Pricing in Accordance with EC Competition Rules

Table of Contents

I. Introduction

II. Pricing Prohibited under Article 81
1. Horizontal Price Fixing
a. Definition
b. The Commission’s Attitude towards Horizontal Price Fixing
2. Vertical Price Fixing
a. Definition
b. The Commission’s Attitude towards Vertical Price Fixing
3. Market Sharing
a. Definition
b. The Commission’s Attitude towards Market Sharing
4. Price Discrimination
a. Definition
b. The Commission’s Attitude towards Price Discrimination

III. Pricing Prohibited under Article 82
1. Excessive Pricing
a. Definition
b. The Commission’s Attitude towards Excessive Pricing
2. Predatory Pricing
a. Definition
b. The Commission’s Attitude towards Predatory Pricing
3. Price Discrimination
a. Definition
b. The Commission’s Attitude towards Price Discrimination

IV. Legal Pricing Strategies under EC Competition Rules
1. The Commission’s guidelines on the applicability of Article 81 to horizontal cooperation
2. Defences for Parallel Pricing
3. Price Control in Vertical Agreements
4. Predatory Pricing and Price Discrimination– The Defence of Meeting Competition

Bibliography

I. Introduction

Price competition constitutes the most essential form of competition, as different prices for similar products promote the interchangeability of goods. In a competitive market, the price depends on the demand for the product. If there is little demand, the company will have to lower the price it can charge in order to compete with its rivals. Consumers who have choice are more likely to buy the product, which they think, is of good value. Therefore, to stay in the market, companies must seek to produce at minimum costs and to sell the product at a price, which includes a reasonable profit. The function of price competition is to keep prices down to the lowest and to encourage the movement of goods between the Member States^[1].

If a good product is sold at an inflated price, consumers might purchase a less appropriate product, which may not satisfy them. Thus price fixing, both horizontal and vertical, is the most obvious infringement of competition law^[2].

While horizontal agreements can eliminate inter-brand competition, price fixing between rivals, which also bind distributors (horizontal/vertical agreement) can restrict inter-brand as well as intra-brand competition. Mere vertical agreements, applied by suppliers individually, can cause horizontal effect as well, because it removes competition between distributors.

Competition can easily be restricted from a position of dominance. In order to drive smaller companies out of the market or to prevent others from entering, a dominant undertaking can abuse its economic power and charge prices which other firms cannot compete with.

The first Common Law country which had to deal with the issue of pricing, were the United States after the introduction of the Sherman Act 1890. In US v. Addyston Pipe and Steel Co.^[3], the Supreme Court held pricing to be illegal per se under sec. 1 of the Sherman Act 1895^[4]. An explanation for this holding can be found in Trenton Potteries^[5]: ‘The power to fix prices […] involves power to control the market and to fix arbitrary and unreasonable prices.’

While pricing on a horizontal level, as it appeared in the early cases remains illegal, legislation on vertical restraints has developed differently during the last century^[6]. Now certain agreements can fall outside the US anti-trust act, if they stand a rule of reason approach, i.e. the plaintiff must prove that the restraint has negative effects on consumer welfare^[7].

The central rules of competition on the European level are Article 81 [ex Article 85] and 82 [ex Article 86] of the Treaty of Rome. Following a continental European tradition^[8], the lawmakers limited the extensive prohibitions of Article 81 (1) by exceptions in Article 81 (3). Thus restrictive practices go through a two-stage test.

Agreements are prohibited under Article 81 (1), if they affect trade between Member States and have as their object or effect the prevention, restriction or distortion of competition within the Common Market. Influenced by the early US experience in anti-trust legislation, fixing of prices is expressly prohibited by Article 81 (1).

If the restrictive practice meets the conditions of Article 81 (3) or a block exemption regulation (BER) which can be issued by the Commission, it will be granted an exemption and is permitted per se.

An undertaking which abuses its dominant position within the common market to the detriment of trade between Member States, contravenes Article 82. There is no possibility for those practices to be exempted, because they always constitute a great danger to trade between Member States.

The first part of this essay deals with the forms of pricing which are prohibited by European competition law, whereas in the second part I will analyse the pricing strategies which remain open for companies acting within the common market, thereby focusing on the new guidelines on the applicability of Article 81 to horizontal cooperation, the possibilities for companies to legally control prices in vertical distribution systems and the defence of meeting competition.

II. Pricing Prohibited under Article 81

1. Horizontal Price Fixing

a. Definition

The most blatant restriction on price competition is the fixing of prices between rivals (cartels), i.e. undertakings that act on the same market level^[9] (horizontal agreements or concerted practices). Horizontal agreements fall within the scope of Article 81, if the participants do not present themselves as a single entity which has a dominant position (then it might also be an infringement of Article 82)^[10].

Although the fixing of prices can have a lot of advantages for the participating companies from an economic point of view, such as stability, protection against cyclical recession and overseas competition^[11], it is usually more profitable to some firms than others^[12]. Costs, which incur in negotiating a price, will increase as more firms join the agreement and the range of products to be comprehended by it is extended. As the more efficient firms will want to fix a lower price, because their output will then be greater, which will lead to an increased total revenue, agreeing to a price can be very difficult. Furthermore, cartels have to be monitored and operated, which will incur even more costs. Meetings have to be organized and more companies will join the cartel producing further expenses. These difficulties and the tendency of such price fixing to break down in the long term, often because of cheating within the cartel, leads undertakings to avoid the risks of competition in other ways. Despite the threat of heavy fines by the Commission, many firms still take the risk of being caught^[13].

b. The Commission’s Attitude towards Horizontal Price Fixing

The Commissioner for Competition, Mario Monti, recently described cartels ‘as cancers on the open market economy’^[14]. In order to ensure inter-brand competition and a certain degree of consumer welfare, pricing on a horizontal level is illegal per se^[15]. If undertakings, which are rivals, agree to sell their products for the same price or to keep it within a certain price range, consumers may be forced to buy a product, which is not worth its price. Furthermore, the variation of price rates is one of the basic conditions for achieving the most important aim of the European Treaty, namely the establishment of a Common Market (Article 2), and hence the direct access of consumers to the sources of production of the whole Community^[16]. As contrary practices always affect trade between Member States and have at least as their effect the prevention of competition as defined by Article 81(1), they are prohibited. The Commission’s point is based on the opinion, that Article 81(1) primarily protects the firms’ possibility to charge their prices individually and to gain more customers by granting rebates or favourable prices^[17].

Horizontal price fixing can be achieved in a number of ways. Although the main attention is given to agreements between competitors which actually came into effect, even arrangements that have never been operated can constitute an infringement of Article 81(1) and hence fines will be imposed on the involved firms by the Commission^[18].

Parallel pricing over a certain period of time without a formal agreement has also been condemned as a concerted practice^[19]. In ICI v. Commission^[20], the stage of an agreement has never been reached. The mere fact that firms within the same product market have knowingly co-ordinated in practice, even if there has never been any contact between them, may therefore be a breach of competition rules. The Commission just has to prove that the only explanation for prices being parallel is that the firms have conspired with one another^[21]. Another form of pricing is the exchange of information concerning price policy between rivals. This often occurs on meetings of trade associations, which collect the information from the firms, and then provides all members with it. Exchanging information on costs of production is also likely to fall foul of competition rules, because the participating companies can predict the prices charged by their rivals, which may diminish price competition.

While the fixing of selling and purchase prices is exclusively mentioned in Article 81 (1) (a) and therefore illegal per se, there exist other forms of prices which are also prohibited by European competition law and which fall within the scope of this paragraph:

The Commission had to deal with firms which agreed to uniform price increases^[22]. Although the prices charged were never the same, the status quo in relation to competition between the undertakings was kept. As this lead to a development of prices which would have been different in a competitive market, it was an infringement of Article 81 (1).

Furthermore, agreements on amount of rebates between undertakings are to be treated like arrangements on price fixing, especially since prices and rebates merge e.g. in branches, which calculate in gross-prices^[23]. In particular, agreements on special rebates for certain customers or the joint fixing of maximum rebates are an infringement of European competition rules^[24].

Both the Commission and the courts also have a strict attitude towards the fixing of target prices. In most cases so far, they were a result of corresponding decisions by undertakings as defined by Article 81 (1)^[25]. A particular price level was presented to the market as ‘the list price’ or ‘the official price’. The opinion of the Commission as well as the court on appeal was, that the fixing of a target price enables the participants to predict what the pricing policy of their competitors would be^[26]. In normal circumstances, if conditions of supply and demand favoured a price increase, the leading producers would test the market with different price levels and the market would eventually stabilize at the appropriate level. Where a single target or list price is set, the operation of this process is restricted or prevented. Usually the establishment of a single list or reference price limited the opportunities for customers to negotiate. Any discounts or special conditions would still be determined by reference to the list price^[27]. Thus those pricing schemes fall foul of Article 81 (1).

2. Vertical Price Fixing

a. Definition

Vertical arrangements are less obvious anti-competitive, because they involve companies on different stages of the supply chain which are not rivals. They regulate the purchase or distribution of goods or services. Unlike in other European jurisdictions^[28], EC competition law rules do not contain a special section which deals exclusively with vertical agreements. However, they are subject to Article 81 (1) of the Treaty^[29].

Regarding pricing, producers have economic interests in setting resale prices. To maintain a quality image consistent with the character of their product, resale price maintenance (RPM) is an essential ingredient. Moreover, the desired market penetration can be achieved in the geographical territory served by the reseller^[30].

Based on the Consumer Welfare Model, which aims at efficiency^[31], the main arguments of the Chicago School in favour of vertical price fixing are the interest of the consumer in a product-service-combination, which prevents free riding^[32], and the fact that merely intrabrand competition is restricted by RPM^[33].

However resale price maintenance has as its effect the elimination of intrabrand competition between resellers, as they all sell the products at the same price. If the manufacturers agree between themselves to enter into RPM agreements with their distributors, they have an effect on interbrand competition as well. It may mean that that resale prices are higher than they would otherwise be. If a company manages to become more efficient, it will not pass this on to their customers in lower prices, because they are bound by their agreement with the supplier^[34].

b. The Commission’s Attitude towards Vertical Price Fixing

Despite criticism by economists, the Commission has adopted a very strict approach towards resale price maintenance. Whereas other vertical restraints are examined from a more economic point of view since the beginning of the year 2000, resale price maintenance remains illegal per se^[35] .

Advocate General Van Themaat outlined three varieties of RPM scheme^[36]:

(a) Individual resale price maintenance is defined as individual agreements between producers and their dealers as to the resale price of an article.
(b) A collective obligation for all producers in a given sector individually to impose resale price maintenance on their dealers constitutes a collective, individual rpm.
(c) The practice of all producers and dealers being bound to each other to uphold resale price maintenance is called collective rpm.

Suppliers are prohibited from including clauses into agreements, which impose on the retailer the obligation to charge a fixed price for a product^[37]. Such an agreement is clearly one which ‘directly or indirectly fixes purchase or selling prices…’. Thus it makes no difference whether there was a collective horizontal agreement or concerted practice between undertakings to introduce RPM^[38] or whether a single company made an individual arrangement with its distributors^[39].

The prohibition of vertical price fixing also involves agreements between suppliers and distributors, which oblige the latter to keep prices within a certain price range^[40] or to stick to a special rebate system^[41]. Even if such a clause is contained in a distribution contract and is not exercised by the supplier, the Commission is of the opinion that it influences the behaviour of the distributor in relation to pricing and is therefore an infringement of Article 81 (1)^[42].

National RPM schemes can fall foul of competition rules, where they prevent distributors from selling reimported goods from outside the concerned Member State below the fixed price^[43].

In a reference to the European Court of Justice in the case of Pronuptia de Paris GmbH v. Pronuptia de Paris Irmgard Schillgallis^[44], the German Bundesgerichtshof asked the court if price guidelines in a franchise agreement constitute an infringement of Article 81 (1). The ECJ held that ‘so long as there is no concerted practice between the franchisor and franchisees or between the franchisees themselves for the actual application of such prices’, price recommendations are permitted. In Article 5 (e) of the block exemption regulation for franchise agreements^[45] as well as in Article 4 (a) of the new block exemption regulation for vertical agreements^[46], the Commission expressly states that price recommendations are not an infringement of EC competition rules.

However, they are prohibited in cases where they constitute a mere fake, i.e. the distributor tries to enforce certain prices by refusing supply or imposing other disadvantages on a retailer selling below the recommended price^[47].

The same applies to agreements which impose on the reseller the obligation to ask for the manufacturer’s permission to deviate from them or to give prior notice to the producer.

3. Market Sharing

a. Definition

The sharing of markets is expressly prohibited in Article 81 (1) (c). Although an agreement to share markets is not necessarily intended to control prices, it is likely to have this effect or it is part of a larger unlawful cartel involving price fixing^[48].

Geographical division, usually along national borders, is the most common type of market sharing. By agreeing to stay out of the others’ national markets, the involved companies try to eliminate the risk of firms entering their market and charge prices below that of the national producer. Furthermore, the choice available to customers is reduced and therefore leads to higher prices. Thus in most cases market sharing agreements distort price competition within the Common Market.

b. The Commission’s Attitude towards Market Sharing

As early as in its First Report on Competition Policy, the Commission noted that ‘[market sharing] allows producers to pursue […] a pricing policy […] which is insulated from the competition of other parties to the agreement’^[49], hence trade between Member States is affected because there is no chance for a healthy competition to develop.

The DG IV had to deal with several agreements of market sharing, most of them so obviously contrary to EC competition rules, that they were terminated by the parties without a formal decision taken. One of the few cases were fines had to be imposed was in the European Sugar Industry Decision^[50]. The involved companies agreed to divide their markets along national lines. As some Member States faced a sugar shortage, the national producers in these countries were supplied with the product by other parties of the agreement, and subsequently they (the national producers) sold the sugar at the same price they charged for their own sugar. Thereby the companies eliminated trade between Member States and price competition. Most of the Commission’s findings were upheld in court on appeal^[51].

Therefore, market sharing as part of a pricing strategy is strictly prohibited by EC competition law, because ‘[it is] particularly restrictive of competition and contrary to the achievement of a single market’^[52].

[...]

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^[1] Case 48/69 ICI v. Commission [1972] ECR 619, at para. 115.

^[2] Faull & Nikpay, The EC Law of Competition (1999), p. 337.

^[3] 175 US 211 (1899).

^[4] “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is hereby declared to be illegal…”.

^[5] US v. Trenton Potteries Co., 273 US 397 (1927).

^[6] Dr. John Miles Co. v. John D. Park & Sons Co. 220 US 373 (1911); Albrecht v. Herald Co. 390 US 145 (1968); Continental TV Inc. v. GTE Sylvania Inc. 433 US 36 (1977); Monsanto v. Spray-Rite Service Corp. 465 US 752 (1984); State Oil Co. v. Khan 118 S.Ct. 277 (1997).

^[7] Popofsky/Brown, ‘The Treatment of Vertical Restraints’, 1031 PLI/Corp 51, 56 (1998).

^[8] Schröter, ‘Antitrust Analysis under Article 85 (1) and (3)’, 1987 Fordham Corporate Law Institut 645.

^[9] Guidelines on the applicability of Article 81 to horizontal cooperation [2001] OJ C3/2 at para. 1.

^[10] Italian Flat Glass [1989] OJ L33/44.

^[11] Allen, Monopoly and Restrictive Practices (1968), ch. 14.

^[12] Whish, Competition Law (1993), p. 391.

^[13] Italian Flat Glass [1989] OJ L33/44; Case T-7/89 Hercules Chemicals NV v. Commission [1991] ECR II 1711; Case T-141/89 ILRO v. Commission [1995] ECR II 791; Case C-248/98P KNP BT v. Commission (November 16, 2000).

^[14] Monti, Mario in a speech (Fighting Cartels Why and How?Why should we be concerned with cartels and collusive behaviour?) at the 3rd Nordic Competition Policy Conference, Stockholm, 11-12 September 2000.

^[15] ICI v. Commission, n. 1 above.

^[16] ICI v. Commission, n. 1 above, at para. 115, 121.

^[17] [1972] OJ L 303/24.

^[18] P&O Ferries [1997] OJ 266/23.

^[19] ICI v. Commission, n. 1 above, at para. 66.

^[20] ICI v. Commission, n. 1 above.

^[21] Wood Pulp [1985] OJ L85/1.

^[22] ICI v. Commission, n. 1 above.

^[23] Joint Cases 209 to 215, 218/ 78 Heintz van Landewyck v. Commission [1980] ECR 3125.

^[24] IFTRA Glass Containers [1974] OJ L160/1.

^[25] Fenex [1996] OJ L181/28; Polypropylene [1986] OJ L230/1; Case T-13/89 Imperial Chemical Industries plc v. Commission [1992] ECR II-1021.

^[26] Case 8-72 Vereeniging van Cementhandelaren v. Commission [1972] ECR 977.

^[27] LdPE [1989] OJ L 74/1.

^[28] Cf. Germany: § 14 GWB (Gesetz gegen Wettbewerbsbeschränkungen) expressly mentions vertical restraints.

^[29] Joint Cases 56 and 58/65 Grundig and Consten v. Commission [1966] ECR 299.

^[30] Hanna / Dodge, Pricing – Policies and Procedures (1995), p. 160.

^[31] Liebeler, ‘Intrabrand “Cartels“ under GTE Sylvania’, 30 UCLA L. Rev. 1 (1982).

^[32] Easterbrook, ‘Vertical Arrangements and the Rule of Reason’, 53 Antitrust L.J. 135.

^[33] n. 31 above.

^[34] Wish, n. 13 above, p. 176.

^[35] Block Exemption Regulation for Vertical Restraints (EC) No 2790/1999 [1999] OJ L 336/21.

^[36] Cases 43-63/82 VBVB and VBBB v. Commission [1984] ECR 19.

^[37] Maher, Competition Law – Alignment and Reform (1999), p. 369-371;

^[38] Vereniging van Cementhandelaren [1972] OJ L 13/34; VBVB and VBBB v. Commission, n 36 above.

^[39] Deutsche Philips [1973] OJ L 293/40.

^[40] Hennessy-Henkell [1980] OL L 383/11.

^[41] VBBB-VBVB [1989] OJ L 22/12.

^[42] Novalliance [1997] OJ L 47/11.

^[43] Deutsche Philips [1973] OJ L 293/40.

^[44] [1986] ECR 353.

^[45] Commission Regulation (EEC) No 4087/1988 [1988] OJ L 359/46.

^[46] Commission Regulation (EC) No 2790/1999 [1999] OJ L 336/21.

^[47] Maher, n. 37 above, p. 370.

^[48] Italian Flat Glass [1989] OJ L 33/44.

^[49] First Report on Competition Policy (1971), p.25.

^[50] European Sugar Industry [1973] OJ L 140/17.

^[51] Case 40/73 Suiker Unie v. Commission [1975] ECR 1663.

^[52] First Report on Competition Policy (1971), p.25.