Pricing in the 21st Century: A Comparative Perspective
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
In the United States, the antitrust analysis is moving away from bright line rules and toward standards that require evaluation of pricing practices on a case-by-case basis using economic factors and the business justifications. The US Supreme Court is leading the way in this transition as it attempts to offer new standards to analyse pricing and monopolistic non-pricing behaviour. Most notably, in a 5-4 decision, the Court recently abandoned its prior treatment of minimum resale price maintenance agreements by overturning the almost century old precedent that treated those agreements as per se illegal. In a separate decision, the Court also clarified the treatment of pricing by buyers with substantial market power (monopsony). Furthermore, the lower courts have eroded the unforgiving framework previously utilised to evaluate bundled pricing in favour of a more plaintiff-friendly but less clear analysis.
Elsewhere, however, what is essentially a per se prohibition against resale price maintenance continues and enjoys reasonably aggressive enforcement.
Perhaps more troubling is the scepticism faced by other pricing practices that may reflect efficiencies or may be otherwise simply benign.
To illustrate these points, we focus on a comparison of US law with the law of other jurisdictions, but focused principally on EU law, with regard to three different settings: resale price maintenance; price discrimination by any seller; and pricing by persons with market power, including predatory pricing and bundling.
Resale price maintenance
Last year, the Supreme Court reversed precedent from 1911 that imposed per se illegality on minimum resale price maintenance (RPM). In Leegin, the Court generally disregarded its precedents and began its analysis from scratch - it examined economic evidence that RPM's suppression of intrabrand competition between retailers often serves to stimulate interbrand competition among manufacturers. Accordingly, RPM has the potential to give consumers more choices of outlets and services, to eliminate free-riding on the promotional efforts of distributors and to facilitate entry for new firms and brands.
While the Court also acknowledged the potential anti-competitive effects of RPM (such as discouraging price cutting), the Court concluded that such effects are not always or almost always present and therefore the per se rule is not appropriate. Accordingly, it directed that claims of illegal RPM be examined under the rule of reason and suggested that the lower courts take into account in their analysis, among other factors:
The aftermath of Leegin should prove most interesting. In contrast to the approach taken by the US Supreme Court, in Europe, fixing the resale price, or establishing a minimum resale price, has long been considered a hard-core restriction on competition and is therefore presumed anti-competitive. While such treatment is not precisely the same as condemning the restraint as per se illegal, the Commission has not been sympathetic to alleged justifications for either practice.
Nonetheless, consistent with US practice, neither maximum nor recommended resale prices are treated as hard-core restrictions. Such conduct is presumed pro-competitive. However, as the Court of Justice found in the recent Volkswagen decision, all relevant factors must be taken into account when establishing the pro-competitiveness of these clauses. These neutral clauses could for example become anti-competitive when applied to a large number of agreements. Similarly, in FNCBV, the Court of First Instance looked beyond the stated intention of the parties in holding that an agreement between federations of ranchers and federations of slaughterhouses which was drafted so as to only be a recommendation on resale price actually constituted an improper hard-core restriction on pricing. In that case, the court construed the words 'at least consistent with this scale' as fixing a set price.
The approach taken in the EU is consistent with much of the rest of world. Many jurisdictions have specific statutory provisions that prohibit the setting of resale prices and there have been enforcement actions - even post-Leegin. Hence, this very inconsistent treatment of RPM between the US and the rest of the world makes implementing a single global pricing and distribution policy virtually impossible and will increase the difficulties in counselling clients in the area.
Under US law, charging a different price to (ie, discriminating between) two competing purchasers of a product is a violation of the Robinson-Patman Act (the RP Act). The seller is not required to have any market power whatsoever, and there are various presumptions that make the plaintiff's case even easier. The RP Act therefore creates an environment where it is very easy for a potential challenger to state a prima facie case of illegal price discrimination - only a difference in the price charged for the same product to customers that compete in a resale market is required. As one can imagine, there are cases litigating each aspect of this simple formulation, but the reality remains the same - any time that a company decides to charge two customers different prices for the same product, it must conduct some analysis to ensure compliance with the RP Act.
For any company, there are some important points to consider with regard to the prima facie case. First, the 'price' element is read very broadly - it can include, for example, different credit terms. Second, the purchasers must be 'competing'. The critical inquiry is to determine whether participants in one channel of distribution are selling to the same customers as participants in another channel in the same geographic region. Third, the products must be of 'like grade and quality'. Thus, charging different prices for different types of a product (eg, light beer and regular beer) should not raise an issue, but charging different prices for products that simply have different labels on the same formulation would.
The good news about the RP Act is that there are important and useful defences. Perhaps the most practical is the 'functional availability' defence, which allows a company to discriminate in price, provided that it has made the lower price available to the competing purchasers, even if some purchasers currently cannot achieve the criteria for better pricing.
Other countries around the world appear to lack such a broad prohibition on price discrimination. Many jurisdictions require that the party engaging in price discrimination have some degree of market power, usually measured by reference to market shares. The Japan Fair Trade Commission has 'recommended' enforcement action against Intel's Japanese subsidiary for engaging in private monopolistic behaviour because it provided discriminatory rebates to computer manufacturers that had previously purchased central processing units from Intel's competitors. Similarly, under EU law, for example, article 82 of the EC Treaty prohibits only companies with a dominant position from 'applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage'.
Nonetheless, there are few EU cases dealing with pure price discrimination (ie, where no other form of monopoly abuse is present). Such cases are most likely where the customers receiving the favoured pricing are 'targeted' because they had traditionally purchased from a competitor or the price discrimination is based on nationality of the customer. While parties may attempt to defend any price discrimination on the ground that there has been no competitive effect, the European Commission has tended to find a 'competitive disadvantage' quite readily, particularly where the discrimination was based on nationality.
Perhaps the most surprising development based on article 82's explicit language has been the Commission's condemnation of price discrimination directed toward end-consumers. While such treatment has largely been limited to cases involving discrimination on nationality grounds, it provides an additional contrast point to the RP Act, which was passed in 1936 at the behest of wholesalers to protect such resellers, but not necessarily consumers.
Pricing by entities with market power
Pricing practices by entities with market power is another area where antitrust enforcement policy in the US appears to diverge from other jurisdictions and Europe in particular. This divergence is created by fundamentally different laws and legal processes in the various jurisdictions. Section 2 of the Sherman Act is narrower than article 82 (and national laws modelled on it) because it only reaches a dominant firm's use of improper means to attain or maintain monopoly power. By contrast, under article 82, the core violation is the exercise of monopoly power, once acquired, to injure unfairly or exclude others from a market. Thus, exclusion is all that matters in the US, while both exploitation and exclusion are bases for liability in Europe. Moreover, the European law has been created and enforced by an administrative process involving well-staffed agencies, while most US law in this area rests on litigation - mostly private litigation - before generalist judges and juries. The European courts have proven extremely deferential to the European Commission's findings of 'abuse' in pricing and other areas, while the US Supreme Court and the courts of appeals have become ever more precisely focused when facing similar issues in the context of jury trials. It seems clear that private litigation has played a crucial role in narrowing the US antitrust focus on pricing decisions and other conduct by dominant firms and such a view has been espoused by the William Kovacic, chairman of the Federal Trade Commission: 'The persistent inclination of US courts to raise liability standards to offset perceived excesses of private rights creates what could turn out to be a permanent fissure between the EU and the US approaches to dominant firm conduct'.
Trends in US antitrust law suggest that US courts will continue to exercise restraint in precluding single-firm conduct that is potentially benign or pro-competitive while directing less consideration to market share held by the firm in question. This cautious approach has been particularly relevant to the pricing area. As a general rule, a company can price its products or services as it pleases. In the US, the notion is that market power, or even monopoly power, generally results from skilled competitors applying sound business acumen and efficient firm practices. By the same token, in Europe and perhaps elsewhere in the world, the tradition will likely continue that the acquisition of market power imposes an obligation not to impede competition unduly or to otherwise take advantage of substantial market power. Accordingly, outside the US, 'too high' pricing may be condemned as exploitative. The European Court of Justice, for example, has set forth a standard that compares the price charged with the economic value of the goods or services at issue. Pricing can be condemned where it is excessive as compared with that economic value. Making such a determination has proved to be a difficult, and somewhat artificial, endeavour.
There is common concern (in both the US and EU) with what could be called 'exclusionary' pricing. The most commonly known is 'below cost' (or 'predatory') pricing. Similarly, there is common concern with the offering of rebates and other efforts to 'bundle' products where the firm employing the practice is able to exclude equally efficient competitors from the marketplace. Notwithstanding a common concern, the US focus on these issues is narrower than that which exists in Europe and much of the rest of the world.
US courts have long been reluctant to penalise firms for engaging in 'below cost' (or 'predatory') pricing because of the extreme uncertainty that such pricing strategies succeed in foreclosing competitors from the market; and lowered prices immediately benefit consumers and can stimulate competition consistent with the fundamental goals of antitrust law. The modern standard for analysing predatory pricing claims in the US comes from the 1993 Supreme Court case Brooke Group Ltd v Brown & Williamson Tobacco.
In order to establish illegal predatory pricing, consistent with Brooke Group, the party challenging the pricing must prove: pricing below an appropriate measure of cost (generally, average variable cost) by a firm with substantial market power where that firm has an ability later to recoup any losses it incurs in employing the below-cost strategy. It should be noted that, since Brooke Group, there have been very few successful challenges to conduct alleged to be predatory pricing.
Recently, the US Supreme Court confirmed the Brooke Group framework and extended it to 'monopsony' (buyer power) cases. In Weyerhaeuser v Ross-Simmons, the Supreme Court made clear that a plaintiff challenging 'predatory bidding' (paying too much for a product in order to make it harder for companies requiring the product to compete) also requires a showing of recoupment. The Supreme Court rejected the reasoning that a lower standard of liability should be applied to predatory bidding because buy-side predatory bidding did not have the analogous benefits of lowering prices to the consumer. Rather, the Supreme Court emphasised the uncertainty that accompanies such a pricing scheme and declined to accept that such pricing strategies would be unlikely to stimulate competition.
The US scepticism towards condemning below-cost pricing has spread somewhat. For example, the 2003 Boral Bessemer decision by the High Court of Australia closely parallels US requirements to establish illegal predatory pricing. Nonetheless, there can be some critical differences between the US approach and the law elsewhere. EU law is distinguishable from the US approach on a couple of key fronts. Pricing below either average variable cost or average total cost may be found to be predatory. The 1991 Akzo case establishes that prices below average variable cost are per se predatory; prices above average variable cost but below average total cost are presumed to be predatory and are condemned if evidence of predatory intent is found.
More importantly, no showing of recoupment is required under EU law. The European Court of Justice in Tetra Pak II intentionally departed from the US approach and explained: 'it would not be appropriate [...] to require [...] proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated'. This approach was recently confirmed by the Court of First Instance, which again rejected the necessity to show a probability of recoupment in France Télécom SA.
'Bundling' and other pricing practices
Beyond predatory pricing and price discrimination, there are a number of pricing practices that may create concerns, irrespective of jurisdiction, when utilised by a company with market power. The basic question is whether the pricing practice is being used to exclude competitors or is simply an effort to compete on the merits by offering customers products or services at lower price.
In this regard, 'bundling' has received tremendous recent attention. The concept of bundling encompasses a variety of pricing practices, but the common theme is a concern that the company employing bundling is attempting to use its market power over one product to limit competition in other products. Bundling therefore is very much akin to tying or exclusive dealing.
A 'tying' analysis applied to pricing appears reasonably straightforward - did a company with substantial market power in one product force, through low pricing, a purchaser to take another product in order to get the first product? In other words, is the price of the two products together low enough to 'force' a purchaser to buy them as a package?
The analysis of product bundles as exclusive dealing is somewhat less clear in the US than elsewhere. In the US, the difficulty in analysis stems from the 3rd Circuit Court of Appeals (in Philadelphia) 2003 decision in LePage. In that case, the court upheld a verdict condemning 3M's granting of large rebates to customers which made substantial purchases across several 3M product lines. The court found that these large rebates essentially forced the customers to purchase office tape from 3M, harming LePage, which competed only in the sale of tape. The fundamental problem with LePage is that it contains no articulable standard for judging the legality of bundled discounts. Dismissing 3M's contentions that liability could not be based on sales above cost, the court of appeals focused primarily on 3M's dominant market share and the size of the rebates.
In stark contrast is a Ninth Circuit Court of Appeals (in San Francisco) decision that specifically rejects LePage. In PeaceHealth, the court required proof that the rebates would result in some products being sold below cost. The court explained that it would calculate the price by focusing on the products for which the seller did not have market power - and apply the entire rebate to such sales. If this resulted in a price below cost, then Brooke Group would apply and the plaintiff would have to show that the seller could recoup its losses.
The PeaceHealth case leaves the bundled product area under considerable uncertainty in the US. Until the Supreme Court acts in this area, companies must proceed with caution.
In contrast, the law elsewhere may appear clearer, but largely because many practices are condemned as 'unfair' without sophisticated economic analysis. In the EU, for example, a firm with a dominant position cannot use loyalty rebates or other payments that provide an incentive to use the dominant firm exclusively. This is true even if the rebate or other payment is not substantial and could otherwise be met by competitors. Even quantity discounts may be questionable if employed by dominant firms. In such cases, the European Commission appears to require some form of cost justification.
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Pricing is an important, but difficult, area of antitrust for firms operating in multiple jurisdictions. As demonstrated by a basic comparison of US and the law of other jurisdictions, and in particular the European Union, some care is required before employing any particular practice on a broad basis because there is tremendous divergence in analysis around the world.