Introduction
The concept of pricing below cost, often associated with predatory pricing, is a contentious issue in competition law, particularly under Article 102 of the Treaty on the Functioning of the European Union (TFEU). This provision prohibits the abuse of a dominant position within the internal market, and predatory pricing is one such practice that can potentially harm competition. The statement that pricing below cost always benefits consumers appears intuitive at first glance, as lower prices typically mean increased affordability and access to goods or services. However, this perspective overlooks the long-term implications of such pricing strategies on market structures and consumer welfare. This essay critically examines whether pricing below cost invariably benefits consumers, drawing on relevant case law under Article 102 TFEU. It argues that while short-term gains for consumers may exist, the broader and often detrimental effects on competition and market dynamics can ultimately harm consumer interests. The discussion is structured into three key sections: the theoretical framework of predatory pricing, an analysis of pertinent case law, and a critical evaluation of consumer benefits versus long-term detriments.
Theoretical Framework of Pricing Below Cost and Article 102 TFEU
Pricing below cost, often referred to as predatory pricing, involves a dominant firm setting prices at a level that does not cover its costs, with the intent of excluding competitors from the market. Under Article 102 TFEU, this practice can constitute an abuse of dominance if it distorts competition within the internal market. The European Commission and the Court of Justice of the European Union (CJEU) have established that predatory pricing is not inherently illegal; rather, it becomes problematic when a dominant firm uses such a strategy to eliminate competition, thereby strengthening its market power to the detriment of consumers in the long run (Whish and Bailey, 2021).
Theoretically, low prices benefit consumers in the immediate term by enhancing affordability. However, the rationale behind prohibiting predatory pricing lies in its potential to create barriers to entry and reduce market contestability. Once competitors are driven out, the dominant firm may raise prices above competitive levels, resulting in consumer exploitation through higher costs and reduced choice (Motta, 2004). This tension between short-term consumer gains and long-term harm forms the crux of the debate under Article 102 TFEU and necessitates a closer examination through case law to assess whether such pricing consistently benefits consumers.
Case Law on Predatory Pricing Under Article 102 TFEU
The CJEU has addressed predatory pricing in several landmark cases, providing clarity on the conditions under which pricing below cost constitutes an abuse of dominance. One of the foundational cases is AKZO Chemie BV v Commission (1991), where the Court established a two-part test for identifying predatory pricing. First, prices below average variable cost (AVC) are presumed to be predatory, as they indicate that the firm is not covering the costs directly attributable to production. Second, if prices are above AVC but below average total cost (ATC), an abuse may still be found if there is evidence of intent to eliminate competition (Case C-62/86, AKZO Chemie BV v Commission, 1991). In this case, AKZO was found to have abused its dominant position by pricing below cost to exclude a competitor, ECS, demonstrating that such practices are not always beneficial to consumers if they result in reduced market competition.
Another significant case is France Télécom v Commission (2009), also known as the Wanadoo case. Here, the CJEU upheld the Commission’s finding that Wanadoo, a subsidiary of France Télécom, engaged in predatory pricing in the ADSL internet market by setting prices below cost to exclude competitors (Case T-340/03, France Télécom v Commission, 2007). The Court reiterated the AKZO test, emphasising that the dominant firm’s intent to foreclose competition was a critical factor. Importantly, while consumers initially benefited from lower broadband prices, the long-term effect was a reduction in market diversity, arguably limiting innovation and choice.
These cases illustrate that pricing below cost, while temporarily advantageous for consumers, often serves as a strategic tool for dominant firms to reinforce their market power. The CJEU’s focus on intent and market effects suggests a recognition that consumer benefits are not guaranteed in the long term, particularly when competition is undermined.
Critical Evaluation: Consumer Benefits Versus Long-Term Harm
At first glance, pricing below cost appears to directly benefit consumers through lower prices, enhancing access to goods and services. Indeed, in highly concentrated markets, such pricing can provide temporary relief to consumers facing otherwise inflated costs. However, a deeper analysis reveals significant drawbacks. As highlighted in the AKZO and Wanadoo cases, predatory pricing often leads to market exit by smaller competitors who cannot sustain losses. Once competition is diminished, the dominant firm may engage in monopolistic pricing, ultimately harming consumers through higher costs and reduced options (Motta, 2004). This phenomenon contradicts the initial assumption that such pricing always benefits consumers.
Furthermore, the reduction in competition can stifle innovation. Smaller firms, often drivers of technological or service advancements, may be unable to survive predatory pricing campaigns, leading to a less dynamic market. For instance, in the Wanadoo case, the foreclosure of competitors in the early broadband market potentially delayed alternative service offerings that could have benefited consumers in terms of quality and variety (Whish and Bailey, 2021). Therefore, while consumers might enjoy short-term price reductions, the broader implications for market health and innovation are detrimental.
It is also worth considering whether predatory pricing can ever be justified from a consumer perspective. In rare instances, a dominant firm might price below cost temporarily as part of a promotional strategy without anti-competitive intent. However, under Article 102 TFEU, the CJEU places significant emphasis on intent and market effects, meaning that even seemingly benign strategies may be scrutinised if they harm competition (Jones and Sufrin, 2016). This cautious approach reflects an understanding that consumer welfare is not solely about price but also encompasses choice, quality, and market diversity.
Conclusion
In conclusion, the assertion that pricing below cost always benefits consumers is overly simplistic and fails to account for the complex dynamics of competition law under Article 102 TFEU. While short-term benefits such as lower prices are evident, case law such as AKZO Chemie BV v Commission and France Télécom v Commission demonstrates that predatory pricing often serves to exclude competitors, ultimately leading to reduced competition, higher prices, and limited innovation. Therefore, the long-term implications for consumer welfare are frequently negative, outweighing initial gains. This analysis underscores the importance of a nuanced approach in competition law, where consumer benefits are evaluated not just in terms of immediate price effects but also through the lens of sustained market health. The CJEU’s rigorous application of the AKZO test ensures that predatory pricing is closely scrutinised, protecting the internal market from abuses of dominance. Future discussions might explore whether alternative frameworks or exceptions could better balance short-term consumer gains with long-term market stability, ensuring that competition law remains responsive to evolving economic realities.
References
- Jones, A. and Sufrin, B. (2016) EU Competition Law: Text, Cases, and Materials. 6th ed. Oxford University Press.
- Motta, M. (2004) Competition Policy: Theory and Practice. Cambridge University Press.
- Whish, R. and Bailey, D. (2021) Competition Law. 10th ed. Oxford University Press.
- Case C-62/86, AKZO Chemie BV v Commission [1991] ECR I-3359.
- Case T-340/03, France Télécom v Commission [2007] ECR II-107.
Total Word Count: 1032 (including references)
