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When Is Pricing Predatory?

August 24, 2009

Major corporations have to pay attention to policies on unfair competition and antitrust. Intel knows all about this, having received a fine of more than $1.4 billion in May this year as a result of an investigation by the European Union (Intel is planning an appeal).

Readers of Chris Anderson’s new book ‘ Free: The Future Of A Radical Price’ will be wise to think about the potential for innovative pricing to fall foul of competition authorities.

The theory behind regulation is that powerful players can use unfair pricing to drive out competition – and then exploit their dominance. But the problem is that the criteria for deciding what is fair are not consistent, and the effects of specific pricing actions are often hard to estimate. In addition, such schemes are often encouraged by the procurement specialists, as part of their effort to negotiate lower prices.

In the case of Intel, the accustation was that rebate schemes operated unfairly against rival chip manufacturer AMD. The rebates certainly appeared anti-competitive because they applied only if customers gave Intel 80 – 100% of their business.  And the EU has always been relatively hostile to rebate schemes or discounting mechanisms that created some sort of  ‘loyalty bonus’.  

At the heart of predatory pricing is the determination of whether the cost of production exceeds the price charged. But this introduces another area that is complex to determine. That is when providers of goods and services ‘bundle’  – the aggregation of goods and / or services into a single price package.  When buying a bundle, the overall price is typically less than the component parts, so this may work against niche competitors, unable to offer similar bundles. The difficulties with this analysis arise when determining what elements of the package truly are distinct; and it is also hard to say which particular element of the package has been unfairly priced.

According to a recent article in The Economist, US anti-trust experts proposed a method that would apply the entire discount to a low-margin element  and then see whether that element failed the price / cost test. But this ignores the fact that the costs for a bundle may well be lower than the costs for their component parts (e.g. distribution, marketing etc may become cheaper).

The difficulty for competiton law is that an overly-protective regime may frustrate innovation, or undermine the benefits of increased efficiency, by preventing large companies from cutting or restructuring prices. And this, of course, would be contrary to their role of protecting consumer interests.

On one level, the fact that competition authorities appear to be acting with increased judgment (rather than applying rigid rules) is to be welcomed. But for companies wanting to establish sources of competitive difference, the unpredictability of such a system can represent significant risk.

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