PREDATORY PRICING - OECD

1 PREDATORYPRICINGORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT2 This report covers PREDATORY PRICING , PRICING so low that competitors quit rather than compete,permitting the predator to raise prices in the long run. PREDATORY PRICING is subject to the competition lawsand policies of most OECD countries, but there has been a lively controversy over what standards shouldbe applied. Some officials go so far as to urge that any rule against predation will do more harm thangood by depriving consumers of the benefits of vigorous price report examines the conflicting proposals for a standard to control PREDATORY PRICING andrecommends a method of analysis which competition officials should follow.

2 Major emphasis is given toidentifying when low PRICING should not be of concern to competition authorities. OECD 19893 TABLE OF ECONOMICS OF 7A. PREDATORY 7B. Non-Price Predation .. 11C. Discussion .. 12 III. THE FREQUENCY OF PREDATORY FOR CONTROLLING PREDATORY 19A. No Rule .. 19B. Short-Run Cost-Based Rules .. 20C. Long-Term Cost-Based Rules .. 21D. Output Expansion Rules .. 22E. Rules Governing Price Rises .. 23F. Industry-Specific 24G. Rule-of-Reason 24H. Two-Tier 26I. Discussion .. MECHANISMS TO CONTROL PREDATION.

3 29 Australia .. 29 Austria .. 31 Belgium .. 31 Canada .. 33 Finland .. 34 Ireland .. 36 New Zealand .. 37 Portugal .. 38 Sweden .. 38 United 38 United States .. 39 European Community .. 434 Discussion .. 45 Australia .. 45 Belgium .. 46 Canada .. 51 Germany .. 58 Sweden .. 58 United 59 United States .. 62 European Community .. 70 Discussion .. 72 VII. 75 NOTES AND 78 Chapter II .. 78 Chapter III .. 80 Chapter 81 Chapter V .. 85 Chapter 895I. INTRODUCTIONThe subject of PREDATORY conduct, PREDATORY PRICING in particular, is topical again.

4 Several trendshave converged which make an examination of predation timely. The first is the sweeping movementthroughout the OECD to increase competition and efficiency through the deregulation of numeroussectors and the privatisation of state-owned enterprises. This movement raises concerns that the newlyfreed firms, often dominant in their markets, will seek unfairly to protect their positions against newentrants. Second, there is the increasingly difficult area of international trade, where economicdislocations in connection with rising imports have caused many domestic industries to charge theirforeign competitors with dumping.

5 This increasing concern over international trading practices couldbenefit from clear thinking about what PRICING should be considered economic literature on PREDATORY PRICING has likewise been in a state of flux. Although earlytheorists made intuitive arguments on the dangers of predation, this view has been largely displaced bytheories that price predation is irrational and should therefore be rare. While this latter view has becomethe conventional wisdom affecting the formation of PRICING rules and decisions by courts and competitionpolicy officials, still more recent theories have cropped up arguing that PREDATORY PRICING can indeed berational in certain circumstances.

6 To the extent that these newer views are correct, heightened concernover predation is recent phenomenon is the emergence of concern over non-price predation. Non-pricepredation, sometimes called raising rivals costs, includes the abuse of judicial and administrativeprocedures to impede domestic and foreign competitors. Because the rules against PREDATORY PRICING anddumping are natural weapons for the non-price predator, it is important that these rules be no broader thannecessary; rules which are overbroad or imprecise invite their abuse for anticompetitive predation is not the only reason why PREDATORY PRICING rules must be carefully drawn;an imprecise rule carries real risks of costly errors.

7 Mistaking competitive PRICING as PREDATORY will tendto inhibit price competition in the economy. On the other hand, mistaking predation for competition mayfoster higher prices from increased concentration in the long run. In light of these considerations,competition authorities should not take action unless the existence of PREDATORY PRICING can be establishedwith a reasonable degree of accuracy and should recognize that it may be better to have no explicit ruleprohibiting PREDATORY PRICING than to mechanically enforce such a of one type or another concerning PREDATORY conduct are found in the competition lawsand policies of most Member countries.

8 These rules typically prohibit abuse of dominant position, effortsto monopolize a market or price discrimination to injure competition in a market. In addition, a fewMember countries have particular legislation prohibiting sales below some cost floor, generally withoutreference to the market power of the firm or the effect of the practice on competition. These sale-at-a-lossprohibitions are described even though they might not normally be considered to be predation rules. Theycould, nonetheless, operate in the same fashion as a cost-based anti-predation rule.

9 Thus, any lessonsdrawn from examining the latter type rules could illuminate the former. In addition, provisions relating to loss-leader and advertised but unavailable items exist in some Member countries but are not examinedin this report. Provisions of this type are as often found under consumer protection regimes as they are6under competition policy, and thus go beyond the scope of the present study. This report describes brieflythe legal framework in each Member country as well as significant cases arising under those laws.

10 Itshould be kept in mind, however, that a number of Member countries report that no such cases have yetarisen under their laws. In addition, a number of necessary elements in the treatment of a predatorypricing case are beyond the scope of this report. For example, questions concerning market definition andwhat constitutes a dominant position or market power are not report defines predation as short-run conduct which seeks to exclude rivals on a basis otherthan efficiency in order to protect or acquire market power.