Analyzing Cost Structures for Determining Possible Predatory Pricing

Abstract

By using a case study of a fictional corporation, Central European Railways, Plc, this paper shows the application of current analytical tests applied within the EU competition policy in order to examine and identify possible predatory pricing. Predatory prices are set in such a way that excludes rivals from competition which potentially leads to the weakening of the price mechanism and redistribution of wealth away from consumers to the dominant competitor. Therefore, predatory pricing cannot be interpreted equally with excessive prices, which only leads to enrichment of the dominant competitor at the expense of consumers. The European Court of Justice uses a set of procedures based on a modified Areeda-Turner test (Russo et al., European Commission Decisions on Competition: Economic Perspectives on Landmark Antitrust and Merger Cases, 2011) to evaluate possible predatory pricing: the first and second AKZO test. The first AKZO test uses the criteria of marginal costs, which in practice are most often approximated by using average variable costs. The second AKZO test applies special price bands defined by average variable costs and average total costs. Prices below average total cost – which is the sum of the fixed and variable costs – but above average variable costs are regarded as abusive if there is a plan to eliminate a competitor. In addition to these economic parameters, there is an element of subjectivity which refers directly to the postulated competitive strategy of the dominant competitor. Production at prices below average variable costs of each unit sold generates a loss totaling all fixed costs and at least a part of variable costs. It is assumed that if the dominant competitor carries out production for such prices, there is no other interest Int Adv Econ Res (2014) 20:467–468 DOI 10.1007/s11294-014-9486-8