A
general definition of predatory pricing is that it is the practice of
a dominant firm selling a product at a loss in order to drive some or all
competitors out of the market, or create a barrier to enter into the market for
potential new competitors[1]
Section
10 of the Restrictive Trade Practices, Monopolies and Price Control Act (RTPA)
provides for predatory trade practices. Predatory prices to are provided for
under Section 10 (3) (a), which states that a price will be considered
predatory if the Minister considers that the price or certain prices at which a
person sells and or supplies goods and services are below their average
variable cost, if these prices drive a competitor out of business or if they
deter a person from establishing a competing business in Kenya.
In many countries, predatory
pricing is considered an anti – competitive practice and is illegal under
antitrust or competition laws.
In Kenya, what determines a predatory price(s) is [1] if the price(s) are below
the average variable cost [2] if the competitor will be driven out of business
[3] if a person will be deterred from entering into business.
Section
10 (3)(a) RTPA gives the Minister the discretion to determine what amounts to a
predatory price. This gives the Minister the authority to control predatory
prices in Kenya that is whatever price the Minister fixes, as being below the
average variable cost will stand and hence it will be a predatory price. There
is a lack of judicial decisions concerning competition law in Kenya and more
importantly none covering predatory prices unlike in the United States and the
European Community where there have been numerous decisions that have
considered predatory pricing. These decisions have been used as tests, theories
and in many instances have been applied as precedent in subsequent cases; they
have also been subject to criticisms by economists. So Kenya is lagging behind
in the control of predatory pricing as compared to the United States and
European Community where this is well developed.
Predatory
prices under the RTPA are per se illegal that is they are illegal and economic
evidence need not be adduced to prove it. It is an offence that has the penalty
of imprisonment and a fine.[2]
In the United States predatory
pricing is provided for under their antitrust laws. Specifically they are Sherman Act Section 2 and the
Clayton Act §2 (as amended by the Robinson-Patman Act). Predatory pricing is
banned in the US, primarily under Clayton Act Section 2 (as amended by the
Robinson-Patman Act) as price discrimination, but also under Sherman Act §2 as
monopolisation and under Federal Trade Commission Act Section 5 as unfair
competition.[3]
However
several cases have established certain rules concerning predatory pricing in
the American jurisdiction. Perhaps the most significant case is the Areeda and
Turner case, which set the test to determine whether a price is predatory. It
suggested that a price should be deemed predatory where it is below a firm’s
short run marginal cost or average variable cost.[4]
Areeda and Turner postulate a test where predation is assumed where pricing is
below marginal cost or average variable cost. That is where a price is below
marginal cost it is a predatory price. However, this case suggested that prices
above the marginal cost were presumed legal.
This
case developed a different way of viewing predatory pricing it introduced not
only the basic way of viewing a predatory price as that which was below the
average variable cost but one that was also below the short run marginal costs.
This is a control that is not provided for under the Kenyan jurisdiction.
Another
another test employed in the U.S in respect of predatory pricing that is not
considered under the EC laws or Kenyan laws is recoupment[5].
It recognises that short term losses sustained during the period of predation
will be recouped by monopoly profits in the future[6].
Courts in the US require the element of the offence of predatory price-cutting
that is so it can be shown that the predator has the ability to recoup any
losses incurred[7].
Under the recoupment approach, it is only if market structure makes recoupment
possible that courts in the U.S. need to consider the relation between price
and cost.[8] The plaintiff must demonstrate that the
competitor had a reasonable prospect or a dangerous probability of recouping
its investments in below cost prices.
The
ECJ has not yet adopted a requirement of recoupment under Article 82[9]
Predatory pricing is banned in the EU as an abuse of a
dominant position under Article 86. Under EC Treaties, Article 82 provides that
predatory price cutting amounts to an infringement of the EC law. This Article
provides for selective price-cutting as a form of predatory pricing. Selective
price-cutting is where a dominant firm cuts its prices selectively but not to
below cost, to customers that might desert to a competitor while leaving prices
to other customers at a higher level.
Proving
intention is sometimes relevant to the EC law on pricing abuses. The ECJ in AKZO
Chemie BV v. Commission 1996 in 1991 and Tetra Pak International SA v.
Commission (No. 2) decided that pricing above average variable cost but
below average total cost could be abusive where there was evidence of an
intention on the part of the dominant firm to eliminate a competitor. In the
AKZO case the Commission imposed an exemplary fine on AKZO of 10,000,000 ECUs
for predatory price-cutting. It held that AKZO had abused its dominant position
and the Commission declined to adopt the Areeda and Turner test of predatory
price-cutting, according to which pricing above average variable cost should be
presumed lawful.[10]However
a price below average variable cost if other prerequisites are met is
conclusively presumed to be illegal that is a price above average total cost is
per se legal under the Areeda-Turner test
The
commission further considered that it was relevant whether the dominant firm
had adopted a strategy of eliminating competition, what the effects of its
conduct would be likely to be and what a competitors likely reaction to the
conduct of the dominant firm would be. It is worth noting, however, that in
both cases the European Court upheld the Commission’s judgment that pricing had
been predatory primarily on evidence of intent to eliminate a competitor and on
evidence of discriminatory pricing, not by any measure of cost or probability
of successful recoupment[11]
as in the U.S.
The
E.C. and U.S. jurisdiction are similar in as far as the requirement of proof of
intent to commit a predatory price. This is a great difference from Kenyan law
because the law does not consider the intention of a party or evidence of
parties to prove they are not performing predatory pricing because it is clear
that predatory pricing is per se illegal. However as stated above it is worth
noting that the ECJ have concentrated more on the evidence of intent to
eliminate a competitor and on evidence of discriminatory pricing, but not on
the measure of cost or probability of successful recoupment which is what the
U.S. have adopted. Both standards are inapplicable in the Kenyan context unless
it undergoes reform.
The
E.C court carries out an evidential test and the evidential burden can shift.
In William Inglis and Sons Baking Co v ITT Continental Baking Co the
court proposed a two-stage test involving a shifting in the evidential burden:
"If
the defendant's prices were below average total cost but above average variable
cost, the plaintiff bears the burden of showing defendant's pricing was
predatory…”[12]
The Court requires plaintiffs to
show a likelihood that the pricing practices will not only affect rivals but
also competition in the market as a whole, in order to establish that there is
a substantial probability of success of the attempt to monopolize.[13]
Differences
between EU and US competition law is that the European belief is driven by the
importance of fairness and the development of an integrated European market, as
distinct from the American belief in the importance of efficiency and laissez
faire.
In
conclusion, the U.S. and E.C. law has put in place less rigid and well-formed
controls of predatory prices. These laws have taken into consideration many
aspects to the predatory prices and have considered all the parties involved
and whether the predatory price is per se harmful or may be beneficial to the
economy. The control of the predatory prices under this jurisdiction is in the
relevant Acts and is subject to interpretation by the judicial bodies. In Kenya
however, control is clearly placed in the Minister (by the RTPA) who may not be
well versed with predatory pricing dynamics.
REFERENCES.
- Competition Law (2nd Edition) Richard Whish (1989) Butterworths, London, Edinburgh England.
- Federation Antitrust Policy, Law of Competition and Practices by Herbert Hovenkamp (1994) West Publishing Co St. Paul Minnesota
3. Cases and Materials on Modern
Antitrust Law and its origins by Thomas B. Morgan (1994) West Publishing Co St.
Paul Minnesota
- Submission to the Committee reviewing the Competition Provisions of the Trade Practices Act 1974 by Ray Steinwall Visiting Fellow, Faculty of Law, University of NSW www.accc.gov.au
- Phillip Areeda & Donald F. Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, Harvard Law Review, Vol. 88, p. 697 (1975).
- Whish, R. and Sufrin, B. 1993. Competition Law. 3rd edn, London: Butterworths.
- Competition Law in the European Union and the United States William Sjostrom www.ucc.ie
[2] The RTPA Section 10
[3] Competition Law in the European Union and the United States William
Sjostrom www.ucc.ie page 3
[4] Competition Law (2nd Edition) Richard Whish page 522
[5] Covered under the Robinson Act
[6] R Bork, The Anti Trust Paradox: A Policy at War with Itself,
Basic Books, New York 1978 at p 145,approved in Matsushita Electric Co v
Zenith Radio Corp 106 S Ct 1348 (1986) at 1357
[7] As was decided in the Brookes Case
[8] Page 5. Submission to the Committee reviewing the Competition
Provisions of the Trade Practices Act 1974 by Ray Steinwall
[9] Page 707 ibid
[10] Page 547
[11] Page 10 ibid footnote 3
[12] 688 F 2d 1014 (9th Cir) (1981) at p1035 - 1036
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