Excessive pricing raises strong concerns for private competition litigation, for three reasons: (1) the inherent difficulty of defining what constitutes an unfair price; (2) additional challenges inherent to private excessive pricing litigation, such as the need to pinpoint when exactly a price becomes unfair in order to calculate damages; and (3) the institutional features of general courts in EU member states.
Given that private litigation of competition law violations is only beginning to develop in the EU, and collective redress mechanisms are still viewed with caution by many member states, this is exactly the time to ensure that, as private litigation expands, it will increase welfare. This is the purpose of this paper, which is available here.
Section 2 addresses the inherent difficulty of determining when a price becomes unfair.
The excessive pricing prohibition, though longstanding, suffers from serious and inherent difficulties in its implementation. In particular, it lacks clear and workable criteria. The challenges can be summarised as follows: to decide whether a price is excessive, one must determine (1) the ratio of price to cost; (2) whether this ratio is excessive; (3) whether the price is unfair in itself; and (4) whether the price is unfair when compared to competing products.
The uncertainties created by addressing these challenges come at a high cost. Importantly, they may detract from dynamic efficiency by unduly deterring those contemplating whether to invest in entering or expanding in the market. Accordingly, a strong case can be made for exercising caution in applying the prohibition against excessive pricing. In effect, it is widely agreed that enforcement of the excessive pricing prohibition is fraught with practical difficulties, and that it should be applied only where it is clear that its contribution to social welfare — both in the case at hand, and in the long run through the externalities it creates on other market players — significantly exceed its costs.
Section 3 discusses four additional challenges created by private enforcement.
Private litigation of excessive pricing allegations creates four additional challenges to applying the prohibition, which carry the risk of increasing harm to welfare.
First, private litigation upsets the status quo by preventing the use of public discretion. So far, competition authorities dealt with the inherent limitations of the excessive pricing prohibition, as well as the fact that they are ill suited to act as price regulators, by adopting a cautionary and largely non-interventionist approach. However, once private litigation is allowed, competition authorities’ control over which cases are brought is lost since courts must decide all cases brought before them. Furthermore, given the high costs of a trial, the need to evaluate cost- and profit-related data, and the potential public visibility of excessive pricing cases, dominant firms might choose to settle even if claims are not well-grounded, thereby increasing the potential chilling effect of the prohibition.
The second challenge is the fact that private suits differ significantly from administrative proceedings. In administrative proceedings, competition authorities and the reviewing courts only have to determine whether the price set by the dominant firm is fair. In a private excessive pricing suit, this is no longer sufficient. Rather, to calculate damages, the court would need to identify the precise point at which the price becomes unfair. Broad-brush estimations with wide margins (to avoid error) are no longer possible. Yet, there is no clear methodology for determining when exactly a price becomes unfair.
Third, once a violation is found, general courts hearing excessive pricing cases—unlike competition agencies—have more limited discretion in designing remedies to reflect all the relevant considerations, including the ability of the dominant firm to estimate in advance what will be considered a fair price. This increases the risk that the profits enjoyed by a would-be dominant firm could be taken away, even if the firm was not reasonably capable of determining whether its prices would be considered fair. Lastly, unlike competition authorities, courts cannot engage in industry-wide studies of costs and the parties’ economic experts usually do not have access to such information, which might be needed in order to apply the prohibition.
Section 4 asks whether we can rely on courts to reach a welfare-enhancing equilibrium.
The increased risk of over-deterrence, and its associated dangers, raise the question of whether we can rely on general courts to deal with these risks effectively and ensure that dynamic efficiency is not impaired to the extent that overall consumer welfare is harmed. To answer this, we must analyse the institutional features and competences of generalist courts in the relevant jurisdictions.
Designing and applying a welfare-enhancing rule against unfair excessive prices requires the decision-maker to engage in complex economic analysis and to have a sound understanding of how markets work. Generalist courts generally lack economic expertise. Instead, they often rely on external economists—commonly employed by the parties— to present the relevant economic arguments. Yet, in the case of excessive pricing, reliance on such external experts might often not be sufficient. In the absence of clear rules and methodologies to determine when a price becomes unfair, economists are not likely to provide clear answers that could have been clearly foreseen by industry participants.
The courts’ lack of economic training, coupled with the vagueness of the prohibition and the need to pinpoint the fair price precisely, may lead to three ‘traps’ that increase the risk that courts will reach socially harmful decisions. The first is the ‘cost trap’: assuming that the competitive price (which is much more easily calculated), or any price near it, is the fair price, thereby ignoring market complexities and constraints that govern product pricing. The second trap relates to fairness. Even those insisting that we have economic tools to apply the prohibition concede that the court needs to make a legal policy assessment as to whether the price charged is excessive and unfair. In turn, this could lead some courts to disregard dynamic efficiency concerns— or, for that matter, any economic concerns—and simply apply the prohibition based on moral notions of fairness. Lastly, we have the ‘monopolistic competition trap’, where high prices feed into the market definition analysis, leading to narrow markets and making it more easy to establish dominant positions.
Other institutional limitations abound. Generalist courts often do not have the tools to verify the effects of their rulings on market dynamics — tools which would enable them to learn from trial and error. Furthermore, as noted above, courts must decide all cases brought before them. Accordingly, they cannot ensure that excessive pricing suits are only brought in situations that further the public interest. Finally, while a number of these arguments seem to apply to any court engaged in complex economic analysis, as a rule courts can rely on clear and precise rules when they are required to engage in such analysis – which is not the case with excessive pricing.
Section 5 considers the social implications of private enforcement against excessive pricing.
The factors discussed above may lead to an overflow of excessive pricing cases, and detract from public welfare. This is the situation in Israel, where private excessive pricing suits have become the main competition law prohibition to be litigated. Despite the Israeli competition authority not having ever identified a single detrimental instance of anticompetitive excessive pricing, in the past three years alone almost 30 private claims have been brought pertaining to a diversity of products and services – usually in very specific and not particularly important markets. None of these markets is protected from competition by high legal or regulatory barriers; none is natural or statutory monopolies; and all products compete with other products. Furthermore, the price margins in some of these markets are not notably high, and, in most markets, the supra-competitive price arises from the comparative advantages of a more desirable product. As a result, Israeli courts have become a special kind of price regulator—one that does not have the discretion to choose the products to be regulated and must determine fair prices ex post. It is questionable whether turning courts into price regulators makes the best use of courts’ resources.
More fundamentally, this situation raises concerns about over-deterrence that harms welfare. Should courts adopt over-inclusive tests, opening the floodgates to numerous erroneous excessive pricing findings, the harm to dynamic efficiency might be significant. The costs of an over-inclusive prohibition are likely to be large in three contexts: in dynamic industries where firms compete by launching new products and services; in emerging industries where entrepreneurs are contemplating whether to start new businesses; and in mature industries where firms may wish to upgrade their services. The cost of mistaken prohibitions is bound to be highest in industries that rely on trial and error, where the cost of experimentation is high but the return on success is much higher.
In the EU context, an additional problem may arise. Given the high level of uncertainty involved in determining when a price becomes ‘unfair’, courts in different member states might set different maximum prices for similar products. This, in turn, may lead to court-approved price differentiation, in a clear clash with fundamental principles of the EU.
Section 6 tries do discern possible solutions.
To ensure social welfare is not harmed, the UK Competition and Markets Authority— which has been one of the most active authorities worldwide in bringing excessive pricing cases—has suggested that no private actions should be allowed on such claims.
As a second-best solution, the author suggests placing significant limitations on the ability of plaintiffs to bring private excessive pricing suits to ensure that the prohibition does not create over-deterrence and that courts are not turned into price regulators. First, the courts, the Commission, and national competition authorities could create more detailed guidelines that reduce at least some of the vagueness that characterises the excessive pricing prohibition. Second, competition authorities should be automatically notified and granted standing in private excessive pricing cases, so that they can ensure the public interest is protected by choosing to act as amicus curiae. Third, efforts could be made to ensure that courts are economically literate and made aware of the social costs of over-deterrence. Further, in line with decision theory, it might be more efficient to create higher burdens of proof for excessive pricing cases brought by private parties heard by generalist courts relative to those imposed on the Commission and national competition authorities in public enforcement contexts.
This paper is scholarship of a very high level, and I am unable fully to do it justice here. For example, you would be hard pressed to find a better (and shorter) summary of the methods used to identify excessive prices and their limitations than the one contained in Section 2. As someone who is concerned about the second-order effects of carelessly delineated legal rules and standards (ehem… we all have our manias), I very much enjoyed the way this article outlines how the safeguards put in place for public enforcement of the notoriously fuzzy standards used to identify excessive pricing are likely to prove ineffective as regards private enforcement.
My sole comment is that it is manifest that the author started the paper from the conclusion that private enforcement of excessive pricing is a ‘bad thing’ and reasoned backwards from that – I would guess that the paper was triggered by the flood of cases in Israel. The paper’s argument is a strong and compelling one, but it is also a bit one-sided. For example, in the discussion of the institutional constraints of courts, I think the argument is made too strongly – as if courts were absurdly naïve and economically illiterate, and as if judicial systems did not have mechanisms in place to address challenges such as this. It may take time, but appeal mechanisms are likely eventually to ensure consistency, and procedural and evidentiary rules could be devised to make bringing spurious claims (or even establishing excessive pricing) more difficult. And, in effect, the author herself seems to recognise this, when she calls for efforts to make courts aware of social costs of over-deterrence in a way that will hopefully affect the legal requirements and burdens of proof on potential plaintiffs.