel (2018) (both discussing the virtues of assessing whether the pre-entry price of a dominant firm is excessive using a comparison with the price the dominant firm charged after entry into its market by a new firm). 14 See class action 46010-07-11 (where the class action was approved by the Israeli district court); see p. 972–1003 in Hendel et al. (2017) (empirically analyzing the effect of the cottage cheese boycott).

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phenytoin sodium capsules (a drug used to treat epilepsy). The benchmark used was based on a price hike, following debranding that managed to avoid previous price regulation.15 Another pharmaceutical company charged for excessive pricing recently was Aspen, who was fined by over 5 million Euro by the Italian Competition Authority in September 2016. Again, the holding was based on a price hike of four anticancer drugs.16 Regulation and higher sensitivity of consumers to prices are benchmarks for the more competitive price, because price regulation usually attempts to mimic a more competitive price, and higher sensitivity of consumers is a market mechanism that stimulates the dominant firm to lower prices to a “more competitive” price. Alternatively, if the dominant firm operates in different geographic markets, and it charges less in one geographic market than it charges in the other, the lower price is the more competitive price and could be used as a benchmark to measure the excessiveness of the higher price. If the price difference is excessive, there are grounds for liability, again, subject to an efficiency defense. A similar comparison can be made between the higher price the dominant firm charges one segment of consumers (e.g., households) and the lower price it charges another segment (e.g., institutional consumers). A post-entry price cut benchmark can often be more accurate than the other benchmarks, since alternative explanations for the price difference are less convincing in the case of a post-entry price cut. It is unlikely that the dominant firm’s costs, for example, suddenly dropped at the same time entry occurred. This is while with a benchmark based on different geographic markets, or different types of consumers, there could be a cost difference that explains the price difference. When using a benchmark based on price differences between pre-entry and postentry situations, or between different markets or segments, there is the concern that the dominant firm will not only respond to the prohibition by reducing its price in the less competitive segment but also by elevating its price in the more competitive segment. For example, when using a post-entry price cut benchmark, the dominant firm may not only reduce pre-entry prices in order to avoid liability but also raise its post-entry price (compared to the case without a prohibition). Although this latter effect can raise the post-entry price (relative to the case without a prohibition), it also has an upside of encouraging the entrant to enter.17 Also, if a few potential entrants can enter the market, competition among them would tend to lower the post-entry price they charge and compel the dominant firm to lower its post-entry price as well.

15 See GOV.UK (2016) and p. 12 in Gilo and Spiegel (2017). But see GOV.UK (2018) for the CAT decision overulling the CMA's decision, although the reasoning and explanations provided in this paper show that the CAT's reasoning is flawed. 16 See The National Law Review (2016). This decision was recently approved by the AGCM (Repubblica Italiana 2016). The European Commission recently announced that it is opening an investigation against Aspen for excessive pricing of the drugs outside of Italy (European Commission 2017). 17 See p. 13 in Gilo and Spiegel (2018).

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A similar concern can be raised with regard to using benchmarks based on price differences between different geographic markets or different types of consumers. All of these concerns can be substantially less important if the gap allowed between the “more competitive price” and allegedly excessive price is sufficiently large. For example, suppose that the rule is that price is prima facie excessive if the gap between the more competitive price and the challenged price is higher than 25% above the more competitive price. This implies that the dominant firm would not hesitate to lower the price to the more competitive segment or market by 25% since such a price difference would not trigger liability. In order to give itself leeway to lower the price in this manner so as to respond to competition, the dominant firm is expected to also reduce the price it charges in the less competitive segment, which is what we would want it to do. Finally, more difficult, but possible, competitive benchmarks can include the prices charged by other firms in more competitive markets. The difficulty here arises due to the need to take account of lower costs that the other firm, who charges the lower price, may have. If this other firm has higher costs than the dominant firm accused of excessive pricing, the comparison would even be a stronger indication. In some cases, the “more competitive price” used for comparison does not necessarily come from a market whose structure is more competitive, but rather from other reasons why the firm restrains itself more in one market compared to the other. Such are cases where in both periods, segments, or markets, the structure of the market is equally monopolistic, but the monopoly in one market restrains itself more than the monopoly in the other market. If these two monopolies are nevertheless comparable, it matters not that the lower price does not stem from a more competitive structure of the market, but rather from self-restraint imposed by other factors (e.g., business strategy or consumers’ sensitivity to high prices). Suppose we have information about such a comparative competitive benchmark. In such a case, we don’t actually need to determine the ultimate “competitive price,” but only the level of the “more competitive price” that is to be compared with the challenged price charged by the dominant firm. Then we can use the measure of excessiveness determined in step 2 and check whether the price the dominant firm charged in the case under scrutiny was excessively above the more competitive price. As we shall see, the measure of excessiveness, determined in step 2, is merely a legal policy decision, of how tolerant we are toward deadweight loss, and transfer of value from consumers. Ideally, this measure of excessiveness should be similar in all cases. We can leave special circumstances (such as the need to stimulate investment in a particular case) for step 3, which discusses efficiencies. As shall be emphasized below, the measure of excessiveness needed for step 2 is not more difficult to determine than the question what is “substantial,” in the determination of many antitrust violations, which require a sufficient probability of substantial harm to competition.

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A Cost-Based Benchmark

Absent a good enough comparative benchmark, the case law speaks of another possible comparison, which in itself serves a similar goal as the “competitive price” test, namely, a comparison to cost. In order to take account of the dominant firm’s total costs of producing the product (including R&D costs and investments provided they have not already been recouped in periods before the period in which the allegedly excessive price was charged), the appropriate measure of cost is the average cost: the total costs of the dominant firm in producing the product under examination divided by the number of units sold. While this measure is mentioned in many of the leading cases, in my view it is inferior to the comparative test, which compares the challenged price to a more competitive price that is comparable. This is because examining the dominant firm’s relevant costs is often a formidable task and is subject to accounting manipulation and difficulties. When the dominant firm has costs that are common to a few products, the examination would need to assess what portion of the common costs should be allocated to the product whose price was allegedly excessive. Allowing the dominant firm leeway in determining the portion that should be allocated may induce it to allocate a disproportionate portion of these common costs to the product in which it wants to charge an excessive price, so as to make it look like the profit margin made on this product is more modest than it really should be. I believe the court or antitrust agency should take account of such possible manipulations and impose more strict requirements on the allocation of common costs disproportionately to the product for which the alleged excessive price was charged. Also, in extreme cases where the dominant firm’s costs are abnormally high compared to similar firms, it may be held, as Jenny notes, that the price was excessive, even though the profits were not.18 Despite the difficulties involved in cost assessment, in my view, if a comparative competitive benchmark does not exist, a cost comparison should be conducted. It is better to apply a test that is not perfect than apply no test at all and grant the dominant firm a de facto exemption from liability. In the Deutsche Post case, for example, the EU Commission relied on an average cost estimate submitted by the dominant firm itself in a previous proceeding, in order to hold that a price exceeding this average cost by 25% is excessive. So although the commission here did not need to conduct the cost assessment itself, it still relied on a price-cost comparison in order to reach the conclusion that the price was excessive. As the Commission stated: According to the case law of the Court of Justice, the fairness of a certain price may be tested by comparing this price and the economic value of the good or service provided. A price which is set at a level which bears no reasonable relation to the economic value of the service provided must be regarded as excessive in itself, since it has the effect of unfairly exploiting customers. 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

See Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume.

18

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the present case. [. . .] the Commission finds that the estimated average cost of delivery for incoming cross-border mail [. . .] as submitted by DPAG [. . .] in their notification to the Commission may serve as a benchmark to estimate DPAG’s costs in this respect. As mentioned above, DPAG charges [. . .] a price which is 25% above the estimated average cost and the estimated economic value for that service. [. . .] the Commission concludes that the price charged by DPAG for incoming cross-border mail [. . .] exceeds the average economic value of that service by at least 25%. [. . .] The Commission [. . .] concludes that the tariff charged by DPAG has no sufficient or reasonable relationship to real costs or to the real value of the service provided. Consequently, DPAG’s pricing exploits customers excessively and should therefore be regarded as an unfair selling price within the meaning of Article 82.19

It should be noted in this respect that although price-cost comparisons are difficult, they are required in many other antitrust violations. A price-cost comparison is often needed in order to assess damages for violations in private actions, including against cartels. A full-blown market definition test, based on the hypothetical monopoly test, should take account of cost, in order to assess whether a hypothetical monopoly is able to profitably raise prices.20 Cost is also a measure required for assessing predatory pricing (pricing below cost), or price squeeze cases (to see if a dominant firm is charging too much for an input it sells its rivals, while charging too less from the end consumers, in a way that the rival cannot compete with the dominant firm over end consumers). Similarly, in order to implement the “as efficient competitor” test in cases of exclusionary discounts (such as loyalty rebates) by dominant firms, again one needs to know the dominant firm’s costs.21 Although a price-cost comparison is difficult and subject to accounting manipulations, it is possible as a last resort, absent good competitive benchmarks. As noted, it is better to enforce the rule using a cost-based test than not to enforce it at all. After all, cost is a reasonable approximation of the ideal, or lowest possible “competitive price” or “more competitive price” that the legal rule aims for. In particular, absent any imperfections of competition, such as product differentiation, capacity constraints, information asymmetries, and so forth, firms that have some costs to enter the market would enter the market until price equals average costs.

6.1.3

The Correct Benchmark to Compare with Is the Competitive Price, or a more Competitive Price, Rather than the Consumers’ Willingness to Pay

The fact that from a policy perspective, the excessiveness should be judged compared to a more competitive price, is well routed in most of the case law and literature, and fits well with the aim of antitrust law, which is maximizing consumer

19 See Commission Decision (2001), Relating to a Proceeding Under Article 82 of the EC Treaty (see par. 159–167 in Deutsche Post AG – Interception of Cross-border Mail (2001)). 20 See U.S. Department of Justice and the Federal Trade Commission (2010). 21 See, e.g., Eilat et al. (2016).

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welfare via as much competition as possible. A different view, according to which the excessiveness of the price should also be determined according to demand considerations, and in particular the consumers’ willingness to pay, is flawed in my view. It is based on an interpretation of the wording in the GM decision, in which the European Court of Justice held that the price should be compared to the “economic value” of the product. But clearly, if the interpretation of this phrase is that excessiveness is determined by consumers’ willingness to pay, then no price will ever be considered excessive, because a monopoly would never want to charge a price higher than what consumers are willing to pay. This point was made at the time by Nils Wahl, Advocate General of the European Court of Justice, criticizing the Scandlines decision, in which allegedly consumers’ willingness to pay was taken into account in favor of the dominant firm: As would appear evident from the Scandlines decision the Commission seems reluctant to strike down on what might be perceived as unfair prices. Indeed, if the reasoning of the Commission is correct it would seem practically impossible to strike down on a price which is not higher than the monopoly price. The monopoly price, i.e. the highest price that a dominant company would be able to charge without losing sales in excess of revenues generated by the high price, would seem to reflect the prevailing attitude of the customers, thus being a good indication of the value which customers attribute to the service or product.22

Nor should any other account be given to consumers’ willingness to pay for the product. Such an account would imply that this particular antitrust rule, unlike any other antitrust rule, does not view consumer welfare as its sole objective. Because antitrust law places weight only on consumer welfare, it’s ideal is that all surplus go to consumers, subject to the constraint that firms should still be stimulated to enter the market and invest in products that maximize consumer welfare. Under this objective of antitrust law, it would be inconsistent to construe the rule applying to exploitation of consumers by monopolies differently, in a way that suddenly gives weight also to the monopoly’s entitlement to profit. In other words, when the prohibition says that dominant firms should charge “fair prices,” it is not referring to fairness toward the dominant firm, but rather to fairness toward consumers. Recall that under my proposed rule, the need to stimulate investment and improvement of the product, for the benefit of consumers, is taken into account, but not in the measure of excessiveness, rather in step 3, where the dominant firm claims that the alleged excessiveness is justified by pro-consumer efficiencies. Indeed, according to the vast majority of cases and commentators, the competitive benchmark is the only one to be used. Since it is important to make clear how abundant this competitive benchmark standard is in the case law and literature, I shall elaborate in detail below.23 The large body of cases and academic papers that sees the competitive benchmark as the only correct one for assessing an excessive pricing case starts from the well-

22 23

See p. 61–62 in Wahl (2007). See also p. 884 in Ezrachi and Gilo (2010). See also p. 769 in Gilo (2015).

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known United Brands case itself, in which the European Court of Justice stressed that: It is advisable therefore to ascertain whether the dominant undertaking has made use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. [. . .] This excess could, inter alia, be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production.24 [emphasis added by the author]

Similarly, all cases that condemn an excessive price based on a comparison with price that was subject to more intense competition de facto imply the same interpretation of “economic value.” Such is, for example, the British Leyland case,25 where it was held that the dominant firm charged an excessive price for the registration of left-hand drive vehicles by comparing this price to the price charged by the dominant firm for right-hand drive vehicles, which were subject to more intense competition. Such a comparison with a more competitive price was also implemented by the UK’s OFT, when condemning pharmaceutical company Napp for charging an excessive price from private pharmacies. The excessiveness was determined, inter alia, by a comparison to the price Napp charged from public hospitals, a price that was subject to more intense competition and more buying power: The prices charged by Napp for MST in the community are excessive. The Director considers that a price is excessive and an abuse if it is above that which would exist in a competitive market and where it is clear that high profits will not stimulate successful new entry within a reasonable period. Therefore, to show that prices are excessive, it must be demonstrated that (i) prices are higher than would be expected in a competitive market, and (ii) there is no effective competitive pressure to bring them down to competitive levels, nor is there likely to be. [emphasis added by the author]26

This way of assessing whether Napp’s price was excessive was upheld by the Competition Appeal Tribunal: In our view those comparisons, taken together, amply support the Director’s conclusions that Napp’s prices in the community segment were, during the period of the infringement, well above what would have been expected in competitive conditions. Thus we agree with the Director’s finding, at paragraph 211 of the Decision, that it is only in the community segment, where buyers are less price sensitive, and where there is an absence of effective competition, that Napp can sustain a premium of 40% over competitors. [. . .] That conclusion is further supported by the fact that where Napp faces competition, in the hospital segment and export markets, Napp’s prices are very significantly lower than Napp’s prices in the community segment.27 (emphasis added by the author)

The same principle of using the competitive price as the correct standard for measuring whether the price charged by the dominant firm was excessive is used in 24 See p. 301 par. 249–250 in Case 27/76, United Brands Co 1978. See also par. III in Ezrachi and Gilo (2009). 25 See par. 18 in Case 226/84, British Leyland Public Ltd 1986. 26 See par. 203 in Director General of Fair Trading Dec 2001. 27 See par. 397–398 in Napp Pharmaceutical Holdings Ltd (2002).

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the EU Commission’s notice regarding access to telecom networks. As the Commission states: [. . .] regulatory authorities have sought to determine what would have been the competitive price were a competitive market to exist (for example, in their calculation of interconnection tariffs).28

The same approach is used by the UK’s OFT in its guidance from 2003: Under EC law, an abuse of dominance can be determined if prices are ‘excessive in relation to the economic value of the service provided’. One way to determine whether prices are excessive is to assess whether they allow the company in question to sustain profits higher than could be expected in a competitive market (see OFT, 1999c, section 2). Another way would be to compare the price directly with the underlying costs of the product.29 [emphasis added by the author]

Waelbroeck and Frignani, in their book on European Competition Law, also stress that the comparison to the competitive price is the one set in the United Brands case and add that this is also the standard under German competition law.30 The same standard appears in the holding of the South African competition appeals court in the Mittal case: A dominant supplier which is able, and does, simply set its price at import parity without careful reference to costs would do so at its peril, for [. . .] the supplier could well have difficulty defending the excess as having any reasonable relation to economic value. However, if in fact the supplier references its price to prices prevailing in other comparable but competitive markets, then its price would be likely to approximate to economic value.31

Motta and Destreel too stress that: Since its well-known United Brands case, the Court of Justice established that a price is unfair when a dominant firm has ‘exploited’ its dominant position so as to set prices significantly higher than those which would result from effective competition. Hence, a price is excessive and unfair when it is significantly above the effective competitive level, or above the economic value of the product. This should correspond, in the Court’s view, to the normal competitive level.32

This vast body of case law and literature shows that the “economic value” mentioned in the early General Motors case is no other than “the competitive price.” This is why my proposal according to which the first step is to determine an upper bound for the competitive price and the second step is to see whether the price charged was excessive compared to this upper bound is not only the analysis dictated by the objectives of competition law but is also based on well-established case law.

28

See par. 106–109 in Notice on the Application of the Competition Rules 1998. See par. 2.12 in Office of Fair Trading (2003). 30 See Waelbroeck and Frignani (2000). 31 See Mittal Steel S 2009. 32 See par. 2.2 in Motta and de Streel (2007). 29

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The two main cases that are usually cited in order to support a different view, according to which the dominant firm can be exempt from liability if consumers are willing to pay a lot for its product, are the EU Commission’s Scandlines decision33 and the UK’s Attheraces decision.34 But these cases are an exception and also can be interpreted in a way that is aligned with the mainstream of the case law. Motta and Destreel, for example, when discussing the Scandlines case, acknowledge that: [. . .] a competitive price is not only determined by supply-side factors (in particular the cost of production), but also by demand side factors (demand elasticity, willingness and ability to pay).35

In this respect, a case that mentions that demand considerations, and not only supply or cost considerations, are relevant in order to determine the competitive price does not diverge from the standard advocated in the bulk of the case law, according to which price should be compared to the competitive price to see if it is excessive. This means that the competitive price, when the competitors’ products are not perfect substitutes, is affected by how imperfect is the interchangeability among the competing products, and this is a demand-side question. This acknowledges that even under (imperfect) competition, price can be somewhat above the marginal cost of production. But this insight cannot support the view that a dominant firm is allowed to charge a price that is excessively above the competitive price, just because many consumers were willing to pay this price. If a firm is able to charge a price which is excessive above the competitive level, by definition this is not a competitive price. In the same vein, the courts’ analysis in the Attheraces decision does not justify departing from the mainstream view that the dominant firm’s price should be compared to the competitive price in order to determine whether it is excessive. Furthermore, the court there was influenced by the fact that the dispute before it was a commercial dispute between two business entities on how to split the proceeds from pre horse racing data, with no effect on end consumers: [. . .] this was not a case where the charges proposed by BHB would cause harm to the end users or downstream consumers of the pre-race data, for example by leading to increased prices. The dispute in this case arises out of the negotiations between BHB and ATR on the commercial division of the revenues derived by ATR from the overseas bookmakers in the downstream market, which is competitive.36

In fact, the court there explicitly refused to adopt the notion that a monopoly is allowed to charge whatever consumers are willing to pay: On the one hand, the economic value of a product in market terms is what it will fetch. This cannot, however, be what [the sections prohibiting excessive pricing by dominant firms] envisage, because the premise is that the seller has a dominant position enabling it to distort

33

See Case COMP/A.36.568/D3 2006. See Attheraces Ltd. v. British Horseracing Bd. Ltd 2007. 35 See par. 2.4.1 in Motta and de Streel (2007). 36 See par. 196 in Attheraces Ltd. v. British Horseracing Bd. Ltd 2007. 34

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the market in which it operates. [. . .] BHB has two principal answers to the accusation of excessive pricing. The first is that, if the price is one which the market will reasonably bear by definition, it is not excessive. The second is that its own role and status are such that its returns are not and should not be treated as simple profit because they are ploughed back into the very product for which ATR are paying. [. . .] We are not prepared to accept the first answer, even with the adverb ‘reasonably’.37

Therefore, if one feels the need to put weight on this holding, it can be interpreted as saying that the competitive price (under imperfect competition) is also affected by some degree of moderate product differentiation, rather than being a basis for the claim that a monopoly can charge whatever consumers can bear or that “fairness,” in the prohibition of unfair pricing by monopolies, is toward the monopoly, rather than toward consumers. Another source for confusion in this respect is a paragraph in the United Brands case, stating that: The questions therefore to be determined are whether the difference between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.38

When put out of context, one might allegedly interpret this phrase as saying that the “excessiveness” of the price compared to cost is only a first step of the analysis, and then, above and beyond it being excessive, it should also be “unfair” for it to be a violation. Such an interpretation, however, fails on logical grounds, since excessive prices are always unfair prices. Otherwise they would not be excessive. The correct interpretation of the phrase, together with other explicit holdings of the court in the United Brands case cited above, is that one way to show that a price is unfair is by comparing it to cost, and seeing whether the price is excessively above cost, and another way of showing that the price is unfair is to compare the price with a more competitive benchmark and see whether the difference between the price and the more competitive benchmark is excessive. As the UK Chancery in the Ineos Vinyl case put it: What therefore is required is (a) an analysis of the costs incurred in producing the product (b) a comparison of those costs with the price charged and (c) an evaluation of whether the resulting difference—the profit—is such that the price charged is unfair—and abusive— either because it is so plainly excessive that no comparison is needed or because it is unfair when compared with competing products. [. . .] Another way of proving that the price charged is unfair, taking up the possibility suggested by para 253 of the citation from United Brands, is by reference to what is charged for the product in question in a suitably comparable competitive market, as suggested by the Court of Justice in Bodson v Pompes Funebres, Case 30/87 [1988] ECR 2479.39

37

See par. 205, 210, 211 in Attheraces Ltd. v. British Horseracing Bd. Ltd (2007). See par. 114 in Case 27/76, United Brands Co (1978). 39 See par. 217–218 in Ineos Vinyls Ltd. v. Huntsman Petrochemicals (UK) Ltd (2006). See also Motta and de Streel (2007); and see Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume. 38

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Indeed, what is the point of demanding that a price be not only “excessive” but also “excessively excessive”? The terms “excessive” and “unfair” are both vague terms that should be used to import legal policy considerations. Therefore, they serve the same purpose, of indicating what margin above the competitive price the court should tolerate. As stated, the test should consist of assessing what “the competitive price” or an upper bound of the competitive price is and then see whether the price charged by the dominant firm is excessively above this more competitive price. Absent a good competitive benchmark, the comparison can be made with the costs of production. In any case, even according to the European Court of Justice itself in the United Brands case, and as also stressed by the same court in the Latvian Copyright Societies case,40 this vague phrase relating to how to assess an excessive pricing case is not the only possible way of such an assessment.

6.2

Step 2: What Is “Excessive” Above the “Competitive Price” and the Similarity Between Assessment of an Excessive Pricing Case and Many Other Antitrust Violations

As mentioned, the second step of the analysis is to determine whether the price charged by the dominant firm is excessive above the competitive price (or the more competitive price) assessed in the previous step. While the first step, of assessing the more competitive price, involves economic analysis (comparisons with more competitive situations or with cost), this second step, of determining whether the price is excessive compared to the more competitive price, involves a legal policy question, rather than economic analysis. It depends on the degree of tolerance the antitrust agency or court has toward deadweight loss and transfer of value from consumers to the dominant firm. In this respect, determining what is “excessive” involves the use of judicial discretion just as does determining whether expected harm to competition is substantial in many other antitrust violations. This is the case in antitrust violations that are subject to a rule of reason. With such an antitrust violation, in the first step of the analysis, the court or antitrust agency needs to determine the expected harm to competition stemming from the alleged violation. This involves economic analysis. In the second step, the court or antitrust agency needs to determine whether this harm to competition is substantial. This involves a legal policy judgment, which is based on the degree of tolerance the decision-maker has toward harm to competition and consumers. Ideally, the difference between the price charged by the dominant firm and the more competitive price (in the case of using a competitive benchmark) or cost (in the

40

See par. 37 in Case C-177/16.

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case of using a cost-based benchmark) needs to be similar across cases, in order to improve the clarity and predictability of the rule. The special characteristics of a case that justify such a price, for example, because of a need to stimulate a particular investment or product improvement ex ante, should be discussed in the third step of the analysis, involving efficiencies. It should be noted that currently, such predictability and clarity do not really exist with regard to antitrust violations that require a substantial harm to competition. For example, in the case of exclusive dealing, which is discussed in the USA under the rule of reason, different cases hold that different levels of foreclosure of the buyers’ market from access by rival firms are enough in order to substantially harm competition. On one hand, for example, the US federal court in the Brunswick case held that: In a vertical restraint case such as this, claimants may establish a § 1 violation by demonstrating that the conduct “substantially forecloses” competition in the relevant market.41

However, as the federal court in the Microsoft case states: [. . .] There is no hard-and-fast rule for determining the point at which market foreclosure becomes ‘substantial’.42

Still, antitrust lawyers have a relatively good idea how to advise their clients when they try to determine whether an exclusive dealing contract is a violation or not, because there is a body of case law in which courts and agencies gave an idea on what harm they believe is “substantial.” There is no reason why the prohibition of excessive pricing should not, with time, become at least as predictable. As mentioned, predictability can be improved by determining a relatively fixed level of excessiveness above the more competitive price or above cost that triggers alleged liability (subject to the efficiency defense). Currently, the case law on excessive pricing does not give a very predictable measure, and it should. The most clear signal produced in the cases that I am aware of is that of the South African Sasol case, in which it was held that if the price difference is below 20%, then the price should not be deemed excessive (interestingly citing a rule under Hebrew Law): A price which is significantly less than 20% of the figure employed to determine economic value falls short of justifying judicial interference in this complex area. Ancient support can be found for this finding. The TALMUD (Baba Bathra 90a) ruled that if the profit gained was more than 16.67% it was regarded as excessive.43

A similar safe harbor of 20% above the competitive price was initiated by the Israeli Antitrust Authority in 2014, when I served as head of the authority. This safe harbor was eliminated in the authority’s revised guidelines, issued under the current head.

41

See Brunswick Corp. v 2000. See Microsoft Corp (2001). 43 See Sasol Chemical Industries Limited (2015). 42

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Other cases do not make a policy statement as to what is the price difference between the challenged price and the more competitive price that would trigger liability (or that a price difference below this threshold would not), but still some of the cases imply that double-digit percentage differences can be enough for the price to be considered excessive. In particular, the Deutsche Post case spoke of a margin of 25% above the average cost submitted by the dominant firm itself in previous proceedings as excessive.44 The abovementioned Napp case relied on multiple benchmarks. But one of them, which may well have sufficed for liability, was 40% above the pricing of competing firms.45 Finally, in the Italian airport case,46 a margin of 50% above the cost estimated by the industry regulator was considered excessive.

6.3

Step 3: The Efficiency Defense

As noted, the proposed rule regarding excessive pricing should have a final and third step, according to which even if the price is allegedly excessive, because it is excessively above cost (when using a cost test), or above the more competitive price (when using a comparison test), then the dominant firm can show that this allegedly excessive price was necessary in order to stimulate some pro-consumer efficiency, so that, over all, consumers are not harmed by it. While, as noted, determining whether the gap between the price charged by the dominant firm and the “competitive price” or “more competitive price” is prima facie excessive is a legal policy question and not an economic question; assessment of the dominant firm’s efficiency claim requires economic analysis. The burden to show such an efficiency would be on the dominant firm, as any other efficiency claimed in abuse of dominance cases. It is in this step that differences among different kinds of dominant firms can emerge. One dominant firm may be equipped with a stronger efficiency claim than the other. The dominant firm has superior information regarding its own pro-consumer efficiencies in charging the allegedly excessive price. Hence, when it considers charging a price that cannot meet the ordinary threshold of non-excessiveness, it must be convinced, based on its efficiency claim, that the price is nevertheless lawful, due to the offsetting pro-consumer benefits. In order to allow the investment considerations to be adequately taken into account, the dominant firm’s burden in showing the efficiency claim should not be prohibitively large. In cases of exclusionary abuse, it has often been claimed that European courts do not really put weight on efficiency claims once a prima facie case of abuse has been established. But at least in exploitative abuse cases, I propose that this efficiency claim be seriously considered.

See Deutsche Post AG – Interception of Cross-border Mail 2001. See Director General of Fair Trading Dec 2001 46 See Autoritá Garante Della Concorrenza e Del Mercato 2008. 44 45

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Shifting the burden to the dominant firm to show a justification for the allegedly excessive price once a prima facie case for excessiveness has been established is not a new concept. It has also been emphasized by the European Court of Justice in the case of the Latvian Copyright Organizations case, also citing previous cases, where the ECJ stated that: Next, it should be noted that these factors are merely indicative of abuse of a dominant position. It may be possible for the copyright management organisation to justify the difference by relying on objective dissimilarities between the situation of the Member State concerned and that of the other Member States included in the comparison (see, to that effect, judgments of 13 July 1989, Tournier, 395/87, EU:C:1989:319, paragraph 38, and of 13 July 1989, Lucazeau and Others, 110/88, 241/88 and 242/88, EU:C:1989:326, paragraph 25).47

7 Liability Should Not Be Limited to Mixed Cases of Exploitative and Exclusionary Abuse In this section, I wish to stress that due to the main goal of competition law mentioned above, of preventing deadweight loss and direct exploitation of consumers, intervention against excessive pricing by dominant firms should not be limited to mixed cases, in which the dominant firm combined excessive pricing with exclusionary conduct (i.e., excluding rivals or entrants). It is true that such mixed cases of excessive pricing and exclusionary conduct, all else equal, deserve higher sanctions than cases involving only one violation. Still, this does not justify allowing dominant firms who engaged only in exploitation of consumers, and not in exclusionary conduct, to escape scrutiny. Indeed, even in cases in which the dominant firm was accused of engaging in both exclusionary and exploitative conduct, the court stressed that exploitative conduct alone would suffice for liability. For example, in the UK’s Napp case, the court of appeals emphasized this point, and held that: If, in the defence, the Director intended to go further and say that the excessive pricing in the community segment was abusive only because of Napp’s exclusionary conduct in the hospital segment, any such view would have been erroneous in law. Nothing in United Brands suggests that the existence of exclusionary conduct is a prerequisite to a finding that prices are excessive contrary to the Chapter II prohibition.48

Similarly, the court in Albion Water Group Limited v. Water Services Regulatory Authority and Dwr Cymru Cyfyngedig holds that even if the allegation of excessive pricing were the only allegation against the dominant firm, it would have been exposed to prosecution:

47 48

See par. 57 in Case C-177/16. See par. 434 in Napp Pharmaceutical Holdings Ltd (2002).

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Plainly, a common carriage price which bears no reasonable relation to the economic value of the service provided can be an abuse of a dominant position; it does not depend on whether the victim is a competitor and/or a customer or whether the abuse is classified as exclusionary or exploitative or, as in this case, both.49

It should also be noted, in this respect, that some of the allegedly “mixed” cases, in which the dominant firm is accused of another violation, alongside excessive pricing, may deal with two or more types of exploitative abuse, rather than a mix of exploitative and exclusionary behavior. For example, if the dominant firm discriminated in favor of consumers in member state A and against consumers in member state B, within the EU, there may be no exclusionary conduct, but only exploitation of consumers in member state B. Still, the dominant firm may be liable for both excessive pricing (i.e., charging unfair prices from consumers in member state B) and price discrimination between consumers in the two member states.

8 Liability Is for Past Behavior, Even When Future Competition Is Expected Antitrust liability for excessive pricing is with regard to past behavior. The antitrust agency or private plaintiff accuses the dominant firm of pricing excessively in the past. This form of liability is meant to deter the dominant firm from exploiting consumers in the first place. Therefore, the claim that when prices are expected to fall in the future, or more competition is expected in the future, the dominant firm should be exempt from liability stemming from its behavior in the past should be rejected in my view.50 Suppose that it had been shown that the dominant firm charged an excessive price for a few years. Why should it escape liability (thereby not being deterred from such behavior ex ante), just because future competition is expected? The claim that the dominant firm should be exempt in such cases may also be related to the notion that prohibiting excessive pricing can harm the prospects of entry. But this claim in itself is often misguided. For example, Yossi Spiegel and I show that if excessive pricing is shown using a post-entry price cut benchmark, the prohibition of excessive pricing actually encourages entry.51

49

See par. 219 in Albion Water Limited v. Water Services Regulation Authority 2008. For such a claim, see Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment”, in this volume. This claim is also present in The Israeli Antitrust Authority’s (2017). 51 See p. 13 in Gilo and Spiegel (2017). 50

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9 The False “Self-Correction” Argument As we have shown elsewhere,52 excessive prices are not self-correcting. A potential entrant decides whether to enter only on the basis of the expected post-entry price and not on the basis of the pre-entry price. Suppose the dominant firm is expected to react to entry by starting a price war, which would lead to the price that reflects the new competitive situation after entry. If the entrant nevertheless entered, it means that it is not the excessive pre-entry price that attracted entry, but rather that entry was profitable despite the expected price war. Hence if entry caused price to go down to price levels we see as non-excessive, such entry would have occurred even under a prohibition of excessive pricing. Conversely, if the entrant expects the dominant firm not to respond to entry by a price war, the entrant is entering due to his expectation for some sort of tacit collusion after entry. This is not the sort of entry that corrects an excessive price, since price is expected to remain excessive, possibly indefinitely, even after entry. Consider now even the rare case where the costs of entry into the market and exit out of it are negligible—the case of so-called contestable markets. Here, the dominant firm would not want to charge an excessive price to begin with, since this would attract firms that can enter the market without costs when prices are high and then exit when prices go down again. Accordingly, even here, excessive prices do not correct themselves: They simply do not occur in the first place. If the price was found to be excessive, without attracting such entry that lowered the price, it implies that the costs of entry and exit are not negligible and the market is not contestable. Finally, when entry barriers are so high that entrants do not find it profitable to enter (given the expected post-entry price), surely, the excessive price cannot correct itself, because entry will not occur. Elsewhere, we also show how even when the pre-entry price is assumed to be a signal for the dominant firm not being efficient, excessive prices are not self-correcting. We show that a signal to potential entrants that the dominant firm is inefficient, thereby inviting entry, may well be more clear to entrants when excessive pricing is prohibited than when it is allowed.53 Also, although under some restrictive assumptions, dominant firms might reduce their price somewhat in order to block entry by signaling that they are efficient, this lower price too may well be excessive.54

52

See Gilo and Ezrachi (2008) and part II in Ezrachi and Gilo (2010). See p. 257–262 in Gilo and Ezrachi (2008). 54 See Gilo and Ezrachi (2008). 53

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Conclusion

The rhetoric regarding reluctance of antitrust authorities to enforce the prohibition of excessive pricing by dominant firms is surprising, given the ultimate aim of antitrust law of preventing precisely this occurrence: Most cases of objection to mergers, for example, are based on this very concern, that following the merger, prices will be excessive. Why then do some claim that if the competitive process did not work, and the dominant firm was able to charge excessive prices, competition law should suddenly retreat and fail to act? Since the claim that excessive prices are selfcorrecting is proved to be false, the alleged answer must hinge on either problems related to assessment of excessive pricing cases or problems related to the need to stimulate valuable investment. But these concerns too, as I show, are not justified. Assessment of an excessive pricing case is no different than assessment of antitrust infringements that require an expected substantial harm to competition. Investment considerations in a particular case should receive attention but, like any other claim for an efficiency defense, should be discussed as a third stage of the analysis, on a case-by-case basis. This analysis shows that the prohibition of excessive pricing, if enforced in a coherent manner, can become as predictable to the dominant firm as many other antitrust violations. Acknowledgment I wish to thank Fred Jenny and Yossi Spiegel for extremely helpful comments and discussions and the S. Horowitz Institute for Intellectual Property for financial assistance and Lior Frank and Hadar Shaked Itzkovitz for research assistance.

References Aghion, P., Bloom, N., Blundell, R., Griffith, R., & Howitt, P. (2005, May). Competition and innovation: An inverted-u relationship. The Quarterly Journal of Economics, 120(2), 701–728. Albion Water Limited v. Water Services Regulation Authority, Case Number: 1046/2/4/04, Competition Appeal Tribunal, (2008). Attheraces Ltd. v. British Horseracing Bd. Ltd. (2007). EWCA (Civ) 38, [2007] info. T.L.R. 41 (Eng.). Autoritá Garante Della Concorrenza e Del Mercato (AGCM), Antitrust Authority Fines Aeroporti di Roma (ADR) Euro 1,668,000 for Abuse of Its Dominant Position, (5 Nov 2008), http://www. agcm.it/en/newsroom/press-releases/1603-aeroporti-di-roma-tariffe-aeroportuali.html (last visited, 14.03.18). Brunswick Corp. v. Concord Boat Corp., 207 F.3d 1039, 1059 (8th Cir. 2000). Case 226/84, British Leyland Public Ltd. Co. v. Comm’n, 1986 E.C.R 3263. Case 27/76, United Brands Co. BV v. Comm’n, 1978 E.C.R 207], 1C.M.L.R 429 (1978). Case C-177/16, Autortiesību un komunicēšanās konsultāciju aģentūra/Latvijas Autoru apvienība v Konkurences padome, http://eur-lex.europa.eu/legal-content/EN/TXT/?uri¼CELEX% 3A62016CN0177 (last visited, 14.03.18). Case COMP/38.427 PO Pay Television Film Output Agreements. Case COMP/39.847/E-Books Case AT.40153. Case COMP/A.36.568/D3 Scandlines Sverige AB v. Port of Helsingborg (2006).

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class action 46010-07-11 Naor v. Tnuva Cooperative for Marketing of Agricultural Products in Israel Ltd. Commission Decision COMP/C-1/36.915 of July 25, 2001. Decision 85/609/EEC of 14 December 1985 (IV/30698 – ECS/AKZO Chemie). Decision 92/163/EEC of 24 July 1991 (IV/31043 – Tetra Pak II). Deutsche Post AG – Interception of Cross-border Mail. (2001) O.J. (L 331) 40. Director General of Fair Trading Dec.: NAPP Pharmaceutical Holdings Limited and Subsidiaries, Case No. CA98/2/2001 (Mar 30, 2001), http://webarchive.nationalarchives.gov.uk/ 20140402142426/http:/www.oft.gov.uk/shared_oft/ca98_public_register/decisions/napp.pdf; jsessionid¼FB7ECDCD5DC5EF7839FCE3B10C72849D (last visited, 14.03.18). Eilat, A., Gilo, D., & Sagi, G. (2016, October). Loyalty discounts, exclusive dealing and bundling: Rule of reason, quasi per se, price-cost test or something in between? Journal of Antitrust Enforcement, 4(2), 345–380. European Commission, Antitrust/Cartel Cases: 40394 Aspen (31 May 2017), http://ec.europa.eu/ competition/antitrust/cases/dec_docs/40394/40394_235_3.pdf) (last visited, 14.03.18). European Commission, Antitrust/Cartel Cases: 40153 E-book MFNs and related matters (Amazon), http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code¼1_40153 (last visited, 14.03.18). Ezrachi, A., & Gilo, D. (2009). The darker side of the moon: The assessment of excessive pricing and proposal for a post-entry price-cut benchmark. In: A. Ezrachi (Ed.), Article 82 EC: Reflections on its recent evolution, Studies of the Oxford Institute of European and Comparative Law 12 (pp. 169–184). London: Hart Publishing. Ezrachi, A., & Gilo, D. (2010). Excessive pricing, entry, assessment, and investment: Lessons from the mittal litigation. Antitrust Law Journal, 76(3), 873–897. France Télecom – Wanadoo Decision of 16 July 2003 (COMP/38.233 – Wanadoo Interactive). Gilo, D. (2015). Excessive pricing as an abuse of dominant position” (in Hebrew), 45 Mishpatim Law Review, 761–799. Gilo, D., & Ezrachi, A. (2008). Are excessive prices really self correcting? Journal of Competition Law and Economics, 5(2), 249–268. Gilo, D., & Spiegel, Y.. (2017) The antitrust prohibition of excessive prices (Working paper, Tel Aviv University, 2017), https://www.tau.ac.il/~spiegel/papers/excessive-prices-Sep-6-2017.pdf (last visited, 14.03.18). Gilo, D. & Spiegel, Y. (2018) The antitrust prohibition of excessive prices. International Journal of Industrial Organization (Forthcoming). GOV.UK, CMA fines Pfizer and Flynn £90 million for drug price hike to NHS (7 Dec 2016), https://www.gov.uk/government/news/cma-fines-pfizer-and-flynn-90-million-for-drug-pricehike-to-nhs, (last visited, 15.03.2018). GOV.UK. (2018). Flynn Pharma Ltd and Flynn Pharma (Holdings) Ltd v Competition and Markets Authority. Last visited June 11, 2018., from http://www.catribunal.org.uk/238-9683/1275-1-1217–Flynn-Pharma-Ltd-and-Flynn-Pharma-Holdings-Ltd.html Hendel, I., Lach, S., & Spiegel, Y. (2017). Consumers’ activism: The cottage cheese boycott. RAND Journal of Economics, 48(4, Winter), 972–1003. Ineos Vinyls Ltd. v. Huntsman Petrochemicals (UK) Ltd. (2006). EWHC 1241(Ch). Microsoft Corp. v. Unites States, 253 F.3d 34, 70 (D. C. Cir. 2001). Mittal Steel S. Afr. Ltd. v. Harmony Gold Mining Co. (S. Afr. Competition App. Ct. May 29, 2009), http://www.comptrib.co.za/assets/Uploads/Case-Documents/70CACApr07.pdf (last visited, 14.03.18). Motta, M., & de Streel, A. (2007). Excessive pricing in competition law: Never say never? In Swedish Competition Authority (Ed.), The pros and cons of high prices (pp. 14–46). Stockholm: Konkurrensverket. Napp Pharmaceutical Holdings Ltd. v. Director General of Fair Traiding, Case No. 1001/1/01 (Jan. 15, 2002), http://www.catribunal.org.uk/237-565/1001-1-1-01-Napp-Pharmaceutical-Hold ings-Limited-and-Subsidiaries.html (last visited, 14.03.18).

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Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector – Framework, Relevant Markets and Principles, Aug 22, 1998, O.J. (C 265) 2. OECD, Policy Roundtables, Excessive Prices, http://www.oecd.org/competition/abuse/49604207. pdf (last visited, 14.03.18). Office of Fair Trading. Assessing profitability in competition policy analysis, Economic Discussion Paper 6 (2003), http://www.oxera.com/oxera/media/oxera/downloads/reports/oft-assessing-prof itability.pdf?ext¼.pdf (last visited, 14.03.18). PostDanmarkA/Sv Konkurrencerådet (C-209/10). Qualcomm Case COMP/39.711., http://ec.europa.eu/competition/elojade/isef/case_details.cfm? proc_code¼1_39711 (last visited, 14.03.18). Repubblica Italiana, N. 08945/2017 REG.PROV.COLL., N. 12806/2016 REG.RIC. https://www. giustizia-amministrativa.it/cdsintra/wcm/idc/groups/public/documents/document/mday/ntm4/ ~edisp/5e2rmfwdi3oqyig55npxxhkhmu.html (last visited, 14.03.18). Resolution of 12 February 2008, Expte. 626/, Canarias de Explosivos. and Judgment of the Supreme Court of 29 May 2013. Sasol Chemical Industries Limited v Competition Commission (131/CAC/Jun 14) (5) SA 471 (CAC) (17 June 2015). Spiegel, Y. (2016, May 5). Comments Regarding the Background Paper for The Reconsideration of Opinion 1/14, (in Hebrew). The Israeli Antitrust Authority’s new guidelines on excessive pricing. See Antitrust Authority, Opinion No. 1/17, The Antitrust Commissioner’s Considerations in Enforcing the Prohibition on Charging a High Unfair Price (28 Feb 2017), http://www.antitrust.gov.il/subject/130/item/ 34515.aspx (in Hebrew) (last visited, 14.03.18). The National Law Review, Italy’s AGCM Market Competition Authority Fines Aspen EUR 5 Million for Excessive Pricing (17 Oct 2016), https://www.natlawreview.com/article/italy-sagcm-market-competition-authority-fines-aspen-eur-5-million-excessive (last visited, 15.03.2018). U.S. Department of Justice & the Federal Trade Commission, Horizontal Merger Guidelines 4.1.1 (2010), available at http://www.justice.gov/sites/default/files/atr/legacy/2010/08/19/hmg-2010. pdf (last visited, 14.3.18). Waelbroeck, M., & Frignani, A. (2000). European competition law. Leiden: Brill-Nijhoff. Wahl, N. (2007). Exploitative high prices and European competition: A personal reflection. In Swedish Competition Authority (Ed.), The pros and cons of high prices (pp. 47–64). Stockholm: Konkurrensverket.

Antitrust Enforcement of the Prohibition of Excessive Prices: The Israeli Experience Yossi Spiegel

Abstract Until recently, there was no antitrust enforcement of a prohibition of excessive pricing in Israel. However, in recent years, a large and growing number of motions to certify class actions alleging excessive prices have been filed, although so far, only one class action has been certified by the court and it may take years before a final verdict is issued. Given this trend and given that courts are yet to clarify what excessive prices are and when high prices are deemed excessive and violate the Israeli Antitrust Law, monopolies in Israel face a high degree of legal uncertainty. In this chapter, I review these developments in detail and discuss the lessons that can be drawn from the Israeli experience.

1 Introduction Under the Israeli Antitrust Law, it is unlawful for a monopoly to set “unfair purchase or selling prices.” Until recently, this provision was generally interpreted as referring to low predatory pricing, intended to force rivals out of the market. Things changed however quite substantially in the past few years. First, the Director General of the Israeli Antitrust Authority (IAA) issued in 2014 Guidelines 1/14, which state that unfair prices include high excessive prices. The guidelines also state that the IAA will begin to enforce the prohibition of excessive pricing and it presents the considerations and rules that will guide the IAA in its

For helpful comments and discussions, I thank Itai Ater, Michal Gal, David Gilo, Nadav Miyara, Yannis Katsoulacos, and Amir Vang. Disclaimer: I am involved as an economic expert in two pending class actions concerning excessive pricing. In the first case, I submitted an expert opinion on behalf of the plaintiff, Israel Consumer Council, in a class action that alleges that the price of prepackaged yellow cheese was excessive. In the second case, I submitted an expert opinion on behalf of the defendant, the Central Bottling Company, in a class action that alleges that the price of 1.5 L bottles of Coca-Cola was excessive. Y. Spiegel (*) Coller School of Management, Tel Aviv University, Ramat Aviv, Tel Aviv, Israel e-mail: [email protected]; http://www.tau.ac.il/~spiegel © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_5

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enforcement efforts. Although Guidelines 1/14 were replaced in early 2017 by Guidelines 1/17, which adopt a more reserved approach, the new guidelines still maintain the view that setting an unfairly high price may, under the appropriate circumstances, be regarded as an abuse of monopoly position. Second, under Israeli law, private plaintiffs may file a class action and seek damages for breach of the Antitrust Law. Two recent District Court decisions from 2016 to 2017 on class actions ruled that setting an excessive price violates the Antitrust Law. Moreover, the 2016 decision certified a class action alleging that the price of cottage cheese was excessive, and for the first time, a class action concerning excessive pricing has proceeded to trial. Following the publication of Guidelines 1/14, and especially after the District Court certified the cottage cheese class action, a large number of motions to certify class actions concerning excessive pricing were filed. Currently, there are 22 such motions pending in court; this is in addition to the cottage cheese class action, which has already been certified. These motions involve a wide range of products and services, ranging from dairy products and soft drinks to trading platforms, recovery and tracking services for stolen cars, and burial services. This trend, which is likely to continue at least in the near future, implies that nowadays, monopolists in Israel face a real risk of being sued for having set excessive prices. While this risk may discourage monopolists from raising prices, it may also discourage them from cutting prices, because price cuts may open the door for claims that past prices were excessive or that prices in other markets, or geographical areas, are excessive. That is, monopolists may have a strong disincentive to engage in price discrimination either over time or across markets. Since price discrimination may enhance aggregate consumer surplus, this is not necessarily a good thing. More generally, monopolists may have hard time deciding on their pricing policies, given that any price change may trigger a class action alleging that prices are excessive now or were excessive in the past. In this chapter, I review the above developments in detail and discuss the lessons that can be drawn from Israeli experience. I begin in Sect. 2 by discussing the legal background and then review key court decisions in Sect. 3. I then discuss Guidelines 1/14 and 1/17 which state the IAA’s position on excessive pricing in Sect. 4, and in Sect. 5, I review the academic debate that took place in Israel regarding excessive pricing. In Sect. 6, I discuss several issues that are worth bearing in mind when evaluating the current situation in Israel concerning the prohibition of excessive pricing. Concluding remarks are in Sect. 7.

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2 The Legal Background The main objective of the Israeli Antitrust Law is to protect competition by preventing the creation of market power in the first place and by ensuring that suppliers and buyers do not abuse their market power when they already have it.1 A supplier or a buyer whose market share exceeds 50% is considered a monopoly under the law and is then subject to various conduct prohibitions intended to ensure that it will not engage in specific practices that are presumed to lessen competition or harm the public.2 Apart from conduct prohibitions, the Israeli Antitrust Law enables the Director General of the IAA to declare a supplier (a buyer) as a monopoly in the provision (purchase) of a specific good or service. The declaration serves as prima facie evidence for the supplier’s or buyer’s monopoly position in any court proceeding and allows the Director General to issue directives to the declared monopoly to prevent it from abusing its position. A declaration of monopoly greatly facilitates class actions on antitrust grounds, including those alleging excessive pricing, because the plaintiffs do not need to prove that the supplier or buyer they sue is a monopoly. This saves plaintiffs the need to engage in the lengthy and complex task of defining the relevant market, which typically requires a lot of data that private plaintiffs may not have. Until 1996, the Israeli Antitrust Law has only provided in Section 29 that a monopoly “may not unreasonably refuse to supply or purchase the asset or service over which the monopoly exists.” In 1996, the Antitrust Law was amended (Amendment 2).3 The newly added Section 29a states in Section 29a(a) that “A monopolist shall not abuse its position in the market in a manner liable to lessen business competition or harm the public.” Section 29a(b) presents a non-exhaustive list of specific abusive practices, which are presumed to lessen competition or harm the public and which a monopoly is not allowed to engage in. These presumptions, which parallel those listed in Article 102 (formerly Paragraph 86) of the Treaty on the Functioning of the European Union (TFEU), include the following4: 1. “Setting unfair purchase or selling prices for the asset or service under monopoly”

1

For an overview of Israeli Antitrust Law, see OECD (2011a). More precisely, the Antitrust Law defines a monopoly as “concentration of more than half of the total supply or acquisition of an asset, or more than half of the total provision or acquisition of a service, in the hands of one person.” 3 Antitrust Law (Amendment no. 2) 5756–1996, book of Laws 1573, 149. 4 The proposed legislation of Amendment 2 of the Antitrust Law in 1996 explained the need for Section 29a as follows: “. . . it is recommended to adopt the regulations of restrictive business practices that are common in other countries (and particularly with the necessary modifications, the supervisory program specified in the laws of the EU, in Paragraph 86 of the 1957 Treaty of Rome), and to state in a clear and comprehensive manner that a monopolist is subject to norms of behavior.” See Legislative proposal 2446, 229, https://www.nevo.co.il/law_word/Law17/PROP-2446.pdf (accessed on March 14, 2018). 2

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2. “Reducing or increasing the quantity of the assets or the scope of the services offered by the monopolist, not within the context of fair competitive activity” 3. “Applying dissimilar conditions to equivalent transactions in a manner which may grant certain customers or suppliers an unfair advantage vis-à-vis their competitors” 4. “Making the contract regarding the asset or service under monopoly conditional on terms that, by their nature or according to commercial usage, are not related to the subject of the contract” It is important to emphasize that according to the Israeli law, “a monopoly is not prohibited, but bears a special responsibility.”5 Section 29a(b)(1) provides that one special responsibility is to refrain from “setting unfair purchase or selling prices.” The question of course is what constitutes “unfair prices” and whether unfair prices are low predatory prices, intended to drive rivals out of the market, or high prices, intended to extract surplus from consumers. These questions were addressed in several class actions brought against monopolies, alleging that they violated Section 29a(b)(1) of the Antitrust Law by setting excessive prices for their products or services. In the next section, I review these class actions.

3 Key Class Actions Concerning Excessive Pricing Before starting, it is important to bear in mind that in Israel, a class action is a two-step procedure: it begins with a preliminary motion to certify the class action.6 If the court grants the motion, the case proceeds to trial. One of the conditions for certifying a class action in Israel is that “there is a reasonable possibility that [the decision] will be in favor of the class.”7 Experience shows however that Israeli courts are quite stringent in applying this standard.8 In fact, so far, only one class action, the one alleging an excessive price for cottage cheese, has been certified and proceeded to trial.

5

See, monograph (Antitrust Authority) 1/93 The Director of the Antirust Authority v. Dubek Ltd., 1995 Antitrust 3,005,459, http://www.antitrust.gov.il/subject/140/item/26311.aspx (accessed on March 14, 2018). The Antitrust Tribunal, which made the decision, resides within the Jerusalem District Court and has exclusive jurisdiction over noncriminal administrative antitrust proceedings. 6 For detail about class action procedures in Israel, see Plato-Shinar (2007) and Taussig (2007). 7 Section 8(a)(1) of the Israeli Class Actions Law, 2006. 8 Klement and Weinshall-Margel (2016) examine all motions to certify class actions submitted in Israel from April 2006 to August 2012 and find that out of the 2056 motions that were filed, only 49 were certified by the court, 122 were rejected, and the rest were either withdrawn (800 motions), settled before the motion was certified (206 motions), or were closed for other reasons.

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The Howard Rice Case

The first important excessive price case involves a motion to certify a class action, filed in 1998 by Howard Rice (a pharmacy owner from Tel Aviv and, at the time, the chairman of the Israeli Pharmacists Association) against CAL, which, until mid-1998, was the sole issuer and acquirer of Visa credit cards in Israel.9 The motion alleges that CAL abused its monopoly position by setting excessive merchant fees of over 2% for the acquisition of Visa card transactions. The motion was based on the claim that following the entry of a new credit card company, Visa Alpha, into the Visa market in mid-1998, merchant fees have dropped to 2%, indicating that the pre-entry fees were excessive in accordance with Section 29a(b)(1) of the Antitrust Law. Accordingly, Howard Rice claimed for damages on the difference between the actual merchant fees charged by CAL and 2% for all Visa card transactions acquired by CAL from May 1996 (the time in which Amendment 2 was enacted) to August 1998 (Visa Alpha’s entry into the Visa market). The total damages were estimated by Howard Rice at more than 1 billion Shekels. The Tel Aviv District Court has certified the class action, but did not explicitly consider whether Section 29a(b)(1) applies in the case of excessively high prices. The Supreme Court decided on appeal to reject the class action on the grounds that the merchant fees following Visa Alpha’s entry into the market are not a valid benchmark to evaluate whether CAL’s pre-entry merchant fees were excessive.10 The decision was based on the fact that the motion to certify the class action was filed just one month after Visa Alpha’s entry into the market. Consequently, it is not obvious that merchant fees of 2%, cited in the motion, represent an equilibrium outcome (the court argued that these fees may in fact represent temporary introductory offers), especially given that Visa Alpha collapsed and went out of business shortly after entering the market. Importantly, the Supreme Court did not rule on whether Section 29a(b)(1) applies in the case of excessively high prices and left the issue open for further consideration.

3.2

The Bezeq International Case

The second important case concerning excessive pricing is the motion to certify a class action against Bezeq International.11 The motion, filed in 1997, is in many ways similar to the Howard Rice case. Until July 1997, the market for international phone calls in Israel was monopolized by Bezeq, which, at the time, was a government-owned regulated monopoly. Following a market reform in July 1997, 9

See D.C.M. (T.A) 106,462/98 Howard Rice v. Cartisei Ashrai Leisrael Ltd., P.M 2003(1). See Permission for Civil Appeal 2616/03 Isracard Ltd. v. Howard Rice, P.D. 59 (5) 701 [14.3.2005]. 11 See, D.C.A (T.A) 2298/01 Kav Machshava v. Bezeq Beinleumi Ltd. (Nevo, 25.12.2003). 10

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the market was opened for competition, and two new firms entered the market. Prices then fell by 80% virtually overnight. Kav Machshava, one of Bezeq’s corporate customers, filed a motion to certify a class action, alleging that Bezeq’s pre-entry prices for international phone calls were excessive. The Tel Aviv District Court certified the class action, but the Supreme Court decided to reject it on appeal on the grounds that Bezeq’s prices had been set by a regulator prior to the 1997 reform, meaning that Bezeq did not set its own prices and hence did not abuse its monopoly position either.12 Neither the District Court nor the Supreme Court has considered directly the question of whether a high price (here the pre-entry prices that Bezeq charged for international phone calls) can be deemed “unfair” and violate Section 29a(b)(1) of the Antitrust Law. Nevertheless, the case suggests that had Bezeq been in control of its own prices prior to the market reform in 1997, the court may have been open to the argument that Bezeq’s prices were excessive. Similarly to the Howard Rice case, this case also suggests that high pre-entry prices may be deemed excessive if a monopoly (Bezeq in this case) cuts prices significantly following the entry of rivals into the market.

3.3

The Cottage Cheese Class Action Case

The next major development came in 2011. Following a steep increase in food prices in Israel since 2005, and following a series of news articles describing the surge in food prices and the general high cost of living in Israel, a Facebook event was created on June 14, 2011, calling for a boycott of cottage cheese until its price drops from over 7 New Israeli Shekels (NIS) to 5 NIS.13 Cottage cheese is a staple food in Israel and one of the best-selling food products. The cottage cheese market is highly concentrated, and the market leader, Tnuva, which is also the largest food supplier in Israel and a declared monopoly in dairy products since 1988, has a market share of over 70%. The rest of the market is served by Strauss, the second largest food supplier in Israel, and by Tara, which is a subsidiary of the Central Bottling Company and the fourth largest food supplier in Israel and the franchisee of CocaCola in Israel. The Facebook event was widely covered by radio, TV, and newspapers, and tens of thousands of Facebook users joined it. The effect was immediate: the average price of cottage cheese dropped virtually overnight by about 24% from over 7 NIS to 5.5 NIS. Shortly after the cottage cheese boycott started, a motion to certify a class action against Tnuva was filed in the Central District Court. The motion alleged that Tnuva has charged an excessively high price for cottage cheese between March 2008

12 See Permission for Civil Appeal 729/04 State of Israel et al., v. Kav Machshava et al., (Nevo, 26.4.2010). 13 For a detailed analysis of the Cottage cheese boycott, see Hendel et al. (2017).

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and July 2011. The plaintiff based his claim on a comparison of the price of cottage between March 2008 and July 2011 with three benchmarks: the post-boycott price, the price before July 2006 when cottage cheese was subject to price control (the price was then under 5 NIS), and an estimate of the cost of production. The Central District Court certified the class action on April 5, 2016.14 Importantly, the court held that the wording and intent of the Antitrust Law support a broad interpretation of Section 29a, which embraces all forms of abuse of monopoly position that are liable to lessen competition or harm the public, including the setting of high unfair prices. It is also important to note that in its decision to certify the class action, the court took into account Guidelines 1/14 issued by the Director General of the IAA in 2014. In these guidelines, which I discuss in detail in Sect. 4.1 below, the Director General argued that Section 29a(b)(1) of the Israeli Antitrust Law applies to excessive pricing and stated the IAA’s intention to begin to enforce the prohibition of excessive pricing. The court held that while it is under no obligation to accept the General Director’s guidelines, the guidelines of the relevant regulator do carry important weight in interpreting firm behavior, albeit not a decisive one. Interestingly, Tnuva did not appeal the District Court’s decision to the Supreme Court like the defendants in the Howard Rice and the Bezeq International cases. As mentioned above, in both cases the Supreme Court has reversed the District Court’s decision to certify the class actions. One can only speculate that Tnuva, which had already faced two other class actions—one that alleges excessive prices for white cheese (soft, spreadable cheese) and heavy cream and the other that alleges excessive prices for prepackaged yellow cheese (yellow cheese is the generic name in Israel for hard cheese)—felt that, perhaps, it is better off without a Supreme Court’s ruling on whether excessive pricing is unlawful under Section 29a(b)(1) of the Antitrust Law. Having been certified, the cottage cheese class action went into trial, with evidentiary hearings scheduled for the summer of 2018, 7 years after the class action was filed. Hence, it remains to be seen how the case will be decided in the end. Regardless of the final outcome, the case is important because it was the first time that a court explicitly ruled that Section 29a(b)(1) applies in the case of excessive pricing, and it is also the first, and by now the only, class action concerning excessive pricing that has been certified.

3.4

The Potash Class Action Case

Another important legal decision came in January 2017 when the Central District Court approved a settlement of a motion to certify a class action against Dead Sea Works (DSW).15 The motion, filed in 2014, alleged that DSW, which was declared a

14

See Gilo (2016b) for detail. Class Action (Central District Court) 41,838–09-14 Weinstein v. Dead Sea Works, Inc. (Nevo, 29.1.2017) 15

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monopoly in the provision of potash in 1989, violated Section 29a(b)(1) of the Antitrust Law and set an excessively high price for potash in Israel. The allegation was based on the fact that DSW sold potash in Israel at a much higher price than overseas and on the fact that the price of potash rose from $200 per ton in 2007 to close to $1000 per ton in 2008–2009 and then fell to $200–400 per ton in 2010–2013. DSW argued, among other things, that excessive pricing is not recognized as an abuse of monopoly position by Section 29a and is not recognized in practice as an unlawful in other countries, and there are substantial reasons not to recognize it as such. Furthermore, DSW argued that even if excessive pricing is recognized as an unlawful abuse of monopoly position under the Israeli law, its potash price was neither excessive nor unfair and merely represented the price at which it can sell potash overseas. After some negotiations, DSW and the plaintiff reached a settlement that was approved by the court in January 2017. In its decision to approve the settlement, the court held that as a matter of principle, Section 29a(b)(1) does recognize excessively high prices as an abuse of dominant position, and hence, the relevant question is how to interpret and enforce the prohibition of excessive pricing. The court argued that this question is still open and there are legitimate differences of opinion about it. The court based its conclusion that Section 29a(b)(1) prohibits excessive prices on four considerations. First, the court held that the wording of the Antitrust Law makes it clear that the legislator intended to prohibit both predatory pricing and excessive pricing. The court held that it is inconceivable that when using the word “unfair,” the legislator only meant that the price is “too good” for the customer (i.e., the selling price is below marginal cost). Moreover, the court argued that if the legislator had only intended to prohibit predatory pricing, he would have used this terminology and, at the very least, would have clarified that unfair prices refer to cases in which the entry of rivals is deterred. Second, the court held that the main source of inspiration for Section 29a is the European competition law, which recognizes excessively high prices as an abuse of dominant position. Third, the court held that the main goal of the Israeli Antitrust Law is to protect the public against socially harmful business practices. Although the main means of achieving this goal is through the promotion of competition, there are some cases in which market structure renders competition impossible. In these cases, the court argued, the legislature granted the IAA and courts complementary tools to deal with inefficient business practices, and the prohibition of abuse of monopoly position is a clear example of this. Fourth, the court held that excessive prices set by a monopolist are a concrete example for exploitative practices, which are generally prohibited under Israeli law, including the contract law, the consumer protection law, the banking law, the insurance law, and even the criminal law. In this respect, the court held, the prohibition of excessive pricing, expresses a policy that takes into account not only efficiency considerations but also distributive justice considerations.

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As in the cottage cheese class action, here too the court took into account Guidelines 1/14 of the IAA’s Director General. In particular, the court stated that while it is possible, and in some cases also appropriate, to disagree with the methodology set forth in Guidelines 1/14 regarding the implementation and enforcement of the prohibition of excessive pricing, the Director General’s view that excessive pricing is prohibited under the Israeli law is indisputable.

3.5

The Natural Gas Case

More recently, in September 2017, the Supreme Court denied an appeal to dismiss a motion to certify a class action against natural gas suppliers, alleging that the price at which they sell natural gas to the Israel Electricity Corporation (IEC) is excessive.16 The natural gas suppliers share a large natural gas field in the Mediterranean and were declared a monopoly in the supply of natural gas in Israel in November 2012. Moreover, in April 2013, the government placed natural gas under regulation, though the type of regulation is quite minimal and only requires the natural gas suppliers to report their prices and profitability to the government. The case raises two important questions. The first question is whether excessive pricing is unlawful under Section 29a(b)(1) of the Israeli Antitrust Law. Unfortunately, the Supreme Court once again left the issue open for further consideration and merely stated that the District Court would have to consider this issue in its decision on whether to certify the class action or reject it. The second question is whether the natural gas suppliers are exempt from Section 29a of the Antitrust Law because they are subject to regulation and because their agreement with the IEC has been approved by the Israel Public Utility Authority for Electricity and by the IAA. The District Court answered the question in the negative. It ruled that since the gas suppliers are only required to report their prices and profitability to the government, but can set prices at their own discretion, they are not exempt from Section 29a. Moreover, the court ruled that none of the regulators who approved the agreement with the IEC has explicitly stated that the price is fair, albeit the approval may carry some weight in later stages of the class action. The Supreme Court upheld this decision and remanded the case to the District Court for further consideration.

16 Permission for Civil Appeal 9771/16 Nobel Energy Mediterranean Ltd. et al. v. Nizri et al., (Nevo, 28.9.2017).

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Pending Motions to Certify Class Actions

Following the publication of Guidelines 1/14 by the IAA’s Director General on April 9, 2014, and especially after the cottage cheese class action was certified in April 2016, a large number of motions to certify class actions concerning excessive prices were filed. The motions were all filed by private plaintiffs, except for the class action in the prepackaged yellow cheese case that was filed by the Israeli Consumer Council, which is a statutory, nonprofit corporation that works to defend consumers and protect their rights. The following table lists these motions, as well as the cottage cheese class action that has already been certified (Table 1). All cases in the table are currently pending in court. As the table shows, the class actions involve a wide range of products and services, ranging from dairy products and soft drinks to trading platforms, recovery and tracking services for stolen cars, and burial services, with several firms, including Tnuva, Strauss, the Central Bottling Company, and Bezeq facing multiple class actions. Although it is hard to know how these cases will end, one thing seems quite clear: nowadays monopolies in Israel face a real chance of being sued on the grounds that their prices are excessive. This situation creates considerable legal uncertainty, especially since courts have yet to establish clear criteria for what constitutes an excessive price. As a result, it is hard for monopolies to know which prices they should set if they wish to avoid class action lawsuits. Even worse, this uncertainty is not going to be resolved any time soon given how slow courts are in dealing with class actions: the most advanced class action involving cottage case was filed back in 2011 and is still pending in court. At this point, it is hard to say when a verdict will be issued. And, if the verdict is appealed to the Supreme Court, the case may drag on even longer. Moreover, it is much less clear which consensus, if any, will emerge in the different cases, concerning when prices are excessive and when they are not excessive. In the meantime, managers of monopolies have to live with the uncertainty of not knowing which prices they are allowed to set.

4 The Position of the IAA Until 2011, the IAA rarely dealt with the exploitative practices listed in Section 29a (b) of the Antitrust Law. Instead, it focused on exclusionary practices, intended to force rivals out of the market. In particular, the IAA had not issued an official position on whether excessive pricing is an abuse of monopoly position, nor did it take any enforcement actions against excessive pricing. Things changed when Professor David Gilo took office as the General Director of the IAA in 2011.17 Prior to taking office, Professor Gilo published several academic 17

For an overview of the IAA position on excessive pricing, see Solomon and Achmon (2017).

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Table 1 Pending class actions concerning excessive pricing

1. 2. 3. 4. 5.

The product/service Cottage cheese White cheese and heavy cream Natural gas

8. 9. 10. 10. 11.

Prepackaged yellow cheese Milky (dairy chocolate pudding) and dairy desserts Stolen vehicle recovery and tracking services Infrastructure to transmit data to the tax authority Communication services Cigarettes Cocoa powder Green tea Electricity

12. 13. 14.

Margarine Instant coffee 1.5 L bottle of Coca-Cola

15. 16. 17.

Israeli couscous Online platform for trading used cars Sport betting

18. 19.

Razor blades Passenger boarding bridges

20. 21.

Baby formula Coca-Cola Zero and Coca-Cola Diet

22.

Burial services

6. 7.

The monopoly Tnuva Tnuva Noble energy Mediterranean ltd. Tnuva Strauss

When was the class action filed? July 2011 February 2014 June 2014

Ituran

November 2014 April 2015 and May 2016 May 2015

Bezeq

August 2015

Bezeq Philip Morris Strauss Wissotzky Tea The Israel Electric Corporation Unilever Strauss The Central Bottling Company Osem (Nestle) Yad 2 Israel Sport Betting Board Gillette Civil Aviation Authority of Israel Materna (Nestle) The Central Bottling Company Chevra Kadisha

November 2015 March 2016 May 2016 May 2016 May 2016 June 2016 July 2016 August 2016 October 2016 October 2016 November 2016 May 2017 July 2017 September 2017 November 2017 October 2017 and November 2017

papers on excessive prices, together with Professor Ariel Ezrachi (Ezrachi and Gilo 2008, 2009, 2010). These papers question the validity of a categorical “hands-off” approach to excessive pricing, which deems excessive prices to be outside the realm of antitrust law, and argue that in many cases, the prohibition of excessive prices may be welfare enhancing. On April 9, 2014, Professor Gilo issued Guidelines 1/14 in his role as the Director General of the IAA. The guidelines state that unlike in the past, the IAA will begin to enforce the prohibition of excessive pricing, as stated in Section 29a(b)(1) of the Israeli Antitrust Law, and present the considerations and rules that will guide the

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Director General when deciding on enforcement measures in excessive pricing cases. In this section, I review Guidelines 1/14, as well as their revision, Guidelines 1/17, that were issued on February 28, 2017, by Professor Gilo’s successor, Michal Halperin, who took office as the IAA’s Director General in March 2016.

4.1

Guidelines 1/14

Guidelines 1/14 present an explicit framework for the implementation and enforcement of the prohibition of excessive pricing. The guidelines are based on the premise that: . . . the prohibition of excessive pricing is one of the central norms that apply to a monopolist, which are the result of his special status in the market and whose goal is to prevent harm to consumers and an increase in the cost of living. Preventing harm to consumers and the inefficiency in the allocation of resources as a result of excessive pricing is at the heart of the antitrust laws.

Guidelines 1/14 came less than 3 years after the social protest that took place in the summer of 2011 and encouraged policymakers to take various measures to lower the high cost of living in Israel. Indeed, the need to deal with the high cost of living is mentioned several times in the guidelines. Among other things, the guidelines claim that: [e]xcessive pricing causes a real harm to consumers’ welfare and contributes significantly to the cost of living

and [a]n approach that categorically rejects adopting measures against a monopolist who charges an excessive price. . . is contrary to the efforts to bring down the cost of living in Israel.

The guidelines acknowledge that the prohibition of excessive pricing is a controversial antitrust doctrine and is not considered unlawful under the US antitrust law. The guidelines though disagree with this “hands-off” approach and claim that the main potential objections to the doctrine are not convincing. The first potential objection is that excessive pricing can boost the monopoly’s incentive to make socially beneficial investments. The guidelines argue however that this objection essentially justifies the existence of monopoly as means of promoting socially beneficial investments and notes that this justification runs contrary to the entire logic of antitrust laws. The second potential objection to the prohibition of excessive pricing which Guidelines 1/14 discuss is that excessive prices tend to be “self-correcting” because they attract entry into the market. The guidelines note that the objection is in most cases incorrect, because entrants should care about the prices that will prevail in the market after they enter and not the pre-entry prices. Hence, in general, there is no reason to expect that high pre-entry prices will promote entry.

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The third potential objection discussed in the guidelines is that determining whether prices are excessive or not is a difficult task. The guidelines admit that in some cases this is true but argue that the IAA can “focus on cases in which it can overcome this difficulty.” The guidelines also note that in and of itself, the difficulty in determining whether prices are excessive “does not justify an across-the-board abstention from enforcement” and that “many doctrines in the antitrust laws . . . are also difficult to apply and enforce.” In particular, although determining whether prices are excessive may require the agency to estimate costs or profitability, this is also true when dealing with predatory pricing, bundling, margin squeeze, and market definition. Moreover, the guidelines note that calculating cartel damages or damages due to other restraints of trade also requires the agency to estimate the counterfactual price that would have prevailed but for the restraint and that this task is no easier than determining whether a monopolist’s price is excessive. A fourth objection is that the prohibition creates substantial legal uncertainty, because monopolists cannot determine in advance whether their prices will eventually be deemed excessive. Guidelines 1/14 acknowledge this objection and propose a safe harbor test, according to which prices will not be deemed excessive, so long as they do not exceed the monopolist’s accounting costs by more than 20%. When prices are more than 20% above accounting cost, they may be deemed excessive, provided that they are “high” relative to cost or relative to some other competitive benchmarks. Importantly, the guidelines leave open the question how high above cost or above some other benchmark a price should be in order to be deemed excessive. Moreover, the guidelines do not explain why a threshold of 20% was chosen for the safe harbor or is appropriate. A priori, it is not clear how many firms meet this safe harbor even in unconcentrated or moderately concentrated industries. The guidelines argue that with the safe harbor in place, the legal uncertainty “will be of a limited nature” and note that “. . . there are many doctrines in the antitrust laws, as in other areas, that are likely to lead to uncertainty among the entities subject to those laws.” The guidelines continue to argue that the legal uncertainty involved with the prohibition of excessive pricing “does not justify refraining from enforcement of the prohibition of excessive pricing by monopolists.” It is quite possible that at the time the guidelines were written, the Director General did not anticipate that only 3 years later, 23 class actions concerning excessive pricing will be pending in court. As I argued above, these class actions create considerable uncertainty, which we do not see when it comes to other antitrust doctrines. After concluding that excessive pricing is unlawful under the Israeli Antitrust Law, Guidelines 1/14 proceed to propose a legal-economic test that can be used to identify excessive prices. The guidelines start by arguing that “. . .an excessive price is one that exceeds the price that would prevail under conditions of competition.” The guidelines then discuss three methodologies that can be used to determine whether prices are excessive: (1) the gap between price and cost, which the guidelines view as the “main methodology”; (2) comparison of the profitability from selling the product in question with the prevailing profitability in the relevant

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industry; and (3) comparison of the product’s price with its price in other markets, other time periods, or the prices of competing products. Regarding the cost of production, the guidelines argue that the relevant cost for determining whether prices are excessive should be “the Long-Run Average Incremental Cost (LRAIC), divided by total production.” Moreover, the guidelines state that the IAA will use accounting costs to establish the safe harbor test and will use economic costs to identify excessive pricing when prices do not meet the safe harbor test. According to the guidelines, the economic cost of production includes raw materials and packaging materials, direct cost of labor and the cost of energy in production and distribution, depreciation and insurance, municipal taxes (but not corporate taxes), and the costs of distribution and sales. Additional costs, including advertising and marketing, general and administrative costs, financing and hedging, indirect taxes, the alternative cost of tangible and intangible assets, and transfer prices, will be considered on case-by-case basis.18 Once the IAA determined the cost of production, it will determine whether the price-cost margin is excessive according to: the circumstances of the specific market in which the monopolist is active, and in accordance with the quality of the information possessed by the Antitrust Authority and the ability to identify with relative accuracy the price that correctly reflects the costs of the monopolist and on the basis of other relevant considerations that will be derived from the circumstances of the case, the relevant market, and the characteristics of supply and demand in that market.

Unfortunately, this standard is rather vague and fails to clarify when exactly the IAA will consider a price-cost margin acceptable and when it will consider it to be excessive. This is especially so, if we bear in mind that when it comes to the safe harbor test, the guidelines are highly specific and state that a price-cost margin of no more than 20% is within the safe harbor. The guidelines are also specific when it comes to the comparison of the product’s price with its price in other markets, different time periods, and the price of competing products: When there is a difference between the price charged by the monopolist in various markets, which is only the result of differences on the demand side, and the gap does not exceed 20 percent, after neutralizing the differences in variable costs, the Authority will not view this gap in prices as an indication of excessive pricing. This rule will enable monopolists to charge different prices on the basis of the characteristics of the demand for the good and to cover its fixed costs in an efficient manner.

Finally, the guidelines state that the IAA will be more inclined to enforce the prohibition of excessive pricing when the relevant industry features high barriers to entry, the price is likely to remain excessive for a relatively long time, the monopolist’s market share is consistently large, and the product or service is essential. By contrast, the IAA will be less inclined to enforce the prohibition of excessive pricing when the monopolist acquired its dominant position through competitive advantage,

18 According to the guidelines, the additional costs will not be taken into account when assessing the safe harbor test.

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there is a relevant regulator that can intervene in the market, and the relevant product requires large R&D investments or involves a high level of risk.

4.2

Guidelines 1/17

Although Guidelines 1/14 drew a lot of attention and encouraged class action lawsuits alleging excessive pricing, the IAA did not manage to take actions against excessive pricing before Professor Gilo left office in September 2015.19 Once Michal Halperin took office as the new Director General of the IAA in March 2016, she decided to reconsider the IAA’s position and announced that the IAA is freezing all pending inquiries on excessive pricing.20 Following a petition by the plaintiffs in the cottage cheese case, the High Court of Justice Court ordered the IAA to continue its inquiries until new guidelines are issued. The IAA then conducted an extensive public hearing and solicited a consultation paper by Professor Frederic Jenny (Jenny 2018). Based on these, as well as on the IAA’s own accumulated experience since Guidelines 1/14 were issued, Michal Halperin issued on February 28, 2017, Guidelines 1/17, which replace Guidelines 1/14, and present the IAA’s updated policy on how to implement and enforce the prohibition of excessive pricing. The starting point for Guidelines 1/17 is that given the District Court’s decisions in the cottage cheese and the potash class actions, setting excessive prices, which the guidelines refer to as “unfairly high prices,” is unlawful under the Antitrust Law. The guidelines, however, take a much more reserved approach toward excessive pricing than Guidelines 1/14 and state that: charging an unfairly high price may, under the appropriate circumstances, be regarded as an abuse of monopoly position.

This statement seems especially reserved if we bear in mind that the premise of Guidelines 1/14 was that “. . . the prohibition of excessive pricing is one of the central norms that apply to a monopolist.” Guidelines 1/17 justify this reserved approach by noting that Section 29a of the Antitrust Law is based on Article 102 of the TFEU, where the prohibition of excessive prices is rarely enforced, and when it is, competition authorities act in a 19

Under administrative law, the IAA was able to condemn excessive prices only if they were charged after Guidelines 1/14 were issued in April 2014. Moreover, to examine whether prices meet the safe harbor test, the IAA needed to collect detailed accounting data, but did not manage to conclude any inquiries that found excessive prices before David Gilo left office in September 2015. 20 In fact, in an antitrust conference held at Haifa University in May 2016, Michal Halperin stated that “. . .it is preferable that the authority will be modest and know its place ... If the courts rule that there is a cause for excessive price, this will be the law in Israel, whether or not the authority has such an enforcement stance.” See “Will monopolies be satisfied? The revolutionary plan of the Antitrust Authority,” Ora Koran, The Marker, May 22, 2016, https://www.themarker.com/news/ macro/1.2950680 (accessed on March 14, 2018).

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relatively restrained manner. The guidelines argue that this restraint reflects the difficulties in enforcing the prohibition, the recognition that direct intervention with prices is not the best route for competition authorities, and the concern for the potential long-run adverse effects of the prohibition on firms’ incentive to invest. Accordingly, the guidelines state that the IAA will exercise caution and restraint in enforcing the prohibition and will focus on cases where the economic benefits from intervention clearly outweigh the associated cost. An additional difficulty raised by the guidelines is that economics, which antitrust laws are based on, does not deal with fairness, and hence it is unclear at which point a high price becomes “unfair.” While fairness is not an economic concept, the guidelines caution against defining high unfair prices solely on the basis of legal tools, as this may lead to arbitrary and undesirable outcomes. Regarding the implementation of the prohibition of excessive prices, Guidelines 1/17 list several considerations, which will guide the IAA when dealing with excessive pricing. First, the IAA will prefer, whenever possible, to rely on structural measures that promote competition, including issuing directives to the monopolist, rather than directly intervene with prices. In a sense then, the IAA views the prohibition of excessive pricing as a measure of last resort that can be used only when other tools are either not available or are ineffective. Second, given the methodological and practical challenges in identifying excessive prices, the IAA will take enforcement actions only when the monopolist’s price is blatantly excessive and significantly exceeds the price that would have prevailed under competition. To establish the latter, the IAA will use, when appropriate, the monopolist’s past prices, its prices in more competitive markets, or the prices of rivals. Moreover, an unusually high rate of return or price-cost margin may indicate that prices are excessive. Importantly, the guidelines maintain that, as a rule, the IAA will refrain from basing its conclusions solely on cost-based tests, both because of the theoretical difficulties in measuring cost and the potential adverse effect of using this benchmark on the incentives of firms to cut costs, innovate, and launch new products. Third, establishing that a supracompetitive price is also unfair is a complex task and involves a value-based judgment. Hence, the IAA will be more inclined to regard a price as unfair if consumers do not have a genuine alternative to the monopoly’s product or service and when the direct harm to consumers is large. Moreover, following Evans and Padilla (2005), the IAA will be also more inclined to intervene if high prices exclude rivals from adjacent markets where the monopoly’s product or service are used as an input. Fourth, the IAA will tend not to enforce a prohibition of excessive pricing if a sectorial regulator exists, who has the expertise, experience, and tools to impose price controls. Fifth, given that excessive price investigations require large resources and have a low chance to succeed, the IAA will generally focus on cases where there are strong indications that the price is substantially supracompetitive and there is no concern for long-run adverse effects on firm’s incentives to invest.

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Finally, Guidelines 1/17 revoke the safe harbor established in Guidelines 1/14, according to which a price is not excessive if it is no more than 20% above cost. The reason for revoking the safe harbor was based on three concerns. One is that a costbased safe harbor tends to favor cost-based tests over other tests. The second concern is that the 20% threshold would become, and perhaps had already become, a normative binding threshold for monopoly pricing. Indeed, casual observation suggests that some plaintiffs argued that prices are excessive because they were more than 20% above cost. This is despite the fact that the safe harbor merely stated that such prices may be, but are not necessarily, excessive. The third concern was that a single threshold for the safe harbor may be inappropriate given the large differences between markets and products, meaning that “one size may not fit all.”21

5 The Academic Debate in Israel About Excessive Pricing The debate on the antitrust prohibition of excessive pricing was also held in academic circles. It seems that this debate had a considerable influence on courts, as well as on plaintiffs and defendants in various class actions, who cited and discussed some of the arguments raised in the academic debate. In this section, I discuss this debate and point out some weaknesses and strengths of the arguments that were raised. The first academic contribution to the debate is probably a public lecture by Professor Michal Gal in a conference on the abuse of monopolistic power held at the University of Haifa in 2004. The lecture, which draws on Gal (2004), was extensively cited and discussed by the Supreme Court in the Howard Rice case. In her talk, Professor Gal suggested that a case can be made that unfair prices include high prices, mainly because Section 29a was copied from the European antitrust law, which prohibits excessive pricing. She points out however that the difficulty in defining what constitutes an excessive price, as well as the fact that the European Commission does not act as a regulator, led the Commission to apply minimal resources to the enforcement of the prohibition. Gal proposed that excessive pricing should not be a criminal offense under the Antitrust Law and should not be applied before the legislature provides indications on how to define excessive prices. Gal and Nevo (2015) take a stronger stance and argue that antitrust law in general and the Israeli Antitrust Law with its peculiarities in particular are not the right way to deal with excessive pricing. Their claim is based on several arguments. First, they express a concern for over deterrence, in part because under the Israeli law, excessive pricing is potentially a criminal offense if accompanied by intent to harm competition or the public. This concern however is largely hypothetical, because both

21

This concern is not very convincing however because 20% above cost is a narrow threshold, so many cases may fall outside the safe harbor. While this makes the safe harbor ineffective, it is not clear what the harm is. After all, an ineffective safe harbor may still be better than none.

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Guidelines 1/14 and 1/17 state clearly that the IAA will not utilize its criminal enforcement powers against excessive pricing. Gal and Nevo also base their concern for over deterrence on the grounds that there is no pre-ruling process that allows a monopolist to ensure that its price will not be deemed excessive. However, pre-ruling seems impractical when it comes to excessive pricing because, typically, firms offer a wide range of products and services and sell them to a large number of buyers. For instance, cottage cheese comes in various milkfat contents and flavors and is sold to thousands of stores around the country, as well as to institutional buyers like hotels, hospitals, prisons, the army, etc. On top of that, firms update prices periodically, say through promotions and sales. It is clearly impractical to have a pre-ruling each time a firm wishes to change one of its prices. Second, Gal and Nevo argue that the prohibition of excessive pricing may deter the entry of multinational firms into the Israeli market. This argument is not very convincing either if we bear in mind that excessive pricing is unlawful not only in Israel but also in all OECD countries, except the US, Canada, Australia, New Zealand, and Mexico.22 Gal and Nevo also claim that the prohibition of excessive pricing may discourage Israeli firms from investing in R&D and in improving their production efficiency. This argument though is probably not very relevant for traditional industries, where R&D investments do not play an important role. Indeed, many of the pending class actions in Israel, listed in Table 1, involve traditional industries like dairy products, cocoa powder, green tea, margarine, instant coffee, Coca-Cola, Israeli couscous, cigarettes, and burial services. Third, Gal and Nevo argue that some firms may raise prices in order to ensure that their market share stays below 50%, in which case they are not considered to be monopolies under the Antitrust Law and therefore not subject to the prohibition of excessive pricing either. Such price increases to avoid a monopoly status will only exacerbate the high price problem. While this concern sounds valid in principle, in reality, it is hard to believe that a firm can fully control its market share and ensure that it stays just under 50%. This is because a firm’s market share also depends on the actions of customers and rivals and is in general subject to random shocks. Moreover, firms learn their precise market shares only in retrospect, because in real time they have only limited information about the sales of rivals. Hence, to avoid an inadvertent monopoly status, a firm may have to keep its market share well below 50%. It is not clear how many firms, if any, would be willing to sacrifice a significant chunk of sales in order to ensure that they are not subject to the prohibition of excessive pricing. Fourth, Gal and Nevo argue that monopolies that serve several distinct markets may raise prices in markets with elastic demand in order to avoid an allegation that their price in a market with inelastic demand is excessive. This concern seems more convincing, although the other side of the coin is that the monopolist may also lower its price in the market with the inelastic demand to minimize the risk that its prices

22 See OECD, Policy roundtable, “Excessive prices,” 2011, http://www.oecd.org/competition/ abuse/49604207.pdf (accessed on March 14, 2018).

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will be deemed excessive. The question then is whether the net effect on consumers is positive or negative. Gilo and Spiegel (2018) address this question in the context of a game theoretic model. They study both the benchmark that Gal and Nevo mention, which they refer to as a “contemporaneous benchmark” for excessive pricing, as well as a “retrospective benchmark” of the type used in the Howard Rice and the Bezeq International cases. Under a retrospective benchmark, a price cut following a rival’s entry into the market is used as an indication that the monopolist’s pre-entry price has been excessive.23 Gilo and Spiegel show that contemporaneous and retrospective benchmarks for excessive pricing induce a monopolist to limit the gap between its prices over time and across markets. As in the case of third-degree price discrimination, this behavior helps consumers in markets where prices would be otherwise high but harms consumers in markets where prices would be otherwise low. In a wide range of cases though, the gain of the former type of consumers outweighs the loss to the latter type, meaning that aggregate consumer surplus is higher when contemporaneous and retrospective benchmarks are used to assess whether prices are excessive. Gilo and Spiegel also show that a retrospective benchmark makes an incumbent monopoly reluctant to cut prices following the entry of a rival into the market and therefore facilitates entry, contrary to what Gal and Nevo claim. Moreover, they show that a retrospective benchmark is more effective in restraining the monopoly’s pre-entry behavior when the probability of entry is high. This is because the monopoly realizes that a high pre-entry price makes it harder for it to compete with the rival if it enters since post-entry price cuts may expose the pre-entry price as excessive. This result stands in contrast to the often-made claim that there is no need to intervene in excessive pricing cases when the probability of entry is high because then “the market will correct itself” (see, e.g., OECD 2011b; O’Donoghue and Padilla 2006; Motta and de Streel 2006). While it is true that entry will lower prices without the need for antitrust action, the claim ignores the fact that the prospects of legal action restrain the monopoly’s behavior before entry takes place. A fifth argument that Gal and Nevo make is that courts need to decide whether prices are excessive even though the concept lacks a clear definition, and moreover they also need to compute the counterfactual prices that would have prevailed but for the abuse of monopoly position in order to assess the resulting damages. They argue that this task is complex and requires expertise and resources that courts lack. Moreover, they point out that it is not clear how prices should be updated once a court makes a decision. Gal and Nevo conclude that price regulation is much more appropriate for dealing with high prices, both because prices are set by professional regulatory agencies and because they are set in advance, so firms do not face legal uncertainty regarding whether their prices are lawful. Similar arguments were also made by Evans and Padilla (2005) and Motta and de Streel (2007). Gal and Nevo

23

A retrospective benchmark was also used in the cottage cheese class action, since the low price following the cottage cheese boycott was used as one of the indications that the pre-boycott price was excessive.

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emphasize though that price regulation is itself imperfect and may have unintended negative consequences. Gilo (2016a) responds to Gal and Nevo (2015) and makes three arguments that I wish to discuss here. The first argument concerns price regulation: Gilo argues that the prohibition of excessive pricing encourages firms to self-regulate their own prices and hence alleviates the need to establish costly regulatory agencies to engage in this task. Moreover, he argues that as a practical matter, it is impossible to regulate all monopolies, and in fact, only a few monopolies in Israel are subject to price regulation. Hence, in general, there is room for the prohibition of excessive pricing to restrain monopoly behavior. The second argument has to do with the legal uncertainty created by the prohibition of excessive pricing. Gilo claims that this uncertainty is very typical of antitrust law and is in fact inevitable. As an example, he mentions exclusivity arrangements: although these arrangements are often socially beneficial, the parties to such an arrangement cannot be sure that an antitrust agency will not conclude ex post that the arrangement significantly lessened competition. The third argument is that although deciding whether prices are excessive is a complex task, the same is also true for other tasks in antitrust enforcement. For example, antitrust agencies routinely use the SSNIP test to define markets, despite the fact that this task requires them to estimate the response of consumers to a small price increase, and whether the result is profitable for the firm or not. Likewise, estimating cartel damages involves a complex task of estimating the counterfactual price that would have prevailed but for the cartel. Gilo argues that this task is even harder than establishing whether a price is excessive, because in the latter case, one can use the monopolist’s past prices or prices in other markets as benchmarks, whereas in cartel cases, one cannot avoid the need to estimate the but-for price. Gal and Nevo (2016) reply to Gilo (2016a) and argue that while there is little doubt that high prices may harm consumer welfare, the prohibition of excessive pricing is not the right tool for dealing with the problem. Moreover, they claim that the prohibition of excessive pricing prices may in fact be a “Trojan horse” that significantly harms social welfare due to its chilling effect on R&D and on costreducing investments, its negative effect on the incentive of international players to enter the Israeli market, and the uncertainty it creates. Gal and Nevo then advocate the use of ex ante regulatory proceedings, based on a clear rule, in order to curb high prices, whenever this is needed.

6 What Can Be Learned from the Israeli Experience? Given the recent court decisions in the cottage cheese and the potash class actions and Guidelines 1/14 and 1/17, it seems that the legal debate on whether excessive pricing is unlawful under the Antitrust Law is largely over. It is always possible that the Supreme Court, which is yet to rule on the matter, will decide otherwise, but such a ruling will be quite surprising. It also seems that the IAA is quite reluctant to

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enforce the prohibition of excessive pricing. The implication is that enforcement of the prohibition is entirely carried out through class actions. As mentioned above, with the exception of the prepackaged yellow cheese class action that was filed by the Israeli Consumer Council, all other class actions were filed by private plaintiffs. As Table 1 shows, currently there are 23 class actions pending in court. These class actions allege excessive pricing in a variety of industries, ranging from dairy products and soft drinks to trading platforms, recovery and tracking services for stolen cars, and burial services. It seems that this trend is likely to continue, at least in the near future, and will only grow if some pending cases are decided in favor of the plaintiffs. The question is whether this trend should be viewed as a good thing, which improves matters, or as a bad thing, and a cause for concern. My own impression is that the jury on this question is still out. In what follows, I discuss several issues that are worth bearing in mind when evaluating the current situation in Israel concerning the prohibition of excessive pricing. But before discussing these issues, I wish to stress that I strongly believe that the best way to deal with the abuse of market power is to simply eliminate market power. This can be done by opening markets for competition, removing barriers to entry, and facilitating consumer switching. These actions benefit consumers by giving them a large number of choices and allowing them to freely choose whom to buy from. Indeed, recent experience in Israel shows that market reforms in mobile telephony, TV services, and airlines, which liberalized these markets and opened them up for competition, benefitted consumers a great deal and lowered prices considerably. The question then is how to deal with cases where competition fails and market power cannot be eliminated through structural remedies.

6.1

Are Courts Qualified to Make Decisions in Excessive Price Case?

Courts in class actions concerning excessive prices face a difficult task: they need to determine if the price set by a monopolist was “unfair,” and if it was, they need to determine the price that would have prevailed but for the abuse of monopoly positions in order to determine the resulting damages. Many commentators, including Evans and Padilla (2005), Motta and de Streel (2007), and Gal and Nevo (2015, 2016), argue that this task requires courts to act, in effect, as price regulators, despite the fact that they lack the necessary expertise and resources needed for this task. In fact, Judge Frank Easterbrook famously wrote that “the antitrust laws do not deputize district judges as one-man regulatory agencies.”24 Although under the US antitrust laws it is not unlawful to set high prices, whereas under Section 29a(b)(1) of the Israeli Antitrust Law it is, it is still not clear that a District Court judge in Israel is qualified to act as a “one-man” regulatory agency in an excessive price class action. 24

See Chicago Professional Sports Ltd. Partnership v NBA, 95 F.3d 593, 597 (7th Cir. 1996)(US).

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To make things worse, the various class actions listed in Table 1 are not handled by the same District Court and are not necessarily heard by judges who specialize in excessive pricing cases. Recent evidence from the US suggests that antitrust cases, which involve complex and technical antitrust issues, may be too complicated for generalist judges (Baye and Wright 2011). In particular, they find that economic complexity significantly increases the probability of appeal, while judicial training reduces it.

6.2

Are Class Actions the Right Tool to Enforce the Prohibition of Excessive Pricing?

Apart from the fact that courts may lack the expertise and resources to deal with excessive pricing cases, there is another question: is it a good thing that the prohibition of excessive pricing is now private and done through class actions? I believe that three issues are worth discussing in this context. The first is that typically, private plaintiffs do not have good data on which to base their claims that prices are excessive. Hence, class actions are often based on weak evidence. A case in point is the motion to certify a class action against the Central Bottling Company, alleging that the price of 1.5 L bottles of Coca-Cola is excessive.25 The economic expert for the plaintiff based his opinion on a few pieces of evidence, all of which are public and available on line for free. The first piece of evidence was the price of Coca-Cola cans in different countries. This evidence is clearly irrelevant given that the class action concerns 1.5 L bottles of Coca-Cola. Nevertheless, the economic expert used this data simply because it was available on line for free. The second piece of evidence was a newspaper article that reported the price of family-sized bottles of Coca-Cola in the US, based on an unknown number of receipts that the journalist received from newspaper readers. This evidence though is also questionable at best since a few receipts sent to a journalist by newspaper readers are hardly a representative sample. When cross-examined in court, the economic expert explained that he did not buy marketing research data about the price of family-sized bottles of Coca-Cola in different countries because his agreement with the plaintiff required him to pay for all data. In fact, he went as far as saying that “even if it was 500 shekels, I would not buy it.” Clearly, it is hard to compare prices in Israel and in other countries when all you have is a newspaper article and the price of another product. The third piece of evidence was the financial statements of publically traded soft drink producers in Israel and abroad. This evidence is also hardly helpful given that the financial statements report highly aggregated data on a wide range of products, many of which are not even soft drinks. Moreover, there is no reason to believe that it 25

As I mentioned earlier, I submitted an expert opinion on behalf of the Central Bottling Company.

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is possible to learn the cost of a single product, like the cost of a 1.5 L bottle of CocaCola, when the supplier produces many products and has large common costs. There is also no reason to believe that the data of one firm is indicative of the data of another firm. This brings me to the second issue that I wish to discuss: some class actions are frivolous. To get an idea for what I mean, consider again the class action concerning the price of 1.5 L bottles of Coca-Cola. The motion to certify the class action is still pending, so it is too early to tell what the court will eventually decide. However, one can consider the arguments used by the economic expert for the plaintiff in support of the allegation. First the economic expert argued that the price of a 1.5 little bottle of Coca-Cola back in 1989, when Coca-Cola was under price control, was 1.47 NIS, whereas the average price in 2015 was 6.77 NIS, a 350% price increase. The expert wrote in his opinion that “this fact is an indication for an excessive price.” Unfortunately, the expert forgot to mention that since 1989 the consumer price index increased by 462%, meaning that a price of 1.47 NIS in 1989 amounts to well over 8 NIS in 2015 prices. Second, the economic expert for the plaintiff did not mention that the average price of a 1.5 little bottle of Coca-Cola in 2015 constant NIS virtually did not change between 2005, which is the first year for which data is available, and 2016 and hovered around 6 NIS throughout the period.26 By comparison, from 2005 to 2011 (the year in which the social protest broke out), food prices grew at an average annual rate of 5% in Israel and 3.2% in the OECD countries (see the Kedmi Committee Report 2012, p. 8). This is hardly consistent with the claim that the price of Coca-Cola was excessive.27 Third, a Nielsen report submitted to the court by the Central Bottling Company shows that while the price of 1.5 L of Coca-Cola is higher in Israel than in the US, Spain, Germany, and Italy, it is lower than in Belgium, France, Great Britain, the Netherlands, and Denmark and is below the average price across all countries in the report. This data, which the expert for the plaintiff would not pay for, shows that the price in Israel is no more excessive than in Belgium, France, Great Britain, the Netherlands, and Denmark. Again, it is hard to tell what the court will decide in the end, but I view the above as strong indications that the class action has no basis. Given that many other class actions are also based on weak evidence and questionable arguments, it would have been much better for either the IAA or the Israel Consumer Council to enforce the prohibition of excessive pricing. Yet, as I already mentioned, the IAA seems reluctant or unable to do that, while the Israel Consumer Council is not very active 26 The data in question is from a marketing research firm that collects data from cash registers of virtually all supermarket chains and most minimarkets in Israel. Again, data on soft drinks is available only from 2005 onward. 27 One can always claim that the price of Coca-Cola did not change since 2005 because it was excessive right from the start. This claim however is inconsistent with the fact that when Coca-Cola was under price control in the late 1980s, its price was above 8 NIS in 2015 NIS, which is 30% above its price in 2005.

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in this respect. Consequently, the prohibition of excessive pricing will probably continue to be enforced by private plaintiffs through class actions. The third issue I would like to discuss is that even if class actions were all filed in good faith and were based on solid data, an adversarial process may not the best way to determine if prices are excessive and what they would been but for the abuse of dominant position. Such questions are much more suitable for a regulatory process, which allows a back-and-forth dialogue between firms and policymakers.

6.3

Alternatives to the Antitrust Prohibition of Excessive Pricing: Price Regulation

In the previous two subsections, I argued that courts are not the ideal place to make decisions about pricing, and class actions may not be the best legal procedure to prevent monopolies from abusing their position. The obvious question then is what might be an alternative if we wish to prevent monopolies from setting excessive pricing? As I already mentioned, many commentators, including Evans and Padilla (2005), Motta and de Streel (2007), and Gal and Nevo (2015, 2016), argue that an obvious alternative should be price regulation. I now consider this possibility and argue that at least in Israel, price regulation is itself highly imperfect and leaves something to be desired. Price controls were very common in Israel since its inception. As of 1996, the Regulation of Prices of Goods and Services Law enables a government committee to regulate the prices of goods and services if they are deemed essential, supplied by a declared monopoly, or their supply is highly concentrated. Currently, a number of goods are under price control, including basic bread, salt, milk, white and yellow cheese, heavy cream, butter, and eggs. Yet, price regulation in Israel is highly inefficient. Indeed, Zvia Dori, who was in charge of enforcing price controls on food products in the Ministry of Economy and Industry for 15 years, admitted in a court testimony that28: [a]fter 15 years of working in price regulation, I do not believe that regulation is effective, and I believe that creating competitive market conditions is far more effective than price controls.

Zvia Dori also expressed her opinion that price controls actually lead to higher prices and that deregulation will boost competition.29 Indeed, as mentioned earlier, the price of international phone calls fell by 80% when it was deregulated, and the 28 See “Price Regulation is not the Solution,” Meirav Arlosoroff, October 19, 2014, The Marker, https://www.themarker.com/news/1.2461501 (accessed on March 14, 2018). 29 Interestingly, Zvia Dori’s testimony was given at a trial, in which the largest industrial bread bakeries in Israel were convicted of forming a cartel. At least on one occasion, the bakeries met in the offices of a large law firm to discuss common regulatory issues.

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market was opened up for competition. Israel is not an exception: Genakos et al. (2018) show that the repeal of maximum wholesale and retail markup regulation in the fruit and vegetable markets in Greece in June 2011 led to a significant decrease of 6% in average retail prices. Moreover, Katsoulacos et al. (2017) identify excessive and low-quality regulation as one of the main impediments to competition and growth in Greece. Of course, this does not mean that regulation always raises prices, but it shows that the converse is also not true: price regulation does not necessarily lower prices as one might hope for. To get an idea about price regulation in Israel, one can consider the case of basic bread.30 Back in 2013, the bakeries requested the government to update the regulated price of basic bread. The government decided in 2014 to reject the request and announced its intention to update the methodology it uses to regulate prices. The new methodology was eventually adopted at the beginning of 2017. The government also hired two accounting firms to examine the bakeries’ cost structure, as well as the normative retail margin that should be used in setting the regulated price. Using accounting data from 2013 for the bakeries’ costs and the retail margin, the government finally decided in 2016 to update the price of basic bread. Following an appeal by the bakeries, the government decided to use accounting data from 2015 for the bakeries’ cost structure instead of the 2013 data, but was unable to tell whether the updated price was set according to the new methodology or the old one. The bakeries appealed again, but as of January 2018, the government has still not made a final decision on the updated price of bread. The upshot is that a regulatory process that started back in 2013 and involved many hearings and appeals, is still pending, and is based on outdated accounting data. Clearly then, price controls are a very imperfect substitute for preventing monopolies from setting high prices. One should also bear in mind that there is an important difference between the two mechanisms: price controls are forward looking and may prevent a dominant firm from abusing its market power in the future, while the antitrust prohibition of excessive pricing is backward looking and sanctions firms for an abuse of monopoly position that already took place.31

30

Disclaimer: I submitted an expert opinion on behalf of one of the largest bakeries in Israel and also participated in a public hearing concerning the regulated price of basic bread. 31 To appreciate the difference, imagine that a monopolist anticipates that it is going to lose its dominant position in the future, say because its market is going to open up for competition. The threat of price regulation may not deter the monopolist from abusing its monopoly position in the present since the monopoly anticipates that it is going to lose this position in the future in any event. By contrast, a backward-looking antitrust action may restrain the monopolist’s behavior in the present.

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Alternatives to the Antitrust Prohibition of Excessive Pricing: Consumer Activism

Another potential mechanism for dealing with excessive pricing is consumer activism. A case in point is the cottage cheese boycott, which I already mentioned in Sect. 3.3 above.32 As mentioned earlier, the boycott followed a steep increase in food prices in Israel from 2005 to 2011. Cottage cheese, which is a staple food in Israel, was under price control until July 30, 2006. Following deregulation, the price of cottage cheese rose sharply by 43% from about 4.5 to 5 NIS before deregulation to over 7 NIS on the eve of the boycott. By comparison, the mean price of regulated dairy products increased over the same period by only 10%. On June 14, 2011, a Facebook event was created calling for a boycott of cottage cheese. The event was widely covered by radio, TV, and newspapers and attracted 30,000 Facebook users on the first day, 70,000 after 3 days, and over 105,000 users by the end of June 2011. The effect of the boycott was immediate: the average price of cottage cheese dropped virtually overnight by about 24% from over 7 NIS to 5.5 NIS.33 In response to the cottage boycott, the government appointed the Kedmi Committee to review the level of competition and prices in Israel. Among other things, the committee recommended structural reforms in the dairy market, including a gradual opening of the market to competition, removing import tariffs, and eliminating the exemptions to produce distributors from antitrust action (see the Kedmi Committee report). The cottage cheese boycott had a long and lasting effect. In January 2013, the Chief Marketing Officer of Tnuva said in the annual meeting of the Israel Marketing Association that “[t]he cottage cheese crisis taught us a lesson of modesty and humility.” Similarly, in July 2013, Tnuva’s CEO said that “[t]he cottage protests caused Tnuva to emphasize the opinion of the consumer and his needs. Part of this policy is putting cottage under self-regulation.” Moreover, although the government decided to reregulate the price of white cheese at the start of 2014 due to “exceptional profitability,” it found no need to reregulate the price of cottage cheese, because it did not find “unreasonable profitability as in the past.” Today, almost 7 years after the boycott, the price of cottage cheese is still around 5.5 NIS, similarly to its price after the boycott started. Shortly after the cottage cheese boycott, in July 2011, the “tents protest,” which also started on Facebook, led thousands of Israelis to set up tents in city centers around the country to protest the rising cost of living and demand social justice. The protest led the government to take several initiatives intended to lower market concentration and promote competition. These initiatives include the Promotion of 32

The material in this section draws on Hendel et al. (2017). Initially, the sharp decline in average prices was driven by special sales by some supermarket chains. Prices dropped across the board only when Tnuva lowered its wholesale prices about 10 days after the boycott started. For more detail about the cottage cheese boycott, see Hendel et al. (2017). 33

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Competition in the Food Sector Law, the Law for Promotion of Competition and Reduction of Concentration, and the Law for Increasing Competition and Reducing Concentration in the Israeli Banking Market.34 These initiatives had a significant effect on the mindset of the public and legislators, as well as the mindset of firms; it would not be a gross exaggeration to argue that it also affected the mindset of courts and their inclination to certify class actions alleging excessive pricing by monopolies. Another consumer protest worth mentioning is the “Milky protest.” Milky is a dairy chocolate pudding topped with whipped cream, and is extremely popular, especially among children. It is produced by the Strauss Group, which is a declared monopoly in the dairy desserts market since 1998. The Milky protest began in October 5, 2014 when an Israeli living in Berlin uploaded to Facebook a picture of a supermarket receipt, showing, among other things, that the price of a Milky-like product in Berlin is only 0.19 euros (around 0.9 NIS at the time). At the same time, the price of Milky in Israel was around 2.60 NIS.35 The protest got a lot of publicity and was widely covered in the media. Several supermarket chains reacted to the protest by offering Milky at a special sale price of just one shekel.36 Following the protest, the average price of Milky dropped to around 2.30 NIS in early 2015, although it rose again to around 2.50 NIS by 2016. The cottage cheese boycott, the tents protest, and the Milky protest demonstrate that consumers can get organized and apply effective pressure on manufacturers and retailers to cut prices. Unfortunately though, Israeli consumers seem to be quite passive. For example, a day after the cottage cheese boycott started, Professor David Gilo, who was then the Director General of the IAA, said in an interview with a newspaper37: There is a kind of indifference with the Israeli consumer. My general impression is that the Israeli consumer is not doing market research, is not willing to invest a little effort and compare competing offers and travel an extra kilometer to go to the cheapest competitor.

Likewise, shortly after the cottage cheese boycott, Professor Oded Sarig, who served as the Commissioner of Capital Markets, Insurance, and Savings, said in a

34

Ater and Rigbi (2017) study the implications of the Promotion of Competition in the Food Sector Law and show that one of its clauses which requires supermarket chains to post their prices online led to a sharp decline in price dispersion and a 4%–5% drop in supermarket prices. 35 For more details, see https://he.wikipedia.org/wiki/%D7%9E%D7%97%D7%90%D7%AA_% D7%94%D7%9E%D7%99%D7%9C%D7%A7%D7%99 (accessed on March 14, 2018). For information about the price of Milky, see the expert opinion of Sela Kolker submitted in support of the class action against Strauss, http://ocu6j3ta8d2palbt119d6nsq.wpengine.netdna-cdn.com/wp-con tent/uploads/2016/07/%D7%9E%D7%99%D7%9C%D7%A7%D7%99-150516-%D7%97%D7% AA%D7%95%D7%9D.pdf (accessed on March 14, 2018). 36 See “Was there a boycott?” Ilanit Hayut, Globes, October 12, 2014, https://www.globes.co.il/ news/article.aspx?did¼1000977809 (accessed on March 14, 2018). 37 See “David Gilo: “Consumer boycott is a welcome phenomenon,” Ilanit Hayut, Globes, June 15, 2011, http://www.globes.co.il/news/article.aspx?did¼1000654462 (accessed on March 14, 2018).

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Knesset’s (the Israeli parliament) Economics Affairs Committee meeting that consumers in the pension market are not sufficiently active38: The most important thing for me is that what happened with cottage will also happen with management fees. People need to understand that they have the power to bargain and they should take advantage of it. . . We allow a person to move from one place to another and compete for his money. I look at the data, de facto it does not happen. . . I can bring the horse to the trough, I can not make it drink.

More generally, an Internet survey conduct by the Israel Consumer Council in September 2015 reveals that Israeli consumers are not very active and have low awareness of consumer rights.39 Hence, while the cottage cheese boycott and the Milky protest were very effective in restraining market power, these events are probably the exception rather than the rule.

6.5

When Are Prices Excessive?

To establish that a price is excessive, it is necessary to compare it to some competitive benchmark. In principle, there are two approaches that can be used. The first is to rely on a cost-based test and compare the allegedly excessive price to the relevant cost. Examining the firm’s profitability is equivalent, because profitability is just the difference between revenue and cost. However, since the prohibition of excessive pricing in Israel is enforced exclusively through class actions, it seems unlikely that cost-based tests could be actually used. The reason is that it is unrealistic to expect that private plaintiffs will obtain the necessary data to determine the monopolist’s cost. Moreover, when firms produce multiple products and a large chunk of their cost is common, it is difficult, if not impossible, to determine the cost of an individual product, because this requires common costs to be allocated to individual products, which is, by definition, arbitrary. A second approach is price-based and involves a comparison of the allegedly excessive price with some other price, which is considered to be more competitive. Here there are four possible benchmarks. The first is a retrospective benchmark of the sort used in the Howard Rice or the Bezeq International class actions, where a price cut following the entry of rivals into the market indicates that the pre-entry price has been excessive. Conversely, one can use a price hike following deregulation as an indication that the new deregulated price is excessive. This benchmark is also retrospective, except that now, a past regulatory price indicates that the current deregulated price is

38

The Knesset Economic Affair Committee meeting, Tuesday, November 15, 2011, http://fs. knesset.gov.il//18/Committees/18_ptv_182849.doc (accessed on March 14, 2018). 39 See Israel Consumer Council, October 8, 2015, http://www.consumers.org.il/item/madad_1015 (accessed on March 14, 2018).

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excessive. This type of benchmark was used, for instance, in the cottage cheese, Milky, and prepackaged yellow cheese class actions. A third possibility is to use a contemporaneous benchmark and compare the allegedly excessive price with the price the monopolist charges for the same product in another market, where it faces competition. For example, in the potash class action, the price in Israel was deemed excessive in comparison with the average price that DSW charged overseas.40 Another example is the British Leland case, where the European Court determined that the price that British Leyland charged for issuing certificates for left-hand drive cars was excessive by comparing it to the price it charged for issuing certificates for right-hand drive cars.41 Likewise, the OFT has determined in the NAPP case that the price charged in the UK to community pharmacies for sustained release morphine was excessive by comparing it to the price charged to hospitals.42 A fourth possibility is to compare the monopolist’s price with the prices charged by smaller rivals in the same market or to prices of other firms in other markets for similar products. This comparison is problematic however because we cannot be sure that we are comparing oranges with oranges. For instance, when comparing the monopolist’s price with the prices of smaller rivals in the same market, one has to wonder why the monopoly is the dominant firm in the market, while rivals have much smaller market shares. This disparity in market shares suggests that consumers view the monopolist’s product as superior, and hence there is no reason to expect that its price and the prices of rivals will be similar. The comparison is even more problematic when it involves the monopolist’s price and the prices charged by other firms in other markets, since then it is even less likely that we are comparing oranges with oranges. In any event, unlike cost data, plaintiffs in class actions should be able to obtain price data from marketing research firms such as Nielsen or, in the case of Israel, from Storenext.43 Hence, it seems that, so long as the prohibition of excessive pricing is enforced through class actions, claims that prices are excessive will be based on price comparisons. The question then is which price difference is sufficiently large to indicate that the monopoly has charged an excessive price? Unfortunately, the Israeli experience does not help in this regard since courts in Israel are yet to rule on this matter. In some sense, the question involves a value judgment, which is not very different than the judgment needed to decide the meaning of “substantially lessons competition.”

40

One can argue that the court was actually using a cost-based approach, because it viewed the price of potash abroad as the alternative cost of selling potash in Israel, based on the assumption that DSW would have been able to sell abroad the potash it did not sell in Israel. 41 See Case 226/ 84 British Leyland Public Limited Company v Commission [1986]. 42 See “Napp Pharmaceutical Holdings Limited and Subsidiaries (Napp),” Decision of the Director General of Fair Trading, No Ca98/2/2001, 30 March 2001. 43 Storenext is a marketing research firms that gets data on sales and prices of consumers goods directly from the cash registers of 2200 stores across Israel.

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My own view is that it would be hard, perhaps even futile, to try to come up with a clear definition of excessive prices, which would fit all cases. My inclination, based on the Israeli experience, is to enforce the prohibition of excessive pricing only in cases where it is obvious that the monopolist has abused its monopoly position. That is, to adopt the same approach that Judge Potter Stewart adopted toward pornography when he wrote that44: I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [hard-core pornography]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it. . .

For example, it would be hard to argue that the British CMA erred in the Pfizer case when it decided in 2016 that the price for phenytoin sodium capsules, which are used to treat epilepsy, was excessive after it was raised by 2300–2600%.45 It would be equally hard to claim that the Italian Market Competition Authority erred when it decided that Aspen charged excessive prices for four anticancer drugs after raising their price by 300–1500%.46

7 Conclusion The Israeli experience is interesting because the enforcement of the prohibition of excessive pricing in Israel is entirely private and carried out through class action lawsuits. Currently there are 23 cases pending in court. This large number gives rise to considerable legal uncertainty, which is particularly large today, before courts have established clear legal rules concerning excessive prices. It may also confirm the concern of Gal and Nevo (2015, 2016) for over deterrence of the prohibition, albeit they emphasize different reasons for this concern. Moreover, some of the motions to certify class actions are based on weak evidence, which increases the legal uncertainty and makes it hard for courts to make well-informed decisions. In addition, the many pending class actions force courts to get into highly technical and complex pricing issues, which courts are probably not best suited to deal with. However, as I claimed above, the alternatives to prevent monopolists from setting excessive prices are also highly imperfect. Price regulation in Israel is inefficient and may also be ineffective. Regulatory proceedings drag for years and are often based 44

See Jacobellis v. Ohio, 378 U.S. 184 (1964). See Gov.UK, Press Release, Published December 7, 2016, https://www.gov.uk/government/ news/cma-fines-pfizer-and-flynn-90-million-for-drug-price-hike-to-nhs (accessed on March 14, 2018). Interestingly though, in early June 2018, the UK Competition Appeal Tribunal found that the CMA misapplied the test for unfair pricing, and decided to remit the matter that deals with abuse of dominance to the CMA “for further consideration as it sees fit.” See http://www.catribunal. org.uk/237-9687/1276-1-12-17–Pfizer-Inc-and-Pfizer-Limited.html (accessed on July 4, 2018). 46 See The National Law Review, Monday, October 17, 2016, https://www.natlawreview.com/ article/italy-s-agcm-market-competition-authority-fines-aspen-eur-5-million-excessive (accessed on March 14, 2018). 45

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on outdated data. Consumer activism may be very effective when consumers get together and protest, but this activism seems uncommon; for the most part, Israeli consumers tend to be passive. So what is the solution? It seems to me that given that neither solution is ideal, there is no quick fix for the problem. Of course, the best way to curb market power is to promote competition by opening up markets and by reducing barriers to entry and to consumer switching. This way, consumers are able to vote with their feet and choose which supplier they wish to buy from. But then, Section 29a(b)(1) of the Antitrust Law is meant to deal with situations in which competition fails and consumers do not have enough choices. In this case, we have three imperfect options: regulate prices directly, rely on class actions to discipline firm, and rely on consumer activism to discipline firm. The preferred option in specific cases should be the lesser of three evils. In any event, I believe that given that the antitrust prohibition of excessive pricing creates considerable legal uncertainty and given that it requires courts to determine prices, despite lacking the necessary expertise or resources, it would be best to proceed cautiously and enforce the prohibition only in blatant cases, where there is little doubt that the monopoly has abused its dominant position and where the harm to consumers is clear.

References Ater, I., & Rigbi, O. (2017). The effects of mandatory price disclosure of supermarket prices, Mimeo. Accessed March 14, 2018, from SSRN https://ssrn.com/abstract¼3046703 Baye, M., & Wright, J. (2011). Is antitrust too complicated for generalist judges? The impact of economic complexity and judicial training on appeals. Journal of Law and Economics, 54, 1–24. Evans, D., & Padilla, J. (2005). Excessive prices: Using economics to define administrative legal rules. Journal of Competition Law and Economics, 1(1), 97–122. Ezrachi, A., & Gilo, D. (2008). Are excessive prices really self correcting? Journal of Competition Law and Economics, 5(2), 249–268. Ezrachi, A., & Gilo, D. (2009). The darker side of the moon: Assessment of excessive pricing and proposal for a post-entry price-cut benchmark. In A. Ezrachi (Ed.), Reflections on its recent evolution, article 82 EC (pp. 225–248). Oxford: Hart Publishing. Available at SSRN https:// ssrn.com/abstract¼1353056 Ezrachi, A., & Gilo, D. (2010). Excessive pricing, entry, assessment, and investment: Lessons from the Mittal litigation. Antitrust Law Journal, 76(3), 873–897. Gal, M. (2004). Monopoly pricing as an antitrust attorney in the US. and the E.C.: Two systems of belief about monopoly? Antitrust Bulletin, 49, 343–384. Gal, M., & Nevo, H. (2015). The influence of decision theory on the design of legal rules: Unfair price as an abuse of monopolistic power. Mishpatim, 45, 277–331 (In Hebrew). Gal M., & Nevo, H. (2016). High prices as abuse: Trojan Horse (in Hebrew). Mishpatim (forthcoming). Genakos, C., Koutroumpis, P., & Pagliero, M. (2018) The impact of maximum markup regulation on prices. Journal of Industrial Economics (forthcoming). Gilo, D. (2016a). Excessive price as an abuse of dominance. Mishpatim, 45, 761–799 (In Hebrew). Gilo, D. (2016b). Excessive pricing: Can experience be drawn from Tnuva (Israël)? Journal of European Competition Law and Practice, 7(9), 620–621.

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Gilo, D., & Spiegel, Y. (2018). The antitrust prohibition of excessive. International Journal of Industrial Organization. https://www.sciencedirect.com/science/article/pii/S01677187183 00572 Hendel, I., Lach, S., & Spiegel, Y. (2017). Consumers’ activism: The cottage cheese boycott. RAND Journal of Economics, 48(4), 972–1003. Jenny, F. (2018). Abuse of dominance by firms charging excessive or unfair prices: An assessment. In Excessive pricing and competition law enforcement. Heidelberg: Springer. Katsoulacos, Y., Genakos, C., & Houpis, G. (2017). Product market regulation and competitiveness: Towards a national competition and competitiveness for Greece. In C. Meghir, C. Pissarides, D. Vayanos, & N. Vettas (Eds.), Beyond austerity: Reforming the Greek economy (pp. 139–178). Boston, MA: MIT Press. Klement, A., & Weinshall-Margel, K. (2016). Class actions in Israel: An empirical perspective. Mishpatim, 45, 707–760. Motta, M., & de Streel, A. (2006). Excessive pricing and price squeeze under EU law. In C.-D. Ehlermann & I. Atanasiu (Eds.), What is an abuse of a dominant position? (pp. 91–125). Oxford: Hart Publishing. Motta, M., & de Streel, A. (2007). Excessive pricing in competition law: Never say never? In Swedish Competition Authority (Ed.), The pros and cons of high prices (pp. 14–46). Stockholm: Konkurrensverket. O’Donoghue, R., & Padilla, J. A. (2006). The law and economics of article 82 EC. Oxford: Hart Publishing. OECD. (2011a). Competition law and policy in Israel 2011, competition law and policy reviews. Paris: OECD Publishing. Accessed March 14, 2018, form https://www.oecd.org/competition/ 50104572.pdf OECD. (2011b). Excessive prices, background paper by the secretariat. OECD policy roundtables, DAF/COMP(2011)18. Accessed March 14, 2018, form http://www.oecd.org/competition/ abuse/49604207.pdf Plato-Shinar, R. (2007). Israel: The new law on class actions. The Journal of Business Law, August, 2007, 527–540. Solomon, T., & Achmon, I. (2017). Excessive pricing in Israel: How to deal with a ‘hot potato’? Journal of European Competition Law & Practice, 8(10), 660–667. Taussig, E. (2007). Prerequisites to class action certification: A comparison of new Israeli law and rule 23(a) of the federal rules of civil procedure. Journal of International Law & Policy, 5(3), 1–28. The “Kedmi Committee” Report (The Competitiveness in the Food and Consumer Goods Market Committee). (2012). Accessed March 14, 2018, from http://economy.gov.il/publications/publi cations/documents/kedmireport2012.pdf

Working Out the Standards for Excessive Pricing in South Africa Liberty Mncube and Mfundo Ngobese

Abstract Excessive pricing is one of the contentious areas of competition law and the standards are developing. South Africa has had at least two important excessive pricing cases. We review the approaches of the Competition Tribunal and the Competition Appeal Court in the Mittal Steel and Sasol decisions in order to demonstrate the complexity of the challenge of giving practical effect to the excessive pricing provisions of the Competition Act. Both the Mittal Steel and the Sasol decisions were concerned with excessive pricing by former state-owned firms. For example, Mittal Steel sold steel in the domestic market at more than import parity to its many South African customers that needed steel as an input while selling the steel for export at the much lower world price. We argue that the ultimate solution may be found in the purposive reading of the law which at the same time does not ignore the required elements to be proved.

1 Introduction In South Africa, like in many other countries across the world, it is prohibited for a dominant firm to charge an excessive price to the detriment of consumers. It is widely acknowledged that excessive pricing interventions are required in markets where there are high non-transitory barriers to entry, where one firm enjoys considerable market power and where investment and innovation play a relatively minor role. Furthermore, competition authorities ought to be most concerned with pricing in markets where the dominant firm’s position is entrenched and where that L. Mncube (*) Competition Commission of South Africa, Pretoria, South Africa University of the Witwatersrand, Johannesburg, South Africa e-mail: [email protected] M. Ngobese Competition Commission of South Africa, Pretoria, South Africa e-mail: [email protected] © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_6

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position is not a consequence of a superior product, innovation or risk-taking but rather current or past exclusive or special rights.1 These market structures are a particular concern in South Africa, where the preamble of the Competition Act ‘includes a manifest concern with previous excessive concentrations of ownership and control within the national economy’ and ‘dictates that a history of such state largesse cannot be permitted to subvert competition nor should the market power inherited from the erstwhile status as a state enterprise be exerted with continued impunity’.2 South Africa is one of the most prominent jurisdictions working out the standards for when a price is excessive. In this chapter, we will focus our attention to two most recent decisions of the competition authorities. By way of background, the first case is the Harmony Gold Mining Company Ltd v Mittal Steel South Africa Ltd both before the Competition Tribunal (Tribunal) and on appeal to the Competition Appeal Court (CAC), hereinafter referred to as ‘Mittal’. This case provided South Africa’s first case law on excessive pricing. ISCOR (a former state-owned company), at the time, called Mittal Steel, held near monopoly position in the South African steel market and was a beneficiary of state privilege and favours over many years.3 Harmony Gold lodged a complaint alleging that Mittal Steel was selling its flat steel products at excessive pricing. The case was heard by the Tribunal. The Tribunal held that Mittal was superdominant. Its import parity pricing was evidence of excessive pricing. On appeal, the CAC set aside the Tribunal’s decision and remitted the matter back to the Tribunal for determination. The matter was then settled out of court. The other fascinating case is the case of the Competition Commission v Sasol Chemical Industries Ltd (hereinafter referred to as ‘Sasol’). Sasol Chemicals is the successor to a state-owned firm and had benefited from state privilege and favours just like Mittal Steel. The products in question were purified propylene and polypropylene. The Tribunal held that a dominant firm’s own circumstances and history were relevant in answering the question of whether a particular price is excessive. In doing so, it gave important weight to the history of Sasol and Sasol’s past privileges. The Tribunal found the price charged by Sasol was excessive pricing. On appeal, the CAC reversed the decision of the Tribunal and held that prices in question did not contravene the prohibition related to excessive pricing. After discussing the Mittal and Sasol cases, we take note of the proposed amendment to the excessive pricing prohibition contained in the Competition Amendment Bill of 2017, before concluding.4 See, for example, Roberts (2008) who argues that it matters how the firm acquired this position and that this position is sustained through the lack of effective challenge from new entrants or other smaller firms, rather than through the firm’s own ongoing product development or innovative effort. 2 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 29. 3 Interestingly, Roberts (2008) observes that Mittal Steel’s previous state ownership and support also accord with the exceptional conditions identified by economists such as Evans and Padilla (Evans and Padilla 2005b) for pursuing a case of excessive pricing. 4 Competition Amendment Bill of 2017, Government Gazette no. 41294, Notice No. 1345. 1

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2 Defining and Assessing Excessive Pricing An ‘excessive price’ is defined as a price for a good or service which bears no reasonable relation to the economic value of that good or service and is higher than that value.5 In prohibiting the practice of charging excessive prices, the South African prohibition follows the position adopted in Europe and borrows its wording directly from the decision of the Court of Justice of the European Communities in United Brands v EC Commission.6 The operative feature of this prohibition is that it is only excessive pricing that is detrimental to consumers that is impugned and not just any excessive price. Excessive pricing is not a per se prohibition. Proving that there has been a breach requires the pricing conduct to have an effect, and the nature of the effect must be detrimental to consumers. In this regard, the consideration which requires dedication and time of the competition authorities and courts to ascertain is not only whether the price is excessive but whether it is detrimental to consumers.

2.1

The Tribunal Decision in Mittal

It is widely accepted that competition authorities face a number of challenges when they try to intervene against excessive prices.7 These challenges relate to, among others, determining when the price is ‘excessive’? Excessive compared with what? Can economic value be confidently identified? Given the origins of the South African prohibition on excessive pricing, the approach taken by the parties in the Mittal case (in arguing for and against excessive pricing) was to pay attention to the methods of identifying excessive pricing identified in EU case law. But the Tribunal rejected these methods of the EU courts, stating that ‘we eschew the role of price regulator, and so the vast quantum of the evidence and much of the argument submitted to us is simply irrelevant’. The Tribunal rejected and criticised the guidance from European competition authorities repeatedly stressing that it was not in the business of price regulation, maintaining that ‘our response to proven allegations of excessive pricing is, wherever possible, to remove those structural and behavioural conditions that inhibit competition and so generate excessive prices; it is not, in contrast with the approach

5

Ezrachi and Gilo point out the reasonable consumer would not want to buy goods priced above true value. 6 United Brands Company and United Brands Continental BV v The Commission of the European Communities [1978] 1 CMLR 429. 7 Evans and Padilla (2005a), in their discussion of various policies towards the prohibition of excessive pricing by dominant firms, emphasise the ‘conceptual as well as practical difficulties’ of determining what constitutes an ‘unfair’ price for purposes of Article 82 of the EC Treaty.

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taken in many of the European cases, to simulate an alternative structure and then to impose outcomes associated with that ‘virtual’ alternative’.8 Undoubtedly, the Tribunal observed that European competition authorities readily assumed the role of a price regulator both in their analysis of whether pricing is excessive and in the remedies for excessive pricing. By taking the above observations, the Tribunal rejected cost-based and comparative methods for determining economic value in excessive pricing cases.9 After hearing voluminous and conflicting testimony and evidence presented by the parties, the Tribunal simply cut through the quagmire of this evidence and constructed its own test for excessive pricing. The test involved two stages which consisted a structural test and a conduct test. The Tribunal pointed out following its structural test that it reasonably holds that the power to price ‘excessively’ is the preserve of firms of overwhelming size relative to the market in which they are located and which are, in addition, markets characterised by unusually high entry barriers.10 That is, the market share enjoyed by the firm in question should approximate 100%, and there should be no realistic prospect of entry—in other words the market should be both uncontested and incontestable.11 To be very clear, the Tribunal pointed out the class of firms that it regarded as subject to the excessive pricing prohibition as firms which are in ‘those rare markets that are uncontested (monopolised or ‘super-dominated’), incontestable (subject to insurmountable entry barriers) and unregulated (not subject to price regulation)’.12 In relation to the kind of conduct that would infringe the excessive pricing prohibition, the Tribunal noted that the excessive pricing prohibition is ‘to cater for those rare beasts who are subject neither to the constraining presence of a regulator or of a potential entrant’.13 A firm in a market that is both uncontested and incontestable and unregulated is unconstrained by law or competition—it can exploit its structural advantage without fear of competition, actual or potential, and therefore without necessary recourse to impeachable exclusionary conduct, and it is unconstrained by regulation.14 The Tribunal stated its test in the following manner: ‘where the price appears to have no explanation other than the pure exercise of monopoly power, then the price is not reasonable in relation to economic value. In other words what is relevant in our enquiry is not the arithmetic relationship between the price and some or other conception of cost. What is relevant are the underlying considerations that underpin the price level. Are these considerations founded in competition in its many degrees

8

Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 89, 157–159. Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 148. 10 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 96. 11 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 96. 12 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 106. 13 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 127. 14 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 127. 9

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and guises or are they founded in pure monopoly?’15 Applying its test, the Tribunal found that Mittal Steel was superdominant. It must be said also with respect to this consideration of the Tribunal in Mittal Steel that it is indeed a correct consideration and in fact an important one in answering the question of whether the price is to the detriment of consumers, but there is a preliminary need to firstly determine whether the price is excessive. In relation to the conduct, the Tribunal found that Mittal Steel had priced its flat steel products to the South African market by reference to import parity pricing.16 The Tribunal held that import pricing was not a competitive way of pricing. Import parity pricing therefore evidenced excessive pricing, since it bore no reasonable relation to competitive pricing. The Tribunal indicated that ‘it is a very peculiar way of settling on a price in our market which, we will insist, must, in order to be non-excessive, be set by reference to competitive conditions in the relevant market which is the South African market for flat steel products’.17 Mittal Steel provided rebates to some of its customers and generally charged lower prices for exporting customers. Mittal Steel undertook an ancillary conduct of preventing customers who bought the steel in South Africa (for export), from reselling it into the South African market (i.e., Mittal Steel prevented arbitrage). In other words, the rebates were conditional on proof that the steel which is subject to rebate had actually been exported.18 Given the state of affairs in relation to Mittal Steel’s conduct, the Tribunal was presented with a fitting and effective selfexecuting remedy. That is, to request the removal of the contract term limiting customers who bought the steel in South Africa (for export), from re-selling it into the South African market, in addition, to the administrative penalty.

2.2

The CAC Decision in Mittal

On appeal, the CAC reversed the Tribunal decision and remitted the matter back to the Tribunal for further determination. The CAC judgement in the Mittal case was a defining moment in the interpretation of the excessive pricing prohibition. The CAC criticised the Tribunal’s finding that Mittal had priced excessively and stated that in effect it amounted to a ‘declaration that AMSA’s practice of reducing the supply of flat steel through the imposition of resale conditions constitutes the charging of an excessive price’.19 The CAC noted that errors in the Tribunal decision

15

Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 151. Mittal SA set its base prices for flat steel products in the domestic market by calculating the notional cost of importing those products. It then added a 5% ‘hassle factor’, essentially a reflection of the additional costs or ‘hassle’ entailed in importing over the advantage of utilising a domestic supplier. 17 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 47. 18 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 79. 19 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 8. 16

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arose from its rejection of the actual wording of the section that prohibits excessive pricing. The Tribunal started with the interpretation it preferred and then ignored the language of the section.20 For not applying the plain words of the excessive pricing prohibition, the CAC criticised the Tribunal’s requirement of ‘super-dominance’, stating that such a requirement for excessive pricing finds no support in South Africa’s competition laws.21 Further, the CAC stipulated that the Tribunal is bound by the specific language of the Competition Act and is bound to apply the test as set out in the law which requires an evaluation of price relative to economic value, and for this exercise, the Tribunal must determine economic value. In other words, the Tribunal made an error because its findings were made without concentrating on cost, pricing structure or comparative price analysis.22 The CAC pointed out that the wording of the excessive pricing prohibition requires four distinct enquiries in order to determine whether an excessive price has been charged to the detriment of consumers: (1) the determination of the actual price charged; (2) the economic value of the good or service must be ascertained; (3) if the actual price exceeds the economic value, it must be determined whether the difference between them is unreasonable; and (4) if so, it must be determined if the charging of the excessive price is to the detriment of consumers.23 These are without doubt the correct elements for establishment of the proscribed conduct. However, the devil is always in the detail. Note that the first enquiries require a factual determination of actual price and economic value, while the last two enquiries require value judgements. The CAC criticised the Tribunal for ignoring the enquiries intrinsic in the excessive pricing prohibition and adopting its own test, in its attempt to avoid engaging in price regulation. It confirmed that the Tribunal was not required to be a price regulator.24 The CAC stated that ‘[t]he words chosen by the legislature when enacting section 8 (a) (and the definition of “excessive price”) clearly and unambiguously indicate that what is prohibited is the “charging” of an excessive “price”, not so-called “ancillary abusive conduct” designed to take advantage of a particular market structure’.25 The term ‘economic value’ although not defined in the Competition Act must refer to an amount of money the CAC held.26 Further, the CAC defined economic value as the notional price that would be charged in circumstances of long-run

20

Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 28. Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 30, 32. 22 The CAC favoured the EU approach of using multiple benchmarks, including a price-cost comparison and also a comparison between the allegedly excessive prices charged by the dominant firm and prices that are subject to competitive constraints. 23 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 32. 24 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 47. 25 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 28. 26 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 34. 21

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competitive equilibrium.27 The CAC observed that the Tribunal could not evade a thorough evaluation of economic and financial evidence in determining economic value. Prices ordinarily charged in other markets by the same or cost-comparable firms may serve as a measure of economic value if the other markets are characterised by effective competition in the long run.28 Other proxies could be used to make a prima facie case; but delving into cost evidence could not be avoided. In considering the relationship between the price of a product and its economic value, the CAC noted the type of considerations to be taken into account in the analysis of available evidence would be (1) production costs, comparison of the sales price of the product to costs of production to determine whether the difference was excessive; (2) profitability, does the firm’s profit exceed its costs of capital for that particular kind of business; (3) price of comparable products in competitive markets; (4) reward for risk or innovation; and (5) inherent characteristics of the market. As already pointed out, the CAC remitted the matter to the Tribunal for reassessment on the basis of the four enquiries articulated by the CAC. The parties settled the matter before the Tribunal undertook the second appraisal. Despite the fact that the CAC correctly reversed the Tribunal decision based on the reading of the excessive pricing prohibition in the Competition Act, there is some advantage in it. The characteristics of the market and the dominant firm’s position in that market are important features in the assessment of whether the dominant firm is actually capable of sustaining excessive prices. Excessive pricing cases are burdened with dilemmas and complications. The advantage of the Tribunal’s decision in Mittal is that it avoided every one of them. Perhaps in those straightforward and unambiguous cases, the guidance of the Tribunal decision in Mittal would escape the protracted and wasting of resources in lengthy and detailed consideration of prices and economic value. The Tribunal’s formulation of how to proceed in excessive pricing cases could be regarded as a creative and possible guide to solving challenges that are inherent in excessive pricing cases.

3 Taking Stock of Excessive Prices, Special Advantages and Previous State Support Sasol Chemical Industries (SCI) is a wholly owned subsidiary of Sasol Limited and forms part of the Sasol group of companies. From its formation, Sasol was controlled and supported by the state. It received state support even after its privatisation. The Calcagno and Walker (2010) state in relation to Mittal that the CAC’s ruling is “economically coherent and in line with what most economists would consider a reasonable approach to the messy and difficult business of assessing whether a firm is charging excessive prices”. They are further supported by O’Donoghue and Padilla (2013) who state that in relation to the Mittal case, assessing economic value in way proposed by the CAC seems correct as a matter of economics. 28 Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 51 (which also cites Motta and de Streel (2007). 27

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state ensured, through legislation and regulation, that Sasol was sustainable and profitable and would not fail. This was done because of its strategic importance as a producer of fuel. Put differently, Sasol achieved its position in the market because of state privilege and not necessarily its own superior performance. Sasol is the only significant producer of feedstock propylene. Feedstock propylene is a by-product in the fuel production process; it has no cost of production. Instead, refineries value feedstock propylene by reference to its opportunity cost, being the value of feedstock propylene if used to produce fuel components. Propylene and polypropylene are used by manufacturers of plastic products, to produce, among other things, a variety of everyday household items such as buckets and containers. The Competition Commission alleged that SCI had priced excessively in relation to purified propylene and polypropylene. The Tribunal found Sasol’s pricing to be excessive.

3.1

The Tribunal Decision in Sasol

The Tribunal in the Sasol case found that SCI was dominant in the relevant markets as a consequence of its past privileges, in particular, very significant historical state support.29 SCI enjoyed special cost advantages as producer of purified propylene.30 The origins of SCI were important in the Tribunal’s determining of economic value and in assessing whether there was a reasonable relation between price and economic value. SCI’s main defence was that the cost of feedstock should be increased in any determination of the economic value of polypropylene or propylene by calculating the ordinary costs of producing those products. The Tribunal rejected this proposition. The Tribunal held that fuel alternative value is the ordinary price of feedstock because it is cost-reflective.31 The Tribunal made some adjustments to the cost of the products and to the prices, following submissions by SCI and the Commission. After making these adjustments, the Tribunal compared SCI’s prices to economic value as determined with reference to costs as well as to economic value determined, in the case of polypropylene, with reference to European prices and SCI’s export prices.32 In the case of propylene, the Tribunal held that there no other reliable indicators of economic value.33 The Tribunal concluded that SCI’s prices were well above

29

Competition Commission v Sasol Chemical Industries Limited [2014], para 119. Excessive pricing prohibitions must be understood to be aimed at pricing that is not the legitimate reward of monopoly power arising from the fruits of successful investment, innovation or efficiency. 30 Competition Commission v Sasol Chemical Industries Limited [2014], para 176. 31 Competition Commission v Sasol Chemical Industries Limited [2014], para 211–236. 32 Competition Commission v Sasol Chemical Industries Limited [2014], para 307–315 in respect of propylene and para 341–357 in relation to polypropylene. 33 Competition Commission v Sasol Chemical Industries Limited [2014], para 316–340.

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economic value. The Tribunal held that context led it to the conclusion that SCI’s high prices did not bear a reasonable relationship to economic value.34 The Tribunal centred its assessment of economic value, principally on SCI’s own costs of producing the products; it explained that prices of the same products in other markets were not useful in the assessment of economic value because suppliers in those markets were not low-cost producers.35 Furthermore, the Tribunal noted that the economic value of a product may vary depending on whether the dominant firm’s low costs result from historic accident and state support or, alternatively, innovation and risk-taking. In other words, at the core of the Tribunal’s approach in Sasol was the principle that, when assessing whether a dominant firm has engaged in excessive pricing, it is necessary to consider how the dominance came about.36 The Tribunal imposed an administrative penalty on SCI. It further required as a behavioural remedy a formulation in which the price of purified propylene to customers in the domestic market is determined by applying a ratio to a benchmark which must be developed by reference to region(s) in the world with the lowest polypropylene prices. The Tribunal also imposed a behavioural remedy requiring polypropylene to be priced ‘on an ex-work basis’. Whereas the Tribunal in both the Mittal and Sasol decision sought to remedy excessive prices with behavioural remedies, our view is that there is no need to crack the skull on what remedies would be suitable and appropriate. This is not the problem of a competition authority; the duty of the competition authority is to identify the excessively high prices.

3.2

The CAC Decision in Sasol

On appeal, the CAC reversed the Tribunal’s decision, holding that SCI had not contravened the excessive pricing prohibition. The CAC was again critical of the Tribunal’s decision stating that it was difficult to understand the decision and that the decision was a piecemeal reading of CAC’s guidance in the Mittal judgment.37 The CAC found in Sasol that the case turned on a refusal to pass a cost advantage by SCI and by another subsidiary of Sasol Ltd (Synfuels (Pty) Ltd).38 The CAC correctly noted down that there were two central disputes between the parties, relating to (1) the determination of the economic value of propylene and polypropylene and (2) whether there was a reasonable relationship between SCI’s prices and economic value.

34

Competition Commission v Sasol Chemical Industries Limited [2014], para 411–419. Competition Commission v Sasol Chemical Industries Limited [2014], para 363. 36 Competition Commission v Sasol Chemical Industries Limited [2014], para 102. See also, for example, Ezrachi and Gilo (2009, 2010). 37 Sasol Chemical Industries Limited v Competition Commission [2015], para 100. 38 Sasol Chemical Industries Limited v Competition Commission [2015] , para 111. 35

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Concerning the first dispute, for both propylene and polypropylene, the CAC determined economic value only by reference to SCI’s costs, adjusted in accordance with the adjustments proposed by SCI. The CAC accepted all of the adjustments proposed by SCI, including those the Tribunal had rejected. In relation specifically to the dispute over feedstock, the CAC held that the price paid by SCI for feedstock ought to be accepted because it was an actual cost.39 This gave rise to the CAC finding that SCI’s polypropylene prices were 24–28% below economic value and its propylene prices 12–14% above economic value.40 Having found that SCI’s polypropylene prices were below economic value, the CAC did not have to consider whether the relationship between the two was reasonable. On the subject of propylene, the CAC held that an amount significantly less than 20% could never justify judicial interference and therefore found that SCI’s propylene prices bore a reasonable relationship to economic value.41 The CAC did not, in these circumstances, consider whether the SCI’s prices were to the detriment of consumers. Whereas the Tribunal had focused on the origins of SCI’s dominance and advantage owing to its history of state support, the CAC noted that SCI charged the same amount to the only independent purchaser as it charged to its own Polymers Division. Further, it also noted that SCI prices were only about 16% higher than the cheapest polypropylene prices in the world. Further, it pointed out that the past history of Sasol was irrelevant. 42

4 Some Policy Debates: A Comment on the Competition Amendment Bill of 201743 Following the Sasol and Mittal decisions of the Tribunal and CAC, there have been many debates on how competition authorities in South Africa should approach allegations of excessive pricing by dominant firms. The debates arise from an impression that something has gone wrong in the language, interpretation or application of the excessive pricing prohibitions, and this has made it impossible to prove an excessive pricing case. Does losing the Sasol case (one case, recall that the Mittal case was remitted back to the Tribunal and the parties then settled out of court) justify amending the Competition Act? How should the excessive pricing prohibition be amended to be more proactive? Before making some specific comments on the amendment itself,

39

Sasol Chemical Industries Limited v Competition Commission [2015], para 84–115. Sasol Chemical Industries Limited v Competition Commission [2015], para52–160. 41 Sasol Chemical Industries Limited v Competition Commission [2015], para 161–176. 42 Sasol Chemical Industries Limited v Competition Commission [2015], para 160, 186. 43 Note that Liberty Mncube (co-author of this chapter) was a member of the Ministerial Advisory Panel on drafting amendments to the Competition Act. 40

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our view is that the Sasol case was lost because of the weight given to the adjustments proposed by SCI and not language of the Competition Act.44 The drafters of the Competition Amendment Bill of 2007 propose deleting the phrase ‘to the detriment of consumers’ such that the statute only captures the prohibition as ‘[i]t is prohibited for a dominant firm to charge an excessive price’. The drafters further propose that ‘[i]f there is a prima facie case of abuse of dominance because the dominant firm charged an excessive price, the dominant firm must show that the price was reasonable’. Further, the drafters propose that the Commission must publish guidelines setting out the relevant factors and benchmarks for determining whether a price is excessive. In Mittal, the Tribunal dismissed the phrase ‘to the detriment of consumers’ in the excessive pricing prohibition as a superfluous description of an excessive price rather than a qualifier of its likely effects.45 In Sasol, the CAC observed that the question of whether the excessive price caused detriment to consumers is a separate inquiry to the question of whether the price bore no reasonable relationship to its economic value.46 We do not understand this proposal of deleting the phrase ‘to the detriment of consumers’. There are two categories of excessive prices of which we may think of: (1) a firm charges excessive prices to final consumers; and (2) a firm charges excessive prices of an input to another firm downstream, either because it wants to exclude it or because it tries to extract as much as possible from it. Either way, this will ultimately result in higher prices for—and therefore to the detriment of—the final consumers. Furthermore, it is a good reminder that the Competition Act has the objective of avoiding practices that have the effect of harming consumers. The term ‘consumers’ includes all those who consume the product, whether productively or as final consumers. The onus is on the Competition Commission or the complainant to prove detriment to consumers. Even when detriment to consumers seems obvious, it should not be regarded as such there must be an inquiry. Our view is that detriment should be significant and not insignificant. We could further argue that the only consideration which requires dedication and time of the courts to ascertain is whether the high price is detrimental to consumers. The kind of preoccupation with the first aspect of this provision which we see in cases such as Mittal and Sasol is, with respect, a misplaced emphasis which has created significant difficulties in enforcing the provisions of this section despite the fact that there is almost an intuitive feeling of unfairness to the consumer arising from prices charged by certain firms, especially when such prices cannot be justified by innovation, investment or superior production processes. 44

For both propylene and polypropylene, the CAC determined economic value solely by reference to SCI’s costs, adjusted in accordance with the adjustments proposed by SCI’s financial expert. The CAC accepted all of the adjustments proposed by SCI’s financial expert, including those the Tribunal had rejected. The CAC also accepted all of the adjustments to SCI’s prices proposed by SCI’s financial expert. 45 Harmony Gold Mining v Mittal Steel South Africa Limited [2007], para 71. 46 Sasol Chemical Industries Limited v Competition Commission [2015], para 167, 177.

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The provision in the Act about the excessiveness of the price is not in our view supposed to be a bone of contention of such a nature that a case will literally turn on it despite that fact that there exists an unjustified extraction of consumer surplus by a firm. In this regard, implicating oneself in all types of price-cost determination in order to ascertain with precision the level of margin derived by the firm is, with respect, an activity tantamount to barking a wrong tree or beating an empty husk for grain. There is a difficulty in knowing upfront that a price is excessive to the detriment of consumers by only ascertaining that it is indeed above costs irrespective of the measure of costs one is using or the level above such costs the price concerned is ultimately found to be. The legislature being keenly aware of the basic economic principles that all prices above costs will consequently fall foul of this section cleared its intention that the prices must be such that they are to the detriment to consumers. Perhaps a more useful recommendation is that the Competition Act should be amended to delete the definition of excessive price. Recall that an ‘excessive price’ is defined in the Competition Act and means ‘a price for a good or service which (aa) bears no reasonable relation to the economic value of that good or service; and (bb) is higher than the value referred to in subparagraph (aa)’. This definition drawn from the European Union case, United Brands, is the cause of the confusion because it does not define what economic value is. By deleting this unhelpful definition, the South African competition authorities will be free to develop sound and workable standards, using common law case-by-case methodology. In other words, the proposition is that this would leave more freedom in deciding what the test should be. In this proposition, an outcome along the lines of the Tribunal decision in Mittal could be achieved because the definition of excessive prices is too restrictive. Importantly, the statute on excessive pricing should not be too particular; it should leave room for development of the law. The shifting of burden to the respondents on whether the price was reasonable should be welcomed because of information asymmetries between the respondent firm and the competition authority. However, the competition authority would still need to prove a prima facie case that the price bears no reasonable relation to the economic value due to the inclusion of this element in the definition of an ‘excessive price’. This shift of burden when a prima facie case of excessiveness is made may do little work because the question is what is necessary to establish a prima facie case. The requirement to publish guidelines setting out the relevant factors and benchmarks for determining whether a price is excessive is superfluous as the Commission can already publish guidelines. The question is, what would be the benefit of these guidelines when they are not binding to the Tribunal or the Court? The guidelines can only reflect the law, perhaps their value would be in reflecting the enforcement priorities of the Commission.

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5 Conclusion Even though the CAC in Mittal settled the issue of whether the Tribunal is called upon to set and regulate prices,47 it disapproved of the Tribunal’s approach which dodged the complexities of working out whether a price is excessive. Arguments about the unsuitability of competition authorities to deal with concerns of excessive high prices have centred on the difficulties involved in determining what constitutes a reasonable price.48 This compounded by other concerns which include whether there is an appropriate remedy for excessive pricing that is not in itself marketdistorting or too interventionist and should the competition authority keep a watchful eye over the dominant firm’s prices to be sure that its prices do not again become excessive? This task is said to be made particularly more difficult when one takes into account the changes in demand, costs and technology. Advocates against excessive pricing prohibitions argue that this task is better carried out by sector regulators who are in constant touch with the firms in the market concerned and as such are being kept abreast of changes that are taking place in the relevant market. Sector regulators are said to possess detailed information on the cost structures and pricing of the regulated operations. While there is little doubt on the advantage of sector regulators in terms of information that they possess, in many developing countries such as South Africa, there are very few competent sector regulators and not all product markets can have sector regulators. Pursuing excessive pricing cases indicates the seriousness of the offence and gives effect to the proscription of the Competition Act in addressing the extremely high prices that have ramifications throughout the economy and to consumers. While we have focused this chapter on litigated cases, it is important to note there have been a number of cases in which concerns about excessively high prices were settled. For example, the Competition Commission is probably the most well-known for its work in the Hazel Tau settlement in 2002. The settlement concerned allegations that the pharmaceutical companies (GlaxoSmithKline and Boehringer International) had priced excessively for the cocktail of drugs (patented drugs) needed by individuals with HIV/AIDs in the midst of the dreadful epidemic. The price of the cocktail of drugs was alleged to be significantly above costs and was prohibitive to those who needed the drugs to save their lives. The Tribunal and the CAC did not get the chance to grapple with the questions because, when required to open their books to reveal their costs, the pharmaceutical companies settled. To sum up, the Competition Commission’s competition enforcement choice has focused on bringing and winning excessive pricing conduct cases in order to address both the concerns and the proscription of the Competition Act.

47 48

Mittal Steel South Africa Limited v Harmony Gold Mining [2009], para 47. See Gal (2004).

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References Calcagno, C., & Walker, M. (2010). Excessive pricing: Towards clarity and economic coherence. Journal of Competition Law & Economics, 6(4), 891–910. Evans, D. S., & Padilla, A. J. (2005a). Excessive prices: Using economics to define administrable legal rules. Journal of Competition Law and Economics, 1(1), 97–122. Evans, D. S., & Padilla, A. J. (2005b). Designing antitrust rules for assessing unilateral practices: A Neo-Chicago approach. University of Chicago Law Review, 73, 76–80. Ezrachi, A., & Gilo, D. (2009). Are excessive prices really self correcting? Journal of Competition Law and Economics, 5(2), 249–268. Ezrachi, A., & Gilo, D. (2010). Excessive pricing, entry, assessment and investment: Lessons from the Mittal litigation. Antitrust Law Journal, 73, 873–879. Gal, M. S. (2004). Monopoly pricing as an antitrust offense in the U.S. and the EC: Two systems of belief about monopoly? Antitrust Bulletin, 49, 343–384. Motta, M., & de Streel, A. (2007). Chapter 2: Excessive pricing in competition law: Never say never? In The pros and cons of high prices. Kalmar: Swedish Competition Authority. O’Donoghue, R., & Padilla, A. J. (2013). The law and economics of Article 82 EC. Oxford: Hart Publishing. Roberts, S. (2008). Assessing excessive pricing: The case of flat steel in South Africa. Journal of Competition Law and Economics, 4(3), 871–891.

Cases Case 1 CPLR 37, Harmony Gold Mining v Mittal Steel South Africa Limited [2007]. Case 011502 48/CR/Aug10, Competition Commission v Sasol Chemical Industries Limited [2014]. Case 70/CAC/Apr07, Mittal Steel South Africa Limited v. Harmony Gold Mining [2009] ZACAC 1. Case 131/CAC/Jun14, Sasol Chemical Industries Limited v Competition Commission [2015] ZACAC 4. United Brands Company and United Brands Continental BV v The Commission of the European Communities [1978] 1 CMLR 429.

The Brazilian Experience with Excessive Pricing Cases: Hello, Goodbye E. P. Ribeiro and C. Mattos

Abstract This chapter describes the Brazilian experience with excessive prices as an antitrust offense since 1994. Over a period of nearly 20 years, more than 60 cases were brought without a single conviction. Discussions about the non-autonomous nature of the offense or its legal inefficacy led to removal of the practice as an abuse of dominance infringement from the new antitrust law enacted in 2012.

1 Introduction There is a widespread perception that prices deemed excessive or abusive in a given market reflect a breakdown of competition or a clear malfunction of the market system. In countries with a history of direct price controls, such as Brazil, Competition Law includes provisions explicitly proscribing excessive or abusive prices. The Brazilian case is of interest as its first modern Competition Law (Law 8.884/ 1994) provided a method for identifying alleged excessive pricing. Nevertheless, the Brazilian experience in prosecuting excessive price practices failed to produce a single conviction, out of the more than 60 cases brought from 1994 to 2012, when the Competition Law was revised. Excessive prices were struck from the list of antitrust offenses in the revised text. The goal of this contribution is to review Brazil’s competition policy experience with excessive prices. We review and update the arguments for the dismissal of excessive price cases under the first Competition Law (1994–2012). We also provide an overview of the methods used to investigate such cases. We close with an analysis of the current status of excessive price cases under the revised Competition Law. E. P. Ribeiro (*) Economics Institute, Federal University of Rio de Janeiro, Rio de Janeiro, Brazil CNPq Researcher, Brasília, Brazil e-mail: [email protected] C. Mattos Brazilian Chamber of Deputies, Brasília, Brazil © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_7

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Two rounds of heated debate on the practice of excessive prices in Brazilian competition policy can be identified (OECD Contribution by Brazil 2011). We provide an update on developments from the discussions and expand the arguments presented. The debates in the Competition Tribunal (Conselho Administrativo de Defesa Economica—CADE) raised serious questions about the economic rationality and legal effectiveness of excessive price provisions before the Brazilian Antitrust System, stopping short of recommending the their blanket dismissal. We describe the efforts to create a manageable excessive price enforcement policy through the application of filters and analytical methods. These efforts, however, were not capable of generating a single conviction in excessive price cases. In 2012, the amended law excluded excessive prices as an abuse of dominance practice. While excessive price cases can still be brought before the Antitrust Authority under the abusive profits provision, conviction for excessive pricing as a stand-alone offense under a rule of reason would be very unlikely. Excessive prices are more likely to be invoked as a reason for conviction when they are a by-product of other abuse of dominance practices, such as a cartel. The Brazilian experience may help other jurisdictions evaluate the pros and cons of maintaining excessive prices as a single antitrust offense. Brazil’s experience reflects the view that competition policy is concerned with improving the competition process, instead of focusing on competition outcomes such as a price level, which is akin to direct price regulation. This position more closely resembles the American or Mexican perspective than the European approach to excessive prices (Jenny 2018). The Brazilian perspective can also be interpreted as a cost-benefit analysis of Competition Authority resources. Given the cost of investigating excessive prices—due to the extensive firm- and market-level information required—the inherent arbitrariness of specifying a non-abusive price level and the high risk and negative consequences of type I errors, competition policy should emphasize other abuse of dominance practices. This contribution is organized into three sections, in addition to the introduction. The next section lays out the excessive price provision prescribed in the first modern Competition Law (Law 8.884/1994) and other provisions of Brazilian law, as well as the experience in cases involving the issue. The second section sets forth the changes introduced by Law 12.529/2011, which consolidated a new approach to competition policy, withering the idea of excessive pricing as a stand-alone antitrust offense. In the last section, we offer some concluding remarks.

2 The 1994 Law: Excessive Prices as an Abuse of Dominance Offense and the Debate on Its Effectiveness Enacted in 1994, Brazil’s modern antitrust law (Lei 8.884/1994) listed the following as administrative antitrust infringements of the economic system: “to limit or damage in any way free competition or free enterprise; to dominate a relevant

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market; to increase profits arbitrarily or abuse one’s dominant position” (Article 20, subsections I–VI, unofficial translation). A list of unlawful business practices follows in Article 21. Specifically, subsection XXIV states: it is unlawful “to impose abusive prices or increase prices without just cause” (unofficial translation). The antitrust law paved the way for applying administrative sanctions on excessive prices. Enactment of the Competition Law affected other statutes as well. First, a provision prohibiting excessive prices or, more precisely, “unjustified product price increases” (Law 8.078/1990 Art. 39, X, free translation) was introduced in the Consumer Protection Act. Second, the 1990 Law on Crimes Against the Economic System was amended to forbid abusive prices, specifically precluding practices that “unreasonably increase the price of goods and services based on a dominant position” (Article 4, subsection VII, Law 8.137/1990, free translation). Under Law 8.137, excessive prices were considered an abuse of dominance and a criminal offense against the economic system, subject to 2–5 years imprisonment in the event of conviction. The penalty applied to firm managers or owners. The status of excessive prices as both a criminal offense and a consumer law offense reinforced the role of Public Prosecutors’ Offices (“Ministério Público”) in economic affairs across the country. A significant number of the excessive price cases began as complaints filed with the Brazilian System of Competition Defense (SBDC) by the Public Prosecutor’s Office (for a summary and critical review of the operation of the SBDC under Law 8.884/1994, see OECD and IDB 2010). The criminalization of business practices under Law 8.137 reflected an acute distrust of the free market’s ability to generate efficient outcomes, compared to a centrally planned or directly controlled economy. Antitrust Law 8.884/94 was deemed insufficient at the time to curb excessive pricing behavior. The view that businesses repeatedly exploited consumers was reinforced by the fact that inflation levels had been above 75% for 15 straight years and above 1000% over the previous 4 years. Before 1994 a number of sectors and goods were subject to direct price controls, including steel, energy, vehicles, bread, and others. Such controls extended to the many stabilization plans in the 1980s which included price-freeze provisions (see, e.g., Cowie and Mattos 1999; Baer 2008). The belief that oligopolies and monopolies caused inflation was deeply rooted in the Brazilian psyche. This belief blurred the distinction between high prices and the first derivative, inflation. This resulted in a history of legislation that codified “excessive prices” as an offense against the economic system, yet without an actual definition of what constitutes high or low prices or their causes. Excessive or abusive price provisions dated back at least to the 1946 Constitution (Todorov and Torres Filho 2012). By 1994, Brazil maintained two large agencies responsible for direct price controls: the Interministerial Price Council (“Conselho Interministerial de Preços”—CIP) and the Superintendency of Supply and Prices (“Superintendência de Abastecimento e Preços” SUNAB) were responsible for setting prices and negotiating price increases with business associations. The agencies were created in the 1950s and 1960s. Traditionally, price setting at these agencies focused

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exclusively on the cost structure of companies. As such, only the supply side of the market was considered, while market structure or the demand side or, to a larger extent, product differentiation was disregarded (Baer 2008). While price controls were offered as protection from abuse of market power, the anecdotal evidence suggest otherwise. In the mid-1970s, former Finance Minister Mario Henrique Simonsen endeavored to eliminate price controls in the Brazilian automotive industry. Unsurprisingly, the primary source of opposition came from the automotive manufacturers’ association, suggesting that the CIP had for all practical purposes assumed the role of coordinating the industry. A clear piece of evidence of this pernicious effect was the first conviction of a cartel under the 1994 antitrust law. In 1997, the country’s three major steel producers requested a meeting with the Ministry of Finance (which oversaw the CIP). At the meeting they jointly announced the annual agreed increase in flat-rolled steel prices, as in previous years. Even in the face of the newly enacted Competition Law, the producers raised their prices accordingly to their announcement, only to be convicted of cartel conduct in 1999 (OECD and IDB 2010; in late 2010, the Supreme Court upheld CADE’s fines on the cartel). An important shift in attitudes toward a market-based system took place with the launch of the “Real Plan,” an inflation stabilization plan enacted July 1, 1994. The Real Plan was the first of such plans not to include direct price freezes across the economy. Nonetheless, interventionist views still influenced some of the provisions of Competition Law 8.884/94, particularly the excessive price provision. Motta and Salgado (2015) report that then president Itamar Franco was convinced of the importance of the new antitrust law because he believed it would provide more tools to control prices, particularly pharmaceuticals, a frequent theme of his speeches. The control of abusive prices is one of the explicit goals set forth in the legislative report of the Competition Law in Congress (“Exposição de Motivos, PL 3.712/1993”). To provide an administrable excessive price enforcement policy and clearly influenced by European competition policy and the United Brands decision handed down in the 1970s by the European Court of Justice on excessive prices (see, e.g., Jenny 2018, for a description of the case), the Brazilian Competition Law specified a four-item “methodology” to verify such acts: For purposes of determining excessive prices or unjustified price increases, in addition to economic or market conditions, the following shall be considered: (a) (b) (c) (d)

A product price level or increase not justified by cost behavior or quality improvements The previous price, if no significant product changes were introduced The price level or price evolution of similar products in comparable competitive markets The existence of any form of agreement among producers that results in price or cost increases (Art. 21, sole paragraph, Law 8.884/1994, free translation).

It is interesting to note that no other abuses of dominance practice, out of the 24 listed, have a methodology written in law. Items (a) and (b) suggest that differences in cost and/or quality characteristics are key to classifying price increases

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as an excessive pricing conduct. Item (c) suggests what is currently known as a differences-in-differences approach to estimate what the expected, non-abusive price increase would be in a comparable market. Item (d) explains excessive pricing as a consequence of a cartel. In line with the bias and practices of direct price controls at the time, this fouritem procedure focused on costs. Demand shocks, or market structure, a key dimension of competition policy analysis, may be considered under a broad interpretation of “economic or market conditions” in the paragraph heading. Notwithstanding the presented methodology to investigate and rule over excessive price cases, the experience of the SBDC in excessive pricing cases was not an encouraging one. A large number of cases were brought before the SBDC, but all of them were dismissed for lack of evidence of antitrust infringement. Most did not pass the early investigatory stage. Under the 1994 law, an abuse of dominance complaint was received by the SBDC through a preliminary inquiry (averiguação preliminar) procedure. If minimum evidence was provided to proceed with the matter, the SBDC would continue with the case, which was then referred to as an “administrative proceeding” (processo administrativo). The actual number of cases is not easy to determine. A 1996 CADE report showed that 31 out of 46 abuse of dominance cases decided pertained to abusive price increases. By 1998/1999, an additional ten cases were dismissed. A search for “excessive prices” in the CADE case law conducted on a private search engine (portal da concorrencia) indicated that between 90 and 100 cases were filed from 1994 to 2012. The search results included cases with more than one antitrust violation, together with excessive pricing (subsection XXIV). Based on the new information system SEi, Silva (2017) provides a list of 42 cases in which excessive pricing represented the alleged single antitrust offense. Silva’s list includes approximately 40 cases prior to 2012, meaning they fall under the statistic above. All of the cases in Silva’s survey were dismissed. A good number of cases (at least 30 on Silva’s list and 55 according to OECD & IDB 2010) were brought before CADE following a Congressional Inquiry on alleged abusive pharmaceutical price increases (CPI dos Medicamentos). Based on a smaller sample of ten of the cases above, Machado (2016) noted that earlier cases took 11 years to complete, with most cases running more than 5 years. In addition to the large number of cases on excessive prices, the early years of Law 8.884/94 saw a large inflow of alleged cartels cases brought before CADE. Public Prosecutors were convinced that simultaneous price increases at gas stations in response to price hikes at refineries were very strong evidence of cartel coordination, thus justifying antitrust proceedings. From 1994 to 2013, about 160 cases were entered. As excessive prices, the vast majority of cases did not meet the minimum standard of evidence for conviction, and 130 were dismissed for lack of evidence (CADE 2014). The possibility of conviction in an excessive pricing case was the subject of intense debate within CADE at two different junctures. The first took place in 2008, when a number of cases examined as part of the Congressional Inquiry into pharmaceutical prices (CPI dos Medicamentos). The second occurred in 2010,

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when CADE reached a decision on one of the earliest cases, a 1998 complaint involving the sale of industrial gases (oxygen and others). In the 2008 ruling of the pharmaceutical price cases, CADE President Farina argued that in a dynamic competition framework, where innovation is central to markets, production cost comparisons are useless for evaluating price levels and, thus, whether prices are excessive or not. This view, seconded by a majority of the CADE Tribunal, dealt a significant blow to excessive pricing cases in the pharmaceutical market. The argument was that imposing sanctions on prices deemed excessive by means of direct cost comparisons could hinder innovation by punishing the appropriation of innovation rents. For his part, Commissioner Prado understood excessive pricing to be a non-autonomous antitrust infringement, as per item (d) of Article 21, sole paragraph, of the 1994 Competition Law. Moreover, he stressed that market prices under workable functioning competition do not necessarily imply perfectly competitive prices with zero economic profits. He noted that the law does not forbid market dominance per se, but forbids the acquisition of dominance by unlawful methods or abusive application of dominance. Commissioner Furquim extended the idea of non-autonomous anticompetitive infringement to the realm of vertical cases, where excessive pricing should be understood as a potential exclusionary practice, such as refusal of sale or foreclosure. It must be noted that while pharmaceutical prices increased significantly in the 1990s and some commentators mistakenly believed that the mandate of competition policy was to explicitly control and curb such price increases (Nobrega et al. 2007), the government adopted more effective pharmaceutical price policies. In 1999, generic drugs were introduced, creating significant competition, and in 2003, a specific body to regulate pharmaceutical prices was established—CMED (Caliari and Ruiz 2014). The second round of debate took place during the ruling on an excessive pricing case on industrial gases in a small town in the state of Minas Gerais (case 08012.000295/1998-92). The case came to a close a full 11 years after the initial investigation began. It was unanimously dismissed due to insufficient evidence. Nonetheless, the matter sparked an intense debate among CADE commissioners on whether abusive prices as a stand-alone antitrust offense case could ever be taken under consideration. Citing the pertinent legal scholarship, Commissioner Ragazzo defined a provision in Law as ineffective when it does not provide the required elements for its application (see also Ragazzo 2012). Ragazzo argued that excessive pricing as a stand-alone antitrust offense was marred by the following problem: it is impossible to objectively segregate abusive prices from prices that emerge as the outcome of competitive forces. The impossibility of objective measurement would render a provision that hinges on such measurement moot. A consequence is that prices could only be deemed excessive when such prices are the outcome of another antitrust offense. He also dismissed use of the comparator procedures presented in Law (discussed above) to legally characterize a price as abusive. It would be difficult for the Antitrust Authority to measure the appropriate costs and market conditions (echoing, in part, President Farina’s comment above, while extending the criticism to

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non-innovation markets). In addition, even if it effectively measured market and cost conditions and trends in the affected market and comparator markets, Competition Law does not provide a clear rule for determining whether price differences from comparator markets or conditions are excessive or non-excessive. A threshold level should be specified to characterize abusiveness. Ragazzo claimed that the description of excessive prices in code law and even the comparator methods stood in stark contrast to merger analysis or other abuse of dominance cases: in addition to an objective dominance level (20% market share, Article 20, Paragraph 3, Law 8.884/1994), an antitrust offense is characterized by proving (potential) effects, not whether such effects are above a specific quantitative level. Comparator methods as described above would deem any price difference from a reference market abusive. This is clearly infeasible, as the abusiveness of prices clearly lends itself to only considering “large” differences. Thus, unexplained (from comparator methods) price differences would require a specific threshold for prices or profits to be deemed abusive. Given that Competition Law principles in general eschews direct price controls, legal provisions requiring the threshold would be a contradiction. In our view, Commissioner Ragazzo’s criticism is supported by a direct review of the comparator methods presented in the Competition Law, as seen above. The provision to use “comparable competitive markets” (Art. 21, sole paragraph, item “c” of Law 8.884/1994) points to the difficulties in excessive price cases. On one hand, the word “competitive” may suggest that the comparator market must present extensive competitiveness, i.e., with no dominance or use of market power. On the other hand, the word “comparable” suggests that comparator markets must be as concentrated as the market where the alleged antitrust infringement resides. The latter point should not be taken lightly. Brazilian antitrust law does not forbid the exercise of market power per se, only the abuse of dominant positions. Hence, comparable competitive markets should be interpreted as markets that are at least as concentrated as the one under scrutiny. The presence of mark-up pricing over marginal costs (or economic profits) that arise naturally in markets with dominance do not imply excessive pricing or an antitrust violation. Convictions for excessive pricing require specifying what level makes a price excessive, based on a direct interpretation of the comparator methods. Possible price excess with respect to costs does not suffice to make the price excessive, based on the comparator method presented in the Competition Law. Commissioner Carvalho challenged Commissioner Ragazzo’s view. Carvalho argued that despite the difficulties in objectively characterizing prices as excessive, the Brazilian competition policy should not dismiss excessive prices as a stand-alone abuse of dominance from a legal standpoint. Carvalho argued that (1) unjustified price increases had previously been subject to sanction by the courts under Law 8.078/1990 (Consumer Protection Law) and (2) excessive pricing is akin to exploitative prices in consumer law. As such, abandoning excessive pricing as a stand-alone offense would effectively lead to abdication of CADE’s charge to protect consumers, as per the Competition Law. In line with the discussions in Congress on the Competition bill that spawned Law 8.884/94 and the initial debate within CADE,

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Mr. Carvalho used the example of pharmaceutical prices as a call to action. While a slim majority of the commissioners and the president (four out of seven votes) adhered to Commissioner Carvalho’s view that the excessive prices provision in the Competition Law was not legally void, all of the commissioners agreed that examining these cases posed significant costs and risk to the Authority. A series of filters were discussed for advancing cases beyond the initial investigative stage and guidelines to expedite the analysis of excessive pricing. CADE’s Economic Department (DEE) provided proposed filter, based on the literature of the time, including Evans and Padilla (2004), Fletcher and Jardine (2007), Motta and Streel (2003), and Paulis (2007), and the specificities of Brazilian Competition Law (see NT02/2010/DEE, here summarized). The basic tenant was to consider the significant difficulty in specifying what an abusive price is from an economic standpoint for purposes of building case filters. Filters would indicate the least likely cases for conviction given their characteristics. The filters would aim at reducing enforcement costs to the Authority (direct costs and indirect, opportunity costs). Both Type I and Type II errors from the Authority decision would generate an opportunity cost for taking up other cases. Type II errors would stiffen incentives to innovation in markets where the appropriation of innovation rents (reflected in higher prices) is required to finance innovation. This major cost to society should be avoided. The filters suggested that the Competition Authority should accept an excessive price complaint when the following cumulative circumstances are met: (a) Non-regulated markets involved (b) Markets with no significant R&D expenditures on product or process development or where competition is not driven by innovation (i.e., mature markets) (c) Near monopoly or pure monopoly positions (not just dominant positions) of the defendant firm (d) Markets with no history of competitively relevant entry Filter “a” reflects the belief that regulators have better information on plaintiff and competitors’ costs and market conditions than the Antitrust Authority. A sector regulator is comparably better suited to evaluate the cost or quality or demand induced price changes required to evaluate excessive pricing, even if the sector is not subject to direct price regulation. Filter “b” recognizes that prices can reflect innovative activity where cost measurement does not explain price dynamics even in well-functioning markets. This is in line with previous statements from former CADE President Elizabeth Farina. Filters “c” and “d” reinforce the idea that if high prices can be challenged by current and potential rivals, the observed prices cannot be deemed excessive, representing just a temporary phenomenon in markets in which there is effective competition. The feasibility and effectiveness of such filters are contingent on a timely decision on whether to take the case up or not in the very early stages of the investigation. This would be possible insofar as the filter uses previous market knowledge held by the Authority. This knowledge would come from either recent merger or abuse of

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dominance cases. Note that no item in the filter list requires investigating costs or demand conditions, which are more time and resource consuming than the information laid out above. Once a case is investigated under excessive pricing as a stand-alone antitrust offense, the DEE document suggested further tests, to effectively assess excessive pricing, revisiting the Law comparator procedure. These suggestions were accepted by the majority of CADE commissioners and are included in the OECD Contribution of Brazil (2011). The DEE’s suggestions highlighted that cost comparisons require a long-term risk-return analysis when innovations are involved. Direct, incremental, variable costs would seriously underestimate the costs involved in producing the innovation, as pointed out above. In the cases where innovation was not relevant for competition analysis, and the use of comparator methods was possible, significant care would be required. A careful selection of comparator markets requires detailed measurement of demand shocks. This is particularly relevant for temporary price increases due to seasonal effects, such as year-end holidays, special sporting events, and even natural disasters (where excessive price complaints would directly take on price gouging). The demand shocks described by DEE are akin to changes in the perceived economic benefits or economic value of products or services rendered to consumers and society that are central to the United Brands decision, as pointed out by Jenny (2018). Nevertheless, the efforts to improve excessive price case handling with the development of filters and methodologies appeared ineffective. Not a single firm was ever convicted under Law 8.884/1994 for the related conduct. Closing this section, before moving to the stand of excessive pricing as an antitrust offense in the 2012 Competition Law Review in Brazil, comments on the limitations of comparator methods use for excessive price convictions are warranted. Measuring costs is part of many antitrust cases, particularly mergers. In the newly suggested price pressure indicators introduced by the 2010 US Horizontal Guidelines (e.g., UPP of Farrell and Shapiro 2010), for instance, price/cost margins are central. But the role and consequences of cost measurement error are radically different in excessive pricing cases from quantitative merger analysis methods. First, excessive pricing cases often deal with a single product in a specific region. This requires the measurement of incremental costs at the product and local level, a task that is far more complicated. Limited information within firms can hinder the appropriate measurements required to apply comparator methods to the level demanded in excessive price cases (see also Lyons 2007). Second, cost behavior is central, if not, in fact, the sole evidentiary factor, for convicting violators in excessive pricing cases. Quantitative methods for merger analysis are only a small part of the evidence applied to decisions in merger cases. Thus, cost measurement errors present serious challenges for upholding excessive pricing convictions submitted to judicial review given their centrality. Third, cost measurements themselves can be subject to intense debate and require extensive resources. The difficulties of cost measurement when central to an abuse of dominance case appear as well in predatory price cases in Brazil. Drago (2017) argues that the difficulties of cost

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measurement contributed to the absence of convictions on predatory price offenses since 1994. For example, the Bann-Dystar case (case 08012.007189/2008-08) dragged on for 6 years until a decision was reached, with cost measurement taking center stage in the ruling that was not able to clearly distinguish the alleged predatory price practice. The difficulties associated with the use of comparator models in excessive price cases do not mean that these methods cannot be used in competition policy practice. Comparator methods, or difference-in-difference empirical models, are widely employed to measure price overcharges in cartel cases (see, e.g., Davis and Garcés 2010). A naïve interpretation would suggest that the legal impossibility of declaring a price level abusive or excessive from the standpoint of Competition Law would call into question price overcharge estimates as well, since both measurement methods hinge on constructing counterfactual prices based on comparator markets and/or market conditions. This interpretation should not prevail. The critique of excessive prices as a standalone antitrust infringement does not lie in the measurement itself, but in the fact that the measurement is the only evidence for conviction. The legal ineffectiveness of excessive price clauses is akin to the perceived legal impossibility of trying a cartel case solely on the basis of “unexplained” price differences in relation to benchmark prices (or counterfactual prices). This is often referred to as the “parallelism plus” doctrine (see, e.g., Fillippeli 2013 for a US and EU comparison). Although price levels that cannot be explained by market fundamentals on a given date, when there is information that competition was tainted by a cartel on that date, do indicate the cartel overcharge level, the contrary is not true across jurisdictions. An observed price level that cannot be explained by the empirical model on a specific date does not necessarily generate sufficient confidence for conviction based on harm to competition. At best, unexplained price differences (using the comparator method description above) provide only indicia of possible competitive infringements (see Boswijk et al. 2016 for a discussion of cartel dating methods).

3 The New Antitrust Law of 2012: Excessive Pricing Stricken from the List of Antitrust Offenses As early as 2004, a number of significant suggested amendments to the Competition Law were presented by lawmakers. The first proposed amendment (PL3.937/2004) maintained the excessive pricing provision in Article 21. Further legislative debate, incorporated in the Lower Chamber’s amended draft Competition Law (PL3.937/ 2008), excluded excessive pricing. Interestingly, the following item “XX—to abusively use intellectual, brand, or industrial property rights” (free translation) was added to the list of unlawful antitrust practices (Article 37). This provision was enshrined in Law 12.529/2011, enacted in June 2012.

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A possible interpretation of the new provision is that excessive pricing analysis was thereafter restricted to cases relating to property rights, as in the case of pharmaceuticals, echoing the Congressional Inquiry on pharmaceutical prices in the early 2000s. This interpretation is misplaced on two fronts. First, it would make no sense to restrict abusive price analyses to precisely those markets that the CADE Tribunal had repeatedly deemed unsuitable for price-cost comparisons. Second, the Brazilian Industrial Property Rights statute was published in 1996, after enactment of the 1994 Competition Law. The Property Rights law required a Competition Law update to properly address abuse of dominance cases related to a legal ordinance that guarantees market power (such as a patent or a trade secret) to the rights owner. The new Competition Law also amended the Law on Crimes Against the Economic System (Law 8.137/1990). Excessive prices and all business practices derived from abuse of a dominant position were no longer deemed criminal offenses, except for cartels. This consolidated a shift from a more interventionist approach to a more market-oriented one. Currently, defendants are only subject to imprisonment in cartel cases. The removal of this item does not preclude the application of excessive pricing as a potential element for conviction, provided the abuse of dominance practice in question meets the criteria established in Article 36 of Law 12.529/2011: excessive pricing can be considered as a means to “increase profits arbitrarily” (subsection III of Art. 36) or to “abusively exploit a dominant position” (subsection IV of Art. 36). Nonetheless, it is fair to say that the chances of success are limited. The exclusion of excessive pricing from the list of unlawful antitrust business practices can be clearly interpreted as the lawmakers’ directive on the matter. The current stand on excessive prices practices Brazilian competition policy is clearly set out on CADE’s website. The Authority’s Q&A page states as follows: What are excessive prices? The excessive price or price increase per se cannot be considered as a practice harmful to competition; it will only be harmful to the extent that it arises from infringement, or if it is likely to cause an anticompetitive effect. CADE’s interpretation converges with the doctrinaire theory that distinguishes between two different categories of excessive price imposition: (1) merely excessive or exploitative prices, arising from the market power; and (2) abusive prices, the so-called exclusionary abuse, adopted to exclude a competitor from the market (adopted by vertically integrated companies). The antitrust authority’s work in the fight against exclusionary abusive prices is defended, so as to provide the conditions necessary for the market operation, by correcting possible failures, without substituting the market mechanisms or interfering with the private agent’s role in the decision-making process, including price fixing. That is, it is understood that the work of antitrust authorities must be performed in relation to the competitive process, to ensure that the dispute for market shares is a licit dispute, and that the possible market power arising therefrom can be legitimate. Acknowledging the antitrust authority’s power to analyze the excessive price or arbitrary price raise practice, per se, would mean assigning to the authority the decision on the fair price, not abusive, which means concluding that the manager has knowledge of the market operation, the company’s cost structure, the investments made by the agent, which is not reasonable, in light of the natural asymmetry existing between the economic agent and the antitrust authority. Moreover, the mere order to drop prices does not ensure that competition

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will be reestablished in that market, and imposes on the authority the duty of constantly supervising the enforcement of its decision. (http://en.cade.gov.br/servicos/faq-1/questionson-violations-against-the-economic-order, active Jan 15, 2018)

CADE’s position states that excessive prices are subject to conviction in abuse of dominance cases only if the respective prices are shown to be abusive. To this end, abusive prices are understood as prices that exploit a firm’s market power for purposes of excluding competitors (primarily in vertical cases), thereby leading to a significant reduction in competition. CADE’s statement highlights that excessive prices are a consequence of business practices that harm competition. In addition, CADE states that there is no way around setting a non-abusive price level in excessive price cases. CADE’s goal is to suppress abusive business practices, not to regulate prices. An interesting recent test to excessive pricing antitrust infringement case law was a complaint relating to hotel rates during the 2014 FIFA World Cup in Brazil (case 08700.007338/2013-30). The case was brought before CADE in 2013 after enactment of the new 2012 Competition Law, based on Article 36, subsection III, namely, “arbitrary profit increases.” Match Services AG and its Brazilian subsidiary were accused of charging abusively high hotel room rates at hotels reserved for FIFA World Cup match dates. The alleged abuse involved a 30% commission charge per Match, an amount two to three times higher than the normal hotel room commission rate charged by travel agencies. Furthermore, Match included a most favorable clause (MFN), forbidding hotels to sell directly at a lower rate than Match’s. The case was brought before CADE by the Brazilian Public Prosecutor’s Office. The contract between Match and the hotels was actually modified before the ruling. Initially (2010–2011), the company barred hotels from selling rooms at a lower rate. Newspaper articles and statements from Public Prosecutors assigned to Consumer Affairs offices and SBDC investigative officials had persuaded Match to drop the clause by 2012. On the issue of excessive pricing, CADE dismissed the case. The reasons for dismissal were (1) Match did not possess a significant market share (above 30%, except in the smallest FIFA World Cup venues, such as Cuiabá) of the affected relevant markets, i.e., it did not contract or reserve more than 30% of a venue hotel rooms (less than 20% in most affected markets). As such, its actions did not disrupt competition and did not deprive consumers of alternatives significantly; (2) the alleged higher margin imposed by Match on hotels was not inconsistent with Match services, which CADE recognized as being broader in scope than those of a regular travel agency; (3) the MFN clause was no longer in effect after early 2013, more than a year before the Brazil 2014 FIFA World Cup; and (4) hotels eventually sold rooms directly at a higher rate than Match’s recommended price. A direct comparison of CADE’s official stance on excessive prices, as laid out above, and the respective case ruling would suggest that if Match had actually held significant market power, the Agency would have found the MFN clause to be illegal. In this case, instead of directly specifying the hotel room rates that would be deemed lawful under Competition Law, CADE’s ruling would have barred the MFN

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contract, so as to eliminate excessive prices in the affected markets. This approach, in turn, would reflect the position that excessive price was the product of an anticompetitive business practice, or not itself an antitrust offense. Apart from the specific circumstances of the case, CADE’s ruling reinforces the idea that proving excessive pricing from a cost-price comparison standpoint is unfeasible. Furthermore, CADE also stated that enforcing excessive price as a single offense in abuse of dominance may lead to unnatural direct price controls by the Competition Authority.

4 Concluding Comments Brazil’s competition policy on excessive prices is of significant interest for competition policy around the world. It was included as an abuse of dominance practice in Brazil’s original modern Competition Law of 1994, only to be removed from the list of anticompetitive practices in the statute’s 2012 amended version. While a large number of cases were filed from 1994 to 2012, not a single firm was convicted for excessive pricing as a stand-alone business practice. The Brazilian experience includes the design of practical tests to evaluate when a price could be deemed excessive. It also offers recommendations on how to filter cases, based on the international scholarship and, particularly, the European experience. Despite all of this and the large number of cases submitted, every complaint was eventually dismissed. CADE’s current competition policy in connection with excessive prices is on a par with that of the USA, Mexico, and Australia. CADE’s stance on excessive prices is that they are a consequence of abuse of dominance, such as a cartel or vertical restraints. There are a number of reasons for this position. First, in many markets, cost comparisons—central to comparator methods used to identify excessive prices—are useless for understanding price dynamics, particularly in innovation markets. Second, dynamic competition requires appropriation of rents to provide innovation incentives, i.e., excessive prices and profits are an integral part of markets in which there is competition. Third, a valid argument can be made for the legal ineffectiveness of excessive prices as a stand-alone abuse. Brazilian law does not explicitly state a price level or increase that is to be deemed abusive, thereby precluding objective characterization of high prices or unexplained price differences across markets or over time as excessive prices. This is in sharp contrast to the case of dominant market position, as prescribed under Brazilian Competition Law, where an objective market share level appears. The fourth is the view that suppressing excessive prices is akin to determining specific price levels. This would have the effects of transforming the competition agency into a sector regulator and undermining the Agency’s effectiveness in other areas of competition policy. Fifth, informational asymmetries between the competition agency and firms are

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viewed as so profound as to render regulation unfeasible and, in fact, generate more harm to markets and consumers than simple inaction. The last argument has important consequences. In code law countries (such as Brazil), one way to make excessive price clauses effective would be to specify the abusive or excessive price level in the applicable Competition Law (similarly to the manner in which a dominant position is determined, namely, a market share of more than 20%, pursuant to Law 8.884/1994). Yet, this would lead the Competition Authority to become a direct price regulator, a risk which cannot be overstated given Brazil’s long experience with direct price regulation as a mechanism to cope with inflation. A governing party could use the Competition Authority’s suppression of excessive prices as a shortcut to the imposition of direct price regulations, while avoiding the explicit implementation of a direct price control system. This would spell the demise of Competition Law, with clear negative implications for economic development. Dropping excessive prices as a stand-alone antitrust infringement, while not ruled out by the current Competition Law, reflects the maturity of a competition policy whose role and effectiveness are perceived as a means to suppress business practices that hinder competition itself, instead of focusing on competition outcomes per se, such as quantity or price levels.

References Baer, W. (2008). The Brazilian economy: Its growth and development (8th ed.). Boulder: Lynne Rider. Boswijk, M., et al. (2016). Cartel dating (ACLE working paper series no. 2016-05). CADE. (2014). Varejo de Combustíveis [Fuel Retail Market Review]. Cadernos do CADE. Caliari, T., & Ruiz, R. (2014). Brazilian pharmaceutical industry and generic drugs policy: Impacts on structure and innovation and recent developments. Science and Public Policy, 41(2), 245–256. Cowie, M., & Mattos, C. (1999). Antitrust review of mergers, acquisitions, and joint ventures in Brazil. Antitrust Law Journal, 67(1), 113–157. Davis, P., & Garcés, E. (2010). Quantitative techniques for competition and antitrust analysis. Princeton: Princeton University Press. Drago, B. (2017). O Cade e a repressão às condutas unilaterais. [Cade and the fight against abuse of dominance practices]. In E. C. Anders, R. Ribas, M. Villela, P. P. S. Cristofaro, & V. Bagnoli (org.), 5 anos lei de defesa da concorrência [Five years of the Competition Law]. IBRAC. Evans, D. S., & Padilla, A. J. (2004). Excessive prices: Using economics to define administrable legal rules (CEMFI working paper no. 0416). Farrell, J., & Shapiro, C. (2010). Antitrust evaluation of horizontal mergers: An economic alternative to market definition. The B.E. Journal of Theoretical Economics: Policies and Perspectives, 10(1), 9. Fillippeli, M. (2013). Collective dominance and collusion: Parallelism in EU and US competition law. Cheltenham: Edward Elgar. Fletcher, A., & Jardine, A. (2007). Towards an appropriate policy for excessive pricing. 12th Annual competition law and policy workshop, Florence. Jenny, F. (2018). Abuse of dominance by firms charging excessive or unfair prices: An assessment. In Y. Katsoulacos & J. Frédéric (Eds.), Excessive pricing and competition law enforcement. Cham: Springer.

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Lyons, B. (2007). The paradox of the exclusion of exploitative abuse. In Konkurrensverket Swedish Competition Authority (Ed.), The pros and cons of high prices (pp. 65–86). Stockholm. Machado, K. (2016). Uma análise da recomendação da jurisprudência recente do CADE ao uso de triagem em casos envolvendo preço abusivo [An analysis of the recent CADE decisions on the use of filters in cases on abusive prices]. In IBRAC, Idéias em Competição – 5 anos do prêmio IBRAC-TIM. São Paulo: IBRAC. Motta, M., & de Streel, A. (2003). Exploitative and exclusionary excessive prices in EU law. 8th Annual European Union competition workshop, Florence. Motta, M., & Salgado, L. H. (2015). Defesa da Concorrência [Competition Policy – Brazilian translation and adaptation]. São Paulo: Elsevier. Nobrega, O., Marques, A., Araújo, A. C. G., Karnikowski, M. G., Naves, J. O. S., & Silver, L. D. (2007). Retail prices of essential drugs in Brazil: An international comparison. Revista Panamericana de Salud Publica, 22(2), 118–123. OECD, & IDB. (2010). Competition policy in Brazil: A peer review. Paris: OECD. OECD, Contribution by Brazil. (2011). Excessive prices. DAF/COMP(2011)18. Paulis, E. (2007). Article 82 EC and exploitative conduct. 12th Annual competition law and policy workshop, Florence. Ragazzo, C. E. J. (2012). A Eficácia Jurídica da Norma de Preço Abusivo [Legal efficiency of the abusive price norm]. Revista de Concorrência e Regulação, 7/8, 189–211. Silva, I. (2017). Preços exploratórios: a operacionalização do conceito, o tratamento da matéria no brasil e a advocacia da concorrência [Excessive prices: concept implementation, Brazil’s experience and competition advocacy]. UFMG MA dissertation. Todorov, F., & Torres Filho, M. (2012). History of competition policy in Brazil: 1930–2010. The Antitrust Bulletin, 57(2), 207–257.

Enforcement Against Excessive Pricing in the Russian Federation Svetlana Avdasheva and Dina Korneeva

Abstract Enforcement outcomes against excessive pricing in Russia are controversial. Since many infringement decisions do not sustain judicial review, there is a recent shift from ex post intervention to ex ante price remedies by competition authorities. The objective of this chapter is to show that modest enforcement records are explained by the absence of convincing standards for price excessiveness but not by the weakness of theories of harm. The analysis of the Russian competition authority’s decisions involves three aspects, including enforcement targets, standards for establishing excessive margin, and reasons for court decisions. The competition authority develops guidelines to prove excessive pricing which do not convince the courts. Thus, the development of a reliable test is of high importance.

1 Introduction In Russia, intervention against excessive pricing is an important part of the provisions against the abuses of dominance. During the last decade, the legal definition and standards of evidence of excessive price have substantially developed. There have been dozens of infringement decisions on excessive pricing made by federal and regional competition authorities. Judicial review is often very skeptical about the motivations of such decisions. Finally, there is evidence of important shifts in enforcement strategies from investigations and sanctioning to ex ante price remedies.

This contribution is an output of a research project implemented as part of the Basic Research Program at the National Research University, Higher School of Economics. We thank participants at the 2nd WCCE Conference in St Petersburg (15–17 June 2017) and at the 12th CRESSE Conference (30 June–2 July 2017) for their comments and suggestions and, particularly, Frederic Jenny, Yannis Katsoulacos, Yossi Spiegel, and David Gilo. In addition, we acknowledge the help of Vadim Novikov for the construction of the dataset of litigation on the excessive pricing decisions in the Russian commercial courts. S. Avdasheva (*) · D. Korneeva National Research University Higher School of Economics, Moscow, Russia e-mail: [email protected]; [email protected] © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_8

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Russian evidence can contribute to international debates on possible and expected welfare effects of competition intervention against excessive pricing, standards of evidence necessary to avoid false convictions and false acquittals, and different enforcement instruments. The objective of this chapter is to explain the demand for enforcement, outcomes of enforcement, and recent shifts in the policy approach of the Russian competition authority, the Federal Antitrust Service (FAS). We summarize legal definitions and evidentiary standards for excessive pricing, targets of enforcement, typical outcomes of judicial review of infringement decisions, and the reasons for changes in the enforcement instruments of the FAS. The structure of the chapter is as follows. Section 2 explains the legal definition of excessive pricing in Russian antitrust law. Section 3 presents the most important enforcement targets among antitrust decisions. Section 4 briefly summarizes the development of evidentiary standards through specific guidelines prepared by the FAS. Section 5 provides evidence on the judicial review of infringement decisions of the FAS. Section 6 is devoted to the recent shift from ex post intervention to ex ante price remedies. This section explains the relationship between the legal definition of excessive pricing and the requirements of price remedies toward dominant sellers. Finally, Sect. 7 draws some important parallels between Russian and international experience of enforcement against excessive pricing, especially in BRICS countries. Section 8 concludes.

2 Legal Definition of Excessive Pricing The blueprint for Russian competition law is European competition legislation, and definition of excessive price is not an exception. Though legal definition of excessive pricing does not rely on the concept of “fairness” (see Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment” in this volume; Akman and Garrod 2011), there is an important correspondence of criteria for price excessiveness with those applied in United Brand case in EU (e.g., see Davies and Padilla’s contribution in this volume). According to Article 6 of the Federal Law 135 of 26.07.2006 “On Protection of Competition,” an excessive price is a price established by a dominant seller that simultaneously satisfies two criteria. First, the price must exceed the price established under similar demand and supply conditions in the comparable competitive market. Second, the price must exceed the sum of costs and profit necessary for production and distribution (which is the legal definition of economic unit costs in the Russian legislation). Ideally the competition authority should prove that both criteria are satisfied. First part of definition is similar to the understanding of “unfair price” or a price above economic value as Davies and Padilla interpret this concept (e.g., see Davies and Padilla’s contribution in this volume). Economic value according to Russian law is a price of the same product in a competitive (though not necessarily perfectly competitive) market. Second criterion in Russian law directly refers to “excessiveness” according to cost-plus approach.

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In 2010, the Supreme Commercial Court of the Russian Federation in the decision on the case on excessive pricing of the largest suppliers of motor fuel (Avdasheva et al. 2012) decided that second (cost-plus) criterion “price exceeds sum of costs and profit necessary for production” could be applied alone if there are no comparable competitive markets where price could be used as a benchmark.1 The prices established by sector regulators, prices of commodity markets, and prices on intellectual property rights are safe harbors for an investigation against excessive pricing. In addition, the law (Art. 6) introduces so-called dynamic test in which a price is considered to be excessive if it remains constant while prices of inputs decrease, if it increases faster than input prices, or if it increases under non-changing input prices and demand conditions. The approach is similar to the test that European Court of Justice (ECJ) established in United Brands case. The FAS develops a legal definition of excessive pricing in several special guidelines, taking into account outcomes of investigations and interventions toward typical enforcement targets.

3 Enforcement Targets In the debates on excessive pricing legal provisions, the issue of target selection is among the most important. A large part of arguments against enforcement addresses the possible adverse effects on incentives of entry and investments of both entrants and incumbent firms (Evans and Padilla 2005). The first argument considers the market with reasonably low entry costs where excessive prices are not sustainable due to the threat of potential competition (Fletcher and Jardine 2008). However, this argument is not completely fair if the competition authority does not make a mistake in establishing dominance. European-style competition legislation implies that a company is dominant if entry costs are high enough so that the market power is not transitory. Barriers to entry that a competition authority cannot decrease are among the necessary conditions for the intervention against excessive pricing (Motta and de Streel 2007). In this context, an excessive price is not self-correcting (Roberts 2008; Ezrachi and Gilo 2009), and competition intervention could enhance welfare. In Russia, targets for enforcement against excessive pricing are heterogeneous. Competition policy is decentralized. Along with the competition authority on the federal level (central office of the FAS), there are 84 regional subdivisions (regional offices) of the FAS that retain independent administrative power in the regional markets. Despite heterogeneous enforcement, two groups of targets are the most important.

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Decisions of Supreme Commercial Court (2010). In Russian. Available at: https://kad.arbitr.ru/ PdfDocument/fedb29ee-f511-4da8-be11-16278cf7c27f/A70-9090-2015_20100525_Reshenija_i_ postanovlenija.pdf

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Target 1: Large Exporters of Primary Products

The first group of enforcement targets is large exporters that are dominant in domestic markets. Large-scale mergers in the 1990s improved the international competitiveness of Russian companies, but they also increased their power in domestic markets (Avdasheva and Tsytsulina 2015). Many exporting companies discriminate Russian downstream producers vis-à-vis those abroad by systematically setting higher prices (Golovanova 2010). Relevant theory of harm is third-degree price discrimination. Affected groups are downstream producers and final consumers. In capital-intensive industries supplying primary products, excessive prices (if export price of the same producer is applied as a benchmark) are not selfcorrecting. At the same time in all these cases, benchmarks for price excessiveness are disputable. The most high-profile case of that type in Russia is the decision against the largest domestic oil companies. Unfortunately, this case provides serious doubts about positive welfare effects of Russian enforcement. Many people consider an accusation of excessive pricing when prices are among the lowest in comparison with neighboring countries as evidence that Russian competition policy in the sector is subordinated to protectionist objectives and substituted for motor fuel price subsidization (Avdasheva and Golovanova 2017). In 2009, FAS accused the “Big Four” Russian motor fuel suppliers (Rosneft, LUKOIL, Gazprom Neft, and TNK-BP (acquired by Rosneft in 2013)) of excessive pricing as a form of abuse of their collective dominance.2 The investigation was initiated after the detection of “economically unjustified price changes” for motor fuel in 2008–2009. The FAS applied the concept of collective dominance, implying that producers are interdependent in their decisions. Under collective dominance, there is a presumption that high prices result from tacit collusion. The FAS presented three main types of evidence in the case (Avdasheva and Golovanova 2017). The main test in favor of price excessiveness was asymmetric pass-through of world oil prices on domestic wholesale fuel prices (sticky domestic prices). When world oil prices increased, domestic wholesale fuel prices increased more rapidly. When world oil prices decreased, domestic wholesale prices were reduced at slower pace. Secondly, changes in unit costs and prices were compared. An increase in the price-cost margin under slow increases of unit costs was also presented in favor of a conclusion on excessive price. Finally, the FAS deemed it illegal that the dominant supplier TNK-BP set higher prices for unbundled retailers than those offered to its subsidiaries. The FAS imposed a huge fine of 26 billion rubles (approximately US$1 billion) on the companies. From the “Big Four,” only TNK-BP claimed to annul this decision in the judiciary up to the Supreme Commercial Court (the highest judicial body at that period). The 2

Decision N A70–9090/2008 against TNK-BP. In Russian. Decision of the Supreme Commercial Court is available at: https://kad.arbitr.ru/PdfDocument/24421fae-ea78-4f06-b5ce-bc19dd6c445a/ A70-9090-2008_20100525_Reshenija_i_postanovlenija.pdf

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commercial courts at different stages of the judiciary process, including first instance, arbitration, and cassation instances, did not come to a consensus in this case. The evidence presented by the FAS seemed to be ambiguous for judges. Figure 1 shows the dynamics of average prices of benzine (weighted across products with different octane ratings). Presented data illustrates that wholesale prices for motor fuel in Russia are generally lower than prices in most countries abroad. This argument is central against the infringement decision of price excessiveness. In this context, the infringement could be proven on the basis of a comparison of prices with the sum of costs and profit necessary for production (second criterion for excessive price), but not on the basis of price comparisons with comparable markets. That is why the May 2010 decision on TNK-BP by the Supreme Commercial Court of the Russian Federation, claiming that Russian motor fuel markets do not have any comparable markets, became a precedent for investigations of excessive pricing in Russia. Since the final decision of Supreme Commercial Court, “excessiveness over sum of costs and profit necessary for production” de facto prevails over comparisons with the prices in comparable competitive markets. Oil companies are important enforcement targets in Russia on both the federal and regional levels. On the regional level, investigations and decisions often aim to

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protect final customers and unbundled retailers of motor fuel. An interesting example is the decision against Gazprom Neft in 2015 in Omsk Oblast.3 The company was accused of excessive pricing in the small wholesale market of motor fuel (supply to the unbundled gasoline stations) in 2014. The infringement decision applied the criterion of excess of price over the sum of costs and profit necessary for production and distribution. The relevant evidence was based on the margin of the prices for independent gasoline stations over wholesale prices. The largest refinery of Gazprom Neft group is located in the Omsk region. According to the decision, the margin of small wholesale prices over normal wholesale prices should be the lowest in Omsk in comparison to other regions, taking into account that Gazprom Neft sets the lowest retail prices in its own petrol stations. The proper equivalent of such “excessive pricing” accusation would be “price squeezing.” Figure 2 illustrates the point. In comparison with other regions in which Gazprom Neft supplies, in Omsk Oblast wholesale prices are lower but not to the extent that can be considered reasonable if we take into account cost only. Logistic cost for wholesale supply to Omsk Oblast from the refinery located there is negligible. Using this argument, independent petrol stations submitted complaints on small wholesale prices stating that they are not justified by the costs and profit necessary for production. The Omsk regional FAS subdivision made an infringement decision against the regional subdivision Gazprom Neft Omsk. The company successfully claimed an annulment. For the arguments of annulment, the court mentioned that the refusal to analyze comparable markets was not substantiated. Therefore, according to the court decision, the conclusion of regional FAS subdivision that pricing policy of Gazprom Neft Omsk contradicted competition law had no proper support. The Gazprom Neft Omsk case generally shows the dangers of using the “costs and profit necessary for production” criterion to prove excessive pricing. Under a set of simplifying assumptions (the calculation of the costs of a regional subsidiary as the costs of a stand-alone company; the claim that prices should perfectly reflect unit costs, and the neglect of the interrelation of pricing policies at different stages of the value chain inside an integrated company etc.), investigations on excessive pricing could result in easy and cheap decisions. Moreover, there is large demand for these types of decisions from the groups that pretend to be protected. The FAS initiated similar investigations in which the main evidence was higher prices in the domestic market vis-à-vis export prices set by targeting large exporters of other primary products. Many of them had much more convincing evidence on price excessiveness than in the oil sector cases. One remarkable case concerned the Novolipetsk Metallurgical Plant (NLMK), one of the largest cold-rolled steel producers worldwide and a unilaterally dominant firm in the domestic market. In 2012, the plant was accused of excessive pricing for cold-rolled grain-oriented steel in 2009–2010. Relevant evidence was the disparity between the trends in export and

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Decision and remedy N 04/59-14 against Gazpromneft from 30 of July 2015. In Russian. Decision of the Commercial Court is available at: https://kad.arbitr.ru/PdfDocument/da02da24-7db6-4618a7fa-3a037cd46b5d/A46-12902-2015_20160708_Postanovlenie_apelljacionnoj_instancii.pdf

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excessive markup, according to the decision domestic price price of import to China Fig. 3 Russian domestic price for grain-oriented steel and price of import of grain-oriented steel to China in 2009–2010, USD per ton. Source: Authors’ own calculations based on price time series data from the Unified Interdepartmental Statistical Information System (UniSIS) (available at https://fedstat.ru/) and Customs database (available at http://www.tks.ru), supplemented by data from decision № 1 10/107-11, Federal Antitrust Service RF, 2011

domestic prices and between the changes in production costs and domestic prices. The FAS reports excessive domestic prices over export prices, especially under decreasing price trend in international markets. Since March 2009, export prices began to decline, reaching the decrease of 44% for Italian and French customers, while domestic prices grew by 2–5%. The ratio of domestic prices over export prices deviates by 3% in June 2009 (in comparison to Indian buyers), by 20% in December 2009 (in comparison to Chinese buyers) and up to 35% (in comparison to Canadian and Mexican buyers). Figure 3 shows that trend in domestic prices of cold-rolled grain steel does not correspond with the trend of export prices of NLMK. The infringement decision was appealed. The commercial courts of first instance, appeal, and cassation instances supported the conclusion of the FAS. Then, the Supreme Commercial Court annulled the decisions of the three lowest courts and sent the case back to the first instance. Finally, under the second round of the judicial review, the arguments of the FAS did not convince the cassation instance, and it finally annulled the infringement decision. The cassation court argued that the FAS did not substantiate the comparability of different markets and the reasons to use the prices in these markets (net of transportation costs) as the benchmark.

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Another example is the accusation against the Raspadsky Coal of the unjustified establishment of different prices for coal in international and domestic markets.4 The FAS showed that the difference in commodity prices for Russian and foreign consumers from October to November 2009 for a single delivery basis (FCA departure station) was approximately 48%. Again, the court finally annulled the decision for the reason that setting different prices across different markets is not an unlawful practice as such. In general, investigations and decisions against large exporters are aimed to protect downstream producers and domestic customers from relatively high prices, which correspond to third-degree price discrimination of domestic buyers against international ones. One may doubt if this enforcement target refers to the objectives of antitrust enforcement. However, in many industries, higher prices for downstream producers vis-à-vis their competitors abroad certainly is an important issue for economic policy.

3.2

Target 2: Dominant Companies in the Markets After Deregulation

The second important group of enforcement targets consists of sellers in deregulated markets. In these cases, theory of harm refers to the sustainability of a natural monopoly and monopoly price. Substantial price increases after deregulation result in the loss of consumer surplus. Recent cases (2016–2017) of this group are the investigations and decisions on stevedoring companies (cargo terminals), including Novorossiysk Commercial Seaport, Global Ports, and Universal Cargo Logistics Holdings.5 Until 2013–2014, rates for cargo services were regulated and set in US dollars. After deregulation, which coincided with the depreciation of national currency, real prices for stevedoring services in Russian ports increased in line with the ruble depreciation rate by an average of 2.5 times. Complaints from large exporters and the national rail operator resulted in an investigation. The FAS found most stevedoring companies to be guilty of excessive pricing in the markets for the transshipment of different commodities, such as ore, fertilizers, containers, ferrous and nonferrous metals, oil, and fuel. The evidence in favor of excessive pricing relies on cost-plus approach. The FAS fined the accused companies at a rate of approximately 17 billion rubles (approximately US$0.3 billion) and imposed remedies to convert prices on transshipments into 4 Decision and remedy N 1 10/89-10 against Raspadsky Coal from 25th of March 2011. In Russian. Available at: http://fas.gov.ru/documents/documentdetails.html?id=6865 5 Decisions against stevedoring companies (cargo terminals), including infringement decisions for Novorossiysk Commercial Seaport from 22nd of March 2017 (Available at: http://fas.gov.ru/presscenter/news/detail.html?id=49397), Global Ports from 24th of March 2017 (Available at: http://fas. gov.ru/press-center/news/detail.html?id=49444), Port of Primorsk from 10th of November 2016 (Available at: http://fas.gov.ru/press-center/news/detail.html?id=47871). In Russian.

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rubles.6 In June 2017, the commercial court of the first instance annulled one of the decisions against one oil cargo terminal. There are reasons to expect that judicial review will be long and difficult. Similar examples of cases concerning excessive pricing of interconnections in telecommunications were held several years ago (see Kryuchkova 2013, in Russian). In these cases, the courts also annulled most of infringement decisions. A common feature of both targets is that the theories of harm to consumers are straightforward. For the first group, the relevant concept is the third-degree price discrimination of domestic customers vis-à-vis export commodity markets. The pricing observed is very close to the “import parity” pricing in the Harmony/Mittal case in South Africa (Roberts 2008; Murgatroyd et al. 2017) in which a large exporter establishes the highest price that is low enough to prevent profitable imports. Such a policy results in a substantial decrease of consumer surplus within domestic markets. The theory of harm is also clear in the cases of the sellers in the market under unsuccessful deregulation when competition does not arise. Market structure and harm to consumers may justify antitrust enforcement.

4 Standards of Evidence The Russian competition authorities have made substantial efforts to develop convincing standards of proof in cases regarding excessive pricing. The FAS elaborated several guidelines to detail the approaches to assess market comparability and to calculate total costs and profit necessary for production. In full accordance with international experience, both price-to-economic costs comparisons and price-tobenchmark comparisons are difficult issues (Evans and Padilla 2005; Grout and Zalewska 2008; Fisher and McGowan 1983; Hou 2011), and the results of both types of tests often seem to be unconvincing under judicial review. The first important guideline directly refers to the pricing of the largest exporters. In 2014, the Presidium of the FAS approved the “Principles of Economic Analysis of Pricing Practices for Their Compliance with Competition Law”7 (hereinafter referred to as Pricing Principles). Pricing Principles provide guidance on how to apply comparative analysis (comparison of prices with the prices of comparable competitive markets). The basic idea of Pricing Principles is that prices in the Russian markets should change in accordance with international market prices, so

“FAS ordered four stevedores to transfer almost 17 billion rubles to the budget for abuse of dominant position”. 2017. Available at http://fas.gov.ru/press-center/news/detail.html?id¼49561 (in Russian). Date of access: April 1, 2017. 7 Principles of analysis of pricing conducts to establish compliance with the Law on protection of competition (2014). In Russian. Available at: http://fas.gov.ru/netcat_files/File/Printsipy% 20ekonomicheskogo%20analiza%20praktik%20tsenoobrazovaniya%20na%20predmet%20ih% 20sootvetstviya%20Zakonu%20o%20zaschite%20konkurentsii.pdf 6

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that domestic buyers of such products do not lose price competitiveness because of pricing policy of dominant domestic suppliers. It reflects the intention to apply data on the markets abroad as comparable markets. Pricing Principles allow the use of indicators from international market prices, such as the prices of spot contracts, export contract prices, and other over-thecounter indicators, for the application of the comparable markets approach. The FAS usually considers world markets as comparable for almost all cases against exporters and makes a comparison of prices as suggested, such as that performed by Hou (2011). This approach FAS applied in the NLMK-VIZ Steel case described above.8 Despite the annulment of this decision, the FAS considers the method itself to be correct. Another group of guidelines is devoted to concerns regarding the costs and profits approach. There are two documents devoted to the calculation of the total costs and profits necessary for production and distribution. The first one is the ‘Commentary to the Federal law “On Protection of Competition”’ (2015).9 It clarifies the following. • The comparison of price-cost margin over time can be applied to identify excessive pricing. Without an objective justification, an increase in the pricecost margin directly indicates excessive pricing. • The difference between price-cost margins of dominant sellers with those of other sellers in the same market, or with other sellers in comparable markets, also indicates excessive margin if differences in productivity are properly taken into account. • There is an option to compare the profitability of a given company with the profitability of sales of identical products from competitive markets. First point directly follows from the law. Second point relates cost-plus approach to comparative one. The last point corresponds to the decision against Gazprom Neft Omsk (2015) that was previously described. The comparison of price-cost margin in Omsk Oblast (where Gazprom Neft Omsk is the only wholesale supplier) with pricecost margins in the neighboring regions allows for a decision on excessive pricing in the case. Even though this approach is highly disputable and unnecessary if comparisons of prices across different markets are legitimate, the FAS still considers it relevant. The second document is the explanatory note of the Presidium of the FAS central office in the “Identification of Monopolistically High and Low Price” (2016).10 “Monopolistically high” and “monopolistically low” are Russian legal names for 8 Decision and remedy N 1 10/107-11 against NLMK and VIZ Steel from 13th of February 2012. In Russian. Decision of the Commercial Court is available at: https://kad.arbitr.ru/PdfDocument/ 0645419c-6d37-4cfe-a201-0de2f40b6ae3/A40-63566-2012_20140127_Postanovlenie_ apelljacionnoj_instancii.pdf 9 Guidelines on Protection of Competition (2015). In Russian. Available at: http://www.consultant. ru/cons/cgi/online.cgi?req=doc;base=CMB;n=17878#0 10 Comments of Presidium of the Federal Antitrust Service № 1 (2016), in Russian. Available at: https://fas.gov.ru/documents/562599

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excessive and predatory pricing, respectively. The most important norms in the document are devoted to cost-plus approach. Guidelines clarify that costs are recognized in the reporting period in which they occurred as explicit monetary payments and other forms of implementation. In this way, the competition authority allows for taking into account also implicit (opportunity) cost in addition to explicit cost. The analysis should cover not only prices, costs, and profits but also the excess profitability over the normative indicators of profitability for markets with regulated prices or markups. Finally, guidelines clarify that both profitability and cost structures should be analyzed and justified. The absence of reasonable economic explanations of costs of production can serve as a basis for recognizing the price to be excessive. Mentioning the normative (regulated) markups, the explanatory note corresponds with recent decisions against Russian stevedoring companies, in which the increase in profitability after deregulation in comparison with previously regulated markups serves as evidence in favor of excessive pricing. Two points are important. First, both groups of guidelines rely on the enforcement records and try to react on the difficulties of proving price excessiveness that the FAS faces. Second, in the investigations against excessive pricing during the last decade and in recent guidelines, the FAS applied nearly every approach that international experience suggests (Hou 2011). In most cases, there was not just one but several approaches. However, the commercial courts found none of them sufficiently convincing and annulled almost half of the decisions made. The next section describes the characteristics of the judicial review of more than a hundred infringement decisions made during the last decade.

5 Enforcement: Infringement Decisions Under Judicial Review In Russia, judiciary access is easy and cheap. Court decisions are fast. Both factors motivate companies that were found guilty of noncompliance with the competition law to claim for annulment of decision under non-negligible probability of satisfaction of that claim. As a result, many infringement decisions are subjects to judicial review. Russian commercial courts that are responsible for considering suits to the authorities provide publicly available user-friendly organized datasets of information contributed at each claim. This fact makes court decisions an important source of information both on the evidence that competition authorities apply in each case and on the attitude of judges toward presented proofs. To present Russian competition enforcement against excessive pricing, we use the data of court decisions on excessive pricing. From all the decisions, we sort out a number of cases where authorities consider excessive pricing in the contracts with

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only one buyer without a causal relationship between dominance (market power) and price excessiveness.11 Since 2008, the first year after the introduction of turnover penalties, which motivates claims to annul decisions on competition law infringement, and until September 2017, there were 136 cases in the Russian courts concerning excessive pricing. Enforcement targets of the contested decisions are heterogeneous. Together with the abovementioned decisions on NLMK-VIZ Steel, the largest oil companies, and Gazprom Neft, there are decisions against smaller companies in smaller markets. Out of the 136 decisions, 63 were against companies in regulated or deregulated markets, markets adjacent to such markets, or companies that combined quasi-regulatory functions with business activities. Examples of the first group are the interconnected services of telecom companies. Examples of the last group are storage warehouses as custom control zones. This type of target is common for several transition countries since competition law emerged (Ordover et al. 1994; Pittman 2004). According to review of Pittman (2004), in Central and Eastern European countries in 1996 and 2001, from 1/3 to 1/2 cases on abuse of dominance target narrowly defined regulated sectors (so-called natural monopolies). Among non-regulated enforcement targets, every third contested decision is against oil companies in either large or small wholesale supply of motor fuel. The evidence presented under judicial review allows us to assess how often the FAS applied particular tests for price excessiveness. In many cases, a “suspiciously fast” price increase was the reason for an investigation. However, in most investigations, the FAS applied more advanced price tests. First, there are comparisons of prices with prices in comparable competitive markets and comparisons of prices with costs, as it is presumed by Russian competition law. The two additional criteria are excess profitability analysis and the comparison of prices in the market under investigation with the prices of the same supplier in the competitive market (like in presented above decision on NLMK-VIZ Steel).12 Figure 4 presents the structure of contested decisions across types of price tests. In almost 2/3 of decisions competition authorities applied at least one test presumed by law. When only one test is applied, in most cases, it is the comparison of prices and economic costs (“sum of costs and profit necessary for production”). This is an evident consequence of the decision of Supreme Commercial Court in 2010 that allows the comparison of prices with costs and profits necessary for production as the only criterion if there is no a comparable market. Decisions on excessive pricing are highly disputed under judicial review. We consider the structure of decisions across higher instances where parties submit a claim as the indicator of disputability. In Russia, there are four instances, including 11 Roughly speaking, we sort out the pricing that could not become an enforcement target in mature competition jurisdictions (for instance, in European one). For several specific reasons (Avdasheva 2016; Avdasheva et al. 2016), Russian competition authorities still investigate the cases that are not a genuine subject of competition intervention. 12 Authors cordially thank Yannis Katsoulacos for suggested classification of price tests in the excessive pricing investigations. Influence of type of the analysis on the probability of annulment reflects ongoing research.

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Both tests + additional analysis undertaken 6%

Only comparison with price of undertaking in other market or excess profitability analysis is applied 6%

Both tests presumed by law are applied 7%

No one specific test is applied 22%

One of the price tests presumed by law is applied 59%

Fig. 4 Structure of investigations across tests for excessive pricing

the first instance commercial court, the appeal commercial court, the cassation instance, and the highest court (before 2014, Supreme Commercial Court; after 2014, Supreme Court of the Russian Federation). Among these instances, only higher courts have the discretion not to consider a case. Due to easy and cheap litigation in the Russian commercial courts, the losing party often submits a claim to higher instance. Only in one of ten cases parties agree with the decision of first instance court. Every fifth case was submitted to the highest court. To compare, in 2016, from all the proceedings between companies and competition authorities, first instance courts consider approximately 7000 claims, appellate courts approximately 3300 claims, and cassation approximately 2100 claims. By roughly considering 7000 claims as 100%, only 30% of all the cases on competition law enforcement go to cassation instance and/or highest court. As Fig. 5 shows, this share is more than twice higher for the cases on excessive pricing. This fact indicates a substantial divergence of expectations of an alleged violator and competition authorities on the court decision in the case. The annulment rate for excessive pricing decisions is high. Out of 136 claims, courts annulled 69 infringement decisions or roughly half. There is no significant difference in the annulment rates across years or between regulated and non-regulated industries. An interesting observation is that in motor fuel markets,

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First instance court 10%

Highest court 22%

Appelate instance 20%

Cassation instance 48% Fig. 5 Structure of investigations across highest instance that considers the claim

in spite of the decision of Supreme Commercial Court in 2010 that confirmed the infringement of largest oil companies, approximately 2/3 of the decisions during 2008–2015 were annulled. Therefore, there is no evidence that the decision of highest court substantially affects the attitudes of the judges toward the pricing policies of the companies in the sector. The interrelationship between the particular test for excessiveness and the probability of annulment is nonlinear. In the subgroup of decisions where the FAS applies no specific price test, the rate of annulment is slightly higher (2/3, or 20 out of 30 decisions). In the subgroup where only one test is applied (price-tocost comparison), the share of annulled decision is lower than the average (44%). However, in a relatively small subgroup where the FAS applies both price tests (comparison with the prices in comparable markets and comparison of prices with costs), the courts annul six out of ten decisions. Therefore, the absence of a specific pricing rule increases the probability of annulment, but there is no evidence that the consistent application of the price tests presumed by law decreases it. Another interesting pattern concerns a specific reason for annulment. Figure 6 presents the structure of arguments that judges apply to explain the annulment. In a small subgroup of claims, the main reason is an unconvincing test on dominance, mostly because of too narrow antitrust market definition. In a quarter of cases, judges found weaknesses in the analysis of market power (dominance) and price excessiveness. However, insufficient, incomplete, or unconvincing evidence on price excessiveness is the most typical reason for annulment.

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Weakness of evidence both on dominance and price excessiveness 25%

Weakness of evidence on dominance without judgement on price excessiveness 11%

Other reasons 3%

Weakness of evidence on price excessiveness with strong evidence on dominance 61%

Fig. 6 Reasons behind judges annul infringement decisions (out of 69 decisions)

To conclude, the analysis of judicial review highlights limitation of a deterrence effect and the overall effectiveness of antitrust enforcement against excessive pricing in Russia. Typically, an investigation on excessive pricing results in the decision that companies will most likely appeal, and after litigation in several instances, a higher court annuls it with a large probability. Specific price tests do not help the FAS to make arguments more convincing for judges.

6 Enforcement: Remedies to Prevent Excessive Pricing Since the sustainability of infringement decisions against excessive pricing is weak under judicial review, the Russian competition authority looks for alternative enforcement instruments. Thus, recently in Russia, there has been a shift toward extensive price remedies. Typical targets of remedies are large producers of exported primary products that are dominant in domestic markets. Remedies attempt to prevent excessive pricing in the form of discrimination of domestic customers vis-à-vis those abroad. Usually, remedies establish price caps and limit price variation across groups of buyers. In most cases, the design of price remedies replicates the criteria of price excessiveness in the Russian law and enforcement practice. This is especially evident when comparing the contents of remedies with Pricing Principles.

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First, a remedy may cap domestic price increases in comparison to price increases of the same producer in other markets. In the motor fuel market, infringement decisions against LUKOIL, Rosneft, and Gazprom Neft were supported by the remedy. It requires them to reduce prices to a reasonable level (without a clear specification of this reasonable level) and not to compensate the declining profitability of export contracts by raising domestic prices (hinting that when world oil prices decreased, domestic prices on motor fuel should also decrease). Several years later, under the pressure of FAS and according to the remedy on acquisition of TNKBP by Rosneft, oil companies elaborated commercial policies themselves. Commercial policies of oil companies include among others the pricing formulas. Typical pricing formula imposes a cap on domestic price increases of motor fuel as the weighted average of three indicators, which are the increase of the export price for the same suppliers (net of transport cost), the price from St. Petersburg motor fuel commodity exchange, and the average domestic wholesale price. Second, a remedy may reflect the comparison of prices with costs. An example is the condition for approval of the 2006 vertical merger of Lebedinsky ore mining and processing enterprise, which specializes in the extraction of iron ore, and Metalloinvest, which is one of the largest mining and smelting companies in Russia.13 Economic concentration deal raises concerns that a merged company may abuse a dominant position in the domestic market of iron ore raw materials. The remedy under merger approval contains a requirement to provide an appropriate economic analysis in the case of a price change of more than 10% relative to the weighted average prices of the previous half year. It is directly connected to cost-plus approach. Finally, the FAS uses the prices in the international markets or the export contracts of a dominant seller as benchmarks (Avdasheva and Radchenko 2017). For instance, after the annulment of the infringement decision in the judiciary, the FAS imposed a remedy for NLMK-VIZ Steel that obliged them to establish prices at a level that does not exceed the weighted average of the export prices of the previous month for similar products. The remedy for Uralkali, which is the largest supplier of potassium chloride, prohibits domestic prices from exceeding the level of export contract prices in the lower price market.14 These conditions directly follow the Pricing Principles that consider export markets as perfectly comparable with domestic one. Another example of the remedies in the form of commercial (pricing) policy is the aluminum market, where RUSAL is the only producer in Russia.15 In 2007, the FAS, under a merger approval, imposed a remedy that the domestic prices should not be higher than the prices calculated on the basis of the average London Metal

13

Decision and remedy N AG/9688 against Metalloinvest from 16th of June 2006. In Russian. Available at: http://solutions.fas.gov.ru/documents/1030-dea7c500-652c-46a6-a84a-7662726d1cb6 14 Uralkali “Commercial policy” (from 29th of March 2011). In Russian. Available at: http://rapufertilizer.ru/docs/tp 15 Rusal “Commercial policy” (remedy N 1777 from 14th of February 2007). In Russian. Available at: http://fas.gov.ru/netcat_files/File/Novaya%20redaktsiya%20predpisaniya%20RUSAL.pdf

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Exchange prices over a certain period, adjusted on the amount of factual logistic costs and regional premiums. The FAS can either establish remedies themselves or ask companies to elaborate remedies in the form of commercial policies for approval. Recently, large oil companies and suppliers of potash fertilizer, caustic soda, and other industrial inputs develop and follow commercial policies that usually contain pricing formulas. However, there is no uniformity in pricing formulas across markets and many of them change over time. Thus, the Russian competition authority chooses to apply conduct remedies rather than to impose infringement decisions against excessive pricing due to its higher sustainability and presumed higher deterrence effect. In contrast to infringement decisions, remedies themselves hardly can be a subject of judicial review, especially when company voluntary develops rules of remedies and FAS only approves them. As a result FAS considers ex ante established price formulas as superior substitute for investigations and infringement decisions on excessive pricing. At the same time, the conditions of price remedies follow the tests for price excessiveness and relevant guidelines of FAS. Extensive use of remedies goes beyond genuine antitrust enforcement. It makes Russian competition authority influential price regulator. An important fact is that regulation takes place in the markets where domestic price was never regulated after the liberalization reform in 1992. During the socialist period, specific features of price regulation in these markets did not exist either. Competition authority does not restore sector-specific price regulation but develop peculiar model of domestic price caps, generally using netbacks (price net of trade and transportation cost) of export suppliers. Unique soft price regulation spread for large part of primary products in the Russian market, including fuel, ferrous and nonferrous metals, and chemicals. This model could have complex effects on pricing, both in domestic and international markets and decision-making inside the companies (Avdasheva and Radchenko 2017).

7 Excessive Pricing Internationally: Perspective from Russian Experience Three points are important to analyze Russian experience of enforcement against excessive pricing in the context of competition policy worldwide. First is a scale of enforcement. For a long time since the case of United Brands, legislation on excessive pricing in EU was considered as a kind of sunset regulation (see Jenny’s contribution “Abuse of Dominance by Firms Charging Excessive or Unfair Prices: An Assessment” in this volume). Less than ten cases for 40 years indicate this attitude. Several countries like Brazil (e.g., see chapter “The Brazilian Experience with Excessive Pricing Cases: Hello, Goodbye” written by Ribeiro and Mattos) even remove relevant rules from the national competition legislation. In other

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jurisdictions, including EU member states, enforcement against excessive pricing imperfectly substitutes weak or absent sector-specific regulation. Recent renaissance of enforcement is located in the areas which are also subject of sector-specific regulation (for instance, pharmaceuticals, e.g., see Davies and Padilla’s contribution in this volume). Russia is an intermediate case. On the one hand, there is a substitution of sector regulation by enforcement against excessive pricing. On the other hand, there is also large-scale enforcement outside regulated or quasi-regulated sectors. Due to large-scale enforcement, Russian experience contributes to international discussion on two issues. First issue is whether enforcement against excessive pricing might be welfare-enhancing in any particular markets under some conditions. Second issue is about appropriate standards for excessive pricing. The answer on the first question in Russia is rather positive. There are markets dominated by a seller that obtains large market power and sets non-transitory excessive price. For the most important enforcement targets in Russia, there are examples of jurisdictions abroad where competition authorities apply provisions against the same group of companies as in Russia, including the exporters of primary products and companies under deregulation. In the EU, a large percentage of infringement decisions on excessive pricing are against companies in deregulated industries, such as the Deutsche Post or the Port of Helsingborg. In South Africa markets on flat steel and purified propylene and polypropylene and pricing strategies of the dominant companies (Mittal Steel South Africa Limited and Sasol, respectively) are very similar to those markets and pricing of dominant companies that have been enforcement targets in Russia. This similarity supports the conclusion that there are markets where pricing of dominant companies substantially reduces consumer benefits. This pricing could be a target of welfare-enhancing enforcement. However, the answer on the second question is negative. The outcomes of enforcement against excessive pricing in the jurisdictions mentioned are also similar to other countries. Decisions on excessive pricing have little chance of surviving a judicial review, mostly because the courts consider evidence of excessiveness to be unconvincing. In the EU, infringement decisions are sustainable only in those member states where there is no tradition of judicial revision (Svetlicinii and Botta 2012). This is also the case outside Europe. The South African Competition Appeal Court annulled the previously mentioned Mittal decision because of the unconvincing test for price excessiveness. Competition economists consider this decision as an example of the deep coherent economic analysis that contributes to the increase of evidentiary standards (Calcagno and Walker 2010). However, we may consider this case from another angle. If a test for price excessiveness that includes a reasonable level of doubt does not exist, then the deterrent effect of enforcement is low. Due to this, enforcement against excessive pricing does not contribute to the social welfare of consumer benefits. Furthermore, in many countries there is a shift to remedies, either being complementary to monetary penalties or substituting them, as in Russia. High-profiled example is Qualcomm case in China. According to the decision of National Development and Reform Commission of China, responsible for enforcement against

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pricing that violates antitrust law, Qualcomm was obliged to follow a set of remedies, including the calculation of the royalty rates based on 65% instead of 100% of the wholesale prices of handsets in China, which is essentially a price cap.16 In South Africa, in the Sasol case, behavioral remedies supplemented monetary fines. Sasol was required to set prices based on a forward-looking principle without the discrimination of any groups of customers. Thus, Russian provisions for the enforcement of excessive pricing have a number of similarities to other jurisdictions. Worldwide competition authorities who tend to apply provisions against supra-dominant companies in the markets with high entry costs face serious problems in proving price excessiveness. The authorities try to substitute infringement decisions that a company can successfully appeal for the use of commitments, settlements, and remedies. Our explanation of this shift is the high cost of investigations due to the absence of a convincing test for price excessiveness together with the non-satisfactory outcomes of judicial reviews of infringement decisions.

8 Conclusion Among competition jurisdictions where prohibition on excessive pricing occurs, Russia is a clear example of a combination of the high demand for enforcement with the absence of a satisfactory test for price excessiveness. There are enforcement targets with clear theories of harm. The competition authority tries to apply nearly all types of tests for price excessiveness that have ever been suggested in international competition policy. However, these tests are often non-convincing for judges under judicial review. From 2008 to 2017, Russian commercial courts annulled nearly half of the infringement decisions on excessive pricing. Among the tests on price excessiveness, the comparison of the price in question with the price of a dominant seller in other markets provokes less substantial criticism. Paradoxically, the Supreme Commercial Court of the Russian Federation rejected this criterion with the statement that any seller has a right to set different prices in different markets under different demand conditions. The high probability of annulment limits the deterrence effect of enforcement against excessive pricing using the instruments of investigations and sanctions. We consider this as an independent and important factor against enforcement, even in the cases where dominance is established and excessive prices are not self-correcting. Evidentiary standards are the weakest point in competition enforcement against excessive pricing. If the standards for establishing excessive pricing are high enough to avoid Type I error, it is very unlikely to support a conclusion on excessive pricing

16

Antitrust in China: NDRC v. Qualcomm—One All. Allen & Overy. 12.02.2015. Available at http://www.allenovery.com/publications/en-gb/Pages/Antitrust-in-China-NDRC-v--Qualcomm– One-All.aspx Date of access: March 25, 2017.

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with a satisfactory level of confidence. As a result, the probabilities of detection and deterrence decrease. In turn, a decrease in the standard may result in the increased probability of Type I error that is detrimental to deterrence. This trade-off explains the non-satisfaction of competition authorities with the outcomes of enforcement against excessive pricing and the recent shift to ex ante conduct remedies. In Russia, facing a low probability to impose sanctions on the dominant seller for excessive pricing, the competition authority looks for alternative enforcement instruments. Price remedies in this context substitute for universal prohibition on excessive pricing. The design of price remedies in most cases replicates the criteria of price excessiveness that Russian competition law contains and Russian competition authorities try to apply. Being ineffective under investigations, they are often effective as a part of quasi-regulatory provisions.

References Akman, P., & Garrod, L. (2011). When are excessive prices unfair? Journal of Competition Law and Economics, 7(2), 403–426. Avdasheva, S. (2016). Models of monopoly in the quarter-century development of Russian competition policy: Understanding competition analysis in the abuse of dominance investigations. In F. Jenny & Y. Katsoulacos (Eds.), Competition law enforcement in the BRICS and in developing countries (pp. 239–262). Cham: Springer. Avdasheva, S., & Golovanova, S. (2017). Oil explains all: Desirable organisation of the Russian fuel markets (on the data of three waves of antitrust cases against oil companies). PostCommunist Economies, 29(2), 198–215. Avdasheva, S., & Radchenko, T. (2017). Remedies in BRICS countries: Are there lessons from and for competition economics? In T. Bonakele, E. Fox, & L. Mncube (Eds.), Competition policy for the new era: Insights from the BRICS countries (pp. 160–172). Oxford: Oxford University Press. Avdasheva, S., & Tsytsulina, D. (2015). The effects of M&As in highly concentrated domestic vis-à-vis export markets: By the example of Russian metal industries. Research in International Business and Finance, 34, 368–382. Avdasheva, S., Goreyko, N., & Pittman, R. (2012). Collective dominance and its abuse under the competition law of the Russian federation. World Competition: Law and Economics Review, 35 (2), 249–272. Avdasheva, S., Golovanova, S., & Korneeva, D. (2016). Distorting effects of competition authority’s performance management: The case of Russia. International Journal of Public Sector Management, 29(3), 288–306. Calcagno, C., & Walker, M. (2010). Excessive pricing: Towards clarity and economic coherence. Journal of Competition Law and Economics, 6(4), 891–910. Evans, D., & Padilla, A. (2005). Excessive prices: Using economics to define administrable legal rules. Journal of Competition Law and Economics, 1(1), 97–122. Ezrachi, A., & Gilo, D. (2009). Are excessive prices really self-correcting? Journal of Competition Law and Economics, 5(2), 249–268. Fisher, F. M., & McGowan, J. J. (1983). On the misuse of accounting rates of return to infer monopoly profits. The American Economic Review, 73(1), 82–97. Fletcher, A., & Jardine, A. (2008). Towards an appropriate policy for excessive pricing. In C. Ehlermann & M. Marquis (Eds.), European competition law annual 2007: A reformed approach to article 82 EC (pp. 533–545). Oxford: Hart Publishing.

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Golovanova, S. (2010). Evidence on imperfect competition: Prices of exported and imported goods in Russia. Journal of Modern Computer, 22(4), 11–25 (in Russian). Grout, P. A., & Zalewska, A. (2008). Measuring the rate of return for competition law. Journal of Competition Law & Economics, 4(1), 155–176. Hou, L. (2011). Excessive prices within EU competition law. European Competition Journal, 7(1), 47–70. Kruychkova, P. (2013). Regulation of prices for call termination services on the telephone operator’s network: Antitrust or tariff regulation? Economic Policy, 6, 126–142 (in Russian). Motta, M., & de Streel, A. (2007). Excessive pricing in competition law: Never say never? In The pros and cons of high prices (pp. 14–46). Kalmar: Konkurrensverket (Swedish Competition Authority). Murgatroyd, R., Yu, Y., & Barnardt, I. (2017). Excessive price regulation in China, South Africa and other BRICS member states. In T. Bonakele, E. Fox, & L. Mncube (Eds.), Competition policy for the new era: Insights from the BRICS countries (pp. 229–242). Oxford: Oxford University Press. Ordover, J. A., Pittman, R. W., & Clyde, P. (1994). Competition policy for natural monopolies in a developing market economy. The Economics of Transition, 2(3), 317–343. Pittman, R. (2004). Abuse-of-dominance provisions of Central and Eastern European competition laws: Have fears of over-enforcement been borne out. World Competition Law & Economics Review, 27(2), 245–257. Roberts, S. (2008). Assessing excessive pricing: The case of flat steel in South Africa. Journal of Competition Law and Economics, 4(3), 871–891. Svetlicinii, A., & Botta, M. (2012). Article 102 TFEU as a tool for market regulation: “Excessive enforcement” against “excessive prices” in the new EU member states and candidate countries. European Competition Journal, 8(3), 473–496.

Anti-monopoly Cases on Unfair Pricing in China Xiao Fu and Heng Ju

Abstract Prohibition of unfair pricing is an area that has seen a growing number of enforcement activities in China. Unfair pricing, also called excessive pricing in some cases, is ruled under Article 17, Paragraph 1, of the Anti-Monopoly Law (“AML”), whereby dominant firms are prohibited to “sell commodities at unfairly high prices or buy commodities at unfairly low prices.” In this chapter, we will introduce the relevant legal framework and provide a review of recent typical cases. The major cases include the investigation against Qualcomm Incorporated (“Qualcomm”) by the National Development and Reform Commission (“NDRC”) and the landmark decision issued by the Shenzhen Intermediate People’s Court in Huawei v. InterDigital. Both cases are related to licensing patents that are essential to standards. There are also several rulings in the markets of certain essential input products such as natural gas pipelines and essential drugs. Given the role of the Chinese economy in the world, a review of antimonopoly enforcement in this field would be helpful to practitioners and researchers.

1 Introduction China’s AML went into effect on August 1, 2008. In a decade of enforcement, a wide range of anti-competitive conduct has been investigated and ruled under the AML.1 Among them, there is an extensive body of unfair pricing decisions by courts and regulatory authorities. 1 The abuse of dominant market positions is covered in Chapter 3, which consists of three articles. For a preliminary assessment of the enforcement of the AML’s abuse of dominance provisions, see Liu and Qiao (2012).

X. Fu (*) School of Management, Fudan University, Shanghai, China e-mail: [email protected] H. Ju College of Business, Shanghai University of Finance and Economics, Shanghai, China e-mail: [email protected] © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_9

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In this chapter, we will review four cases that were ruled under Article 17, Paragraph 1, of the AML, whereby dominant firms are prohibited to “sell commodities at unfairly high prices or buy commodities at unfairly low prices.” Specifically, two cases are related to licensing standard-essential patents (“SEPs”) on fair, reasonable, and nondiscriminatory (“FRAND”) terms, namely, the NDRC’s investigation against Qualcomm and the landmark decision issued by the Shenzhen Intermediate People’s Court in Huawei v. InterDigital. The third one is on the pricing of pharmaceutical drugs. The last one is on the building of natural gas pipelines in urban areas. Moreover, we expect that in the near future, Chinese regulators will take a close look at suppliers in certain raw material markets for their seemingly unfair pricing practices. The firms investigated under the AML’s unfair pricing provision range widely in terms of industries and ownership types (such as multinational corporations, stateowned enterprises, and domestic private firms). Interestingly, the two SEP-related cases are both on abusive conduct by a single firm. Decisions in the two cases contain assessment of market power in the relevant markets, and the SEP holders are charged for abusing their dominant market positions to unfairly overprice their licenses. A review of the two cases would help us explore how FRAND commitments are understood by Chinese competition agencies and courts, and, from the Chinese regulators’ perspective, what would be the appropriate methodology for determining FRAND royalty rates. By contrast, the other two cases both involve multiple firms in the same or nearby markets. The authority applied certain price and cost benchmarks in supporting the rulings. In the aforementioned cases, some important and controversial issues include what is an appropriate methodology for defining “fairness.” Determining whether prices are “too high” can be especially complex in high-technology or digital industries. Besides, the NDRC’s decisions in the multiple-firm cases seem to suggest that the unfair pricing paradigm is better suited than the (possible) monopolistic agreement paradigm. A possible reason is that it might be easier for the agency to find convincing evidence to support the former one. This implies that Chinese regulators may still need to develop a consistent and transparent analytical framework for applying the unfair pricing provision. In what follows, after introducing the legal framework, we will discuss our understanding of the enforcement pattern in China, focusing on the economic evidence considered by the NDRC and courts in those four cases. We will also clarify the main points for compliance and provide some possible directions for future economic research in this understudied area.

2 The Legal Framework The AML is a comprehensive system of competition law applying throughout the People’s Republic of China with the exception of the two Special Administrative Regions of Hong Kong and Macau. Its Article 1 states that “the Law is enacted for

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the purpose of preventing and restraining monopolistic conducts, protecting fair market competition, enhancing economic efficiency, safeguarding the interests of consumers and the interests of the society as a whole, and promoting the healthy development of socialist market economy.” Noticeably, consumer welfare is emphasized in this general provision. This would guide the law enforcement to be in line with the practices in a number of other major antitrust jurisdictions. The monopolistic conducts prohibited under the AML include (1) monopoly agreements reached between undertakings, (2) the abuse of dominant market positions by undertakings, and (3) the concentration of undertakings that lead or may lead to elimination or restriction of competition. The abuse of dominant market positions is covered in Chapter 3, which consists of three articles. Article 17, Paragraph 1, lists the particular abuses of dominant market positions that are prohibited. Both unfairly high and low prices are regulated under its Subparagraph 1: Article 17: Undertakings holding dominant market positions are prohibited from doing the following by abusing their dominant market positions: (1) selling commodities at unfairly high prices or buying commodities at unfairly low prices.

According to the AML, “a dominant market position” refers to a market position held by a business operator having the capacity to control prices, quantities, or other trading conditions of commodities in relevant markets or to hinder or affect any other business operator in entering the relevant markets. Article 18 outlines the criteria for determining a dominant market position, and Article 19 states under which conditions a business operator may be presumed to have a dominant Violation of Article 17, including unfair pricing practices, can be subject to legal liabilities including (1) suspension of the business practices, (2) confiscation of the illegal gains, and (3) fines of not less than 1% but not more than 10% of the sales achieved in the previous year.2 Enforcement structure of the AML involves both the governmental agencies responsible for public actions and the courts for private litigations. Prior to March 2018, public enforcement was divided among three competition agencies, two of which, the State Administration for Industry and Commerce (“SAIC”) and the NDRC, took cases under the abuse of dominance provisions. Specifically, the NDRC was in charge of pricing-related violations, and the SAIC was responsible for violations that are related to non-pricing conduct.3 Particularly to the interest of this book, unfair pricing cases were investigated by the NDRC and its provincial

In practice, the fines are determined in consideration of the extent, the nature, and the duration of the violations, as well as whether the undertakings under investigation are applicable to the leniency program. Recently, the issuing of the Draft Guidelines on the Determination of Illegal Gains and Fines in Relation to Undertakings’ Monopoly Conduct (June 17, 2016) by the NDRC was a very important first step to develop a consistent framework for calculating fines and illegal gains. See, for example, Deng and Katsoulacos (2017) for detailed discussion. 3 The third competition agency in China was the Ministry of Commerce, mainly responsible for merger review and control. 2

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subsidiaries. On March 13, 2018, the State Council announced that the duties of three competition agencies would be consolidated into a new government agency, called State Administration for Market Supervision, to handle all antitrust matters. This consolidation plan was approved by the legislature on March 17. We expect that this change could lead to better consistency and transparency in the enforcement of the AML. It is worth noting that China has a separate Price Law, which may overlap to some extent with the AML (e.g., in practice, both laws can deal with unfairly high prices). However, there are two major distinctions between them. First, the application of Price Law does not need to assess market power and establish a dominant market position, while the enforcement of the AML does require this as a precondition. Second, the pecuniary penalty under the Price Law is limited to RMB 2 million, which can be substantially modest as compared with the liability under the AML.

3 Single-Firm Cases: Two Cases on SEPs Next, we will move to discuss two categories of unfair pricing cases, based on a review of Chinese regulators’ reasoning and decisions. Since the AML came into effect, there has been considerable attention on the treatment of Intellectual Property Rights (“IPRs”) under the AML. The first AML case involving unfair pricing in a FRAND context is Huawei v. InterDigital, which began in the Shenzhen Intermediate People’s Court in 2013 and was eventually appealed to the Guangdong High People’s Court.4 The second one, the investigation by the NDRC against Qualcomm, is the first major abuse of dominance case against a foreign company by a Chinese competition agency. Both cases provide good examples to study the enforcement pattern by Chinese government agencies and courts in determining FRAND royalty rates.

3.1

The Qualcomm Case

On February 10, 2015, the NDRC issued its administrative penalty decision (“decision”) based on its 16-month investigation against Qualcomm, an American multinational telecommunications equipment supplier and technology developer.5 According to the decision, the NDRC found that Qualcomm abused its dominant 4

For a general discussion of important issues covered in Huawei v. InterDigital, see Han and Li (2013). For a general assessment of FRAND determination in US, European, and Chinese courts, see Evans et al. (2014b) and Layne-Farrar and Wong-Ervin (2017). 5 The NDRC’s decision (in Chinese) is available at http://www.ndrc.gov.cn/zwfwzx/xzcf/201503/ t20150302_754177.html. An unofficial translation of the decision can be found at https://www. competitionpolicyinternational.com/wp-content/uploads/2016/03/国家发展和改革委员会行政处

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market position in two relevant product markets in Mainland China, namely, (1) the licensing market of SEPs for CDMA, WCDMA, and LTE wireless communications technology standards (the “SEP licensing market”) and (2) the market for the sale of baseband chips for CDMA, WCDMA, and LTE wireless communications (the “baseband chip market”). The NDRC held that Qualcomm violated Article 17 of the AML by (1) charging unfairly high royalties for its SEPs, (2) bundling the sale of non-SEPs with SEPs without reasonable justification, and (3) conditioning the sale of baseband chips on the customers’ agreement to sign a license agreement with unreasonable provisions. The decision imposed a fine of 8% of Qualcomm’s annual revenue within the territory of Mainland China for 2013 (approximately USD975 million), constituting the highest fine since the AML came into effect. This is also the first investigation by a Chinese competition agency against a foreign giant technology company. In its response to the decision, Qualcomm decided to accept the fine and agreed to modify certain of its business practices in China.

3.1.1

Industry Background

Wireless Communications Technology In the wireless communications industry, standards are needed to ensure compatibility. For each handset device to work with the other, telecommunication carriers, equipment producers, and handset device manufacturers must follow a common set of technical standards.6 For decades, industry players have joined standard-setting organization (“SSOs”) to participate in standard-setting process. Since the introduction of wireless communications devices in the 1980s, there have been four generations of standards, and the resulting interoperability between different manufacturers’ products has had substantially positive effects on social welfare. It is widely acknowledged that Qualcomm is responsible for the fundamental technologies that made several leading second-generation and third-generation standards (i.e., the “2G-CDMA” and “3G-WCDMA” standards) possible. Conforming to a standard requires the use of patents and thus paying licensing fees to patent holders. Specifically, wireless communications standards are usually made up of thousands of patented technologies owned by dozens or even hundreds of different firms. SSOs themselves do not grant end users a right to use the patented technologies described in their standards. This right must be negotiated in private agreements with patent holders.7 As a result, an SEP owner may be able to obtain

罚决定书-2015-1-EN_Final.pdf, accessed on March 22, 2018. For a general assessment of the NDRC’s decision, see Harris (2015) and Rill (2015) 6 In general, standards are technical specifications that regulate the common design of products and services. Standards apply to inputs and components that affect product quality and interoperability. 7 For more detail on SEP-licensing practices, see, for example, Baron and Spulber (2015), Choi (2016), Evans et al. (2014a), Leonard and Lopez (2014), Spulber (2018), and Zhang (2014).

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Fig. 1 Supply chain of the wireless communications industry. Source: Prepared by the authors

royalty rates that are considered to be unfairly high. Moreover, since the overall royalty burden to implement a standard is determined by adding all the different claims for royalties together, the overall royalty burden could be large even with relatively small average royalties per patent, which is known as the “royalty stacking” problem.8 As shown in Fig. 1, SEP holders (i.e., technology developers of industry standards) play a key role in the wireless communications industry. To ensure standards can be used at a reasonable cost, SSOs typically require members to license their SEPs on FRAND terms.9 However, challenge often lies in how to determine the appropriate FRAND royalty rate for an SEP or a portfolio of SEPs.10

Baseband Chipsets Baseband chipsets are semiconductor chips within wireless communications devices, which allow handset devices to work with a carrier’s cellular network. To

8 As first defined by Shapiro (2001), the term “royalty stacking” is now often used in SEP-related litigations to describe the danger that excessive royalty rates would exhaust device manufacturers’ total profits and threaten adoption of the standard. 9 Some SSOs use the reasonable and nondiscriminatory (RAND) terminology. From many economists’ point of view, there is no critical difference between the RAND and FRAND terms. 10 In the last several years, courts around the world, including in China, the European Union, and the United States, have ruled on appropriate methodologies for calculating a FRAND royalty rate. For a review of recent juridical decisions, see supra note 5.

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communicate with others, a device must contain a baseband chipset that complies with the standards that the network adopts. Typically, a baseband chipset can comply with multiple standards. For example, to be used in a network deploying the latest 4G-LTE standard, a mobile phone must contain a baseband chipset that complies with both LTE and some older 2G and 3G standards. That is because it takes years to upgrade network infrastructure, a baseband chipset must comply with some 2G and 3G standards to communicate with the network in areas where the carrier has not replaced its older equipment.

3.1.2

Assessing Qualcomm’s Market Power

Qualcomm’s Dominance in Licensing SEPs In assessing Qualcomm’s market power in the SEP licensing market, the NDRC first argued that there is little scope for demand substitution between different standards, due to high switching cost and the fact that different standards essentially perform the same functions. The NDRC then illustrated the importance of each SEP in the implementation of a particular standard. That is, once a patent has been incorporated into a standard, it becomes unique and non-substitutable. There is no supply substitution for SEPs due to their indispensable nature and difficulty in R&D. Once the standard has been designed, further market entry is practically foreclosed. Therefore, the NDRC defined a separate relevant product market for each SEP license. Lastly, the NDRC concluded that the relevant product market is “a collection of every single market for SEP licenses held by Qualcomm,” because Qualcomm had combined its SEPs (i.e., 2G-CDMA/3G-WCDMA/4G-LTE SEPs) and offered portfolio licenses, and the relevant geographic market is “a collection of countries or regions where Qualcomm owns SEPs.” The NDRC then found that Qualcomm held a 100% market share in every single licensing market where it owned SEPs (i.e., there is no competition in each market). Accordingly, the NDRC presumed that Qualcomm was in a dominant position in the SEP licensing market.11 Following Article 18 of the AML, the NDRC then considered specific factors for the assessment of market dominance. The NDRC determined that Qualcomm had a relatively high ability to control the SEP licensing market in the sense that Qualcomm unilaterally determined the licensing terms and the licensees did not have any ability to constrain Qualcomm’s market power, and the agency also noted that smartphone manufacturers highly relied on Qualcomm’s SEP portfolio for access to the relevant technology standards.

11 Article 19, Paragraph 1 of the AML states that a company can be presumed to have a dominant market position if its market share accounts for more than 50% of the relevant market.

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Qualcomm’s Dominance in Supplying Baseband Chipset The NDRC relied primarily on the patterns of demand and supply substitutability to define relevant markets for the sale of chips, based on the information from extensive market surveys. To produce handset devices that operate on specific networks, manufacturers have to use baseband chips that comply with the relevant standards. Therefore, there is little demand substitution between baseband chips that comply with different standards. Supply substitution is also weak, due to high technical and financial barriers. The lack of substitutability between baseband chips for different standards indicates that they constitute different product markets. The NDRC thus defined three separate baseband chip markets, namely, the sale of CDMA, WCDMA, and LTE baseband chips. The relevant geographic markets for all three kinds of baseband chips are determined to be global. The NDRC found that in 2013 Qualcomm was the leading supplier of baseband chips in the global market, with over 50% market share, calculated according to sales amount in each aforementioned relevant product market.12 This leads to a presumption that Qualcomm was in a dominant position in the baseband chip markets.13 To further determine whether Qualcomm had a dominant position, the NDRC noted that Qualcomm had long been the leading supplier of baseband chips worldwide and the company had market shares that were substantially larger than those of its competitors in the three relevant markets. Qualcomm had the ability to control the market, because the number of chip manufacturers was so small that the smartphone manufacturers did not have many options. Due to Qualcomm’s advantages in terms of technology, functionality, and branding, smartphone manufacturers are highly dependent on Qualcomm’s chips, in particular Qualcomm’s middle- and high-end products.

3.1.3

Qualcomm’s Abusive Conduct

Having determined Qualcomm to be dominant in all the relevant markets, the NDRC then identified three types of conduct that constitute abuses of dominance under Article 17 of the AML: (1) charging unfairly high royalties for its SEPs; (2) bundling 12

More specifically, the NDRC found that in 2013 Qualcomm had 93.1% market share in CDMA baseband chip market, 53.9% in WCDMA baseband chip market, and 96% in LTE baseband chip market. The NDRC also recognized that although there were other important players in the concerned market, such as MediaTek, Intel, and Broadcom in WCDMA baseband chip market, holding market shares of 15.5%, 11.8%, and 9.3%, respectively, Qualcomm’s chips had advantages over other players’ chips. 13 Qualcomm argued that it was not dominant in the baseband chip market because its market share by sales volume was less than 50%. The NDRC rejected this argument, stating that market share should be calculated based on sales amount rather than sales volume. The NDRC further argued that the discrepancy in market share calculated based on sales volume and sales amount suggested that Qualcomm’s products had relatively high prices, further indicating that Qualcomm has a dominant position in that market.

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the sale of non-SEPs with SEPs, without reasonable justification; and (3) conditioning the sale of baseband chips on the customers’ agreement to sign a license agreement with unreasonable terms, such as charging license fees for expired SEPs, compelling royalty-free grant-back of licenses from licensees, bundling SEPs and non-SEPs, and requiring customers not to challenge the license agreement offered by Qualcomm. The remainder of this subsection will focus on the NDRC’s reasoning regarding excessive license fees and evaluate whether the NDRC reached the correct conclusion. Specifically, the NDRC found that Qualcomm violated Article 17, Paragraph 1, Subparagraph 1, of the AML by charging unfairly high royalties for the following reasons: (1) charging royalties for expired wireless SEPs, (2) requiring royalty-free grant-back, and (3) charging royalties based on the “net wholesale price of the entire mobile device.” In the rectification plan approved by the NDRC, Qualcomm agreed (1) to provide patent lists during the negotiation process, (2) to negotiate cross-licenses with Chinese licensees in good faith and provide fair compensation for such rights, (3) to charge royalties of 5% for 3G SEPs and 3.5% for 4G SEPs using a royalty base of 65% of the net wholesale price of the relevant device, and (4) not to condition the sale of baseband chipsets on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable.14

Charging Royalties for Expired Wireless SEPs According to the decision, Qualcomm combined its wireless SEPs to offer portfolio licenses with a flat royalty rate. As patents expired over time, new patents were consistently added to the package. In other words, Qualcomm charged a long-term fixed royalty rate for its patent package, the content of which changed constantly over time. The NDRC’s main objection was that the licensees were forced to pay for expired SEPs. To address this concern, the NDRC emphasized that Qualcomm did not provide evidence that the newly added patents equaled the value of the expired SEPs. Moreover, Qualcomm did not disclose its patent list so that the licensees could not evaluate the value of the licensed patents or whether the newly added patents were needed. We can see that the NDRC treated the chance to verify and compare the value of newly added patents with that of expired patents as a necessary condition for the licensees to avoid being charged for expired patents.15 14 Additionally, Qualcomm will provide existing licensees an opportunity to take the new licensing terms. For more details, see https://www.qualcomm.com/news/releases/2015/02/09/qualcommand-chinas-national-development-and-reform-commission-reach. In the remedies part of the NDRC’s decision, Qualcomm is also required not to charge royalty for expired patents. 15 Following the NDRC’s reasoning, the inclusion of expired patents would have had not become an evidence of excessive royalty if Qualcomm had proven that the value of newly added patents exceeds that of expired patents.

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Requiring Royalty-Free Grant-Back of Licenses from Licensees The second and the more sophisticated statement to condemn Qualcomm’s licensing practices is that the company required some licensees to grant back their own patents on a royalty-free basis and asked some to waive the litigation rights over their patents against Qualcomm and Qualcomm’s other customers.16 The NDRC objected to this conduct because Qualcomm failed to compensate the licensees for the patents licensed back. Although Qualcomm argued that the request for grant-back was already part of the consideration in its licensing agreements with the licensees, the NDRC believed that Qualcomm failed to provide evidence that the value of the licensees’ patents had been fairly evaluated and taken into account during the negotiation process. Although the NDRC explicitly pointed out that a grant-back provision is not per se illegal, it does not appear that the agency followed an effect-based approach (or the “rule of reason” approach) when analyzing the competitive effect of Qualcomm’s compulsory grant-back. From the decision, the NDRC’s major concern was that Qualcomm had not verified the value of the licensees’ patents and not given these licensees any discount when charging them for using Qualcomm’s patents. One may wonder what if Qualcomm had offered one royalty rate with the compulsory grant-back clause and one without, with the former being lower than the latter. According to the NDRC’s argument, the grant-back in this case would not constitute one of the factors for consideration in the determination of unfairly high royalties. It thus seems that, to satisfy the NDRC’s concern, Qualcomm only needs to charge a higher royalty rate when the licensee does not have any valuable patents. Moreover, the NDRC inferred harm to welfare from the fact that Qualcomm’s licensees were treated unfairly and consequently their incentives to innovate might be harmed. But there was no discussion about potential efficiencies associated with the grant-back. Qualcomm’s grant-back typically required its customers to crosslicense their patents to each other, which may help reduce the aforementioned “royalty stacking” problem and thus tends to decrease the aggregate royalty burden that could be charged for all SEPs of a particular standard. Overall, the NDRC’s condemnation over Qualcomm’s royalty-free grant-back possibly lacks a sound economic and legal analysis. It would have been preferred if the decision had more explicitly quantified the actual impact of the grant-back on consumer welfare and offered more details about possible efficiency justifications.

16 The grant-back in this case is typically different from the grant-back usually demanded by licensors. A traditional grant-back is an arrangement under which a licensee agrees to allow the licensor to use the licensee’s further improvements to the licensed technology. Qualcomm’s grantback did not cover future improvements over the licensed technology.

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Charging Royalties Based on the Net Wholesale Price of the Entire Device Lastly, the NDRC noted that it is unfair for Qualcomm to use the net wholesale price of the entire mobile device as the base for calculating royalty. Qualcomm’s wireless SEP had very high value for smartphone manufacturers, but these patents were not related to many complementary components of a mobile device, such as screen, camera, battery, memory, operation system, and so on. The NDRC thus objected to the use of the net wholesale price of the entire device as the royalty base, which was typically beyond the scope of wireless SEPs. In the rectification plan, Qualcomm agreed to reduce the royalty base for its SEPs to 65% of the relevant device’s net wholesale price. In the decision, the NDRC did not regulate a specific royalty rate for licensing Qualcomm’s SEPs. Interestingly, although the agency formally determined that the royalty base was unfairly high, it never claimed that the royalty rate was excessive. Also, there was no discussion of FRAND commitments to which Qualcomm is subject. It seems that following this decision, Qualcomm can maintain the original royalty rate and continue offering package license to Chinese customers.

3.2

Huawei v. InterDigital

Huawei Technology (“Huawei”), with its headquarter in Shenzhen, is one of the largest telecoms equipment and device supplier in the world. InterDigital Communications (“IDC”) is a non-practicing entity (“NPE”) whose business model is primarily based on licensing patents for 2G, 3G, and 4G wireless standards.17 Both companies are members of a European SSO and have committed to licensing their SEPs on FRAND terms. The two companies had negotiated on the terms for Huawei to use IDC’s wireless SEPs since 2008 but failed to reach an agreement. Subsequently, IDC sued Huawei at a US district court for allegedly infringing its patents. On December 6, 2011, Huawei, in turn, filed a lawsuit against IDC to the Shenzhen Intermediate People’s Court in Guangdong province in China, claiming that IDC violated the AML by abusing dominant market position in licensing wireless SEPs and asking the court to determine the appropriate FRAND royalty rate. This is the first-ever SEP-related litigation in China. On February 4, 2013, the Shenzhen Intermediate People’s Court (the Shenzhen court) determined that IDC abused its market dominance by charging excessive royalties and also specified that the royalties Huawei should pay for use of IDC’s SEPs should not exceed 0.019% of the actual sales price of each Huawei device.18

17

A NPE refers to a company which acquires patent rights but does not practice invention. In addition, an NPE typically does not manufacture or sell any products or processes. 18 Huawei v. InterDigital Communications (IDC), Shenzhen Intermediate People’s Court, Decision of Feb. 2013, (2011) 深中法知民初字 No. 858.

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Then both Huawei and IDC appealed to the Guangdong High People’s Court. The Guangdong court ruled to maintain the Shenzhen court’s decisions, addressing that IDC was unwilling to disclose the royalty rate it charged other companies.19 Specifically, the Shenzhen court’s approach for defining the relevant market and assessing market power was the same as what was adopted in NDRC v. Qualcomm. Then, the court supported Huawei’s claim that IDC had abused its dominant market position by (1) including a tying arrangement in its license agreements, (2) requiring grant-backs without providing fair compensation, and (3) requesting a discriminatory and unreasonably high royalty rate for its SEPs. Although the Shenzhen court determined that the IDC’s offers did not comply with its FRAND commitments, it did not provide any explanation as to how it arrived at this conclusion.20 However, the three judges who ruled on this case wrote an article that provided more details on their reasoning,21 which stated that: When comparing the terms of the offers that the defendant made to the plaintiff with the terms of the licenses that the defendant signed with Samsung, Apple, and others, regardless of using the standard of one-time lump sum payment or per unit royalty rate, the rates stated in the offers are much higher than those in the licenses to Samsung, Apple, and others. The defendant not only demanded high royalty rates, but also forced the plaintiff to license all of its patents back for free, bringing extra benefits to the defendant. These indicate that the defendant’s pricing was too high and discriminatory. Investigation shows that both the quality and the quantity of the patents owned by the plaintiff are much higher than those of the patents owned by the defendant. In other words, the market and technological value of the plaintiff’s patents is much higher than that of the defendant’s.22

One can see that the judges’ approach for determining a FRAND royalty rate was to use comparable license agreements as benchmarks for identifying the market’s valuation of the SEPs in question. The judges determined that the upper limit of the IDC’s FRAND royalty rate cannot exceed the royal rates that IDC charged other licensees. More specifically, they looked at the IDC-Apple license (from 2007) and the IDC-Samsung license (from 2013) and ultimately relied on the IDC-Apple license since the agreement between IDC and Samsung was reached in settlement of litigation.23

19 Huawei v. InterDigital Communications (IDC), Guangdong High People’s Court, Decision of April, 2014, (2013) 粤高法民三终字 No. 306. The judgment of the Guangdong High People’s Court (in Chinese) is available at https://wenku.baidu.com/view/edda79482f60ddccda38a0f3.html, accessed on March 22, 2018. 20 See InterDigital’s 10-K for the year of 2012, available at http://www.sec.gov/Archives/edgar/ data/1405495/000140549513000010/idcc-20121231x10k.htmsB8CBDEB8939B47C8E810BD0438747BFA, p. 43, accessed on March 22, 2018. 21 See Ye et al. (2013, in Chinese) [叶若思 祝建军 陈文全, “标准必要专利权人滥用市场支配地 位构成垄断的认定: 评华为公司诉美国IDC 公司垄断纠纷案”, 电子知识产权 2013 (3)]. 22 Translated by Deng and Su (2014). 23 For more detail, see Deng and Su (2014) for a discussion of the potential dissimilarity between the proposed comparable licenses and the license proposed to Huawei. For example, they suggest that both the IDC-Samsung license and the IDC-Apple license may be different from the license IDC proposed to Huawei in terms of their coverage of the wireless standards.

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IDC believed that the decisions were seriously flawed. In its petition for retrial to the Supreme People’s Court in China (“SPC”), IDC argued that, for example, (1) the lower court improperly determined a FRAND royalty rate by using as a benchmark the Apple lump sum fixed payment license agreement and looking in hindsight at the unexpectedly successful sales of Apple iPhones to construct an artificial royalty rate that neither InterDigital nor Apple could have intended and that would have varied significantly depending on the relative success or failure in hindsight of Apple iPhone sales, (2) the Apple license agreement was also an inappropriate benchmark because its scope of product coverage was significantly limited as compared to the license that the court was considering for Huawei, and (3) if the appropriate benchmarks had been used, and the court had considered the range of royalties offered by other similarly situated SEP holders in the wireless telecommunications industry, the court would have determined a RAND royalty that was substantially higher than 0.019%.24 The SPC held the first hearing on October 31, 2014, regarding whether to grant a retrial and requested that both parties provide additional information regarding the facts and legal theories underlying the case, and a decision in this proceeding is still pending. This case is the first Chinese court ruling on SEPs-related issues and is also the first case in which the court determined a FRAND royalty rate. As demonstrated by the judges’ article and the IDC’s argument, identifying which existing patent licenses are appropriately comparable is not easy. The Shenzhen court’s judges did point out some important factors relating to licensing SEPs under FRAND commitments, and their decision will have a significant long-term impact in China. The courts’ main objection was that Huawei was asked to pay significantly (sometimes even 100 times) higher royalty rates than Apple, Samsung, and other IDC’s clients. But meanwhile, the courts’ decisions concerning the determination of FRAND royalty rate are controversial.25 Specifically, the courts did not investigate whether there exists any dissimilarity between the proposed comparable licenses and the license offered to Huawei. Note that even the existing licenses that cover the same set of SEPs can have terms and conditions that make them dissimilar in important ways to the license offered to Huawei. To accurately calculate the FRAND royalty rate, adjustments must be taken in account for the dissimilarity, if any, between the existing licenses and the license in question. In addition, unlike the US courts, the Chinese courts did not evaluate the ex ante value of the SEPs in question relative to the next best substitute technology (i.e., the so-called incremental value approach) when calculating the FRAND royalty rate.

24 See InterDigital’s 10-K for the year of 2015, available at https://www.sec.gov/Archives/edgar/ data/1405495/000140549516000047/idcc-20151231x10k.htm, p. 24, accessed on March 22, 2018. 25 See, for example, Han and Li (2013), Deng and Su (2014), and Lee (2016).

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4 Multiple-Firm Cases: Two Cases on Essential Input Products A number of unfair pricing cases in China involved multiple firms. Up to the time we finish this chapter, all those cases were investigated by the NDRC and its provincial subsidiaries. This section will study two cases, one on an essential drug and the other one on natural gas pipeline building market.

4.1

Essential Drug Makers

In November 2011 two pharmaceutical companies, Shandong Weifang Shuntong Pharmaceutical Co. Ltd. (Shuntong) and Weifang Huaxin Medicine Trading Co. Ltd. (Huaxin), were fined a total of RMB 6.9 million by the NDRC for abusing their market dominant positions in supplying promethazine hydrochloride (PH) in China. The agency found that the two companies unlawfully entered into exclusive sales agreements with the only two PH manufacturers and subsequently driving up the prices substantially. It was the first unfair pricing case in China.26 PH is the critical input to produce compound reserpine, a common and inexpensive treatment for high blood pressure. Compound reserpine is on the China’s essential drug list. More than 10 million patients apply drug to control the blood pressure. It was estimated that the yearly need is between 8 and 9 billion tablets. And most of those patients are from low- to mid-income households. PH was manufactured by only two companies in China. Through exclusive sales agreements signed in June 2011, Shuntong and Huaxin became their sole distributors of PH by paying 40% above the market price. The exclusive agreements also stipulated that two PH producers could not supply to any third parties without their approval. Shuntong and Huaxin hence established their monopoly position in the supply of PH. They immediately raised PH price from less than RMB 200 per kilogram to RMB 300–1350 per kilogram, an increase of 50% to almost 600%. Quickly responded in July 2011, many reserpine manufacturers had to halt their productions, and the medical institutions had to rely on their remaining inventories. The market was in a dangerous shortage of supply, as identified by the NDRC. According to the NDRC press release, Shuntong and Huaxin’s monopolistic conducts were extremely malicious. NDRC ordered the two companies to terminate the PH exclusive contracts and their illegal practices. Shuntong’s illegal gain RMB 0.377 million was confiscated, and the company was also fined for RMB 6.5 million, totaling RMB 6.877 million. Huaxin’s illegal gain RMB 52,600 was confiscated, and the company was also fined for RMB 0.1 million, totaling RMB 0.1526 million. 26

Official NDRC news release can be found at http://jjs.ndrc.gov.cn/fjgld/201203/t20120306_ 465386.html, accessed on March 22, 2018.

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At the time being of the case, the NDRC sanction on two local companies cleared the international concern that Chinese authority might use AML as a tool to control international corporations mainly. Further, this case marked the start of using AML as a legal tool to correct market distortions in several crucial industries, with pharmaceutical and medical markets as one of the major focuses.

4.2

Natural Gas Pipeline Builders

On 12 July 2016, under the supervision of NDRC, Hubei Price Bureau announced that five natural gas and pipeline suppliers abused their market dominance in each’s relevant market to charge unfairly high prices in selling, violating AML 17(1).27 The total pecuniary fines due to those monopolistic conducts were nearly RMB 3 million. Compared to the former case on drugs, the agency released a good amount of detailed information. Within each city that a company locates, it is authorized by the local government to be the sole supplier of piped natural gas and related services in the authorized region. Particularly, the case centered on their pipeline infrastructure constructions and installations to nonresidential clients. The agency investigated those five companies for their businesses during 2013 and 2014 and found that all the five companies had abused their positions of market dominance in delivering the construction and installation of natural gas pipelines for nonresidential clients. They deprived the clients’ rights in self-choosing contractors of pipelines and charged unfairly high prices to their construction services. The Hubei Price Bureau further showed evidence by using financial data from selected contracts for each company. Table 1 summarizes those numbers. Column II includes the license terms signed with local government. All licenses are 30 years in length and can be deemed to be long term. Column III illustrates the ratios of gross profit over cost from selected pipeline construction contracts. Column IV is the ratios of gross profit over cost of selected building materials. Column V compares the contract prices against other firms with similar characteristics. Column VI compares the contract prices against the bids by third-party agents. All the numbers appear to be excessively high against common sense and reference points. Two of the five suppliers were fined 2% of their previous year’s relevant revenue since they were cooperative in the investigation and voluntarily took corrective measures to mitigate the effects of the illegal conduct. The other three suppliers were fined 4% of their previous year’s relevant revenues, respectively.

27

NDRC news release can be found at http://www.ndrc.gov.cn/fzgggz/jgjdyfld/fjgld/201607/ t20160712_811024.html. The Decisions of Administration Punishment on the five companies, issued by the Hubei Price Bureau, can be found at http://www.hbpic.gov.cn/zwgk/gfwj/xzxkhcf/. Both were accessed on March 22, 2018.

Xiantao Municipality, 7/1/2010–6/30/ 2040

Jiangxia District of Wuhan City, 1/15/2011–1/15/ 2040

Daye Municipality, 5/18/2009–5/17/ 2039

Shishou Municipality, 5/8/2011–5/7/ 2041

I. Undertaking China Petrol Kunlun Gas Co., Xianning Branch

China Petrol Kunlun Gas Co., Xiantao Branch

Jiangxia Huarun Natural Gas Ltd.

Daye Huarun Natural Gas Ltd.

Shishou Natural Gas Ltd.

(Use incentive contract)

1153%, 181%, 74%

86%

188%, 118%, 153%, 88%, 86%, 113%

III. Markups in pipeline constructions (price— cost/cost) 140%, 104%, 158%, 132%, 93%

356%, 594%, 86%, 98%

1053%, 797%, 381%, 247%

64%

282%

IV. Markups in materials (price— cost/cost) 51%, 107%, 50%, 40%, 95%

V. Construction price/benchmark price 2013: 311%, 169%, 149%a 2014: 188%, 126%a 2013: 247%, 761%, 744%, 558%b 2014: 190%, 131%, 484%b 1/2013–6/2015: 410%, 271%, 202%; 252%, 199%, 224%c 2013: 1629%, 302%, 164%b 2014: 150%, 167%, 182%b 447%, 583%, 667%, 203%d

RMB 196,239 (4% of 2014 revenue)

RMB 1,174,247 (2% of 2014 revenue)

RMB 660,480 (4% of 2014 revenue) RMB 310,600 (2% of 2014 revenue)

N.A.

252%, 145%

N.A.

VII. Pecuniary penalty RMB 614,324 (4% of 2014 revenue)

N.A.

VI. Construction price/3rd-party appraisal 120%

a

Source: summarized by the authors Benchmark price is the average price of other state-controlled natural gas companies in the eight cities of similar size in the province in the same time period b Benchmark price is the average price of all other 20 state-controlled natural gas companies in the province in the same time period c Benchmark price is the average price of a similar company within the same city in the same time period d Benchmark price is the average price of companies serving nearby regions in the city in the same time period

II. License (geography and period) Xianning Municipality, 1/1/2007–12/ 31/2036

Table 1 Hubei natural gas pipeline case

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5 Discussions and Concluding Remarks As economists, we do acknowledge the lack of economic foundation for excessive or unfair pricing in the existing cases. On the other hand, we also need to realize the practical situation, especially in China, which may drive the ongoing and perhaps tightening enforcement of unfair pricing. The Chinese economy is undergoing a major transition from a state-controlled economy into a market economy. Chinese government used to apply an ideology that a central planner is capable of allocating economic resource to its full efficiency. Thereby the government controlled and determined most if not all commodity and service prices. All the governmental and productive agencies were designed to accomplish the idea and control. Rome was not built in a single day, so the fundamental change cannot finish in a single day, either. Chinese government and the economy have spent more than three decades to gradually forgo the government’s intervention in the pricing. It is now widely advocated that the markets should be the fundamental forces in forming prices and allocating economic resources, albeit the job is unfinished yet. At least within this transitional time period, looking at the positive side, prohibition of unfair pricing is a legal tool that the authority would not give up, and it is also a way to advocate competition. Public may worry the negative side within the rule enforcement, largely centering the effectiveness and correctness. In reviewing the unfairness in pricing, a fairness condition shall be unavoidably referred to benchmark the actual marketplace. Commonly applied practices by the Chinese authorities include price-cost test, profitability test, and price benchmarking test, indicated by the publicly available information. In the testing, agencies tend to compare the selling price against other operators of the same commodities/services or over the historical prices or, when cost is stable, whether the actual price increase is beyond the normal range. The specific standard of “fair” range is up to the authority’s discretions, as it varied across cases. Each case was on different industry, so this variation might be the result of different industrial nature. Many unfair pricing cases involved multiple horizontal firms, but they were not ruled under the provision of monopolistic agreements (Article 13 of the AML). We conjecture that the investigation under Article 13 requires solid evidence of overly communications among the participating firms, such as coordination in prices or market divisions. If those evidence are difficult to collect and the public concerns over high prices are pressing, the agency can seek the law provision on unfairness to handle the cases. In that regard, the provision provides a flexibility for the enforcers. Along the road, we believe that the unfair pricing provision would be kept as an important instrument to combat against those obviously exploitative business conducts, so cases in this field will continue to appear. Indeed, while we were wrapping up the chapter, in December 2017, the NDRC released its decision on Tianjin and Shanghai ports for unfairly charging high prices on local container loading services by abusing their dominance in the relevant

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markets.28 The agency identified two categories of loading services in each port, local container loading service (which targets the customers setting the port as departure or destination for their cargos) and international transshipment service (which targets the customers setting the port for switching ships). The latter category generally involves higher costs than the former one. Further, international transshipment customers can be relatively easy to use different ports for their purpose, so nearby ports and sometimes ports in other countries compete in this service category. On the other hand, customers for local container loading service are usually located nearby a particular port, so the port’s competition pressure is less in this category. NDRC found that, although the costs are lower for local container loading, its service charge was two to three times higher than that for international transshipment. The price differential should be mainly explained by the ports abusing their dominant market positions to raise the local service charges. That constituted a violation of AML Article 17 (1). The agency required those ports to reduce the fees by 10–20% in 2018. The other two ports, Ningbo and Qingdao, although not included in this investigation, would also follow the case decision to reduce their service charges by similar percentages. NDRC estimated that the total savings in the shipping costs would amount to 3.5 billion RMB annually for the economy, due to the intervention.

References Baron, J., & Spulber, D. F. (2015). Technology standards and standard setting organizations: Introduction to the searle center database. https://papers.ssrn.com/sol3/papers.cfm?abstract_ id¼3073165 Choi, J. P. (2016). FRAND royalties and injunctions for standard essential patents. Global Economic Review, 45(3), 233–250. Deng, F., & Su, S. (2014, Winter). Determining the FRAND rate: U.S. perspectives on Huawei v. InterDigital. Competition Policy International Antitrust Chronicle, 2(1). Deng, J., & Katsoulacos, Y. (2017, Summer). Antitrust sanctioning in China: How can the NDRC guidelines be further improved, antitrust chronicle. Competition Policy International Antitrust Chronicle, 1(2). Evans, D. S., Zhang, V. Y., & Zhang, X. (2014a). Implications of international experience for evaluating unfair pricing under China’s anti-monopoly law. Competition Policy International Asia Column. https://www.competitionpolicyinternational.com/implications-of-internationalexperience-for-evaluating-unfair-pricing-under-china-s-anti-monopoly-law/ Evans, D. S., Zhang, V. Y., & Zhang, X. (2014b). Assessing unfair pricing under China’s antimonopoly law for innovation-intensive industries. https://www.competitionpolicyinternational. com/assessing-unfair-pricing-under-china-s-anti-monopoly-law-for-innovation-intensiveindustries/ Han, M., & Li, K. (2013). Huawei v. InterDigital: China at the crossroads of antitrust and intellectual property, competition and innovation. Competition Policy International Asia Column. https://www.competitionpolicyinternational.com/huawei-v-interdigital-china-at-the-cross roads-of-antitrust-and-intellectual-property-competition-and-innovation/

28 The press release is at http://jjs.ndrc.gov.cn/fjgld/201711/t20171115_867110.html, accessed on March 22, 2018.

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Harris, H. S. (2015, Summer). An overview of the NDRC decision in the qualcomm investigation. Competition Policy International Antitrust Chronicle, 7(2). Layne-Farrar, A., & Wong-Ervin, K. W. (2017). Methodologies for calculating FRAND damages: An economic and comparative analysis of the case law from China, the European Union, India, and the United States. https://www.competitionpolicyinternational.com/methodologies-for-cal culating-frand-damages-an-economic-and-comparative-analysis-of-the-case-law-from-chinathe-european-union-india-and-the-united-states/ Lee, J. (2016). Implementing the FRAND standard in China. Social science electronic publishing. http://www.jetlaw.org/wp-content/uploads/2016/12/Lee_Final.pdf Leonard, G. K., & Lopez, M. A. (2014). Determining RAND royalty rates for standard-essential patents. https://www.edgewortheconomics.com/files/documents/Determining_RAND_Roy alty_Rates_for_Standard-Essential_Patents.pdf Liu, Z., & Qiao, Y. (2012). Abuse of market dominance under China’s 2007 anti-monopoly law: A preliminary assessment. Review of Industrial Organization, 41, 77–107. Rill, J. (2015, Spring). The application of China’s anti-monopoly law to essential patent licensing: The NDRC/QUALCOMM action. Competition Policy International Antitrust Chronicle, 3(2). Shapiro, C. (2001). Navigating the patent thicket: Cross licenses, patent pools, and standard setting. In A. Jae, J. Lerner, & S. Stern (Eds.), Innovation policy and the economy (Vol. 1, pp. 119–150). Cambridge, MA: MIT Press. Spulber, D. F. (2018). Standard setting organizations and standard essential patents: Voting and markets. The Economic Journal, forthcoming. Wong-Ervin, K. W. (2017). An update on the most recent version of China’s anti-monopoly guidelines on the abuse of intellectual property rights. Competition Policy International Asia Column. https://www.competitionpolicyinternational.com/an-update-on-the-most-recent-ver sion-of-chinas-anti-monopoly-guidelines-on-the-abuse-of-intellectual-property-rights/ Ye, R., Zhu, J., & Chen, W. (2013). Determination of whether abuse of dominance by standard essential patent owners constitutes monopoly: Comments on the Antitrust Lawsuit Huawei v. InterDigital. Electronic Intellectual Property Rights, 2013(3), 46–52. Zhang, V. Y. (2014, Spring). Assessing unfair pricing under China’s anti-monopoly law for innovation-intensive industries. Competition Policy International Journal, 10(1).

Excessiveness of Prices as an Abuse of Dominant Position: The Case of India Augustine Peter and Neha Singh

Abstract Competition Act, 2002, successor to MRTP Act, 1969, addresses unfair/ excessive pricing in three ways: price overcharge through horizontal agreements, RPM coupled with self-administered MRP and, finally, AoD, which is the focus of the chapter. While being careful not to chill the dynamic effects in the market, casespecific factors are scrutinized by the Commission before arriving at excessiveness of price. Cost, profitability, industry average price, prices in similar markets, etc. though important, have not been found to be conclusive of excessive pricing. Unscientific market definition, presence of IPR and high-tech industries may render identification of excessive prices difficult. In regulated sectors, the Commission is cautious in intervening though it possesses the mandate. Peter and Singh also touch upon remedies for addressing the issue in the Indian context. Division of enterprise and compulsory licensing are remedies in extreme cases.

1 Introduction Competition law enforcement is triggered where competitive constraints are weakened. Fear of losing customers keeps prices down. However, where a firm acquires a dominant position or significant ‘market power’, it becomes strong enough that while setting its pricing strategy, it remains unconstrained by its competitors. Indian Competition Act, 2002 (the Act), defines dominant position as the ability of the enterprise to operate independently of the competitive forces prevailing in the market

Augustine Peter is Member and Neha Singh is Research Associate (Legal), Competition Commission of India. The authors can be reached at [email protected] and advocate. [email protected] Views are personal. Authors appreciate useful comments from P.K. Singh, Adviser (Legal), and Jyoti Jindgar, Adviser (Economics), Competition Commission of India. A. Peter (*) · N. Singh Competition Commission of India, New Delhi, India e-mail: [email protected]; [email protected] © Springer International Publishing AG, part of Springer Nature 2018 Y. Katsoulacos, F. Jenny (eds.), Excessive Pricing and Competition Law Enforcement, International Law and Economics, https://doi.org/10.1007/978-3-319-92831-9_10

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or affecting its competitors or consumers or the relevant market in its favour. Such a dominant firm’s pricing policy could either be excessive, predatory or discriminatory (all the three falling under the gamut of unfair prices) for it to be characterized as an abusive conduct. Excessive prices are abnormally high prices for goods and services which have no reasonable relationship to their economic value.1 Over the years, competition authorities have typically shied away from intervention in excessive pricing for various reasons, the most prevalent one being that price regulation, as such, is not their mandate. Besides, price regulation acts as a disincentive for investment and will have a chilling effect on innovation.2 While excessive prices can lead to violations of competition rules in South Africa, the European Union (EU), its Member States and a few of other countries, some other jurisdictions, including the United States (US) consider that high prices should not be controlled by competition authorities, as markets will self-correct any pricing excesses by dominant firms because excessive prices will attract new entrants.3 India, although has made a start, has not gone far ahead in this direction largely because not many cases have come before it and partly because some investigations4 are still in progress. The chapter begins with the meaning of excessive prices and the arguments for and against intervention by competition agencies. It moves on to analysing the case of unfair/excessive pricing in India under different provisions of the Act. It proceeds to present sectoral analysis of the cases related to excessive pricing dealt with by the Indian competition regulator. Finally, we look at the remedies available at the disposal of the Indian competition regulator to rectify unfairness/excessiveness in prices.

Bellamy, C and Child, G, ‘European Community Law of Competition,’ Roth, P.M. (eds.), Sweet & Maxwell, 5th Edition (2001). 2 Motta, M, ‘Competition Policy Theory and Practice’, Cambridge University Press (2008). 3 Motta, M and de Streel, A, ‘Exploitative and Exclusionary Excessive Prices in EU Law’ in Ehlermann, D and Atanasiu, I (eds.), ‘What is an Abuse of a Dominant Position?’ European Competition Law Annual 2003, Oxford, Hart Publishing (2006). Also see Geradin, D, ‘The Necessary Limits to the Control of ‘Excessive’ Prices by Competition Authorities – A View from Europe’, Tilburg University Legal Studies Working Paper (2007). Also see Plessis, L and Blignaut, L, ‘Staying Safe – Dominant Firms’ Pricing Decisions in Industries where High Prices Do not Attract Entry’ presented in Third Annual Competition Commission, Competition Tribunal and Mandela Institute Conference on Competition Law, Economics and Policy in South Africa (2009). 4 Investigation in competition cases in the Indian Competition Law cases is carried out by the Office of the Director General (DG), CCI. 1

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2 Excessive Pricing: Meaning and Whether a Case for Intervention of Competition Authorities Excessive prices are, generally speaking, treated as covered under unfair prices. An excessive price is defined as price for a good or service which bears no reasonable relation to the economic value5 of that good or service and which is also abnormally higher than that value. It is charging of a price substantially higher than a fair/ reasonable price in the market and forms part of exploitative abuses, as distinct from exclusionary conduct of a dominant player. It is considered, in many jurisdictions,6 as one of the most notorious forms of exploitation of the consumer. The Competition Commission of India (the Commission), in HT Media,7 observed: Pricing abuses may be ‘exclusionary’ i.e. pricing strategies adopted by dominant firms to foreclose competitors. Such strategies include a wide variety of measures, such as predatory pricing, price squeezes, loyalty rebates. Pricing abuses may also be ‘exploitative’ i.e. which cover instances where a dominant firm is accused of exploiting its customers by setting excessive prices.

Excessive pricing remains a highly controversial topic in competition law. The arguments for intervention/non-intervention are varied, and the actual practice may differ from jurisdiction to jurisdiction. The case in favour of intervention by competition agencies is argued on the ground that it directly increases consumer surplus, at least in the short run. In a developing country with capital scarcity, there is a view that producer surplus should benefit which would enable capital formation and further investment, generating robust growth. However, as economies grow and develop, consumer interest becomes paramount, and consumer surplus is aimed to be maximized. In such a scenario, excessive pricing would tend to be treated as a drag on consumer surplus and be frowned upon. However, intervention by competition authorities is not free from constraints. This is because, firstly, excessive prices are difficult to assess and necessitate establishing a standard benchmark ‘fair price’. Secondly, high margins in some industries are necessary for future productivity and dynamic efficiency. Some industries, such as high-tech and network industries, have high fixed costs, low marginal costs and oligopolistic market structures.8 Thirdly, excessive pricing can be self-correcting at times. This happens as excessive prices attract new entrants, which

Bellamy, C and Child, G, ‘European Community Law of Competition,’ Roth, P.M. (eds.), Sweet & Maxwell, 5th Edition (2001). 6 EU prohibits excessive pricing under Article 102 TFEU, South African Competition Act prohibits excessive pricing under Section 8. Excessive pricing is considered as an abuse under Section 19 Act against Restraints of Competition of Germany. Article 3 of Decree Law 211 of Chilean Competition Law delineates anticompetitive behaviour. The United States follows a noninterventionist approach. 7 Case No 40/2011, Competition Commission of India. 8 OECD Roundtables: Excessive Prices (2011), DAF/COMP(2011)18, accessed from http://www. oecd.org/competition/abuse/49604207.pdf, accessed on 29/01/2018 5

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makes the dominant firms lower their prices and restrain them from charging high prices. Fourthly, what level of profit margin is acceptable as excessive is difficult to assess.9 Fifthly, in the absence of an objective and efficient rule to determine price, cost or standard profitability benchmark, it becomes impracticable to work out the legal standards.10 Sixthly, excessive price actions may undermine the investment incentives of new entrants and also of the dominant firms.11 Lastly, all said and done, the question of how to remedy the situation remains.

3 Dissecting the Case for India We begin by discussing the history of price control regime in India, followed by the role of sectoral regulators in price regulations. We then analyse the concept of excessive pricing in the Indian context followed by the ways in which excessive pricing is dealt with under the Competition Act, 2002. A sector-wise analysis of excessive pricing cases dealt with by the Competition Commission of India under the provisions of abuse of dominant position has been attempted along with assessment.

3.1

History of Price Control/Regulation in India

In India, price control has, until a few years back, been one of the weapons in the armoury of the Government for achieving socio-economic objective under the 5-year plans. Taking the basic form of price ceiling and price floors, price control subsumed itself as a regulatory tool, regulating the prices of commodities in order to maintain

Geradin, D, ‘The Necessary Limits to the Control of ‘Excessive’ Prices by Competition Authorities – A View from Europe’, Tilburg University Legal Studies Working Paper (2007). 10 Duque, O. V., ‘Excessive Pricing: A View from Chile’, The University of Oxford Centre for Competition Law and Policy, Working Paper CCLP (L) 41 (2015), accessed from https://www.law. ox.ac.uk/sites/files/oxlaw/cclpl41.pdf, accessed on 29/01/2018. Also see Whish and Bailey, ‘Competition Law’, Oxford University Press, (2015). Also see Evans, D. S. and Padilla, A. J., ‘Excessive Prices: Using Economics to Define Administrable Legal Rules’, CEMFI Working Paper No. 0416 (2004), accessed from http://www.cemfi.es/ftp/wp/0416.pdf, accessed on 29/01/2018. 11 Motta, M and de Streel, A, ‘Excessive Pricing in Competition Law: Never Say Never?’ In ‘The Pros and Cons of High Prices’, Konkurrensverket Swedish Competition Authority (2007), accessed from http://www.konkurrensverket.se/globalassets/english/research/the-pros-and-consof-high-prices-14mb.pdf, accessed on 29/01/2018. Also see Fletcher, A and Jardine, A, ‘Towards an Appropriate Policy for Excessive Pricing’, in Ehlermann, C. D. and Marquis, M (eds.), ‘European Competition Law Annual (2007): A Reformed Approach to Article 82 EC’, Hart Publishing (2008), accessed from https://www.eui.eu/Documents/RSCAS/Research/Competition/ 2007ws/200709-COMPed-Fletcher-Jardine.pdf, accessed on 29/01/2018. Also see O’Donoghue, R and Padilla, J, ‘The Law and Economics of Article 82 EC’, Hart Publishing (2006). 9

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their availability and to prevent inflation of prices during shortage. Besides curbing black marketing, price control measures seek to ensure distributive justice, maintain the quality of goods and services and aid in prevention of monopolistic, restrictive, unfair and anticompetitive trade practices. Over the years, it has served as an instrument aiding the state to achieve its socio-economic goal laid down under Article 39(b) of the Constitution of India: ‘the ownership and control of the material resources of the community are so distributed as best to sub serve the common good’. The objective of price regulation, in short, is anti-profiteering. The Apex Court of India12 in Union of India & anr v Cynamide India Ltd & anr13 declared: Profiteering, by itself, is evil. Profiteering in the scarce resources of the community, much needed life-sustaining food-stuffs and lifesaving drugs is diabolic. It is a menace which had to be lettered and curbed. One of the principal objectives of the Essential Commodities Act, 1955 is precisely that. . .

India has a long history of price regulation dating back to medieval history when Sultan Alauddin Khilji14 employed officers to enforce price regulations in the market. Economic regulations were enforced through Diwan-i-riyasat.15 His economic policy16 included not only the fixing of prices of all articles of food, cloth, horses, cattle, etc. but also ensuring that no one charged beyond the fixed rate. Measures were taken to ensure that merchants refrained from hoarding grains. Price of cloth was controlled although it was difficult to enforce cloth control. Post independence, India followed a mixed economy model17 with the state retaining control over ‘the commanding heights of the economy’ such as heavy industries and utilities. Although private sector was allowed to step in, it was basically made subject to governmental control in the form of licensing and quotas. The Government was not only the producer and regulator in strategic areas but also

12

Supreme Court of India is the Apex Court. 1987 AIR 1802, 10 April, 1987. 14 AlaudDin Khalji (1296–1316) was the second and the most powerful ruler of the Khalji dynasty that ruled the Delhi Sultanate in the Indian subcontinent. See Alauddin Khalji. Wikipedia https://en. wikipedia.org/wiki/Alauddin_Khalji 15 During the reign of Alauddin Khilji, Diwan-i-risalat was renamed or replaced by the department called Diwan-i-riyasat whose primary function was to implement the economic regulations issued by the Sultan and control the markets and prices. 16 Shahana-i-mandi were officers appointed as controller of grains. The office of Shahana-i-Mandi controlled the grain market and prepared a chart mentioning the prices of various essential commodities. The merchants of Delhi, who wanted to sale those commodities at the government fixed prices, were required to obtain license from the office of Shahana-i-Mandi. The private stockpiling of sustenance was banned. For controlling the food prices, Alauddin Khilji tried to control not only the supply of food grains from the villages, and its transportation to the city by the grain merchants (Karwanis or banjaras) but also its proper distribution to the citizens. A distributing system was introduced and there was a system of quality control. However, the method of quality control could not work much after the death of Alauddin Khilji. 17 Singh, V. V. and Mitra, S, ‘Regulatory Management and Reform in India’, Background Paper for OECD, CUTS International, accessed from https://www.oecd.org/gov/regulatory-policy/ 44925979.pdf, accessed on 29/01/2018. 13

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exerted direct control over the output and price of goods which fell in the private sector domain. While the era of 1985 saw deregulation of many industries and relaxation of quotas, the decade of the 1990s witnessed opening up of India’s relation with the world though globalization, privatization and liberalization. The comprehensive liberalization covered industrial, investment, fiscal and trade policy. The Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), was drastically amended in 1991 with the Rs 1 billion threshold for MRTP registrable companies being removed and chapter relating to mergers and amalgamations deleted therefrom. Large government monopolies began to give way to private entrepreneurship making sectors such as civil aviation, banking and insurance, oil and gas, telecommunications, etc. open to private investment. The move from state monopolies to multiple players including private enterprises necessitated the need to ensure a level playing field, and this is where various independent regulators were made to step in.

3.2

Sectoral Regulators and Price Regulation

From electricity to telecommunication, banking to pharmaceuticals, India witnesses a wide array of regulators overseeing the activities in the relevant sector. Sectoral regulators are in-market regulators with an ex ante interventionist approach. They set the rules of the game besides deciding on the entry and exit conditions, performance parameters, technical details, safety standards, etc. They seek to prevent inefficient use of resources through regulation, control prices, quantity and/or quality of regulated product and usually provide a specialized dispute redressal mechanism. Sectors such as electricity,18 petroleum and natural gas,19 telecommunication,20 insurance,21 airports22 and airlines23 are regulated by independent sectoral regulators which in turn are governed by the respective legislations and regulators. The regulator not only sets price ceilings (wherever mandated) but also ensures that the

18

Central Electricity Regulatory Commission (CERC) at the central level and State Electricity Regulatory Commissions (SERC) at state levels constituted under the Electricity Act, 2003. See http://cercind.gov.in/ 19 Petroleum and Natural Gas Regulatory Board (PNGRB) constituted under the Petroleum and Natural Gas Regulatory Board Act, 2006. See http://www.pngrb.gov.in/ 20 Telecommunications Regulatory Authority of India (TRAI) and Telecom Dispute Settlement and Appellate Tribunal (TDSAT) constituted under the Telecommunications Regulatory Authority of India Act, 1997. See http://www.trai.gov.in/ and http://www.tdsat.gov.in/Delhi/Delhi.php 21 Insurance Regulatory and Development Authority of India (IRDA) constituted under the Insurance Regulatory and Development Authority Act, 1999. See https://www.irdai.gov.in/ Defaulthome.aspx?page¼H1 22 Airport Economic Regulatory Authority of India (AERA) constituted under the Airport Economic Regulatory Authority of India Act, 2008. See http://aera.gov.in/content/ 23 Directorate General of Civil Aviation (DGCA). See http://dgca.nic.in/

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same are not violated. While sectors such as petroleum24 (in most part) and the telecom have witnessed a gradual abandoning of price regulation in the recent times, price regulation in electricity remains intact. While a sector-specific regulator seeks to identify a problem ex ante, addressing structural issues before the problem arises, competition regulator generally addresses the problem ex post in the backdrop of market conditions. The Competition Commission of India was set up as an ex post regulator (except in case of combination where it acts as an ex ante regulator), with cross sector sweep, in the year 2003 under the Competition Act, 2002. However, the enforcement of the provisions of the Act started in May, 2009 and June, 2011 for anticompetitive agreements and combinations respectively. The Commission was preceded by the Monopolies and Restrictive Trade Practices Commission (MRTPC) established under the MRTP Act. Though the presence of a regulator does not oust the jurisdiction of the Commission, nevertheless any intervention by the competition regulator in the regulated sector may lead to conflicts between the two regulatory bodies. A step towards reconciliation of the unnecessary tension between the two regulators is Section 21 and 21A25 of the Competition Act, where the competition watchdog may refer the matter to another regulator for its opinion. Similarly, regulatory authorities may also refer a matter to the Commission when they find themselves vexed in a case which impinges upon competition in the market. The recently26 passed Real Estate (Regulation and Development) Act, 2016, expressly mandates the authority therein to make a reference to the Commission27 where it is vexed with an issue pertaining to agreement/action/omission/practice/ procedure which prevents/restricts/distorts competition. The authority can also suo moto make reference where market power of a monopoly situation is being abused affecting the interest of the allottees.

24 In April 2002, India abolished the Administrative Pricing Mechanism (APM) controlling the domestic price of petroleum products in India under which product prices were directly administered by the Central Government based on cost of operating capital plus formula. The new regime brought to the forefront the freedom of oil marketing companies to set retail product prices based on an import parity pricing formula, under the supervision of the petroleum sector regulator. The domestic refining and retail sector was also opened to private sector firms. Also see Petroleum Prices, Taxation and Subsidies in India, International Energy Agency, June 2009, accessed from https://www.iea.org/publications/freepublications/publication/petroleum_pricing.pdf, accessed on 29/01/2018. 25 Inserted by Competition (Amendment) Act, 2007. 26 The Real Estate (Regulation and Development) Act, 2016, is a new legislation and came into force on 01/05/2017. 27 The Competition Commission of India.

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The Monopolies and Restrictive Trade Practices Act, 1969, with Respect to Unfair/Excessive Pricing

Although the MRTP Act did not contain any specific provision on excessive/unfair pricing, false claims or representations regarding the price of goods and services therein amounted to unfair trade practices (UTP).28 On repeal of the MRTP Act in 2009, the then ongoing UTP cases were transferred29 to the National Commission constituted under the Consumer Protection Act, 1986 (CPA). It is noteworthy that Section 2(r) of the CPA defines unfair trade practices in the same way as MRTP Act does.

3.4

The Competition Act, 2002: Unfair/Excessive Pricing?

The Act aims to promote and sustain competition in markets, aiming towards consumer welfare and sustaining competition in Indian markets. Besides prohibiting cartels and regulating combinations, it bars abuse of dominant position, thereby protecting consumer interest against exploitative and exclusionary conduct of dominant players. The Act is not aimed to strike at dominance as such but at abuses of dominant position as laid down under Section 4.30 Once abuses under Section 4 of the Act are established following an affirmative answer on the issue of dominant Section 36A of the Monopolies and Restrictive Trade Practices Act, 1969, defined an ‘unfair trade practice’ as a trade practice, which, for the purpose of promoting the sale, use or supply of any goods or for the provision of any services adopts any unfair method or unfair or deceptive practice including oral, written or visible misrepresentations regarding standard, quality, status, condition usefulness and price of goods or services; false warranty, guarantee or promise regarding goods or services; disparaging of goods and services of another person; and false advertising and misrepresenting with regard to the gifts, prizes and offers in sale, etc. 29 Section 66(4) of the Competition Act, 2002. 30 Section 4 of the Competition Act, 2002: (1) No enterprise or group shall abuse its dominant position; (2) There shall be an abuse of dominant position under sub-section (1), if an enterprise or a group.— (a) directly or indirectly, imposes unfair or discriminatory,— (i) condition in purchase or sale of goods or service; or (ii) price in purchase or sale (including predatory price) of goods or service. Explanation.— For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or service referred to in sub-clause (i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub-clause (ii) shall not include such discriminatory condition or price which may be adopted to meet the competition; or (b) limits or restricts— (i) production of goods or provision of services or market there for or (ii) technical or scientific development relating to goods or services to the prejudice of consumers; or (c) indulges in practice or practices resulting in denial of market access in any manner; or (d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or (e) uses its dominant position in one relevant market to enter into, or protect, other relevant market. Also see Dugar, S. M., ‘Guide to Competition Law’, 6th Edition, Lexis Nexis (2016). 28

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position of the enterprise in the relevant market, it is not open to the enterprises to argue that no anticompetitive harm followed. Pricing as an issue in the Act figures in different hues and colours as price constitutes the core of competition. It is the fulcrum and the invisible hand behind the market economy. The basic assumption of competition law is that correct prices would be thrown up by competitive forces of demand and supply and that the role of competition authority is to ensure that there is free play of market forces so that none of the market players are able to impose higher than normal price on the consumers. Section 4 of the Act uses the term ‘unfair or discriminatory price’, and the term ‘excessive price’ is conspicuously absent from the Act. This, at once, brings to mind a question—‘Does the term unfair pricing in the Act include excessive pricing?’ In the round table organized by Organization of Economic Cooperation and Development (OECD) in 2011, the Indian Competition Authority is reported to have maintained the position31: Thus, excessive price forms a subset of ‘unfair price’ in the Indian context. ‘Unfair price’ has however not been defined in the Act.

While the term unfair price is suggestive of ‘fairness and reasonableness that is expected to flow from a transaction’, the term excessive price connotes something more ‘rigorous and extreme’. To be excessive in the sense of being unfair, a price must show characteristics of being obviously disproportionate to a price that is reasonable and fair. Rejecting any straightjacket formula for determining what constitutes unfairness and observing that unfairness has to be examined in relation to customer or the competitor, the Commission in NSE-MCX32 noted: The term ‘unfair’ in relation to pricing in the context of the Indian Competition Act has not been dealt with in any case so far. . . However, ‘unfair’ price has not been defined anywhere. This unfairness has to be determined on the basis of facts of a case.

In Honda Siel,33 the Commission noted34: The concept of unfairness of a price is related to the notion that such price is unrelated to the ‘economic value’ of the product and that such price is being charged by the enterprise because of its capacity to use its market power or position of strength in that relevant market to affect its competitors or consumers in its favour.

Whatever be the standard, a price that is neither fair nor consistent with the principles of competition can be termed as excessive which is ultimately unfair.

31

OECD Roundtables: Excessive Prices (2011), DAF/COMP(2011)18, accessed from http://www. oecd.org/competition/abuse/49604207.pdf, accessed on 29/01/2018. 32 Case No 13/2009, Competition Commission of India. 33 Case No 03/2011, Competition Commission of India. 34 Quoted in ‘Competition Issues in Aftermarkets – Note from India’, OECD, Directorate for Financial and Enterprise Affairs Competition Committee (2017), accessed from https://one.oecd. org/document/DAF/COMP/WD(2017)11/en/pdf, accessed on 29/01/2018.

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Unfortunately, the terms are nowhere defined. The MRTP Act, the CP Act, the Competition Act and the Companies Act, 2013, are all silent on the definition. The test applied to conclude a case of excessive pricing is the same as applied to other abuses under Section 4, viz. whether the enterprise is dominant in the relevant market and, if so, whether the firm has indulged in abusing that dominant position by engaging in conducts hit by Section 4.

3.5

Excessive Pricing Vis-à-vis Discriminatory and Predatory Pricing in the Competition Act

The scheme of the Act treats unfair and discriminatory differently which is apparent from the use of the conjunction ‘or’ between the two. Though Section 4(2) (a) (ii) is widely worded so as to include unfair, discriminatory and predatory pricing, the Commission has made it a point to highlight the difference between the concepts as and when necessary. NSE-MCX35 was the first case where the Competition Commission of India discovered the chance to look at the concept of unfair pricing, as covering predatory pricing. Holding that the zero pricing policy of MCX amounted to unfair pricing,36 the Commission observed: In the present context, unfairness of pricing (as distinct from the concept of the predatory pricing) cannot be determined by selecting ATC,37 AVC,38 ALRAIC,39 AAC40 or any other costing calculation used in accounting. It has to be seen whether, in this case, zero pricing by NSE can be perceived as unfair as far as MCX-SX is concerned. (Emphasis added)

Similarly in Association of Man-made Fibre and Grasim Industries,41 the allegations pertain to discriminatory pricing by Grasim by segmenting the buyers in the viscose staple fibre market and not excessive pricing as such though both forms of abuse are covered under Section 4(2) (a) (ii). The case is under investigation after the Commission formed a prima facie view that Grasim offered the domestic customers selling textile products competing with Grasim’s subsidiaries in the downstream domestic market, a discount of only Rs.7–10/kg of yarn, whereas it provided a much larger discount of Rs.20–25/kg to those domestic customers who exported their textile products.

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Case No 13/2009, Competition Commission of India. Under Section 27 of the Act, NSE was directed to cease and desist from unfair pricing, exclusionary conduct and unfairly using its dominant position in other markets to protect the relevant currency derivative (C.D.) market. 37 Average total cost. 38 Average variable cost. 39 Long run average incremental cost. 40 Average avoidable cost. 41 Case No 62/2016, Competition Commission of India. 36

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Legal Framework: Excessive Pricing Under the Act

Under the Competition Act, there are three ways in which excessive prices can arise: first, through price overcharge in the context of a horizontal agreement or cartel under Section 3(3); second, through resale price maintenance (RPM) under Section 3 (4) (e) where excessive prices in maximum retail price (MRP) gets reflected in retail prices; and third, and the most important, is the exploitative abuse of dominant position under Section 4(2) (a) (ii), where relying on dominant position in the market, excessive prices are imposed on consumers. Though we concern ourselves with excessive pricing as an abuse of dominant position, we shall briefly discuss the other two ways as well.

3.6.1

Price Overcharge Under Section 3(3)

Price overcharge as a result of collusive activity is a way of imposing excessive prices under the Act. Price overcharge refers to the difference between the collusive price and the price that would have been observed in the absence of collusion by the interplay of market forces, the latter price being called as the benchmark price. One of the aspects of Section 3 of the Act is that which deals with price increase in the form of price fixation resulting from collusion among horizontal players. The Indian regulator has received several cases where the parties have alleged that unfair/ excessive prices have been extorted out of them as a result of collusion between the parties. In S. K. Sharma, Deputy CMM-IV, North Western Railways against M/s RMG Polyvinyl India Ltd & Ors,42 the informant issued tender to procure polyvinyl sheets. It was alleged that rapid hike in price of PVC sheets by opposite parties43 (OP) in a connected way amounted to cartel formation. It was stated by the informant that he procured the sheets from OP 4 months earlier at half the price. The investigation found that the rates of PVC sheets were increased to very high levels without any justification by the parties even when the prices of the raw materials did not change much. However, the case did not result in a penalty imposed upon the parties as the alleged violation was supposed to have been committed in 2007 when the Act was not in force. Similarly, in the Cement44 case, the Commission imposed penalty upon ten (10) cement companies and their trade association, the Cement Manufacturers’ Association, for cartelization in the cement industry. The Commission

42 Case No RTPE 31/2008, initiated under the MRTP Act, 1969. Order passed by the Competition Commission of India. 43 The opposite party under Competition law enforcement in India is the party against whom the alleged matter is brought by the informant. Under the procedure followed by the Commission, the informant brings the case before the Commission, except when it is a suo moto case, Reference Case or a Lesser Penalty application. Opposite parties are the enterprises or persons who have been made party in the case as defenders. 44 Case No 29/2010, Competition Commission of India.

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reached a conclusion of violation taking note of the high profit margins and net profits of the opposite parties as compared to the previous year’s figures, for establishing the change in prices by the opposite parties amounting to anticompetitive conduct. In Aluminium Phosphide Tablets Manufacturers,45 the anticompetitive conduct in the tender for procurement of aluminium phosphide tablets required for preservation of central pool food grains by the Food Corporation of India was in question and the Commission penalized Excel Crop, Sandhya Organics and United Phosphorus at a rate of 9% of their total turnover46 for agreeing to raise bid prices between 2007 and 2009. However, since we, in this article, concern ourselves with unfair prices as a result of market dominance, we shall not delve further into the aspect of high price/price overcharge as a result of concerted action among competitors.

3.6.2

Resale Price Maintenance Under Section 3(4)(e)

The Act makes a distinction between agreements of a horizontal nature and those of a vertical nature. While the former is subjected to a rebuttable presumption of anticompetitiveness, the latter is subject to the standard evidence of ‘rule of reason’ pure and simple, viz. preponderance of probabilities. It is interesting to note that RPM, which features as a vertical agreement under Section 3 (4) (e), has relevance for excessive pricing in the context of India. While MRP is the maximum retail price that can be charged from a consumer, RPM is the price below which many manufactures do not permit selling of the product to the consumers by the retailers. A conjoint reading of both the terms seems to suggest that there are cases where RPM could be susceptible to higher than normal prices. If the MRP, which is not subjected to any regulatory ceiling, is excessive, there is no guarantee that the retail price subjected to RPM will not be excessive. The Commission is at present investigating a case against Becton Dickinson and Max Super Speciality Hospital47 where the allegation pertain to conduct of Max Hospital in charging higher price, through printing excessively higher MRP as compared to the price charged by the manufacturer to the retailers on ‘Disposable syringe with needle size 10 ml of B. D. Emerald Brand’ (DS) in connivance with Becton Dickinson, which, prima facie, amounts to imposition of unfair price in sale of DS in violation of the provision of Section 4(2) (a) (ii) of the Act. It is to be noted that it is the CP Act, 1986, which is intended to ensure that the traders do not charge

45

Suo Moto 02/2011, Competition Commission of India. Reduced by the Competition Appellate Tribunal (now National Company Law Appellate Tribunal) and the Supreme Court to relevant turnover instead of total turnover while upholding the contravention. 47 Case 77/2015, Competition Commission of India. 46

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prices in excess of what has been demarcated by law as the MRP.48 However, when the price has not been fixed by law or displayed on the package, the CP Act, 1986, does not contemplate any action on the ground that excess prices may have been charged. There are a large number of cases involving RPM that were looked at by the Commission during the last 7 plus years of its existence, the major ones being ESYS Information Technologies against Intel,49 Shubham Sanitary,50 Prime Magazine against Wiley51 and Ghanshyam Das Vij against Bajaj Corporation.52 JasperKaff53 is ongoing with the Commission. Fx Enterprises against Hyundai,54 marks the beginning of an era where the Commission directly ruled on RPM by holding that the restriction imposed by Hyundai on the maximum permissible discount that may be given by a dealer to the end consumer, amounted to an act of RPM, which was in violation of the Act and slapped a fine of Rs 870 million. However, none of the above cases pertain to the issue of RPM read with MRP.

3.6.3

Excessive Pricing as a Result of Abuse of Dominant Position Under Section 4(2)(a)(ii)

The third and the most common form of the notorious conduct of excessive pricing is as an abuse of dominant position under Section 4. While Section 3 deals with price overcharge in the form of price fixation resulting from collusion among horizontal players, Section 4 addresses unfair prices or increase in prices as a result of unilateral abuse of dominance. The standard of proof required in either case will depend upon the nature of the case, nature of the allegation, etc. While Section 3(4) can be effective only when significant market power is attributable to the enterprise, Section 4 relates to enterprises that hold dominant position.55 Indian law does not envisage any safe harbour market share for the purpose of market power as far as Section 3(4) (e) is concerned. A charge of excessive pricing under RPM, which is subject to rule of reason, can be defended by the opposite party on showing pro-competitive effects exceeding adverse effects on competitors. However, the position is somewhat distinct under Section 4. Once it is shown that the enterprise is dominant in the relevant market and the abuse falls under the designated

48

MRP differs from the system of recommended retail price wherein the price calculated by the manufacturers is only a recommendation as opposed to being enforceable by law. 49 Case No 48/2011, Competition Commission of India. 50 Case no 09/2015, Competition Commission of India. 51 Case No 07/2016, Competition Commission of India. 52 Case 68/2013, Competition Commission of India. 53 Case No 61/2014, Competition Commission of India. 54 Case No 36 and 82/2014, Competition Commission of India. 55 Dominant position is established with reference to explanation (a) to Section 4 and Section 19 (4) of the Competition Act, 2002.

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subsections of Section 4, it is not open to the party to show that the conduct had some pro-competitive or beneficial effects on the market or on the consumers.

3.7

Intervention of the Competition Commission of India

The Commission has always been aware of the fact that unnecessary meddling in pricing policies of enterprises can only result in discouraging entry as profit motive drives entry and expansion of enterprises. Also, incentive to invest by enterprises should not be allowed to be cold watered. The competition authority has to be careful not to allow dynamic efficiencies to wither due to its activism. However, when selfcorrection of prices through market dynamics looks remote and when excessive prices are likely to get entrenched getting even worse, the Commission will have no option other than to intervene. This is because the impact of excessive prices is on the consumers, and one of the objectives of the Act is to enhance consumer welfare. Consumer surplus is the first casualty of excessive pricing. Transfer of resources from consumers to producers results in lower consumption and lower overall surplus and welfare. This is the most important argument in favour of regulation of excessive prices. In India, many of the sectors have only in the last two decades moved from public sector dominance or monopoly to liberalized regimes, and the markets are not in a position to self-correct itself. Hence, intervention by the Commission is warranted. The majority of the cases dealt with by the Commission as regards excessive pricing falls under the category of abuse of dominant position under Section 4 (2) (a) (ii) which shall be discussed in the following section in respect of major sectors.

3.8

Sector-Wise Case Assessment

Out of the total 109 cases penalized under Section 27, 38 pertain to Section 4 (abuse of dominance) pervading various major sectors of the economy, including agriculture, pharmaceutical, real estate, electricity, banking and insurance, petroleum and natural gas, coal and mining, etc. Of the aforesaid number, the Commission has found violation of Section 4(2) (a) (ii) in two cases.56 The Act portrays an inbuilt scope to deal with issues of excessive pricing under Sections 3(3), 3(4) (e) and 4(2) (a) (ii). The Act is clear about the manner of handling

56 Cases included till 31/12/2017. The Commission found violation in Kiratpur Sahib Truck Owners and Honda Siel.

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of cases of abuse of dominant position. Delineation of the relevant market57 covering both product and geographic market is the first step followed by establishment of dominance of the enterprise in the relevant market. In this regard, the Indian law envisages probing the industry structure and policy play which are widely captured in the factors as given in Section 19(4)58 of the Act. This section takes into account the dynamic efficiency angle as distinct from the static perspective, by analysing a number of factors going beyond market share. Market share is no more a proxy for market dominance as was under the erstwhile MRTP Act. The market dynamics, including the ability of competitors to provide counterweight to the market power of the alleged dominant player, is closely studied. The role of the product and the enterprise in the economic development of the country is also assessed. Besides, the definition of dominance does not allow the Commission to yield to the temptation of bringing into the fold of dominance the enterprises that have fleeting market share predominance. The ability of the enterprise to act independently of market forces including competitors and consumers should come out distinctly and clearly on a stable basis for it to be treated as a dominant enterprise. Abusive conducts are well defined and categorized into five types. These, if engaged in by dominant players, are treated as anticompetitive in themselves, and no escape route is envisaged. In this section, we shall look at cases dealt with by the Commission pertaining to unfair (excessive pricing), on a sectoral basis along with the assessment of the trend it portrays.

57 Relevant Market is defined under section 2(r) as the market which may be determined by the commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets. Relevant Geographic Market is defined under section 2(s) as a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas. Relevant Product Market is defined under section 2(t) as a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use. 58 Section 19(4) of the Competition Act, 2002, reads as: The Commission shall, while inquiring whether an enterprise enjoys a dominant position or not under section 4, have due regard to all or any of the following factors, namely: (a) market share of the enterprise; (b) size and resources of the enterprise; (c) size and importance of the competitors; (d) economic power of the enterprise including commercial advantages over competitors; (e) vertical integration of the enterprises or sale or service network of such enterprises; (f) dependence of consumers on the enterprise; (g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a government company or a public sector undertaking or otherwise; (h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers; (i) countervailing buying power; (j) market structure and size of market; (k) social obligations and social costs; (I) relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition; (m) any other factor which the Commission may consider relevant for the inquiry.

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Airline and Civil Aviation Sector

In Manjit Singh Sachdeva against Director General of Civil Aviation,59 it was alleged that the Directorate of Civil Aviation being regulator of aviation sector had not evolved any pricing policy on air tickets for air fares to be charged from the passengers for service offered by various airlines and that, due to the same, airlines were charging exorbitant prices fixed arbitrarily and whimsically from air travellers. The Commission found no competition issues and held that it cannot direct the Government of India to fix prices of services provided by private entrepreneurs as the same runs contrary to the spirit of competition law. In Citizen Grievances Redressal Foundation against Mumbai International Airport and Delhi International Airport,60 the informant alleged that Mumbai and Delhi International Airports abused their dominant position by charging excessively high vehicle parking rates as compared to the International Airports of Kolkata and Chennai. The Commission observed that the two airports were owned and operated by consortiums. In a consortium bid project, competition is at the time of bidding which is known as ‘competition for the market’. Once the project is awarded the monopoly status of awardee is not an issue. Hence, the dominant position of Mumbai and Delhi International Airports in the relevant market of ‘the aeronautical and non-aeronautical services in the airport of Mumbai and of Delhi’, respectively, was not an issue. The Commission observed that the earning from non-aeronautical services form a substantial part of income of the consortium and it is given liberty to charge for such services so as to recover the investments and to meet overall maintenance and management of the airport. Thus, each non-aeronautical service could not be separately looked into from the point of view of cost audit or pricing to come to the conclusion of unfair prices. A comparison could not be made of the parking rates prevailing in Mumbai and Delhi airport with other airports. Also, keeping higher parking rates is in consonance with the interplay of demand and supply as Mumbai and Delhi International Airports have two to three times higher passengers than other airports. In a comparatively recent case, the Commission dismissed the case of abuse of dominant position against the Bangalore International Airport Limited (BIA) and the Airports Authority of India (AAI).61 The informant was engaged in providing ground handling services (GHS) to various domestic airlines and services for chartering of aircraft. Bangalore International Airport was engaged in the operation, maintenance, etc. of Kempegowda International Airport at Bengaluru (KIAB). Airports Authority of India is responsible for development, finance, operation and maintenance of airports. It was alleged that, citing security reasons and congestion at KIAB, Bangalore International Airport refused to allow it to offer self-handling of GHS for its TruJet flight operations without offering any explanation. The Commission, 59

Case No 68/2012, Competition Commission of India. Case No 51/2013, Competition Commission of India. 61 Case No 59/2015, Competition Commission of India. 60

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considering the relevant market as the ‘market for the provision of ground handling services at Kempegowda International Airport in Bengaluru’, considered that Bangalore International Airport enjoys complete discretion in matters relating to handling of aircrafts, passengers, baggage and cargos at KIAB and was in a dominant position. It was noted that the Directorate General of Civil Aviation’s circular on GHS prohibited self-handling of GHS at KIAB and other metropolitan airports and that the number of GHS providers had been determined by the Central Government having regard to the demand for GHS, available infrastructure and competitive environment. In Yeshwanth Shenoy against Air India & Ors,62 it was alleged that Air India charged higher price for the tickets booked under Leave Travel Concession Scheme of Union of India in comparison to the tickets available in non-concession category. The Commission was of the opinion that Union of India, being in the position of a consumer of air travel services, had the right to exercise its free choice to avail the services of Air India which negated the allegation of unfair price against Air India. 3.8.2

Agriculture Sector

The agriculture sector is marked by the presence of the case of Monsanto. The controversy arose during the MRTP days when the state of Andhra Pradesh filed a reference before the MRTPC requesting for a temporary injunction restraining Monsanto63 from collecting Rs 1250/- per 450 grams for Bt cottonseeds as trait value from the farmers pursuant to the agreement entered. It was alleged that the cost of production of the variety of seed ranged from Rs 400/- to Rs 500/- per 450 grams of seed whereas Monsanto was selling the same between the price range of Rs 1600/to Rs 1800/- per packet of seeds of 450 grams in the state of Andhra Pradesh, the latter price being unbearable and unaffordable by majority of the farmers.64 The MRTPC took note of the fact that the trait value was not mentioned in the agreement and that it had to be fixed from time to time and that during the pendency of the petition the trait value was reduced to Rs 900/-. The MRTPC accepted the comparison of the prices prevailing in India with that in China owing to the same geographical and economic conditions but not that of the USA and Australia and held that charging of Rs 900/- for the seed packet of 450 grams imposed an unjustified cost on the consumers. The MRTPC acknowledging that it was not empowered to decide the price of any article or decide margins of profits, directed Monsanto not to charge trait value of Rs.900/- for a packet of 450 gm of Bt cottonseeds and to fix a reasonable trait value that is being charged by the parent company in neighbouring countries like China. 62

Case No 98/2015, Competition Commission of India. Case No RTPE 05/2006 & Interim Application No 05/2006, Monopolies and Restrictive Trade Practices Commission. 64 Monsanto was charging trait value of Rs 1600/- to Rs 1800/- per packet of seeds of 450 grams in the State of Andhra Pradesh. During the pendency of the petition before the MRTPC, Monsanto reduced charging of the trait value to Rs 1250/- per 450 grams. 63

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In Mahyco Monsanto Biotech65(MMB), the case pending before the Commission where investigation orders have been passed, it has been alleged that the trait value is unfair as it is being unilaterally fixed by Monsanto at rates higher than those determined by the state governments and that MMB is dominant in the upstream relevant market of ‘provision of Bt cotton technology’. The Union Government, Ministry of Agriculture and Farmers Welfare, recently issued a seed price control order66 declaring the maximum sale price of Bt. cottonseed packets (450 grams of Bt. cottonseed plus 120 grams refugia) to Rs 635/-. In Saurabh Bhargava against Secretary, Ministry of Agriculture & Corporation,67 the informant was an importer of insecticides, and the opposite parties were government departments in charge of administering of the Insecticide Act, 1968. It was alleged that as a result of monopoly, exorbitant prices were being charged by the insecticide importers and manufacturers. However, it was found by the Commission that the Minsitry of Agriculture & Cooperation was not engaged in any economic activity so as to qualify them as enterprise under Section 2(h) of the Act. Further, there was no evidence that the insecticide importers and manufacturers were charging exorbitant prices.

3.8.3

Automobile and Transport Sector

In Shivam Enterprises against Kiratpur Sahib Truck Operators,68 investigation found that Kiratpur Sahib Truck Operators imposed unfair prices for transportation services in contravention of the provisions of Section 4(2) (a) (ii) of the Act. The Commission held that Kiratpur Sahib Truck Operators imposed unfair prices for transportation services in contravention of the provisions of Section 4(2) (a) (ii) of the Act. The Commission found: Thus, it is evident that M/s Jaiprakash Associates Ltd. which had a willing transporter to execute its job @ Rs.1.50 per MT/KM was forced to enter into a contract with OP 1 at much higher rate i.e. @ Rs. 2.56 per MT/KM. It is seen that OP 1’s strong-arm tactics not only ousted a potential competitor offering services but also compelled the customer to avail of its services at a price which was much higher than what was otherwise available to such customer.

In Honda Siel,69 the investigation revealed that each original equipment manufacturer (OEM) had substantially escalated the price of spare parts, for their respective brands of automobiles which showed their ability of imposing unfair prices in the sale of spare parts in terms of Section 4(2) (a) (ii) of the Act. The investigation also found that the substantial price margin earned on spare parts amounted to unfair

65

Reference Case No. 2 of 2015 & Case No. 107 of 2015, Competition Commission of India. S.O. 686 (E) dated 08/03/2016. 67 Case No 70/2011, Competition Commission of India. 68 Case No 43/2013, Competition Commission of India. 69 Case No 03/ 2011, Competition Commission of India. 66

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pricing within the meaning of Section 4(2) (a) (ii) of the Act. The Commission was mindful of the fact that car manufacturers hiked up the price of spare parts up to 100% and even 5000% in certain cases. The Commission opined: . . .As evident from the DG’s investigation, the OEMs are charging a substantially high price for its top 50 spare parts, without which the respective owners of the various models of the automobiles manufactured by the OEMs cannot get their automobiles repaired, serviced or maintained in the aftermarket. The actual cost of procuring the spare part is much lower than the price at which they are being sold to the ultimate consumer; however, the value of such spare parts to the consumer is great, because without such spare parts the owner will not be able to effectively repair his automobile. Even if the OEM has substantially marked up the price of its spare parts; the locked-in consumer would be forced to purchase such spare parts in order to effectively render the much expensive primary market equipment, i.e., the automobile itself, in a workable condition. If the aftermarket was open to competition; i.e., the OEMs were not the only source of the genuine spare parts and diagnostic tools in the aftermarket; the OEMs would not have been able to maintain such high markups without facing necessary competitive restraints.

As a remedy to rectify excessiveness of prices, the car companies were directed to have an effective system to make the spare parts and diagnostic tools available easily through an efficient network. They were also directed to sell spare parts in the open market without any restriction, including prices, and to provide systems for training of independent repairer/garages. They were also directed to make the information regarding the spare parts and their MRP available in the public domain. In a comparatively recent case, Shree Hari Inn against Mercedes Benz,70 the Commission found no competition issues and noted that the informant was aggrieved by malpractices such as sale of non-genuine parts, charging of higher prices than MRP, etc. resorted to by the authorized service centre of Mercedes. Similarly no competition issue was found in Akhil R. Bhansali against Skoda Auto India71 wherein the Commission noted that the case pertained to deficiency in services on the part of the authorized dealer of Skoda.

3.8.4

Banking and Insurance Sector

In Mir Jawwad Ali against Standard Chartered Bank and ors,72 the informant availed housing loan of Rs 20,00,000/- from Standard Chartered Bank with floating rate of interest of 8.25% per annum. Although the loan was availed from Standard Chartered Bank, it was submitted that the rate of interest charged by banks, in general, operating in India was higher than the agreed/contractual interest rate. The Commission, finding no dominance of the Standard Chartered Bank, noted that the banks do not qualify to be enterprises falling in the same group.

70

Case No 93/2016, Competition Commission of India. Case 44/2017, Competition Commission of India. 72 Case No 35/2011, Competition Commission of India. 71

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Similarly, the OP was not found to be dominant in the relevant market in Metal Rod against Religare.73 In this case, the informant was engaged in the trading of ferrous and nonferrous metals, while Religare was a non-banking financial company in the business of granting loans and other financial services. The informant took loan from Religare against mortgage of property with floating rate of interest at 18% per annum. It was alleged that Religare charged exorbitant processing fee for sanction of the loan and a huge amount towards insurance premium charges for the property to be mortgaged. In R. V. Ramgopal and Venkat Reddy against Shri Ram Transport Company Ltd.,74 the informants took a loan from Shri Ram Transport Company for purchase of lorries. The informant opted for the rescheduling of the outstanding loan amount whereupon the interest rates were found exorbitant. It was alleged that Shri Ram Transport Company also arbitrarily imposed other charges which made the actual rate of interest to climb from 3–4% to 36–40% on an annual basis. The investigation concluded that Shri Ram Transport Company was dominant in the relevant market of ‘provision of services for financing pre-owned heavy commercial vehicles by NBFCs in India’. The investigation established no abusive practice and that the rate of interest charged was on a diminishing basis. However, the Commission broadened the relevant market to ‘provision of services for financing commercial vehicles in India’ in which Shri Ram Transport Company was not dominant. In Aditya Automobile Spares against Kotak Mahindra Bank,75 the Commission dismissed the case for want of dominance when the allegation of the informant was that Kotak Bank was indulging in abuse of dominance by unfair pricing in interest rate in violation of the provisions of Section 4(2) (a) (ii).

3.8.5

Coal and Mining Sector

Prior to 1970, several private players were engaged in the mining and production of coal in India. Unplanned growth, inability of the sector to cater to the needs of the economy (acute shortage) along with unscientific exploitation of coal reserves, despicable conditions at work, etc. led to a series of enactments nationalizing coal mining in the early 1970s.76 The Government first took over the management

73

Case No 28/2010, Competition Commission of India. Case No 14/2011 & Case No 60/2011, Competition Commission of India. 75 Case No. 103/2016, Competition Commission of India. 76 Rao, P. S, ‘Law of Mines and Minerals’, Vol. 2, 18th Edn., 2012, Asia Law House. Also see Bhatnagar, M, ‘Competition and Regulatory Issues in Coal Sector in India’, CIRC Working Paper 11, CUTS, Institute for Regulation & Competition (2015), accessed from http://www.circ.in/pdf/ Competition-and-Regulatory-Issues-Coal-Sector-India.pdf, accessed on 29/01/2018. 74

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of the Coking Coal and Coal Mines77 and thereafter nationalized the mines.78 All existing mines were bought under the gamut of Coal India Limited (CIL) which is an Indian state-controlled coal mining company. At present, there is no coal regulator in the county. CIL produces coal through seven of its wholly owned subsidiaries. These are Eastern Coalfields Limited (ECL), Bharat Coking Coal Limited (BCCL), Central Coalfields Limited (CCL), Western Coalfields Limited (WCL), South-Eastern Coalfields Limited (SECL), Northern Coalfield Limited (NCL) and Mahanadi Coalfields Limited (MCL).79 In the coal and mining sector, the Commission has dealt with unfair pricing in the case of Madhya Pradesh Power Generating Company Limited against M/s South Eastern Coalfields Ltd.80 wherein the informants, the power-generating companies, alleged that SECL arbitrarily increased the price of grade A and grade B coal by more than 155% resulting in huge financial burden to the informant and thereby impacting the price of electricity being produced. It was also stated that after hike in price by SECL, buying 1000 kcal in GCV band G2 to G5 (equivalent to grades A to C) was costing the informant more than double while buying the same heat in G6 to G12 band (equivalent to grades D to F). However, the Commission recorded no separate finding on excessive/unfair pricing, though SECL was found to be in violation of Section 4(2)(a)(i) of the Act for imposing unfair/discriminatory conditions and indulging in unfair/discriminatory conduct in the matter of supply of non-coking coal. In Maharashtra State Power Generating Company and Anrs against Coal India and Ors,81 the Commission observed that CIL through its subsidiaries enjoys economic strength and advantages of monopoly vested by law. However, on the issue of excessive pricing, no evidence could be found during the course of investigation that revealed any unfair pricing on the part of CIL in supply of coal in the relevant market. Thus, considering the fact that there was no material on record to prove that CIL charged excessive price on the Informants for the supply of coal, the allegation stood negated.

77

The Coking Coal Mines (Emergency Provisions) Act, 1971 and the Coal Mines (Taking Over of Management) Act, 1973. Also see Bhatnagar, M, ‘Competition and Regulatory Issues in Coal Sector in India’, CIRC Working Paper 11, CUTS, Institute for Regulation & Competition (2015), accessed from http://www.circ.in/pdf/Competition-and-Regulatory-Issues-Coal-Sector-India.pdf, accessed on 29/01/2018. 78 The Coking Coal Mines (Nationalisation) Act, 1972 and The Coal Mines (Nationalisation) Act, 1973. Also see Bhatnagar, M, ‘Competition and Regulatory Issues in Coal Sector in India’, CIRC Working Paper 11, CUTS, Institute for Regulation & Competition (2015), accessed from http:// www.circ.in/pdf/Competition-and-Regulatory-Issues-Coal-Sector-India.pdf, accessed on 29/01/ 2018. 79 https://www.coalindia.in/, accessed on 03/02/2018. 80 Case Nos. 05, 07, 37 & 44 of 2013, Competition Commission of India. 81 Case No 03, 11 & 59/2012, Competition Commission of India.

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In All Odisha Steel Federation against Odisha Mining Corporation,82 Informant was the association of steel manufacturers in Odisha, while the Odisha Mining Corporation was the public sector undertaking engaged in the activities of raising, assembling and transportation of ore in the state of Odisha. The informant submitted that the Odisha Mining had monopoly power over the extraction of chrome ore in the state of Odisha and had been abusing it by fixing arbitrary and highly unreasonable price of chrome ore. It was alleged that 2007 onwards the method of deriving price of chrome ore was changed by resorting to a price setting tender (PST). It was further alleged that, as a result of this, a few unknown companies, whose lifting of chrome ore was less than 2% of Odisha Mining’s total sale, quoted abnormally high price becoming the H1 in the tender and making such price the benchmark for all plants. The investigation found the Odisha Mining to be dominant in the relevant market of ‘friable chrome ore in the State of Odisha’ as it was the only domestic source for friable chrome ore. The investigation was of the view that the Odisha Mining being able to generate increasing margins could not ipso facto be construed as selling chrome ore at excessive rates and that the rates in PST emanated from the market based on the economic value ascribed to the product by the buyers. The investigation concluded that if the sale prices of chrome ore by Odisha Mining had been at excessive rates, yielding supra competitive profits, it would have attracted Tata Steel, the competitor of Odisha Mining, to sell chrome ore rather than by using chrome ore in ferro chrome market. The Commission found that chrome ore being a mineral, finding its correct economic value was difficult and that the raising cost and royalty did not represent the intrinsic worth of the mineral or its market value. Since, the supply of chrome ore, a non-renewable resource, was limited, its pricing and supply could not be determined by the market forces and thus the price set by Odisha Mining was not excessive. In All Odisha Steel Foundation against Odisha Mining Corporation,83 it was alleged that Odisha Mining Corporation had been abusing its dominant position by fixing prices of iron ore which were highly unreasonable and arbitrary. It was contended that the mode of price fixing by Odisha Mining was unfair where a small quantity of iron ore was tendered through price setting tender and the highest price quoted by some bidder was accepted as H1 price and the same was treated as benchmark price. The Commission delineated the relevant markets as ‘sale of iron ore in the State of Odisha’ where it was found that the Odisha Mining was not dominant having a market share of 9.25% only. In Sponge Iron Manufacturers Association against National Mineral Development Corporation,84 it was alleged that National Mineral Development Corporation, the largest mineral producer in India, abused its dominant position and sold iron ore at an extremely high price as compared to cost of production. It was alleged that even when the cost of production of iron ore remained static between Rs. 200 and 300 per metric tonne (MT), the sale price ranged between Rs.3200 and 8000 per MT

82

Case No 12/2012, Competition Commission of India. Case No 13/2012, Competition Commission of India. 84 Case No 69/2012, Competition Commission of India. 83

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resulting in a very high profit margin of 85%. The Commission found that the dominance of National Mineral Development Corporation was attributed to a Supreme Court order which banned mining in the district of Bellary and that the prices of iron ore were regulated and overseen by a Central Empowered Committee setup under the instructions of the Supreme Court. Hence, the Commission was of the view that the question of dominance could not be gone into. In Association of Indian Mini Blast Furnaces against National Mineral Development Corporation,85 it was alleged that National Mineral Development Corporation got monopoly in iron ore mining through Supreme Court order which permitted it to continue mining activities in Karnataka and adjoining areas. As a result, National Mineral Development Corporation arbitrarily fixed prices to maximize profits which amounted to abuse of dominant position. The informant further highlighted that operating margins of National Mineral Development Corporation increased massively in 2010–2011 and 2011–2012 and reached 74.98 and 78.13%, respectively, which were higher by 36 and 35% as compared to the nearest competing enterprise. It was also alleged that National Mineral Development Corporation changed over from the previously adopted ‘Net Back Calculation Pricing Mechanism’ on the basis of which prices were determined with reference to international prices in export market to the ‘difference in demand and supply basis’ without any consultation with the informant. The Commission, closing the case at a prima facie stage, reached the view that mining activities were undertaken as per the orders of the Supreme Court which also dealt with the pricing policy decisions stating that the fixation of basic price was transparent and did not require any interference. The Central Empowered Committee was also of the view that the pricing mechanism need not be interfered with.

3.8.6

Consumables

In Cine Prekshakula Viniyoga Darula Sangh and Consumers Guidance Society against Hindustan Coca-Cola Beverages,86 the informants were registered societies for the benefit of the cine goers in Andhra Pradesh. It was alleged that Hindustan Coca-Cola was supplying cola bottles by listing price of Rs 15 as MRP instead of Rs 10/Rs 8 (depending upon the size) as available in the market. The investigation found that Hindustan Coca-Cola enjoys complete dominance as suppliers of the cola bottles to Inox theatres by virtue of its agreement which allows unfettered rights to supply the bottled water and other cold drinks within the multiplexes and that Hindustan Coca-Cola abused its dominant position under section 4(2) (a) (ii) by imposing unfair price. However, the Commission found that Hindustan Coca-Cola

85

Case No 15/2013, Competition Commission of India. Case No RTPE 16/2009 & Case No UPTE 99/2009 initiated under the MRTP Act, 1969. Order passed by the Competition Commission of India. 86

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was not dominant87 in the relevant market and opined that taking the relevant market as defined by the investigation would lead to illogical conclusions and would mean that every retail outlet, restaurant or store having exclusive supply agreement with a supplier would be dominant within the boundaries of its premises. At the same time, supplier would also be deemed dominant within the closed premises of that retailer. In Global Tax Free Traders against William Grant,88 the informant was engaged in the business of importing and distributing foreign liquor in the territory of India and alleged that William Grant imposed exorbitant, unfair and discriminatory prices on the informant in as much as the prices charged from its Indian subsidiary were significantly lower than those charged from the informant. The Commission noted that whiskey constitutes a separate market in itself and that Scotch Whiskey and Imported Whisky together amounted for less than 2% market share in the relevant market of ‘sale of Whiskey in India’ and that there were various competing brands of Scotch and imported whiskey. The Commission found no dominance. In Ramamurthy Rajagopal against Doctor’s Associates, Subway,89 the Commission passed order under Section 26(2) finding no violation, prima facie. The informant was a franchise of Subway and alleged that the royalty payments clause of the Franchisee Agreement which required gross sales taken as a measure of calculating royalty instead of profits was highly unfair and contravened Section 4 (2) (a) (ii) of the Act. It was also alleged that mandatory payment of 4.5% of the gross sale of the restaurant on a weekly basis as a contribution towards advertising fund was unfair. The Commission delineated the relevant market as ‘market of services of franchisee for a fast food restaurant chain/quick service restaurant chain in Chennai’ in which Subway was not found to be dominant. Indian Paint & Coating Association against Kanoria Chemicals,90 it was stated by the informant that as per the website of Kanoria, it enjoys leading position in India in the production of pentaerythritol (Penta), hexamine and formaldehyde, in addition to other chemicals. The informant submitted that in 2015, the basic price charged by Kanoria was Rs. 136 per kg amounting to Rs. 1,36,000 per MT (against a production cost of Rs. 82,500 per MT, i.e. Rs. 82.5 per kg). However, Kanoria was not found to be dominant in the market for ‘sale of Penta in India’.

87

Dissenting per Prasad R, Hindustan Coca-Cola enjoys complete dominance. Since other competitors are not allowed inside Inox, competition is eliminated. Charging exorbitantly higher MRP, Hindustan Coca-Cola and Inox have abused its position dominance in the relevant market. 88 Case No 87/2013, Competition Commission of India. 89 Case No 90/2014, Competition Commission of India. 90 Case No 42/2016, Competition Commission of India.

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E Commerce

In Deepak Verma against Clues Network,91 the allegation of the informant was that the sellers on the online platform charge more prices than the bricks and mortar market. However, the Commission found no case and observed that there are a number of competitors selling similar goods and services (online and offline). Hence, the buyers were not dependent on the aforesaid sellers. Therefore, Clues Network was not found dominant.

3.8.8

Electricity Sector

The electricity sector in India has the Central Electricity Regulatory Commission92 (CERC) as the regulator at the national level besides having state regulators such as Delhi Electricity Regulatory Commission (DERC), Maharashtra Electricity Regulatory Commission (MERC), etc. Under Section 60 of the Electricity Act, CERC has powers to deal with situations of market domination. It can issue appropriate directions to a licensee or a generating company if such an entity enters into any agreement or abuses its dominant position or enters into a combination which is likely to cause or causes an adverse effect on competition in electricity industry. Besides it has the mandate to advice the Central Government on, inter alia, promotion of competition. The presence of an electricity regulator does not, by any chance, oust the jurisdiction of the Commission. The Competition Act conspicuously acknowledges the fact that its provisions are in addition to and not in derogation of any other law for the time being in force (Section 62). The Commission in Neeraj Malhotra against North Delhi Power Limited93 and Suo Moto against North Delhi Power Ltd & BSES & Ors,94 where the allegation was regarding the installed meters running 2.5% faster than the normal speed and the electricity supply company submitting inflated bills to the customers, found that there was dominance of the distribution companies (DISCOMS) in the relevant market of ‘distribution and retail supply of electricity in Delhi’. The investigation was of the opinion that there was substance in the allegation that the meters installed

91

Case No 34/2016, Competition Commission of India. The primary mandate of the CERC is to regulate the tariff of generating companies owned or controlled by the Central Government, to regulate the inter-State transmission of electricity, to determine tariff for inter-State transmission of electricity and to issue licenses to persons to function as transmission Licensee and electricity trader with respect to their inter-State operations. Under Section 66 of the Electricity Act, CERC has been mandated to take steps for promoting the development of market (including trading) in power taking into account the National Electricity Policy. See http://cercind.gov.in/ 93 Case No 06/2009, Competition Commission of India. 94 Case No UTPE 45/2005 & Case No RTPE 19/2008 initiated under the MRTP Act, 1969. Order passed by the Competition Commission of India. 92

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by the DISCOMS had an upward bias in measurement of electricity. However, the Commission found that the issue of fast running meters was a consumer dispute and that the appropriate authority was Consumer Grievance Redressal Forum & Ombudsman established under the Electricity Act. Similarly, in Bajrang Steel & Alloys Pvt Ltd against Western Electricity Supply,95 the informant alleged that Western Electricity Supply charged high rates for the distribution of electricity when compared to the charges for similar services in other states. The Commission observed that the relevant market was the market of ‘supply and distribution of electricity in the State of Orissa’ and the four DISCOMS were in a dominant position. The Commission also observed that the Orissa State Electricity Commission determined the tariffs in respect of the four DISCOMS and is the appropriate forum to decide the issue of rebate, subsidies and tariffs. More recently, the Commission dismissed the case of unfair pricing against Maharashtra State Power Generation Company Limited, Maharashtra State Electricity Distribution Company,96 and Ors. The informant, Vidarbha Industries Association, alleged that Maharashtra State Power Generation Company and Maharashtra State Electricity Distribution entered into a long-term power purchase agreement (PPA) through which the entire power of the former was to be purchased by latter at arbitrary and exorbitant rates. It was further alleged that Maharashtra State Electricity Distribution Company did not follow Merit Order Dispatch and purchased entire power of Maharashtra State Power Generation Company at exorbitant rates. It was also alleged that the rates of Maharashtra State Power Generation Company were exorbitant as power was generated in an inefficient manner. The investigation delineated the market as ‘provision of services for distribution of electricity in the state of Maharashtra except Mumbai’ in which Maharashtra State Electricity Distribution Company was found to be dominant. However, the Commission, accepting the argument that the long-term PPA was entered when the market for competitive bidding was at a nascent stage, for ensuring stable and continuous supply of electricity, noted that the Maharashtra State Electricity Distribution Company purchased only 41% from Maharashtra State Power Generation Company while the remaining 59% was procured through other sources. Reiterating the powers of the Central/State Electricity Regulatory Commission to determine the purchase price of electricity, it was held by the Commission that Maharashtra State Electricity Distribution Company was not in a position to arbitrarily impose price on the consumers. In Anand Parkash Agarwal against Dakshin Haryana Bijli Vitran,97 it was alleged that Dakshin Haryana Bijli Vitran had been steadily increasing the fuel cost surcharge adjustment (FSA) post 2008 even when the fuel costs was steadily declining during the same period. It was reiterated by the Commission that FSA

95

Case No 65/2011, Competition Commission of India. Case No 12/2014, Competition Commission of India. 97 Case No 01/2016, Competition Commission of India. 96

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charges were computed and levied by the Electricity Distribution Companies as per the regulations issued by the concerned State Electricity Regulatory Commission. The Commission did not intervene in the issue as no fact or figure had been provided to substantiate the purported decline in the price of fuel used for power generation leading to a decline in the cost of power generation.

3.8.9

Entertainment

In HT Media Super Cassettes,98 the Commission reiterated its OECD stand of 2011 and observed: . . .excessive price forms a subset of ‘unfair price’ in the Indian context.

The case, theoretically speaking, reiterated the law on pricing and the abuses that feature under dominance. It was noted: pricing abuses may come under the purview of competition law as abuse of dominance. Pricing abuses may be ‘exclusionary’ i.e. pricing strategies adopted by dominant firms to foreclose competitors. Such strategies include a wide variety of measures, such as predatory pricing, price squeezes, loyalty rebates. Pricing abuses may also be ‘exploitative’ i.e. which cover instances where a dominant firm is accused of exploiting its customers by setting excessive prices. This case deals with the issue of pricing abuse which is exploitative i.e. excessive prices charged by a dominant firm to its customers. (Emphasis added)

However, the case was closed with respect to the allegation of unfair pricing even though the investigation established that the opposite party by virtue of its dominance was charging excessive and unfair prices from the consumers, i.e. private FM channels in the relevant market. It was noted: . . .in the absence of the cost data it will be difficult, neigh impossible, to term the price charged by the opposite party at 661 INR per needle hour as unfair being excessive solely on the basis that it is higher than the price charged by the competitors of the opposite party. In view of all factors discussed in the preceding paragraphs above, the Commission holds that a case of excessive pricing has not been made out against the opposite party.

In BIG CBS Network against TATA Sky,99 the informant wanted to telecast its channels on the Direct-to-Home (DTH) network of TATA Sky. It was alleged that TATA Sky was a dominant enterprise in the relevant market having a market share of 26–35% and abused the same by asking the informant for exorbitant prices for its services which were much higher than the prevalent market rates. The informant was asked to pay Rs. 60 million per channel per annum plus Rs. 20 million worth cross promotion. The Commission defined the market as the market of ‘provision of services for broadcasting of TV channels through DTH in India’ in which TataSky was not found to be dominant having a share of 18% only.

98 99

Case No 40/2011, Competition Commission of India. Case No 36/2012, Competition Commission of India.

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In Dish TV India against Hathway Cable and Ors,100 the informant was a DTH operator in India, and Hathway Cable and Ors was a multisystem operator operating at various states in India. It was alleged that they were abusing their dominant position in violation of Section 4 by forcing broadcasters to pay high carriage and placement fee for carrying and placing their channels. The case was closed by the Commission as the Indian law does not recognize collective dominance.

3.8.10

Glass

In Schott Glass,101 it was alleged by the informant, a competitor of Schott Glass, that after the exit of competitors of Schott Glass particularly the informant, it increased the price of tubes drastically to recoup the losses made on account of predatory pricing in earlier years. The investigation reported that increases in prices by Schott Glass related to increase in manufacturing costs and cannot be said to have been resorted to recouping predatory pricing losses. The investigation also found out that there were no standards to judge as to what constitutes excessive and high pricing. The price which a consumer is willing to pay depends on the value which he ascribes to a product, and it cannot be said to be excessive till the buyers are willing to pay the price of the product. The Commission, on the issue of excessive pricing, was of the opinion that the allegation of excessive pricing was based on the allegation of recouping of profits subsequent to predatory pricing indulged in by Schott Glass prior to 2008, and in the absence of any finding by the investigation on predatory pricing, the allegation on excessive pricing stood negated. In HNG Float Glass against Saint Gobain,102 the allegation pertaining to excessive pricing was that Saint Gobain, subsequent to the acquisition of Sezal,103 began to increase the price which was suggestive of recoupment of losses suffered by Saint Gobain after indulging into predatory pricing in the clear float market. However, the Commission was of the view that the market was distributed among five to six players and that Saint Gobain was not dominant in the relevant market of ‘production and sales of clear float glass in India’. Even otherwise the price movement after the acquisition of Sezal was also not found to be excessive or unfair.

100

Case No 78/2013, Competition Commission of India. Case No 22/2010, Competition Commission of India. 102 Case No 51/2011, Competition Commission of India. 103 One of the competitors of Saint Gobain, the management and operations of which were taken over by Saint Gobain. 101

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Journals

In Prints India against Springer India,104 it was alleged that Springer India abused its dominant position in the relevant market for ‘STM (Science Translational Medicine) journals published in the English Language in India’. It was also alleged that Springer India was imposing unfair prices on the consumers in the sale of journals in violation of Section 4(2) (a) (ii). The investigation found that the prices of journals had been increased substantially over a short period of time, and Springer India was found to have abused its dominant position by imposing unfair prices in the sale of goods for the reason that the consumers had not been given a choice to avail or not to avail the value-added services. However, the Commission noting that the investigation failed to include all the journals in the STM category redefined the relevant market as ‘publishing of all academic journals in the English Language in India’ which included online content with the result that the market share of Springer India globally came to less than 10%. The case was closed.105 In another case pertaining to journals, the Commission dismissed the case against Global Information Systems Technology (GIST);106 the informant was primarily aggrieved by the conduct of GIST for charging exorbitant price for the subscription of e-journals by the technical educational institutions in terms of the instructions of All India Council for Technical Education (AICTE) in its handbook. It was alleged that GIST enjoyed a dominant position and was abusing the same by pricing the journals exorbitantly. However, the Commission did not accept the argument of dominance of GIST on the ground that the subscription of the academic journals can be done either directly from the publishers or through their agents like GIST and that the AICTE had granted no exclusivity to GIST.

3.8.12

Petroleum and Natural Gas Sector

The petroleum and natural gas sector witnesses the presence of the Petroleum and Natural Gas Regulatory Board107 (PNGRB) constituted under the Petroleum and Natural Gas Regulatory Board Act, 2006. One function of the Board is to regulate the access to common carrier or contract carrier so as to ensure fair trade and competition among entities.

104

Case No 16/2010, Competition Commission of India. Dissenting Prasad R, the relevant market is the services for dissemination of STM knowledge in India. OP is the second largest publisher of STM and journals in the world. Journals published by the OP have increased substantially over a short period of time, in some cases up to 400%, and hence a violation of Section 4(2) (a) (ii) is made out. 106 Case No 48/2015, Competition Commission of India. 107 PNGRB has been mandated to regulate the refining, processing, storage, transportation, distribution, marketing and sale of petroleum, petroleum products and natural gas excluding production of crude oil and natural gas so as and to ensure uninterrupted and adequate supply of petroleum, petroleum products and natural gas in all parts of the country. See http://www.pngrb.gov.in/ 105

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In Gujarat Textiles Processors Association against Gujarat Gas Company,108 the informant alleged that Gujarat Gas Company being in a dominant position in the supply of compressed natural gas (CNG) in the area of South Gujarat was abusing its dominant position to reap windfall profits by inflating the price of gas to the extent of 25% during 2010–2011 and creating artificial scarcity of CNG. The Commission found that even though Gujarat Gas Company was enjoying a monopoly position in the ‘transmission and distribution segment of Compressed Natural Gas and Natural Gas in the geographical area of Surat District’, there was nothing on record to suggest that Gujarat Gas Company was charging excessive, unfair or discriminatory pricing. The Commission relied on the information available in the public domain and compared the operating margins of the Gujarat Gas Company with that of Indraprastha Gas Limited (IGL), another company supplying the similar product in another geographical market, and found that the margins of IGL was higher than that of the Gujarat Gas Company. In Faridabad Industries Association against Adani Gas,109 the informant was an association of industries comprising of auto-component, medical devices, steel, alloys, textile, chemical, etc. Adani was engaged inter alia in the business of setting up distribution network in various cities to supply natural gas to industrial, commercial, domestic and CNG customers. The informant alleged that Adani not only reserved to itself the unrestricted right to change/modify/revise the contract price and excess gas price in an opaque and nontransparent manner but also revised gas prices arbitrarily and irrationally from time to time. The investigation found that in the matter of revision of gas prices, Adani’s conduct could not be construed to be a reflection of abuse of its dominant position. The Commission observed that due to the peculiarities of the gas industry, it was impractical to have a pricing mechanism based on fixed formula for fixation of gas prices. Taking into consideration that gas prices for consumers was not solely linked to crude oil prices, the Commission noted that the allegations of the informant that Adani was revising gas prices arbitrarily/ irrationally appeared to be misconceived. Saurabh Tripathi against Great Eastern Energy Corporation,110 the Commission held that no case of unfair pricing was made out on the mere assertion of the informant who was not even an aggrieved party and that Great Eastern Energy Corporation, being a commercial enterprise, was not obliged to sell on cost-plus basis as desired by the informant. In this case, the informant, inter alia, challenged the pricing of gas by Great Eastern Energy Corporation. It was argued that price of gas was increased despite cost of production going down. The investigation pointed out that the pricing of coal bed methane does not come under the administered price mechanism, and the producer was free to sell the gas at market rates as per the Production Sharing Contract of Great Eastern Energy Corporation with the Government.

108

Case Nos 50/2011 & 02/2011, Competition Commission of India. Case No 71/2012, Competition Commission of India. 110 Case No 63/2014, Competition Commission of India. 109

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Pharmaceutical Sector

The National Pharmaceutical Pricing Authority111 (NPPA) is entrusted with the task of fixation/revision of prices of pharmaceutical products112 (bulk drugs and formulations), enforcement of provisions of the Drugs (Prices Control) Order and monitoring of the prices of controlled and decontrolled drugs in the country.113 The originally passed Drugs Price Control Order 1970 (under the Essential Commodities Act, 1955), is amended from time to time, wherein the Government may review and fix maximum sale price for bulk drugs and formulations. The latest DPCO, 2013 Para 12 provides that a manufacturer, launching a scheduled formulation, shall be free to fix the price of the scheduled formulation equal to or below the ceiling price fixed for that schedule formulation by the Government. However, Para 13(2) of DPCO, 2013, provides that all the existing manufactures of scheduled formulations, selling the branded or generic or both the versions of scheduled formulations at a price lower than the ceiling price (plus local taxes as applicable) so fixed and notified by the Government, shall maintain their existing MRP. Thus, a new product covered in the scheduled formulations can be priced at the ceiling price, whereas those manufacturers selling medicines at a price below the ceiling price will have to maintain their existing MRP and would not be allowed to increase their prices. The attraction of competition authorities towards excessive pricing in pharmaceuticals gains weight from the fact the society legitimately expects to benefit from lower prices of drugs after the patent expires. In the recent Biocon against Rosche Case,114 with regard to Biocon’s allegation on unfair pricing of the drug trastuzumab, the Commission gave Rosche the benefit of being the innovator of the drug observing that it might have invested huge sums on research and development. Regard was also given to the fact that Rosche introduced cheaper versions in the market, viz. Biceltis/Herclon. Although the Commission passed order under Section 26(1), it was not convinced that a prima facie case of unfair pricing was made out.

111

Established on 29/08/1997. Pharmaceutical industry in India was not well developed until the twentieth century, and the drug demand was catered to by importing drugs. Post First World War, the demand for drugs had increased tremendously which led to creeping in of cheap and substandard drugs into the market. To control cheap drugs, the Government passed the Poisons Act 1919 to regulate possession of substance or sale of substances as specified as poison. This was followed by various other legislations like the Drugs and Cosmetics Act, 1940, Pharmacy Act, 1948, Indian Patent Act, 1970 etc. 113 See www.nppaindia.nic.in 114 Case No 68/2016, Competition Commission of India. 112

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Railways

In Arshiya Rail,115 the informant, inter alia, alleged that Arshiya Rail abused its dominant position by making an increase in haulage charges and stabling charges in an arbitrary and irrational manner without any correlating increase in cost adversely affecting the profits of private container train operators (PCTO). The investigation concluded that at the time of entry, the CTOs were charged uniform haulage charges irrespective of the commodity being moved, which was, in 2010, changed to variable haulage charges for certain commodities. There was an increase from 35% to 150% for certain commodities, while there was no change in the tariff rates for movement of goods by wagons in violation of Section 4(2) (a) (ii). The Commission while negating the argument for unfair haulage charges held that increase in haulage charges was provided for in the concession agreement as a result of expenses incurred by the railways on maintenance of rail engines, etc. with the stipulation that increase would not be affected more than twice in a year. While rejecting the argument of squeeze in profits, it was found that the charges increased even for empty containers. Further railways did not put any restriction from charging freight rates on the goods being transported.

3.8.15

Real Estate Sector

The recently passed Real Estate (Regulation and Development) Act, 2016, seeks to establish Real Estate Regulatory Authority for regulation and promotion of the real estate sector and to ensure sale of plot, apartment or building or sale of real estate project, in an efficient and transparent manner and to protect the interest of consumers in the real estate sector. The move was expedited by the Government due to the advisories by the Commission while it handled a plethora of cases of abuse of dominance by real estate firms. In fact, the largest number of cases pertaining to allegation of unfair/excessive pricing disposed of by the Commission relate to the real estate sector. The real estate sector India is almost unique in itself in as much as the bookings for apartments have to be made well in advance. Based on the proceeds, the real estate companies start the process of investment in the project. While payment of instalment are normally phased to coincide with the progress of the project, there have been large number of instances of diversion of funds outside the project resulting in delays in completion of the project and resultant cost escalation. This makes unfair conditions in the agreement and excessive pricing in real estate sector a regular feature. The Commission, since its inception, has been active in promoting competition in the real estate sector. The inflow of real estate cases to the Commission rapidly increased after the DLF Belaire case.116 Penalizing DLF for incorporating one-sided

115 116

Case Nos 64/2010, 12/2011 & 02/2011, Competition Commission of India. Case No 19/2010.

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discriminatory clauses in the Apartment Buyer’s Agreements, the Commission imposed a penalty of Rs 6.3 billion in violation of Section 4(2) (a) (i). Although there was no finding of unfair pricing in the DLF case, a large number of the subsequent cases bore the allegation of unfair/excessive pricing either under the head of remuneration charges, maintenance charges, conversion charges or increase in the price of the apartment unilaterally by the real estate builder after issuing of the allotment letter. However, in almost all these cases, the Commission found the real estate builder not to be dominant. Randhir Kaur Sidhu against Fargo Estate,117 South City Group Housing Apartment Owners Association against Larsen & Toubro,118 Iqbal Singh Gumber against Purearth Infrastructure,119 Shivang Agarwal against Supertech Noida,120 A.K. Jain against The Dwarkadhis Project,121 Lalita Ramakrishnan against Vatika,122 Ajit Mishra against Supertech Limited,123 DLF City Members Welfare Association against DLF Recreational Foundation,124 Raj Kamal Bhatia against Supertech Limited,125 Tunuguntla Chandra Shekhar against S.G. Estates Limited,126 Arvind Kumar Sachdeva against EMAAR MGF,127 Anonymous against Bengal Greenfield Housing,128 TDI Fun Republic Association against E-City Property,129 Dalip Singh Arshi against Aerens Jai Reality,130 Sunil Chowdhary against TDI Infrastructure,131 Deepak Kumar Jain against TDI Infrastructure,132 Gautam Dhawan against Parsvanath Hessa Developers,133 Geeta Kapoor against DLF Qutab Enclave Complex Educational Charitable Trust,134 Mukul Kumar Govil against ET Infra Developers,135 Yashpal Raghubir Mertia against Aura Real Estate136 and Capt. Deepak

117

Case No 18/2011, Competition Commission of India. Case No 49/2011, Competition Commission of India. 119 Case No 10/2012, Competition Commission of India. 120 Case No 28/2012, Competition Commission of India. 121 Case No 43/2012, Competition Commission of India. 122 Case No 65/2012, Competition Commission of India. 123 Case No 03/2013, Competition Commission of India. 124 Case No 25/2013, Competition Commission of India. 125 Case No 77/2013, Competition Commission of India. 126 Case No 80/2013, Competition Commission of India. 127 Case No 102/2013, Competition Commission of India. 128 Case No 103/2013, Competition Commission of India. 129 Case No 05/2014, Competition Commission of India. 130 Case No 11/2014, Competition Commission of India. 131 Case No 27/2014, Competition Commission of India. 132 Case No 40/2014, Competition Commission of India. 133 Case No 69/2014, Competition Commission of India. 134 Case No 16/2015, Competition Commission of India. 135 Case No 5 & 6/2016, Competition Commission of India. 136 Case No 14/2016, Competition Commission of India. 118

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Shrikrishnarao against Tata Housing Development137 were all closed on allegation of excessive pricing due to the real estate builder not being dominant in the concerned relevant market. In a recent case, Sudarshan Kumar against Delhi Development Authority (DDA),138 the informant approached the Commission alleging that DDA asked for arbitrary price for the allotted plot which was 116 times higher than the price given in the Brochure and that DDA charged at the prevailing 2014 rates instead of 2012 rates when the draw of lots were held. The Commission, in its prima facie analysis passing order under Section 26(1), observed that DDA had revised the price of the plots, which was initially Rs. 200/- per square meter in 1981 to Rs. 23,252/- per square meter which was fixed as per 2014 prevailing rates at the time of allotment. The Commission was of the view that there was no parity between the rate of escalation of the price to be paid by the allottees and the compensation being offered to them owing to the delay caused by DDA although both related to the same period. The Commission noted: Such stark difference between the two seems prima facie unfair qua the allottees and skewed in favour of OP particularly, in view of the fact that the application money of Rs. 5000/- was almost 27% of the consideration amount.

In another recent case against Ghaziabad Development Authority139 (GDA), the Commission passed an order under Section 26(1), for prima facie abuse of dominant position in relation to arbitrarily increasing price for sale of residential flats for economically weaker section under Pratap Vihar Residential Housing Scheme in Ghaziabad, Uttar Pradesh (UP). The informant was allotted a flat by the GDA for a consideration of Rs 0.2 million which was subsequently increased to Rs 0.7 million. The Commission considered that the unilateral conduct of GDA in increasing the sale price of its flats from Rs 0.2 million to Rs 0.7 million prima facie, without any enabling stipulation in the brochure or in the allotment letter, appears to be abusive and amounts to imposition of unfair price on the informant and other allottees of the flats in violation of Section 4(2) (a) (ii) of the Act. The case is currently under investigation.

3.8.16

Technology Sector

In Atos Worldline against Verifone,140 the informant alleged that Verifone, through the 2012 draft SDK agreement, sought to impose unfair and unreasonable conditions and prices on the informant in contravention of Section 4(2) (a) (i) and (ii) of the Act. As per the informant, Verifone, by demanding payment of unfair prices for provision

137

Case No 37/2017, Competition Commission of India. Case 78/2016, Competition Commission of India. 139 Case No 86/2016, Competition Commission of India. 140 Case No 56/2012, Competition Commission of India. 138

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of service, sought to limit and restrict provision of services and technical development in the market which was in contravention of Section 4(2)(b)(i) and (ii) of the Act. However, the Commission, in its final order, did not find any violation of Section 4(2) (a) (ii). In Dr. Anoop Bhagat against Spectra Medical Systems and Solta,141 the informant was a cosmetologist. Spectr a was the distributor of medical laser and aesthetic equipment. Solta was the owner of the registered trademark over Fraxel Laser Machine, the sole distributor of which in India was Spectra. It was alleged that Spectra and Solta, abusing their dominant position, sold the machine at very high price to the informant. However, it was not established as to how exclusive supply agreement created barriers to new entrants in the market or how the same foreclosed competition by hindering entry into the market. Hence, it was held that no case of contravention was made out. In Shahi Exports against Lakshmi Machine Works,142 it was alleged that the Lakshmi Machines, being the largest manufacturer of spinning machinery in India, abused its dominant position by accepting advance payment of 10% for machinery and then unilaterally increasing the final price of the machinery. As per the informant, the aforesaid act of Lakshmi Machines was also not in accordance with the industry practice as the quoted price incorporated about 10–15% possible increase in costs. The relevant market was found to be ‘sale of spinning machinery for textiles in India’ where the Commission found Lakshmi Machines to be dominant. However, it was found that the increase in price of machinery was not arbitrary and had valid economic reasons such as increase in raw material prices and other inputs and the increase was uniform for all customers. In Amitabh against Kent RO Systems,143 it was alleged that by charging exorbitant price for its spare parts and after sales service, the Kent RO charged a price which was unrelated to the ‘economic value’ of the product. It was also pointed out that Kent RO, in terms and conditions of its warranty, had excluded the customer to purchase any spare part from an independent supplier. However, the Commission was of the view that the informant had failed to adduce any document or any pricing data to support the assertion that the prices charged by Kent RO were ‘exorbitant’ and ‘unusually high’. The Commission opined that the RO water purifier systems appeared to be in the pricing band of Rs 0.01 million to Rs. 0.015 million and that there were a number of web-based market places available for the customers to dispose of old products making potential buyers for used products instantly available, thereby facilitating switching by the existing customers. In Micromax against Ericsson,144 Micromax alleged that Ericsson demanded unfair, discriminatory and exorbitant royalty for its patents regarding GSM technology and that the royalty demanded was excessive when compared to royalties

141

Case No 57/2012, Competition Commission of India. Case No 72/2012, Competition Commission of India. 143 Case No 100/2014, Competition Commission of India. 144 Case 50/2013, Competition Commission of India. 142

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charged by other patentees for patents similar or comparable to those held by Ericsson. The royalty rates imposed were (a) GSM, 1.25% of sale price of product of the informant; (b) GPRS, 1.75% of sale price of product of the informant; (c) EDGE, 2% of sale price of product of the informant; (d) WCDMA/HSPA to phones and tablets, 2% of sale price of product of the informant; and (e) Dongles, US $ 2.50 per dongle. This, as per Micromax, was an abuse of dominant position as Ericsson was the sole licensor for the standard essential patents (SEP) of globally acceptable technology standards. It was further alleged that the royalty was not being charged on the basis of cost of product licensed but on the basis of value of the phone in which product of Ericsson was being used. The Commission held that the royalty rates charged by Ericsson had no linkage to patented product, contrary to what was expected from a patent owner holding licences on FRAND terms. The Commission observed: For the use of GSM chip in a phone costing Rs. 100, royalty would be Rs. 1.25 but if this GSM chip is used in a phone of Rs. 1000, royalty would be Rs. 12.5. Thus increase in the royalty for patent holder is without any contribution to the product of the licensee.

It was, prima facie, held that this was reflective of excessive pricing vis-à-vis high cost of phones. The case was clubbed with yet another case against Ericsson bought by Intex145 wherein it was alleged that Ericsson, by way of its Term Sheet for A Global Patent License Agreement demanded exorbitant royalty rates and unfair terms for licensing its patents to the informant. In Best IT World against Ericsson,146 the Commission observed that forcing a party to execute a non-disclosure agreement and imposing excessive and unfair royalty rates, prima facie, amount to abuse of dominance in violation of Section 4. The Commission, prima facie, noted that the allegations made in the information concerning royalty rates made it clear that the practices adopted by Ericsson appeared to be discriminatory as well as contrary to Fair, Reasonable and Non-Discriminatory (FRAND)147 terms and that royalty rate charged by Ericsson has no linkage to the functionality of the patented product but to the final price of the manufactured product in which the patent was used.

3.8.17

Telecom

Vishwambhar Doiphode against Vodafone,148 it was alleged that Vodafone follows a practice of not informing its consumers about the rates for data usage before activating international roaming and thereafter charges exorbitantly high amount, as much as Rs 564/- per MB and that it was misusing its dominant position by 145

Case 76/2013, Competition Commission of India. Case No 04/2015, Competition Commission of India. 147 FRAND commitment is a voluntary agreement between the standard-setting organization and the holder of standard essential patents. 148 Case No 04/2016, Competition Commission of India. 146

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directly or indirectly imposing unfair or discriminatory price in purchase or sale of service to consumers who activated international roaming services. However, Vodafone was not found to be dominant in the relevant market of ‘market for provision of international mobile data services in Mumbai.’

3.8.18

Others

In PDA Trade Fairs against India Trade Promotion Organization149 (ITPO), the informant was in the business of organizing international trade fairs, while ITPO was the agency of the Government engaged in promoting India’s external trade. It was alleged that ITPO revised the rentals by increasing it unreasonably. It was found that ITPO was dominant in the relevant market due to its unique position and there were no substitutable service because of its international exposure. However, it was made clear in the decision that dominance doesn’t necessarily imply anticompetitive practices and that the party was charging unreasonable prices had to be proved with reference to comparison with other similar service providers which was not done by the informant in this case.

3.9

Assessment of Indian Cases on Unfair/Excessive Pricing

The Act portrays an inbuilt scope to deal with issues of excessive pricing under Sections 3(3), 3(4) (e), and 4(2) (a) (ii). Nevertheless in HT Media Super Cassettes,150 the Commission acknowledged the concerns faced by it in addressing pricing issues: The Commission notes that determining whether a price is excessive is an uncertain and difficult task.

The EU case of United Brands151 lays down the standard for testing excessive pricing in the form of a two-pronged test: (i) the difference between the costs incurred and the price charged must be excessive, and (ii) the price charged must be either unfair in itself or in comparison with competing products.152 India has, by far, tried to incorporate both the parameters besides others, in assessing unfairness or

149

Case No 48/2012, Competition Commission of India. Case No 40/2011, Competition Commission of India. 151 United Brands Co. v Commission, Case 27/76, [1978] ECR 207. See Dabbah, M.M, ‘EC and UK Competition Law: Commentary, Cases and Materials’, Cambridge University Press, (2004). Also see Bellamy, C and Child, G, ‘European Community Law of Competition,’ Roth, P. M. (eds), Sweet &Maxwell, 5th Edition (2001). 152 OECD Roundtables: Excessive Prices (2011), DAF/COMP(2011)18, accessed from http://www. oecd.org/competition/abuse/49604207.pdf, accessed on 29/01/2018. 150

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excessiveness in pricing. Cases dealt with by the Commission pertaining to Section 4 (2) (a) (ii) relating to allegations of excessive prices show the following trend: 1. Almost all the real estate cases alleging excessive pricing, barring the recent ones of Sudarshan Kumar against DDA153 and Ghaziabad Development Authority,154 have been dismissed on account of the real estate builder not being dominant in the relevant market. The sudden surge in real estate cases of unfair/excessive pricing seems to have come down with the passing of the Real Estate (Regulation and Development) Act, 2016. Yet another plausible reason is the inability of the Commission to grant any instant monetary relief by way of compensation to the informant in such cases.155 Similarly, in banking and insurance sector, Mir Jawwad Ali against Standard Chartered Bank,156 Metal Rod against Religare,157 R.V. Ramgopal and Venkat Reddy against Shri Ram Transport Company Ltd.158 and Aditya Automobile Spares against Kotak Mahindra Bank159 have been closed for the want of dominance. Similarly, Vodafone160 was not found to be dominant in the market for ‘provision of international mobile data services in Mumbai’. Also, TataSky161 was found to have a market share of 18% only in the market of ‘provision of services for broadcasting of TV channels through DTH in India’. In the consumables sector, Subway162 was not found to be dominant in the relevant market of ‘services of franchisee for a fast food restaurant chain/quick service restaurant chain in Chennai.’ In the mining sector, Orissa Mining Corporation163 was found to have a market share of 9.25% only and hence was found not dominant. 2. In regulated sectors such as electricity, the Commission has been cautious in intervening. In Maharashtra State Electricity Distribution Company164 and Dakshin Haryana Bijli Vitran,165 the Commission held that the powers of the Central/State Electricity Regulatory Commission cover determination of the purchase price of electricity. Similarly, in Sponge Iron Manufacturers

153

Case No 78/2016, Competition Commission of India. Case No 86/2016, Competition Commission of India. 155 Section 53N provides for awarding compensation where a person may make an application to the Appellate Tribunal to adjudicate on claim for compensation that may arise from the findings of the Commission or the orders of the Appellate Tribunal. 156 Case No 35/2011, Competition Commission of India. 157 Case No 28/2010, Competition Commission of India. 158 Case Nos 14/2011 & 60/2011, Competition Commission of India. 159 Case No 103/2016, Competition Commission of India. 160 Case No 04/2016, Competition Commission of India. 161 Case No 36/2012, Competition Commission of India. 162 Case No 90/2014, Competition Commission of India. 163 Case No 13/2012, Competition Commission of India. 164 Case No 12/2014, Competition Commission of India. 165 Case No 01/2016, Competition Commission of India. 154

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Association against National Mineral Development Corporations166 and Association of Indian Mini Blast Furnaces against National Mineral Development Corporation,167 the question of dominance was not gone into as the prices of iron ore were regulated and overseen by a central-empowered committee which had been set up under the instructions of the Supreme Court. Similarly, in Manjit Singh Sachdeva against Director General of Civil Aviation,168 the Commission held that it cannot direct the Government to fix prices of services provided by private persons. 3. There may be times when the conduct falls beyond the purview of the Act, for example, in the case of Saurabh Bhargava against Secretary, Ministry of Agriculture & Corporation,169 the Ministry of Agriculture & Corporation was not engaged in any economic activities so as to qualify it as enterprise within the meaning of Section 2(h) of the Act. Similarly, Dish TV India against Hathway Cable,170 was closed by the Commission as the Indian law does not recognize collective dominance. Likewise, the Commission passed closure orders when the allegations pertained to consumer issues like deficiency in services as in Neeraj Malhotra,171 Shree Hari Inn against Mercedes Benz172 and Akhil R. Bhansali against Skoda Auto India.173 4. Price cost comparison has been one of the ways in which the Commission attempts to ascertain excessive pricing in suitable cases. Such a comparison has to be between price in the same industry in another market within the country or even outside the country where the market is similar. While costbased decision on excessive pricing has some merits, the Commission’s approach has been cautious. First, a vigilant approach requires to rule on excessive pricing on there being increase in prices higher than the increase in input costs, unless the input prices have already been high. Second, while estimating costs the risk premium, R&D intensity, existing conditions in the market, etc. have to be taken into account. Third, when markets are not sufficiently narrowly defined, there is a danger of higher-quality products being included in the market definition resulting in wrongly branding such products as excessively priced. Thus, when the prices of inputs had risen substantially and there was a proportionate increase in the price of the product, the case of the informant was rejected in Shahi Exports against Lakshmi Machine Works.174 In

166

Case No 69/2012, Competition Commission of India. Case No 15/2013, Competition Commission of India. 168 Case No 682012, Competition Commission of India. 169 Case No 70/2011, Competition Commission of India. 170 Case No 78/2013, Competition Commission of India. 171 Case No 06/2009, Competition Commission of India. 172 Case No 93/2016, Competition Commission of India. 173 Case No 44/2017, Competition Commission of India. 174 Case No 72/2012, Competition Commission of India. 167

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Sudarshan Kumar against DDA,175 the Commission regarded the fact that there was a massive difference between the pre-revised and post-revised rates which were not adequately explained by DDA. Similarly in Ghaziabad Development Authority176 case, the sudden 250% increase in the sale price of the flats, prima facie, constituted unfairness in prices. In Honda Siel,177 the Commission was mindful of the fact that the actual cost of procuring the spare part by the automobile companies was much lower than their sale price to the ultimate consumer. However, in HT Media,178 the Commission showing its cautious approach refused to accept the allegation that Super Cassette was charging higher than that of its competitors by charging Rs 661/- per needle house in the absence of relevant cost data. 5. Prices of competitors in the same market normally tend to be lower vis-à-vis the prices of dominant player because the smaller players normally lack the ability to price higher and yet remain in the market. There is also a tendency among smaller players to compromise on packaging and marketing expenditure to sell below the price of the dominant player. Therefore, the mere fact that prices of competitors are lower than that of dominant players cannot be conclusive of the fact that prices of dominant players are excessive. The Commission in Gujarat Textiles Processors Association against Gujarat Gas Company,179 compared the operating margins of the Gujarat Gas Company and Indraprastha Gas Limited and found that the margins of Indraprastha Gas Limited was higher than that of Gujarat Gas Company. In Kiratpur Sahib,180 in order to penalize the truck association, the Commission compared the price of 2.56 per MT/KM (price at which M/s Jaiprakash was forced to enter into contract with Kiratpur Sahib Truck Operators) with that of 1.5 per MT/KM (the price at which other transporter was executing the job). 6. Prices of the same enterprise in other foreign markets can be an indicator that it is charging excessive price in the domestic market. However, this again may not be a conclusive test. The economic principle of market segmentation and pricing based on the ability to pay comes to the forefront. A firm may be able to maximize sales by segmenting markets and pricing based on the ability of the market to absorb a particular price. Interim injunction on Monsanto181 was passed by MRTPC by comparing the prices of Bt cottonseeds charged by it in India with that charged by the parent company in China. 7. High profits can be an indicator of excessive prices, but not always. Enterprises are likely to target higher profits, keeping in view the concept of ‘return-risk

175

Case No 78/2016, Competition Commission of India. Case No 86/2016, Competition Commission of India. 177 Case No 03/2011, Competition Commission of India. 178 Case No 40/2011, Competition Commission of India. 179 Case No 50/2011 and 02/2011, Competition Commission of India. 180 Case No 43/2013, Competition Commission of India. 181 Case No RTPE 02/2006 and Interim Application No 05/2006, Monopolies and Restrictive Trade Practices Commission. 176

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interface’. This is when the sunk costs are high and when the product is subject to a high risk of obsolescence. Here industry average profits may serve as a guiding lamp. However, when industry average profits fall short of the profit level of the enterprise under investigation, it is not right to conclude excessive prices outright as consistently higher profits by a big margin above the industry average could mean that the enterprise is efficient. At any rate, profits cannot be uniform across enterprises in an industry. The Commission considered high profits margins as an indicator of excessive pricing in Honda Siel182 when the investigation revealed that OEMs had substantially marked up the price of spare parts to 100–5000% indicating high profits to the automobile companies. 8. As market definition plays an important role in excessive pricing, deficiency in defining markets may result in serious flaws. In such a case, a relook at the market definition may be advisable before proceeding. In Prints India against Springer India,183 the investigation defined the relevant market narrowly which was widened by the Commission with the result that Springer India could escape the net. Similarly, the market definition proposed by the informant was widened by the Commission in Global Tax Free Traders184 while noting that whiskey constitutes a separate market and that Scotch Whiskey and Imported Whisky together accounted for less than 2% share in the market of ‘sale of Whiskey in India’. The market suggested by the investigation in Hindustan Coca-Cola Beverages185 was disregarded by the Commission noting that it would lead to illogical conclusion. Similarly, in Shri Ram Transport Company,186 the Commission noted that a narrow definition of the relevant market by making distinction between finance for heavy and light commercial vehicles, between pre-owned and new vehicles and between vehicles financed through NBFCs and other banking/lending institutions would not be correct and changed the market to ‘provision of services for financing commercial vehicles in India’ making Shri Ram Transport Company not dominant. 9. Several commentators have objected to price regulation from a policy perspective, arguing that in the absence of market failures, excessive prices motivate potential competitors to enter into the market and are, therefore, selfcorrecting.187 When the markets are found not to be self-correcting, the Commission promptly intervened as in Honda Siel.188

182

Case No 03/2011, Competition Commission of India. Case No 16/2010, Competition Commission of India. 184 Case No 87/2013, Competition Commission of India. 185 Case No RTPE 16/2009 & UTPE 99/2009, Case filed under MRTP Act. Order passed by Competition Commission of India. 186 Case No 14/2011 & 60/2011, Competition Commission of India. 187 Competition Issues in Aftermarkets – Note from India, OECD, Directorate for Financial and Enterprise Affairs Competition Committee, (2017), accessed from https://one.oecd.org/document/ DAF/COMP/WD(2017)11/en/pdf, accessed on 29/01/2018. 188 Case No 03/2011, Competition Commission of India. 183

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10. Intellectual Property Rights (IPR) may vest with the enterprise a dominant position which may be susceptible to abuse. However, IPRs are conducive to growth of the economy in terms of new products and services they come up with albeit after a handsome amount of investment on research and development. Here dynamic efficiencies are an important consideration. Whether or not the IPR holder has abused its dominant position depends on facts and circumstance of each case. Ongoing excessive royalty cases against Ericsson189 emerge from the fact the Ericsson is the holder of SEP in the 2G, 3G and 4G technology. The Commission, in its prima facie order, held that Ericsson was not abiding by the FRAND terms in violation of competition laws. In another ongoing case, Biocon-Rosche Case190 the Commission, in its prima facie order, gave Rosche the benefit of being the innovator of the drug trastuzumab observing that it might have invested huge sums on research and development. 11. It is extremely difficult for an enterprise to sustain excessive prices when product characteristics, product quality, etc. are similar. In Monsanto,191 what was stressed on was that Bt cotton is a genetically modified high-produce organism variety of cotton which produces an insecticide to bollworm, a characteristic feature that has a marked difference from the indigenous variety used by the Indian farmers.

3.10

Remedies to Rectify Unfair/Excessive Prices Under the Indian Law

Orders to rectify anticompetitive behaviour find incorporation under Section 27192 of the Act. The Act manifests a balance of the principles of proportionality and 189

Case No 04/2015, Case No 50/2013 and 76/2013, Competition Commission of India. Case No 68/2016, Competition Commission of India. 191 Case No RTPE 05/2006 and Interim Application No 05/2006, Monopolies and Restrictive Trade Practices Commission. 192 Section 27, Competition Act, 2002 – Where after inquiry the Commission finds that any agreement referred to in section 3 or action of an enterprise in a dominant position, is in contravention of section 3 or section 4, as the case may be, it may pass all or any of the following orders, namely:— (a) direct any enterprise or association of enterprises or person or association of persons, as the case may be, involved in such agreement, or abuse of dominant position, to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position, as the case may be; (b) impose such penalty, as it may deem fit which shall be not more than ten percent. of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse: Provided that in case any agreement referred to in section 3 has been entered into by a cartel, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty of up to three times of its profit for each year of the continuance of such agreement or ten percent. of its turnover for each year of the continuance of such agreement, whichever is higher; (c) [Omitted by Competition (Amendment) Act, 2007] (d); direct that the agreements shall stand modified to the extent and in the manner as may be specified in the order by the Commission; (e) direct the enterprises concerned to abide by 190

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deterrence in not only the penal clauses but also in imposing remedies to rectify distortions in the market arising out of anticompetitive conducts. The Commission may order division of enterprise,193 direct discontinuance of the anticompetitive conduct,194 impose penalty for violation of Section 3 or Section 4,195 direct that the agreement shall stand modified,196 direct the enterprise to abide by orders as the Commission deems fit197 or pass such other orders/issue directions as it may deem fit.198 Excessive prices are considered to be among the most difficult and complex cases for competition authorities in terms of standards for assessment, analysis of data and the design and implementation of suitable remedies.199 Remedies may not only be difficult to devise but also to monitor for the purpose of compliance. Implementing such remedies may require competition agencies to undertake several assessments of an expert nature. The issue being sensitive, remedies have to be carefully crafted as direct price intervention can prove to be a drastic solution. More important and practicable is to address the root cause of excessive prices. In other words, it is important to address the ways in which excessive prices are perpetrated by the dominant player and ensure that such practices are stopped. This calls for a case-to-case analysis of what

such other orders as the Commission may pass and comply with the directions, including payment of costs, if any; (f) [Omitted by Competition (Amendment) Act, 2007]; (g) pass such other [order or issue such directions] as it may deem fit. 193 Section 28, Competition Act, 2002 – Division of enterprise enjoying dominant position – 28 (1) The Commission may, notwithstanding anything contained in any other law for the time being in force, by order in writing, direct division of an enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant position. (2) In particular, and without prejudice to the generality of the foregoing powers, the order referred to in sub-section (1) may provide for all or any of the following matters, namely:— (a) the transfer or vesting of property, rights, liabilities or obligations; (b) the adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise; (c) the creation, allotment, surrender or cancellation of any shares, stocks or securities; (d) [Omitted by Competition (Amendment) Act, 2007]; (e) the formation or winding up of an enterprise or the amendment of the memorandum of association or articles of association or any other instruments regulating the business of any enterprise; (f) the extent to which, and the circumstances in which, provisions of the order affecting an enterprise may be altered by the enterprise and the registration thereof; (g) any other matter which may be necessary to give effect to the division of the enterprise. (3) Notwithstanding anything contained in any other law for the time being in force or in any contract or in any memorandum or articles of association, an officer of a company who ceases to hold office as such in consequence of the division of an enterprise shall not be entitled to claim any compensation for such cesser. 194 Section 27(a), Competition Act, 2002. 195 Section 27 (b), Competition Act, 2002. 196 Section 27 (d), Competition Act, 2002. 197 Section 27 (e), Competition Act, 2002. 198 Section 27(g), Competition Act, 2002. 199 OECD Roundtables: Excessive Prices (2011), DAF/COMP(2011)18, accessed from http://www. oecd.org/competition/abuse/49604207.pdf, accessed on 29/01/2018.

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constitutes excessive prices. In this section, we discuss certain remedies to rectify excessiveness of pricing. Remedies could be broadly, behavioural or structural. Behavioural remedies would presuppose understanding of what the correct price is, which in most cases is difficult to arrive at. One of the most important factors that enable a dominant enterprise to charge higher than normal price from customers is the inability of the latter to switch. Switching costs are at times large, and switching may be difficult due to technical reasons. When switching is made difficult through conditions in the contract for provision of services, modification of the agreement is the obvious remedy. When tied selling or bundling acts as a constraint, the solution is to unbundle or untie. Enhanced transparency is often a part of remedy. When ‘exclusive/special rights’ are the reasons for market power and hence for excessive prices, the Commission can only use its good offices through advocacy so that government relaxes such ‘exclusive/special rights’ of the enterprise, besides prescribing behavioural remedies. Structural remedies are invoked when behavioural remedies are either not effective or are not practicable. Structural remedies under the Act could run even to the extent of ‘division of enterprise’. This is an extreme remedy and has not been applied till date by the Commission in any case of abuse of dominance. The remedy contemplates to direct division of the enterprise to ensure that the abuse is halted. When high and non-transitory entry barriers are at the root of excessive prices caused by IPRs, the Commission can go to the extent of ‘compulsory licensing’ of IPRs drawing on the powers under Section 27 (g). This again is an extreme step and would be resorted to only as last resort. In Honda Siel,200 the Commission sought to rectify the issue by directing the car companies to make available in the public domain information regarding the spare parts along with their MRPs in order to ensure consumer’s freedom of choice. On the other hand, Section 27, which serves as a remedy to both Sections 3 and 4, has been made use of by the Commission in cases where unfairness in prices have been figured out. In Kiratpur Sahib,201 finding a violation of Sections 3 and 4, the Commission imposed maximum penalty at 10% of the average turnover for the past 3 years. The Competition Appellate Tribunal (COMPAT) not only upheld202 the Honda Siel203 order of the Commission but also the positive move of the Commission directing the automobile companies to host information regarding spare parts and their MRPs on their websites. COMPAT has also directed the Ministry of Road 200

Case No 03/2011, Competition Commission of India. Case No 43/2013, Competition Commission of India. 202 Toyota Kirloskar Motors v Competition Commission of India and Ors, Appeal No 60/2014 dated 09/12/2016 of Competition Appellate Tribunal (Now National Company Law Appellate Tribunal). COMPAT upheld the order of the Commission reducing the penalty from 2% of the average turnover (total turnover) to 2% of the average annual turnover of spare parts in the aftermarket (relevant turnover). 203 Case No 03/2011, Competition Commission of India. 201

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Transport and Highways to develop voluntary standards for certification of independent garages.

4 Conclusion In a free market economy, determination of prices is left to the market forces. However, in actual, market forces may not always function freely. Competition authorities as ‘off-market’ referees are mandated to keep a watch to ensure that prices are the outcome of free play of market forces. When distortion in the market takes place, whether through anticompetitive agreements or abuses of dominant position, competition authorities are expected to act. However, when it comes to excessive prices as an abuse of dominant position, some of the major jurisdictions are reluctant to intervene, while others including India have shown a cautious approach. Excessive prices, generally speaking, are abnormally high prices for goods or services which have no reasonable relationship to their economic value. India has a long history of price regulation which has been gradually getting phased out in the wake of the 1991 liberalization and the subsequent reform process. Regulation of excessive pricing in the form of anti-profiteering has, recently, been introduced in 2017 in the wake of the implementation of goods and services tax. While the peaceful coexistence of the competition commission and sectoral regulators is envisaged through Section 21 and 21A of the Act, the recent judicial pronouncements make it clear that when there is no irreconcilable conflict, the Commission can proceed to intervene. The Delhi High Court in Ericsson204 gives a green signal to the Commission to proceed when there is no irreconcilable conflict. The law has been spelt out in even clearer and wider terms by the Hon’ble Supreme Court in its most recent (24/01/2018) judgement in CCI v Fast Way205 where it is observed that Section 60 of the Competition Act, keeping in mind the economic development of the country as a whole, gives overriding effect to it over other statues in case of a clash. The MRPT Act had taken a few steps to tame excessive pricing, though in limited cases. The extant Competition Act addresses unfair/excessive pricing in three ways: price overcharge by concerted action in horizontal agreements, manufacturers setting MRP too high along with mandatory RPM to allow the high set MRP to be indiscriminately exploited by the retailers and finally abuse of dominant position. Excessive prices under abuse of dominant position in Section 4(2) (a)(ii) are (i) unfair in nature; (ii) indulged into by enterprises enjoying dominant position in

204

Judgement dated 30/03/2016 of the Delhi High Court in W.P.(C) 464/2014 & CM Nos.911/2014 & 915/2014, Telefonaktiebolaget LM Ericsson (Publ) v. Competition Commission of India and Anr. 205 Judgement dated 24/01/2018 of the Hon’ble Supreme Court in CA No 7215/2014, Competition Commission of India v M/s Fast Way Transmission Pvt Ltd & Ors.

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the relevant market and (iii) determined by economic analysis within the broad framework of legal provisions based on the facts and circumstances of the case. The major reason for rejection of cases of alleged unfair pricing at the prima facie stage was absence of dominant position of the opposite party. What assumes importance here is the proper and rigorous definition of relevant market. While a flaw can give misleading results, loosely defined markets can throw up false positives. In regulated sectors portraying evidence of regulated conduct, the Commission has been cautious in intervening. However, when competition or competition process was at stake, the Commission has not failed to strike, despite the fact that in some cases judicial challenges had to be withstood. Dealing with IPRs, not only in India but worldwide, is a slippery slope as a static view may turn out to be at the cost of future dynamic efficiencies. The ‘self-correcting markets’ paradigm holds the Commission back from taking an overly proactive role as regards alleged excessive pricing. Economic analysis for determining excessiveness of prices in the form of price cost comparisons, comparisons with enterprises in the same market or with those in similar markets, can help, subject to a number of ifs and buts. Similarly ‘high profits’ do not provide conclusive evidence. While designing remedies, what is most important is to address the root cause of excessive pricing, based on case-to-case analysis. Structural remedies are invoked when behavioural remedies are either not effective or are not practicable. The Indian law provides for division of enterprise as an extreme remedy which has not been resorted to as yet. Indian jurisprudence is still evolving.

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Competition Commission of India A Aditya Automobile Spares against Kotak Mahindra Bank, Case No. 103/2016. Ajit Mishra against Supertech Limited, Case No. 03/2013. A. K. Jain against The Dwrakadhis Project, Case No. 43/2012. Akhil R. Bhansali against Skoda Auto India, Case No. 44/2017. All Odisha Steel Federation against Odisha Mining Corporation, Case No. 12/2012. All Odisha Steel Foundation against Odisha Mining Corporation, Case No. 13/2012. Aluminium Phosphide Tablets Manufacturers, Case No. Suo Moto 02/2011. Amitabh Anand Parkash Agarwal against Dakshin Haryana Bijli Vitran, Case No. 01/2016. Anonymous against Bengal Greenfield Housing, Case No. 103/2013. Arshiya Rail Infrastructure Limited against Ministry of Railways and Container Corporation of India, Case No. 64/2010, 12/2011 and 02/2011. Arvind Kumar Sachdeva against EMAAR MGF, Case No. 102/2013. Association of Indian Mini Blast Furnaces against National Mineral Development Corporation, Case No. 15/2013. Atos Worldline against Verifone, Case No. 56/2012.

B Bajrang Steel & Alloys Pvt Ltd. against Western Electricity Supply, Case No. 65/2011. Best IT World against Ericsson, Case No. 04/2015. Bharti Verma against Global Information Systems Technology, Case No. 48/2015. BIG CBS Network against TATA Sky, Case No. 36/2012. Biocon and Mylan against Hoffman-La Rosche, Case No. 68/2016. Builders Association of India against Cement Manufacturers Association and Ors, Case No. 29/2010.

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D DLF City Members Welfare Association against DLF Recreational Foundation, Case No. 25/2013. Dalip Singh Arshi against Aerens Jai Reality, Case No. 11/2014.

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Deepak Kumar Jain against TDI Infrastructure, Case No. 40/2014. Deepak Verma against Clues Network, Case No. 34/2016. Department of Agriculture, Cooperation & Farmers Welfare, Ministry of Agriculture & Farmers Welfare against Mahyco Monsanto Biotech (India) Limited, Reference, Case No. 2 of 2015 & Case No. 107 of 2015. Dish TV India against Hathway Cable and Ors, Case No. 78/2013. Dr Anoop Bhagat against Spectra Medical Systems and Solta, Case No. 57/2012.

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G Gautam Dhawan against Parsvanath Hessa Developers, Case No. 69/2014. Geeta Kapoor against DLF Qutab Enclave Complex Educational Charitable Trust, Case No. 16/2015. Ghamshyam Das Vij against Bajaj Corporation, Case No. 68/2013. Global Tax Free Traders against William Grant, Case No. 87/2013. Gujarat Textiles Processors Association against Gujarat Gas Company, Case No. 50/2011 and 02/2011.

H HNG Float Glass against Saint Gobain, Case No. 51/2011. HT Media against Super Cassettes, Case No. 40/2011.

I Indian Paint & Coating Association against Kanoria Chemicals, Case No. 42/2016. Intex Technologies against Ericsson, Case No. 76/2013. Iqbal Singh Gumber against Purearth Infrastructure, Case No. 10/2012.

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J Jasper Infotech against Kaff Appliances, Case No. 61/2014.

K Kapoor Glass against Schott Glass, Case No. 22/2010.

L Lalita Ramakrishnan against Vatika, Case No. 65/2012.

M Maharashtra State Power Generating Company and Anrs against Coal India and Ors, Case No. 03, 11 & 59/2012. Manjit Singh Sachdeva against Director General of Civil Aviation, Case No. 68/2012. MCX against National Stock Exchange, Case No. 13/2009. Metal Rod against Religare, Case No. 28/2010. Micromax against Ericsson, Case No. 50/2013. Mir Jawwad Ali against Standard Chartered Bank and Ors, Case No. 35/2011. Mukul Kumar Govil and Anshu Bansal against ET Infra Developers, Case No. 5 and 6/2016.

N Neeraj Malhotra against North Delhi Power Limited, Case No. 06/2009. North Delhi Power Ltd. against BSES and Ors, Suo Moto Case No. UTPE 45/2005 and Case No. RTPE 19/2008.

P PDA Trade Fairs against India Trade Promotion Organization, Case No. 48/2012. Prime Magazine against Wiley, Case No. 07/2016. Prints India against Springer India, Case No. 16/2010.

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R Raj Kamal Bhatia against Supertech Limited, Case No. 77/2013. Ramamurthy Rajagopal against Doctor’s Associates, Subway, Case No. 90/2014. Randhir Kaur Sidhu against Fargo Estate, Case No. 18/2011. R. V. Ramgopal against Shri Ram Transport Company Ltd., Case No. 60/2011.

S Satyendra Singh against Ghaziabad Development Authority, Case No. 86/2016. Saurabh Bhargava against Secretary, Ministry of Agriculture & Corporation, Case No. 70/2011. Saurabh Tripathi against Great Eastern Energy Corporation, Case No. 63/2014. Shamsher Kataria against Honda Siel, Case No. 03 of 2011. Shahi Exports against Lakshmi Machine Works, Case No. 72/2012. Shivam Enterprises against Kiratpur Sahib Truck Operators, Case No. 43/2013. Shivang Aggarwal against Supertech Noida, Case No. 28/2012. Shree Hari Inn against Mercedes Benz, Case No. 93/2016. Shubham Sanitary Wares against Hindustan Sanitary Wares, Case No. 99/2013. S. K. Sharma, Deputy CMM-IV, North Western Railways against M/s RMG Polyvinyl India Ltd. & Ors, Case No. RTPE 31/2008. South City Group Housing Apartment Owners Association against Larsen & Tubro, Case No. 49/2011. Sponge Iron Manufacturers Association against National Mineral Development Corporation, Case No. 69/2012. Sudarshan Kumar against Delhi Development Authority, Case No. 78/2016. Sunil Chowdhary against TDI Infrastructure, Case No. 27/2014.

T TDI Fun Republic Association against E-City Property, Case No. 05/2014. Tunuguntla Chandra Shekhar against S. G. Estates Ltd., Case No. 80/2013. Turbo Aviation Pvt Ltd. against Bangalore International Airport Ltd. and Anrs, Case No. 59/2015.

V Venkat Reddy against Shri Ram Transport Company Ltd., Case No. 14/2011. Vidarbha Industries against Maharashtra State Power Generation Company Ltd., Maharashtra State Electricity Distribution Company, and Ors, Case No. 12/2014. Vishwambhar Doiphode against Vodafone, Case No. 04/2016. Vivek Sharma against Becton Dickinson and Max Super Speciality Hospital, Case No. 77/2015.

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X XYZ against Association of Man-made Fibre against Grasim Industries, Case No. 62/2016.

Y Yashpal Raghubir Mertia against Aura Real Estate, Case No .14/2016. Yeshwanth Shenoy against Air India, & Ors, Case No 98/2015.

E.C. United Brands Co. against Commission [1978] ECR 207, Case No. 27/76.

Legislations India The Airport Economic Regulatory Authority of India Act, 2008. The Competition Act, 2002. The Coking Coal Mines (Emergency Provisions) Act, 1971. The Coal Mines (Taking Over of Management) Act, 1973. The Coking Coal Mines (Nationalisation) Act, 1972. The Coal Mines (Nationalisation) Act, 1973. The Electricity Act, 2003. The Essential Commodities Act, 1955. The Insurance Regulatory and Development Authority Act, 1999. The Petroleum and Natural Gas Regulatory Board Act, 2006. The Real Estate (Regulation and Development) Act, 2016. The Telecommunications Regulatory Authority of India Act 1997.

Chile Decree Law No 211.

E.U. Treaty on the Functioning of the European Union.

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South Africa The Competition Act, 1998.

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Working Papers Bhatnagar, M. (2015). Competition and regulatory issues in coal sector in India, CIRC Working Paper 11, CUTS Institute for Regulation & Competition. Geradin, D. (2007). The necessary limits to the control of ‘excessive’ prices by competition authorities: A view from Europe. Tilburg University Legal Studies Working Paper. Evans, D. S., & Padilla, A. J. (2004) Excessive prices: Using economics to define administrable legal rules, CEMFI Working Paper No. 0416. Plessis, L., & Blignaut, L. Staying safe: Dominant firms’ pricing decisions in industries where high prices do not attract entry, presented in Third Annual Competition Commission, Competition Tribunal and Mandela Institute Conference on Competition Law, Economics and Policy in South Africa. Singh, V. V., & Mitra, S. Regulatory management and reform in india, Background Paper for OECD, CUTS International.

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