Predatory Pricing After AKZO-Chemie

AuthorSimon Hannigan
PositionSenior Sophister Law Student, Trinity College, Dublin
Pages36-52
PREDATORY
PRICING
AFTER
AKZO-CHEMIE
SIMON
HANNIGAN*
Introduction
Predatory
pricing
is
generally
regarded
as
a
very
difficult
concept
to
define
with
any
degree
of
accuracy.
At
its
most basic,
predatory pricing
can
be
described
as
a
policy
of
price-cutting
by
a
firm with
significant
market
power
designed
to
deter
new
entrants
or
force
existing
rivals
from
the
market,
so
as
to
enable
the
predator
to
increase
market power
and
recoup
any
lost
profits
in
the
long-run
following
the
diminution
of
competition
in
the
market. Until
recently,
in-depth analyses
concerning predatory
pricing
have been
scarce
in
EC
law
and
academic
debate
is
practically
non-
existent.
In
AKZO
Chemie
BV
v.
Commission,
1
the
issue
of
predatory
pricing
came
before
the
European
Court
of
Justice
(ECJ)
for
the
first
time
in the
history
of
EC
law.
As
with
many
concepts
of
EC
competition
law,
the
origins
of
seeing predatory
pricing
as
a
form
of
abuse
under
Article
82
of
the
EC
Treaty
lie
in
the
jurisprudence
of
the
US.
In
1975
an article
by
Areeda
and
Turner
2
initiated
a
fresh debate
on
the
issue
of
predatory
pricing.
Several different economic approaches
were
proposed,
providing
American
judges
with
the
appropriate
economic
basis
to
deal
with
the
legality
of
predatory
pricing.
Therefore,
before
turning
to
the
caselaw
of
the
ECJ,
it
is
important
to
assess
the
differing
approaches
proposed
by
the
American
academics
and
the
manner
in
which
they
have
been
applied
by
the
American
judiciary.
Overview
of
Economic
Theories
of
Predatory Pricing
Areeda
and
Turner
Areeda
and
Turner
initiated
the
academic
analysis
of
predatory
pricing
with
their
cost-price
rule.
They
argue
that
if
a
dominant
firm's
price
equals
or
exceeds
marginal
cost
it cannot
eliminate
a
more efficient
competitor.
Senior
Sophister
Law
Student, Trinity College,
Dublin.
AKZO
Chemie
BVv.
Commission
[1991]
ECR
1-3359;
[1993]
5
CMLR
215.
2
Areeda
and
Turner,
"Predatory
Pricing
and
Related
Practices
under
Section
2
of
the
Sherman
Act"
(1975)
88
Harv
L
Rev
697.
©
2001
Simon Hannigan and
Dublin
University
Law Society
Predatory
Pricing
They therefore
consider
as
predatory
any
price
below
marginal
cost.
Areeda
and
Turner
recognize
however
the
difficulty
in
discovering
a
firm's
marginal
costs
and therefore
adopt
average
variable
cost
as
a
proxy
for
marginal
cost. Thus
Areeda
and
Turner
regard
as
unlawful
any
price
below
average
variable
cost.
The
test
is
designed
to
be
permissive
since they
presume
any
price
above
average
variable
cost
is
lawful. This
approach
is
based
on
their
belief
that
predatory
pricing
is
in
reality
a
rare
phenomenon.
They
are
also
concerned
about
the
detrimental
effects
a
more
restrictive
rule
could have
on
legitimate competition.
As
has
been mentioned,
the
Areeda
and
Turner
article sparked
the
emergence
of
several
new
predatory
pricing
rules
aimed
at
improving
upon
their
short-run
marginal
cost
approach.
These
different
rules
can
be
summarised
under
three categories:
Cost-Based
Rules,
Non-Cost
Rules and
a
Rule
of
Reason
Approach.
Cost-Based
Rules
Posner's
main
goal,
like
Areeda
and
Turner,
is
the
achievement
of
allocative
efficiency
in the
market.
3
He
defines
as
predatory:
"pricing
at
a
level
calculated
to
exclude
from
the
market
an
equally or
more efficient
competitor.",
4
Posner,
however,
believes
that
one
must
recognize
the
long-
term
strategic nature
of
predation, which
was
an
important
element absent
from
Areeda and
Turner's
short-run marginal
cost analysis. Posner
would
condemn
either
pricing
below
short-run
marginal
cost
or
pricing "below
long-run
marginal
cost
with
the
intent
to
exclude
a
competitor.,
5
He also
recognizes that
some
competitors
may
try
to
abuse
rules
against predatory
pricing
in
order
to
prevent
price
reduction
by
rivals.
He
therefore suggests
that
plaintiffs
in
predatory
pricing
cases
should
be
required
to
show
that
the
relevant
market
has structural characteristics that
would
make
predatory
pricing
profitable
by
proving that
the
alleged
predator
possessed
market
power
and
that
the
market
was
surrounded
by
barriers
to entry.
Only then
would
the
matter
of
the
alleged abusive
behaviour
be
considered.
Joskow
and
Klevorich proposed
a
two-tiered
predatory
pricing
test.
6
The
first
tier
requires
the
plaintiff
to
prove
that
the
market
structure
was
monopolistic
at
the
time
of
the
alleged
predatory
act
and
would
make
predatory
pricing
possible.
This
first
tier
recognizes
Posner's
concern
that
rules
on
predatory
pricing
could
be
abused
and
thus
represents
a
screening
test
to
eliminate
cases
where concern
over predatory
pricing
is
totally
3
See
Posner,
Antitrust
Law:
An
Economic
Perspective
(University
of
Chicago,
1976),
at
186.
4
Ibid.,
at
188-189.
'
Ibid.
6
See
Joskow
and
Klevorich,
"A
Framework
for
Analyzing
Predatory
Pricing
Policy"
(1979)
89
Yale
LJ213.
20011

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