It's All Dominance That's Crucial in Predatory Pricing

It's all Dominance that's crucial in Predatory Pricing.justification or efficiencies defense[xii].
Predatory pricing is a strategy that entails aUnlike United States, EU has a relaxed requirement
temporary price below the cost of production infor predation and the liability for predatory pricing is
order to injure competition and thereby reap higherunder two scenarios. Firstly, any price below the
profits in the long run[i]. Predatory pricing is aaverage variable cost is per se illegal. Predatory intent
strategy adopted to enhance market power.is presumed here since such arrangement can not be
Predatory pricing has to be distinguished from afor reason other than to hamper competition.
competitive pro-consumer pricing. There is aSecondly, a price above average variable cost but
difference between pricing to meet and beat thebelow average total cost is illegal if it is proved that
competition; in predatory pricing the object is tothe intent of such pricing is to eliminate a
hamper competition. The pricing scheme may be forcompetitor[xiii]. But in both the above instance
elimination of a competitor or restriction of a potentialdominance is a precondition. In case the charge is
entrant or reducing the cost of acquisition of aunder the second scenario the intent of the predator
competitor.shall be proved with sound and consistent
The preliminary object of predatory pricing is toevidence[xiv], however there is no requirement of
capture and dictate the terms of market. Predatoryshowing the likely market impact of the pricing
pricing occurs when a company cuts its price in orderscheme.
to drive out or discipline a competitor and enjoyCanada
higher profits from reduced competition[ii]. ThoughIn Canada, predatory pricing is an offence under
there is a chance of recoupment on long-run, thesection 50 and a civil abuse of dominance under
predator has to sacrifice a lot initially, further thesection 78 and 79 of the Competition act 1985. In
returns of such arrangement are also uncertain.Canada there is no requirement of dominance to
Practically speaking this strategy involves a high riskcharge a person under section 50 of the act but for
and is feasible for dominant players alone. Thusfixing the civil liability you have to prove dominance
majority of the jurisdictions view predatory pricing asof the entity.
a form of abuse of dominance.In respect of civil action for abuse of dominance, as
The task of this paper is to analyze the relevance ofper the decision of the competition tribunal in
dominance in predatory pricing claims. The discussionNutrasweet case[xv], the pricing scheme shall have
will be based on the legal principles and practice inthe following two elements. Firstly, the pricing is
Canada, European Union and United States.below marginal cost. Secondly, there is some
Essential features of Predatory Pricingprospect of recoupment or the firm is trying to build
Predatory pricing is a market specific strategy thata reputation for predation in one market by engaging
can be adopted only by some of the players. Thus inin predatory conduct in another market.
predatory pricing claims, the real analysis is to look atFurther the competition bureau has clarified that
the suitability of market structure and position of therecoupment is the essential ingredient of predatory
alleged player in that market. The elements that arepricing. Though recoupment is considered to be an
material in predatory pricing cases areessential element of predatory pricing, it is presumed
Market concentration: Market concentration refers toon the existence of dominance[xvi]. However this is a
the number and size of the participants in therebuttable presumption which can be disproved on
market. Predatory pricing is one of the meansthe submission of evidence to the contrary.
through which market power is raised. PracticallyThe 2007 draft guidelines on predatory pricing
speaking, in competitive markets, attaining marketenforcement[xvii] say that recoupment is achieved
power through artificial means is a myth. Combinationby "charging prices above competitive levels or
is the general means advocated to attain dominanceachieving another anti-competitive objective". The
in concentrated markets, but in majority of theanticompetitive practices include preserving the
instance it is implausible for the simple reason thatlong-term stability of an existing market structure,
competitors least agree to merge. Thus predatoryraising barriers to entry by acquiring a "reputation for
pricing though illegal preferred than mergers, furtherpredation," coercing participation in an illegal
detecting predatory pricing is a complex issue[iii].conspiracy, or establishing an industry standard to
Entry barriers: Concentrated markets are alsoexclude others or maintain market control. Thus the
characterized by entry barriers. In the absence ofaspect recoupment in Canada is very broad.
entry barriers, the threat of entry or the impact ofIndian Position
frequent entries acts as a check to the adoption ofCompetition Act 2002 says that "predatory price"
predatory pricing. De-concentrated markets aremeans the sale of goods or provision of services, at
Competitive and are not compatible for any type ofa price which is below the cost, as may be
anticompetitive practice.determined by regulations, of production of the
Excess capacity: Absorption of rival sales is thegoods or provision of services, with a view to reduce
intended object of every predatory pricing policy.competition or eliminate the competitors[xviii]. The
With the reduction of price, the demand for theact declares predatory pricing as a means of abuse
predator's product increases with a decrease in theof dominance, thus dominance is a precondition to
demand for the product of the competitors. In thesustain a predatory pricing claim under our law.
absence of excess capacity, the predator would notHowever this Act is not yet notified, at present The
be able to absorb the intended rival's sales. Further ifMonopolies and Restrictive Trade Practices Act, 1969
the there is no additional production it does not(MRTP Act) is the law regulating competition in India,
pressurize the rivals and their survival.under which predatory pricing is a restrictive trade
Deep-pocket: Only firms possessing sufficient financialpractice under S. 2(o) and 33(j). Under MRTP Act,
reserves can be successful in engaging predatorydominance is not a pre-condition for predatory pricing
pricing. "Financial reserves may in turn be possessedrather the conduct and intent of the predator is
by firms with large market shares with relativematerial and needs to be proved with clear and
efficiencies and competitive costs or othercogent evidence[xix].
advantages over their rivals or with operations in 
independent relative markets. A firm with multiConclusion
market operations would have easier access to fundsThere is a clear difference of approach between the
derived from profits of other markets in which itthree jurisdictions with respect to the requirement of
successfully operates..."[iv] Since in the first phase ofdominance in predatory pricing claims. Though
a predatory scheme, i.e. when selling at artificially lowdominance is not a formal condition in U.S, it matters
prices, the predator will incur losses over a substantialfor the purpose of showing probable recoupment[xx].
period of time, it becomes clear that the predator'sIn EU dominance is a precondition but no need to
financial resources must be greater than the ones ofprove recoupment as such. In Canada both
his rival and the latter will may not be as able as thedominance and recoupment are pre-requisites but the
predator to withstand losses.latter is presumed from the presence of former.
Recoupment: In the absence of recoupment of theIf the object of predatory pricing law is to restrict
short-run loses, predation pricing becomes aharm to competition then dominance shall not be a
senseless operation. There is a difference betweenpre condition. It may be validly argued that
jurisdictions in the understanding and proof ofrecoupment is the essential element in all predation
recoupment. Recoupment in this sense does not limitclaims, which may be inferred from dominance, but
itself to the regaining of monetary loses suffered inwhat recoupment really means again requires a
short term, it includes the acquisition of reputation,serious investigation. There are probabilities even for
market power, etc.. In most the instance recoupmenta non-dominant entity to adopt predatory pricing
is inferred or presumed from the presence of otherstrategy to capture market. Especially a new entrant
attributes. Structural examination is the valuable toolwho is financially sound and dominant in other market
for identifying the markets likely to be vulnerable tomay well adopt this strategy to monopolize the new
recoupment[v].market with his reputation. It is because of this
Practically speaking, it is possible only for a dominantreason under section 4(e) of our Act declares, uses
entity to possess the said attributes. Marketof dominant position in one relevant market to enter
Dominance is a multifaceted aspect and it is also quiteinto, or protect, other relevant market as a form of
possible for a non-dominant entity to adoptabuse of dominance. Thus our legislation explicitly
predatory pricing provided it has sound financialaddresses the lacuna that is not addressed by other
position. Let us briefly look in to legal practice inthree jurisdictions.
Canada, European Union and United States withPractically speaking the position in EU is very sound
respect to the requirements in predatory pricingbut technically speaking a law should foresee all
claims.possible future instances that it should address[xxi].
United StatesThe author personally feels that the law shall not be
The American courts are much influenced by Chicagoas tough as US to prove the claim, at the same time
school. Scholars of this school challenge the notionit shall not preclude a non-dominant entity from the
that predatory pricing is a means to monopoly. Forrigors of predatory pricing law.
them predatory pricing is an implausible and irrational 
strategy. They don't say that predatory pricing as anReferences
impossible event. Their main concern is about the[i] Ritter: Recent Developments in Predatory Pricing
probability of occurrence and possibility of detection.Law: [2005] E.C.L.R at pg.48.
The present position in US is governed by the ratio[ii] Scott Hamphill, The role Recoupment in Predatory
of the Supreme Court in Brook's case[vi]. As per thePricing analysis, Stanford Law Review, Vol. 53, No. 6,
decision the plaintiff has to show that(Jul., 2001), at Pg. 1581.
1. That the alleged predatory prices are below an[iii] Matsushita Electric Industrial Co. v Zenith Radio
appropriate measure of the defendant's cost and ACorp., 457 U.S. 576 (1986); the claim was rejected on
dangerous probability that the defendant would bethe ground that the TV market is a De-concentrated
able to recoup its investment in below cost price.industry.
2. The position before this case was little different,[iv] Aditi Gopalakrishnan, Abuse of Dominance,
were proof of price discrimination with anExamining Issues in Predatory Pricing, project done on
exclusionary intent is sufficient to succeed abehalf of Competition Commission of India
predatory pricing claim[vii].[unpublished].
At present recoupment is the prime essential, in the[v] Supra 2, at Pg. 1583.
absence of which competition remains unharmed[vi] Brooke group ltd., petitioner v Brown &
even if other competitors suffer. Thus recoupment isWilliamson tobacco corporation, 113 S. Ct. 2578.
the sinquonon and sufferings of a competitor is[vii] Utah pie Co. v Continental Banking Co., 386 U.S.
immaterial for preventing a below cost pricing.685.
Further, American courts repeatedly held that anti[viii] Brown Shoe Co. v United States, 370 U.S. 294,
trust laws are concerned about competition and not320 (1962).
competitors[viii]. Though the courts recently agreed[ix] US V. AMR, 353 F.3D 1109.
that predatory pricing is a rational strategy[ix] they[x] Weyerhaeuser Co. v Ross-Simmons Hardwood
still stick on to the requirement of Brook's ratio[x].Lumber Co., Inc. 127 S. Ct. 1069.
In the assessment of recoupment, American courts[xi] Supra 4.
adopt a structural approach and significance is given[xii] Elzinga, Kenneth G, Mills, David E, Predatory
to market concentration, capacity constraints of thepricing and strategic theory, Aug 2001, Georgetown
competitors and entry barriers of the market. Even inLaw Journal. Available at (accessed on June 12th,
Brook's[xi] decision the court refused the predation2008)
claim on the ground that the market is "highly diffuse,[xiii] AKZO Chemie BV v Commission, [1991] ECR
competitive and new entry is easy," recoupment isI-3359.
unlikely, and a predatory pricing claim should fail. Thus[xiv] Tetra Park International SA v Commission [1996]
primarily importance is given to market structure, onECR I-5951
satisfaction of which court compares the short term[xv] Canada (Director of Investigation and Research)
loss and long term gain. In this analysis dominance ofv NutraSweet Co., [1990] 32 C.P.R. (3d) 1 (Comp.
the entity might influence the claim but it is not aTrib).
formal requirement.[xvi] S.4.3 of the enforcement guidelines on the
European Unionabuse of dominance provisions, 2001.
The position of EU law in respect our issue is very[xvii] Available at (Accessed on May 15, 2008).
clear. Predation is an anticompetitive practice under[xviii] Explanation (b) to Section 4 (2) Competition
abuse of dominance provision [Art.82] thusAct, 2002.
dominance is a pre-condition for predatory pricing.[xix] (Modern Food Industries Ltd. (MRTP
Europeans accept predatory pricing as a practical andCommission) 1996 3 Comp LJ 154, New Delhi, 1996
profitable strategy.case).
European law is much influenced by Strategic theory[xx] In J&S Oil Inc. v Irving Oil Corp., 63
which rests on the notions of asymmetric informationF.Supp.2d 62 (D. Me . 1999): it was held that the
or asymmetric access to financial resources. Thepurpose of proving recoupment the plaintiff shall (a)
theory explains how a dominant entity can use itsdefine the relevant market (b) show that the
market power to exclude its rivals and prolong itsdefendant enjoys a dominant share and lastly (c)
market power. Greater degree of demand sidethere are significant barriers to the entry in the
information and independence from outside financingmarket.
makes it possible for a market leader to mislead and[xxi] In Tetra park case, thought the defendant is a
harm the growth of a rival. To succeed thenon-dominant entity in the market where predation is
predatory pricing claim under this theory one has toalleged, the EC held it liable on the ground that it had
show the presence of the following (1) facilitatingdominance in an adjacent industry. Thus dominance
market structure, (2) a scheme of predation andfor the purpose of predatory pricing is interpreted in
supporting evidence, (3) probable recoupment, (4)a broad sense.
price below cost and (5) absence of a business