The Treatment Excessive Pricing

Introduction:

Taking into account the definition given by Cosmo Graham on what constitutes an excessive pricing it can be said that it is: the classic offence of a monopolist. It can be achieved when a monopolist raises its prices by restricting output and thereby harming social welfare because those consumers who purchase goods or services pay more than they would, under competitive conditions and those who would have bought the goods or services at a competitive price do not do so.

One possible indicator of excessive prices would be high or excessive profitability of the undertaking, although this may also be the result of the undertaking’s efficiency or a competitive advantage.

In the area of excessive pricing, on the one hand the European Commission has not shown too much interest and it is said that they have hardly bothered with pursuing excessive pricing cases, while on the other hand the UK competition authorities have shown too much interest in the examination of profitability of undertaking and they used this analysis in reaching conclusions about the competitiveness of particular markets, but the approach taken was criticized as flawed and misleading.

Difficulty For Competition Authorities:

It is difficult for a competition authority to pursue excessive pricing and profitability cases and there are a number of reasons why.

To start with the first problem, which is the one of high profits, high profits are not necessarily an indication of a competition problem, for the reason that the high profits may be a result of risks taken and innovations, or the undertaking may be more efficient than its competitors. If this is the reason then it cannot be said that high profits are a competition problem but they are the rewards of the competitive process for undertakings, which in the long run will reduce as the other undertakings will familiarize there self with the innovation and therefore the competitors will also become more efficient.

“The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful but it also constitutes an important element of the free-market system. Even for a short period, the opportunity to charge monopoly prices is what attracts business acumen in the first place as 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.”

Moving forward, the second problem, which is more difficult, is the one of measuring the profits of an undertaking. The problem here is that undertakings measure accounting profits, whereas the competition authorities are interested in economic profits, where there is a need to draw a distinction as accounting and economic profits are two different things.

The determination of accounting measures of profitability can be made by a set of rules and conventions that require interpretation and offer some degree of flexibility. Therefore the reported profitability of an undertaking will depend on the accounting conventions employed, where there may be a variety of these conventions between undertakings. Therefore, the approach that the competition authorities will have to take is the interpretation and translation of the accounts of an undertaking if they tend to use it for profitability analysis.

Cost Allocation:

When following the above process a problem is created, this is named cost allocation. The profitability of an activity depends on the costs of an activity and almost all undertakings produce more than one product or service. In result of these, there will be costs which are peculiar to the production of that product and also costs which are common to the undertaking for the production of its other products.

Taking for example, current accounts services offered by banks to small businesses or personal customers, where there are numerous costs that are peculiar to each activity such as printing of cheque books and production of statements but also there are costs that are peculiar to such activities such as the cost of the bank’s branch network. Normally the interest of a competition authority will turn in only one activity, where they will have to find a way to allocate the common costs between the activity where it showed interest in and the one that it is of no interest. There are a number of ways of allocating common costs, but there is no agreed way of doing such an allocation and different ways may lead to different results.

When the competition authority arrives at a satisfactory number of allocating costs, a third problem arises. The third problem in resolving a case has to do with the competition authority’s decision of what level constitutes a profit too high, where it has been said that this involves, “a high level of arbitrariness”.

The UK competition authorities look at the rate of return for the activity against the cost of capital for such an activity, where this approach has been criticized of being different from comparison, the rate of return is accounting based and the cost of capital is market based, and therefore flawed, as well as problems with determining the cost of capital.

Remedy – Price Control

If the competition authority decides that profitability and the prices are too high, the final step that it has to be taken is to reach a decision based on a suitable remedy, which is the remedy of price control.

The remedy of price control makes the competition authority a sectoral regulator, something that the European Commission was very wary of, stating that it does not normally control or condemn the high level of prices as such.

On the implementation of price control, it has to be monitored and reviewed in order to check if it remains appropriate, all activities that take up administrative resources.

Excessive pricing cases are difficult for competition authorities but the UK experience on the subject shows that the problems are not insurmountable. There is a difference between the approaches taken by the UK and the EC. The difference lies more in the administrative capacity of the institutions and the procedures that are followed, rather than in the difficulty of each case. In the UK excessive pricing cases have not been dealt with in accordance with Article 82 cases, with one notable exception, but have been market investigations by the Competition Commission.

The Competition Commission has more economic and accounting expertise available that neither the Office of Fair Trading (OFT) nor the European Commission have, and thus raised its confidence in dealing with these issues.

European Community’s Approach In Excessive Pricing:

The starting point for looking at the European Community approach to excessive pricing is the case of “United Brands”, where in this case the United Brands was charging different prices in different countries for its bananas, where in some part of continental Europe were 100% higher than those sold in the Irish market by the same company, 20% – 40% higher than the prices of unbranded bananas, with minimal quality differences and 7% higher than other sellers of branded bananas.

In this case the European Commission penalized United Brands with a large fine and suggested a 15% cut in the prices of its bananas. This decision was however annulled by the ECJ on the grounds that the European Commission did not provide sufficient evidence because it didn’t attempt to evaluate the production costs of bananas and the 7% difference could not be considered automatically as unfair.

In principle the ECJ accepted that excessive pricing could constitute an abuse stating that: “charging a price which is excessive because it has no reasonable relation to the economic value of the product supplied would be an abuse. 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 if the product in question and its cost of production, which would disclose the amount of the profit margin. 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 affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products. Other ways may be devised of selecting the rules for determining whether the price of a product is unfair.”

This approach taken is accepted as having created a two part test where at 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.

Because the ECJ did not give a specific guidance as to what is considered to be unfair, a number of issues were raised in relation to the comparison with competing products, as they may offer a different price or quality mixture which may make such a comparison difficult, where no difference is available it will constitute in concealing a competition problem. As a result the ECJ suggests that there are other ways that require no specific guidance in order to decide whether or not a price is to be considered unfair.

The ECJ has been more helpful where in the case of “Bodson”, which involved price charging for funerals by an undertaking with an exclusive concession in a local area, where the prices that were charged could be compared with the prices of another competitive market. The ECJ held that the comparison could be made between prices charged, in Member States, for a specific product with those charged for a similar product in another Member State. The ECJ stated that the comparison has to be of fee levels should be made on a consistent basis.

Since the case of United Brands the European Commission started bringing more often cases regarding excessive pricing. The first case of “General Motors”, was found by the European Commission that the undertaking was charging excessive prices for vehicle conformity certificates in Belgium. In contrast with the Commission’s judgment, the ECJ held that it was not charging excessive prices, therefore no abuse was committed, on the ground that the issue was a temporary one as national procedures were changed.

In an identical case, the one of “British Leyland”, were it was charging different prices for cars that were left handed and right handed. In this case the European Commission held these prices being excessive and discriminatory. This judgment was upheld by the ECJ.

Another successful case was the one of “Deutsche Post” where the German post office, who wrongly had classified certain types of mail that came from the UK as having originated from Germany and had imposed the full domestic tariff on this mail. In this case it was impossible for the Commission to compare the prices to Deutsche Post’s costs because there was no reliable accounting data, it had a statutory monopoly. The Commission’s judgment was based on Deutsche Post’s own estimate, which was based on international agreements for cross-border mail and made an indication of an excessive pricing around 20%. The outcome of this case was the imposition of a nominal fine.

Recently the European Commission dealt with excessive pricing in two complaints that a Swedish port had charged excessive prices to ferry operators. Despite the fact that the Commission had declined the complaints, the case indicates some of the difficulties of proving excessive pricing. The most important thing in this case is that the Commission had adopted the two stage test that was mentioned above. The difficulty that the Commission was faced with was in determining costs because most of them were indirect, hence this lead to a question of cost allocation, and because the largest portion of the costs were fixed, while the variable costs were particularly small. Also the Commission could not find a sufficient benchmark for what constituted an excessive price. Hence it was impossible for them to make a comparison and to decide what a “reasonable” profit margin would be.

In relation to the German system for recycling of packaging for consumer products, the Commission’s decision raised the issue of excessive pricing and appealed to the CFI and the ECJ. In the case of “Dual Systemes Deutschland (DSD)”which concerned a nationwide scheme for recycling packaging which revolved around all packaging which was eligible for this system to bear a green dot label. The manufacturers and distributors were charged a fee for the use of this symbol based on the amount of packaging that they put into circulation, regardless of the amount that was recycled by DSD and the reason for the abuse was that the fee was not linked to the use of the system and made it difficult for competitors to enter the market. The CFI upheld the decision stating that “it was an abuse to charge fees for services which were disproportionate to the economic value of the service”.

The above leads to the conclusion that the Commission used it power sparingly and focused on cases that concerned a legal monopoly and barriers to the creation of an internal market e.g. “British Leyland”, while recently it was active on markets open to competition. Cases such as the “DSD” and “Swedish Port” are cases that belong to this second group of cases and indicate the difficulty that the Commission is faced with in order to establish a case of excessive pricing where comparison or benchmark is unclear.

UK’s Approach In Excessive Pricing Under Sec. 18:

Moving forward in order to start the analysis of the UK’s approach the case of “Napp” has to be analyzed. In this case Napp which was a pharmaceutical company had produced sustained release morphine tablets that were used to treat moderate and severe pain. Two relevant markets existed for this specific drug. The first was the community market for under the care of GP’s and secondly the hospital market where Napp held over 90% of the shares in both these markets.

As it comes to the community market the Director General of Fair Trading (DGFT) held that Napp was in breach as it had abused its dominant position by imposing excessive prices.

A definition of whether a price would be regarded as excessive was delivered by the DGFT who stated: “a price would be excessive if it was above that which would be found in a competitive market and that there was no effective competitive pressure which would bring the prices down to competitive levels nor was there likely to be any”. The view above was accepted by the Competition Appeal Tribunal (CAT). This case was an easy one because the comparison was very clear and therefore the DGFT could easily compare it to another undertaking of the same product.

Bringing cases of excessive pricing under sec 18 is very difficult and the explanation is shown in the comparison of the following two cases.

First the case of “Attheraces” which concerned a dispute, between British Horse Racing Board (BRB) and a broadcasting company called Attheraces (ATR), over the provisions of pre-data from BRB to ATR, where ATR claimed that the price charged for this data was excessive and hence a breach of sec. 18 Competition Act 1998. At first it was successful in the CFI where it was held that the competitive price was the cost of producing the data plus a reasonable return of that cost. The Court of Appeal overturned this judgment stating that the approach taken was too narrow and did not considered the economic value of the data to the purchaser and that the economic value would depend on market conditions. It also stated that no evidence was available that had shown that ATR’s competitiveness was damaged, as this is the objective of Article 82.

In the second case of “Albion Water”, Albion wanted to supply water to a paper mill, using the transportation system of Welsh Water’s (Dwr Cymru). Albion brought a claim that the price charged in order to use the specified system was excessive and an abuse of dominance.

Albion brought the complaint to the regulator, who has competition powers with the OFT, who rejected it. Then it appealed to the CAT where it was held that the price charged was excessive in relation to the costs, where in the particular case the Welsh Water had a monopoly, and that the economic value of these services was to be judged in relation to the cost of the services. Helping the CAT to reach its decision was a detailed report on the costs of the service provided from the regulator.

In this case the CAT gave a brief analysis of the test that is used by the European Commission, the OFT and the UK judicial authorities. First, an analysis of the costs incurred in producing the product of service must be made, then the costs and the price charged must be compared and then an assessment of whether the resulting difference is such that would constitute the price charged as excessive. Finally an assessment of whether the excessive price bears no reasonable relation to the economic value of the product or service supplied and is an abuse of a dominant position, with the consequence that it is either unfair in itself or unfair when compared with competing products.

Conclusion:

A solution of excessive pricing may be considered as the one of reducing the prices to non-excessive levels but then a new question arises as to what level is to be considered as satisfactory.

In conclusion many attempts were made in order to treat excessive pricing but in each attempt new problems were created. All the appropriate institutions dealt with many cases in order to come to the final test that was stated above, where it can be seen as very useful in many cases when deciding cases concerned with excessive pricing.

Bibliography

Case-Law

• • Verizon Communications v Trinko 124 S. Ct. 872 (2004) per Scalia, J

• • Competition Commision “The supply of banking services by clearing banks to small and medium sized enterprises” (2002); Competition Commission “Northern Irish personal banking” (2207) Appendix 4.1 par. 16-26.

• • United Brands Co v Commission of the European Communities [1978] E.C.R. 207; [1978] 1 C.M.L.R. 429

• • Case 27/76 United Brands v Commission [1978] E.C.R. 207 par. 250-253Case 30/87

• • Corinne Bodson v Pompes Funebres des Regions Liberees SA [1988] ECR 2479

• • Case 26/75 General Motors v Commission [1975] ECR 1367

• • Case 226/84 British Leyland v Commission [1986] ECR 3263

• • Deutsche Post AG [2002] OJ L 331/40

• • Scandlines Sverige v Port of Helsingborg COMP/36.568, [2006] 4 CMLR 1298

• • Case T-151/01 Duales Systemes Deutschland v Commission [2007] 5 CMLR 5

• • Napp Pharmaceuticals v Director General of Fair Trading [2002] CAT 1

• • Attheraces Ltd v British Horse Racing Board [2007] EWCA Civ 38

• • Albion Water v Water Services Regulation Authority [2008] CAT 31

Statutes

• • Competition Act 1998

Secondary Sources

• Alison Jones and Brenda Sufrin, EC Competition Law, (3rd ed. Oxford University Press, Oxford, 2008)
• Cosmo Graham 2009 (Chapter 3)
• R. Whish, Competition Law (LexisNexis, 2008, 6th ed.)
• Professor Cosmo Graham’s handout and power point slides