12 February 2007

Predatory Pricing - bad intentions and no economic sense

Case T-340/03 France Télécom v Commission (judgment of 30 January 2007)

The Commission’s Wandoo decision fining the firm for predatory pricing in the sale of high-speed internet access, was affirmed by the Court of First Instance. The Commission immediately issued a press release to show its delight. In this press release is an important passage: “Broadband is a strategic sector highly important to the European economy and the Commission's strategy for growth and jobs. The Commission is determined to prevent exclusionary practices by incumbent operators on strategic markets.” This is in line with its 2004 Communication, which sought to align competition law enforcement with the Lisbon Strategy (a bold attempt to make Europe more competitive). This is the ‘Community interest’ that guides competition enforcement post-modernisation. But if the pursuit of this interest leads to decisions like this one, we must wonder whether Europe is not made less competitive by competition law enforcement.

After a hundred or so paragraphs where the CFI rejects procedural points and checks the Commission’s arithmetic, the Court wrestles with several interesting points of principle that Wanadoo raised. Their rejection shows a complete failure to understand predatory pricing.

Meeting competition
There is some doubt as to whether a dominant firm can react aggressively when challenged by competitors. The CFI said that the dominant firm “cannot rely on an absolute right to align its prices on those of its competitors in order to justify its conduct. Even if alignment of prices by a dominant undertaking on those of its competitors is not in itself abusive or objectionable, it might become so where it is aimed not only at protecting its interests but also at strengthening and abusing its dominant position.” (para.187)

This is not novel, but it confirms that there is no meeting competition ‘defence’ in EC competition law. The only defence is for the dominant firm to prove that there was no abuse. But it is too easy for the Commission to prove abuse.

Prices above average variable cost (AVC) and below average total cost (ATC) are abusive only if there is a plan to eliminate competition. More clearly than in earlier cases, the CFI states that this requires proof of ‘intention’.

In this case, the Commission proves intention with a raft of internal documents where the dominant firm’s management explained how it wished to pre-empt the challenge of new entrants by selling goods more cheaply. The firm’s intention to acquire and hold on to market power is evidence of abuse. This is unwise. In previous cases, intent was shown by selective price cuts designed to harm certain rivals, this was a little more probative. In contrast here, intent is proven by evidence that I suspect we can find in any company. What company does not want to beat its competitors? To gain and hold on to a higher market share? Is the intention to compete evidence of abuse? Yes, it seems.

Admittedly Wanadoo was somewhat unwise to write in language that so fits the Commission’s legal standards, look at this note: ‘The high-speed and ADSL market will, for the next few years, continue to be conquest-driven, the strategic objective being to gain a dominant position in terms of market share, the period of profitability only coming later.’ (cited at 215) Nevertheless, can this really be sufficient evidence of anticompetitive intent?

Perhaps as a last throw of the dice, the defendant thought that if the Commission’s burden of proof is so light in showing intention, that the Court would see sense and rectify this by requiring proof that predatory pricing would create a dominant position and that Wanadoo would be able to recoup its losses. No such luck. In Tetra Pak 2 the ECJ said that on the facts of that case recoupment need not be shown. The CFI says that there is never any need to prove recoupment. (227). This removes the caution of the ECJ and is in line with the Advocate General’s view in Tetra Pak 2 that all predatory pricing should be condemned without the need to show the possibility of recouping losses.

Predatory pricing standards and the Lisbon strategy
To be clear, I am not suggesting predatory pricing should not go unpunished, nor that Wanadoo was not trying to harm its competitors. Rather, that the court sets such a low threshold of illegality that dominant firms are deprived of any incentive to compete hard. First, the fact that
recoupment need not be shown, is economically irrational: if a predator cannot recover the loss of profits, it means predation was unsuccessful, and competitors have not been harmed, so the predator is punished by the market for his irrational attempt to exclude rivals. Second, flimsy evidence of intention makes findings too easy, creating further risks of over enforcement. If dominant firms cannot respond aggressively to maintain their position (Wanadoo has to pay a fine of 10.35 million euros), what incentives are there to be successful?

No comments: