PREDATORY PRICING ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT This report covers predatory pricing, pricing so low that competitors quit rather than compete, permitting the predator to raise prices in the long run. Predatory pricing is subject to the competition laws and policies of most OECD countries, but there has been a lively controversy over what standards should be applied. Some officials go so far as to urge that any rule against predation will do more harm than good by depriving consumers of the benefits of vigorous price competition. This report examines the conflicting proposals for a standard to control predatory pricing and recommends a method of analysis which competition officials should follow. Major emphasis is given to identifying when low pricing should not be of concern to competition authorities. OECD 1989 2 TABLE OF CONTENTS I. INTRODUCTION......................................................................................................................... 5 II. THE ECONOMICS OF PREDATION......................................................................................... 7 A. Predatory Pricing...................................................................................................................... 7 B. Non-Price Predation ............................................................................................................... 11 C. Discussion .............................................................................................................................. 12 III. THE FREQUENCY OF PREDATORY PRICING.................................................................... 14 IV. THEORIES FOR CONTROLLING PREDATORY PRICING.................................................. 19 A. No Rule ................................................................................................................................. 19 B. Short-Run Cost-Based Rules ................................................................................................ 20 C. Long-Term Cost-Based Rules .............................................................................................. 21 D. Output Expansion Rules ....................................................................................................... 22 E. Rules Governing Price Rises ................................................................................................ 23 F. Industry-Specific Rules......................................................................................................... 24 G. Rule-of-Reason Tests............................................................................................................ 24 H. “Two-Tier” Rules.................................................................................................................. 26 I. Discussion............................................................................................................................. 27 V. LEGAL MECHANISMS TO CONTROL PREDATION.......................................................... 29 Australia...................................................................................................................................... 29 Austria......................................................................................................................................... 31 Belgium....................................................................................................................................... 31 Canada ........................................................................................................................................ 32 Denmark...................................................................................................................................... 33 Finland ........................................................................................................................................ 33 France.......................................................................................................................................... 33 Germany...................................................................................................................................... 34 Ireland ......................................................................................................................................... 35 Japan............................................................................................................................................ 36 New Zealand ............................................................................................................................... 37 Norway........................................................................................................................................ 37 Portugal ....................................................................................................................................... 38 Sweden........................................................................................................................................ 38 Switzerland.................................................................................................................................. 38 United Kingdom.......................................................................................................................... 38 United States ............................................................................................................................... 39 European Community ................................................................................................................. 43 3 Discussion ................................................................................................................................... 43 VI. ENFORCEMENT ACTIONS..................................................................................................... 45 Australia...................................................................................................................................... 45 Belgium....................................................................................................................................... 46 Canada ........................................................................................................................................ 48 Denmark...................................................................................................................................... 49 France.......................................................................................................................................... 51 Germany...................................................................................................................................... 55 Japan............................................................................................................................................ 57 Norway........................................................................................................................................ 58 Sweden........................................................................................................................................ 58 United Kingdom.......................................................................................................................... 59 United States ............................................................................................................................... 62 European Community ................................................................................................................. 70 Discussion ................................................................................................................................... 72 VII. CONCLUSIONS................................................................................................................................. 75 NOTES AND REFERENCES.................................................................................................................... 78 Chapter II .................................................................................................................................... 78 Chapter III................................................................................................................................... 80 Chapter IV................................................................................................................................... 81 Chapter V .................................................................................................................................... 85 Chapter VI................................................................................................................................... 89 4 I. INTRODUCTION The subject of predatory conduct, predatory pricing in particular, is topical again. Several trends have converged which make an examination of predation timely. The first is the sweeping movement throughout the OECD to increase competition and efficiency through the deregulation of numerous sectors and the privatisation of state-owned enterprises. This movement raises concerns that the newly freed firms, often dominant in their markets, will seek unfairly to protect their positions against new entrants. Second, there is the increasingly difficult area of international trade, where economic dislocations in connection with rising imports have caused many domestic industries to charge their