Excessive Pricing: The Flaws of 'Tea Party' Competition Policy

Abstract

Since the adoption of the Guidance Communication in 2009, the Commission has kept exploitative abuses— and in particular excessive pricing cases—in a state of artificial hibernation, and focused on exclusionary cases as a matter of enforcement priority. The Commission’s small antitrust policy against exploitative abuses is predicated on ‘Tea Party’ competition economics: in the long term, high prices are presumed to deliver efficient outcomes, and competition enforcers risk doing more harm than good in trying to improve market outcomes. Tea Party competition gurus are, however, wrong on three counts. First, they are wrong on the theory. Contrary to the ominous suspicion that competition agencies fiddle with excessive pricing laws to tax dominant firms’ profits and achieve distributional transfers, there is a sound conceptual basis to justify the control of dominant firms’ excessive prices. Take a monopolist charging excessive prices in market A. With this, the monopolist dries up demand in neighbouring markets (B, C, D, etc.). But the monopolist also dries up a range of unrelated markets (W, X, Y, Z) which include all the markets where customers purchase goods/ services. For instance, a customer faced with surging oil prices will purchase lower quantities of milk, cereals, fruits, etc. (assuming finite resources). As a consequence, the monopolist’s pricing policy on market A thus forecloses—possibly unwillingly—sales opportunities for other producers on a range of markets. In turn, this may force out a number of firms from those markets, increase concentration, decrease entry opportunities and eventually harm consumer welfare. Competition authorities should thus pay attention to the foreclosure effects that arise on ir-relevant markets. Second, Tea Party competition enthusiasts are wrong on the practice. In particular, the assertion that excessive prices cannot be objectively determined is not persuasive. Most of us have, for instance, noticed that the price of competition law conferences, books, or subscriptions has reached insanely high levels. And beyond such personal experiences, policy makers at all levels routinely consider that some prices are excessive, and craft policy decisions on this basis. This occurs, for instance, in all markets where States facilitate the purchase of high price products with subsidies (for instance, pharmaceutical products) or discourage the purchase of low priced products with taxation (for instance, cigarettes). Last but not least, firms themselves often recognize that their prices are excessive. This is aptly illustrated in markets where firms engage in price discrimination (and thus slash some of their prices), in order to serve additional categories of customers with low reservation prices. Of course, the remaining issue is of a methodological nature. It boils down to devising a standard of price excessiveness that ensures economic efficiency. But as in other legal disciplines (e.g. risk regulation), the absence of a ‘silver bullet’ evidentiary method—or the existence of several methods with intrinsic limitations—should not hinder the enforcement of the law. Rather, the sole admissible limitation is that in such areas where legal standards are blurred, competition agencies should not inflict sanctions on non-compliant firms. This issue is at the heart of the Microsoft case currently pending before the EU courts. Third, Tea Party scholars and practitioners are wrong from an institutional perspective. Often, opponents of Article 102 (a) TFEU resort to scaremongering, suggesting that the application of excessive pricing doctrines would open the floodgates to litigation, with angry customers clogging up courts and competition agencies with requests to change the price