Competition Law

Introduction

Our essay question before us falls within the area of competition law and particularly within the area of Article 82 of the European Community. “Competition means a struggle or contention for superiority, and in the commercial world this means a striving for the custom and business of people in the market place [1] “. Article 82 EC prohibits undertakings from committing an abuse of a dominant position held within a substantial part of the common market where that abuse has an effect on trade between Member States [2]. In my essay I am going to examine the concept of excessive pricing as it is a vital type of abuse since it can be seen as the classic offence of a monopolist.

Article 82 EC

Article 82 EC states that any abuse by one or more undertakings of a dominant position within the common market or substantial part of it shall be prohibited as incompatible with the common market insofar 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, b. limiting production, markets or technical developments to the prejudice of consumers, c. applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage, and finally d. making the conclusion of contracts subject to the acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. [3]

According to the article 3 section 1(g) of the Treaty of Rome 1957 the European Community must make sure that competition is not distorted in the internal market. However, this does not clarify the purpose of undistorted competition and therefore many critics argue that Article 82 EC is used to defend the competitors rather than to protect competition. The Commission instead, protests that it does not act to protect competitors, but to support consumer welfare through competition.

Abuse of a dominant position

There is not a definition provided by the Community Courts of what we mean by saying abuse of a dominant position. Although, according to the case of Hoffmann-la Roche v Commission [4] : “the concept of abuse is an objective concept relating to the behavior of an undertaking in dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those governing normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or growth of that competition”. [5] The term of abuse has been categorized in two types, the exploitative abuses and exclusionary abuses. By exploitative abuses we mean that the dominant undertaking is making anti-competitive attempts in order to exploit the consumers, such as excessive pricing or limiting output. On the other hand, exclusionary abuse excludes the competitors from the market with the aim to reach a greater market power in order to exploit then the consumers.

Arguments against direct control

There are convincing arguments against direct control of prices under competition law. By direct control the competition authorities will have the power to control and adjust the prices under the conditions of Article 82 EC. The main argument is the fact that firms by having the opportunity to control the prices, in certain limits, are encouraged to take steps to improve their products in order to succeed in the market. For example, in the case where a monopolist is able to receive large earnings the removal of monopoly profits will be self-defeating and can act as an important economic indicator to possible entrants to enter the market. A monopolist should be entitled to earn large profits in order to make expensive and risky researches and developments. Furthermore, it is difficult for the competition authorities to identify and control all exploitative pricing

Given these problems, it is not surprising that competition authorities tend to prefer to deploy their resources by proceeding against abuses that exclude competitors from the market rather than establishing themselves as price-regulators [6] .

Excessive Pricing

As I have mentioned above an abuse of Article 82 EC is excessive pricing, which is placed in the category of exploitative abuses. Article 82(a) states that ‘an abuse may consist in directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions’. Excessive pricing is the most observable method in which a monopolist can take advantage of its position. Based on some economic theories, monopoly prices are higher than those in competitive markets and also, excessive prices equal the popular conception of the problems of monopoly.

Moreover, a price is excessive and therefore unfair in the case where dominant firms have benefitted of their dominant position to set higher prices than these which would result from effective competition. Consequently, a price is excessive when above the effective competitive level. Also, a price is unfair when above the economic value. That means that when it is above the normal competitive level.

EC case law

There are two cases where the European Court of Justice quashed the decision taken. First, we have the case of General Motors v Commission [7] where there was an attempt to accuse them for excessive pricing under the Article 82. It was held that there was no abuse due to lack of evidence to support that there was an abuse of a dominant position. Then, in United Brands v Commission [8] case the Commission forced a fine for excessive pricing. The European Court considered an application by United Brands Company to set aside a decision of the Commission of the European Communities for infringement of the Treaty of Rome 1957Aricle 85 and Article 86 for moral damages, cancellation or reduction of the fine imposed by the Commission, and costs. This company is the largest group in the world banana market [9] . The European Court of Justice said that: ‘charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied is…an abuse’. Hence, excessive pricing may considered as an abuse of a dominant position. The problem is how to identify whether a price is abusive, where there is no relation of excessive pricing to the products’ economic value. We also have a two part test: first the profit margin is calculated and then it must be decided if the price is unfair in itself or by comparison to competing products [10] .

Additionally in the case of Deutsche Post AG-Interception [11] , in the case of cross-border mail the Commission concluded that the prices for the onward transmission of cross-border mail were excessively high. In this case the Commission in order to decide whether there was an abuse of a dominant position compared the prices of Deutsche Post with its domestic tariff and came to the decision that there was an abuse.

The earlier attempt of the European Commission to deal with excessive pricing was found in the case of Scandlines Sverige AB v Port of Helsingborg [12] where the Commission abandoned the complaint that the port charges at the Helsingborg’s port were high. Also, the Commission looked the economic value of the service provided and then it has to examine whether the price is unfair in itself or to compare the charges with prices of other services provided in the same port and with charges to ferry operators in other ports. The Commission finally concluded that there was not a breach of Article 82 EC.

In addition, the abuse of excessive pricing is also found in the telecommunications sector. The Commission in that situation investigated many cases referring to excessive pricing in the telecommunications area. The dominant firm in each of these cases adapted its prices in a way that ended the proceedings.

Furthermore, we have the yardstick competition which is a technique of comparing the performance of an undertaking with the performance of other undertakings. A famous illustration of this is the Corinne Bodson v Pompes Funebres des Regions Liberees [13] a case related to funeral services in areas of France where there were monopoly concessions granted by local authorities [14] . Here it was suggested by the European Court of Justice that the prices charged could be compared with the prices charged somewhere else. A similar case to this is the case of Lucazeau v SACEM [15] . In this case the European Court of Justice held that the charges for a product of a Member State should be compared with prices charged for similar products in other Member States. The comparison of the level of fees should be on a reliable basis. Another example of excessive pricing is found in the case of Ministere Public v Tournier [16] . According to this case the European Court of Justice stated that excessive or disproportionate costs should be overlooked when establishing the reasonableness of prices.

Moving on, another thing that must be pointed out is the case of excessive pricing that impedes parallel imports and exports. An illustration of this is found in the case of BL v Commission [17] where the reason for the Commission’s interference was not the fact that it wished to establish itself as a regulator of the prices charged for the issuance of type-approval certificates for cars, but that the prices that the Commission regarded as excessive were imposed with the intention of impeding parallel imports and exports [18] .

In the case of excessive pricing and aftermarkets we have the CICCRA v Renault [19] case where the European Court of Justice suggested that a car manufacturer may not give licences to third parties to construct spare parts for its cars. If the spare parts which it constructs have excessively high prices then this may amount to an abuse. In Parke, Davis & Co v Probel [20] the Court said that the higher price of a patented compared with a non-patented product did not necessarily mean that an abuse had been committed [21] .

Additionally, we have to discuss the case where the prices are excessively low. CICCE v Commission [22] concerned a complaint about the allegedly low prices paid as licence fees for the showing of films on French television [23] . The ECJ rejected the complaint against the Commission which referred to the refusal of the Commission to criticize the unfairly low prices which were paid by a monopolist on the buying side of the market, since there was not enough evidence to support the assertion. On the contrary, the European Court of Justice agreed with the Commission which said that the complainant had to prove that the price was excessively low in relation to each individual film and also, that it could not rely on standard or undifferentiated figures.

UK case law

As in the European Community, we have cases referring to excessively high prices in the United Kingdom as well. A chief decision was taken in Napp Pharmaceutical Holdings Ltd v Director General of Fair Trading [24] where Napp sought an order suspending directions issued in the course of a decision by the Director, which found that Napp had abused its dominant position contrary to the Competition Act 1998 s.18(1) by granting discounts to hospitals on the supply of drugs while also maintaining high prices for the same products sold to general practitioners [25] . On appeal the Competition Appeal Tribunal (CAT) concluded that the methods used by the OFT were “among the approaches that may be reasonably used” but also said that without a doubt other methods do exist. Therefore, the Tribunal upheld the CFI’s decision on excessive pricing but reduced the amount of the fine the OFT had placed upon Napp because there were some factors mitigating its position. This was the first application before the tribunal under the 1998 Act, the judgment and procedure were set out as guidance for future cases.

The difficulty of determining excessive prices is illustrated by two cases, the case of Attheraces Ltd v British Horse Racing Board [26] and the case of Albion Water Ltd v Water Services Regulation Authority [27] . In the first case the facts where that the claimant company (X) sought an injunction and declarations in proceedings in which it alleged that the defendant company (B) had abused its dominant market position. X supplied websites, television channels and other audio and visual coverage of horse races by using its own website, branded television channel, audio visual bookmaker service and an international audio visual bookmaker service run by another company. The website and channel showed British horse races and allowed viewers to place bets on races through X’s services. B maintained and operated a database of information containing pre race data relating to British horse racing. By an agreement between its parent company and one of B’s shareholders, X had acquired rights allowing it access to most of the licensed racecourses in Great Britain to film meetings and exploit such films worldwide. That agreement was terminated and X entered into negotiations with B to secure media rights to the racecourses but X did not agree with the terms suggested by B and commenced proceedings. X alleged that B had sought to impose terms for the supply of pre race data required by it for its business and had made threats to procure the termination of the supply of such data amounting to an abuse by B of a dominant position contrary to EC Treaty Art.82 and the Competition Act 1998 section 18 [28] . Here it was held that the competitive price was the cost of producing the data plus a reasonable return on that cost. Then the Court of Appeal upturned this decision by saying that this approach did not consider the economic value of the data to purchaser and that it was too narrow. Also, the Court of appeal focused on the fact that the object of Article 82 EC was not to control the prices but to protect and encourage the competition, specially the consumers’ interests.

On the other hand in the Albion Water case the claimant succeeded. The Albion wanted to supply water but it needed to use a Welsh Water’s transportation system. It complaint, that the price was excessively high and therefore it was an abuse of a dominant position. When the regulator discarded the complaint made, Albion Water appealed to the CAT who held that Albion was right to complain. The CAT decided that the charges were excessive and that the economic value was to be judged relating to the cost of services.

Furthermore, there is a provision in section 13 of the Competition Act 1980 which remains in force, whereby the Secretary of State may ask the OFT to investigate prices ‘of major public concern’: only a factual report may be made under this section, which has never been used [29] .

Conclusion

On the whole, basic elements of Competition law have been analyzed and included in the essay. Investigating case law and statutes helped us to perceive what the courts would do in situations of excessive pricing. Fifteen years ago, Fox (1986:992) noted that, “the Common Market law on excessive pricing has profound implications. It assumes that high pricing is unfair, it assumes that unfairly high pricing can be identified by courts, and it implies that courts are better mechanisms than markets to correct unfairly high pricing”. Closing up, excessive pricing under Article 82 EC, is a controversial issue that needs to be considered for future changes.