Price Discrimination – Legal Aspects

OECD, 30 November 2016

Prof. Damien Geradin Tilburg Law & Economics Center (TILEC) &

University College London EDGE Legal, Brussels

Agenda • This presentation discusses through several examples two forms of

price discrimination: exploitative and distortionary. • Exploitative price discrimination:

• Price discrimination combined with territorial restrictions • Price discrimination through geo-blocking • Price discrimination through personalized pricing

• Distortionary price discrimination: • Price discrimination and downstream market power • Price discrimination on the ground of nationality • Price discrimination in the shadow of litigation

• Conclusions

Exploitative price discrimination • Unlike exclusionary strategies, exploitative conduct does not seek to

harm competitors. It seeks to exploit consumers. It is often helped by facilitating practices.

• Exploitative conduct, such as excessive pricing, by dominant firms may be considered as an abuse of a dominant position in certain jurisdictions (e.g., Article 101(a) TFEU).

• In other jurisdictions (e.g., the US), exploitation is not an abuse of a dominant position, although excessive pricing may be subject to other legal regimes (e.g., price gouging laws).

• While exploitative practices may breach competition rules, the same can be said of “facilitating practices”, such as for instance measures designed to prevent arbitrage by partitioning markets.

Example 1: Price discrimination combined with territorial restrictions

• A dominant firm sells its product at different prices in distinct geographic markets and regularly engages in steep price increases if there is a strong demand for its product in a given market.

• If the product can be freely traded across borders, the ability of the dominant firm to increase its price will be constrained.

• For that reason, the dominant firm may adopt policies restraining cross-border trade, by, for instance, imposing territorial restrictions on its distributors.

• From a competition law standpoint, this conduct: • May be considered as an abuse of a dominant position if the price of the product in

the high-price country is considered “excessive” (see, e.g., Article 102(a) TFEU). • Note that excessive pricing cases are rare in the EU (because it is not easy to demonstrate a

price is too high), although significant price variations across Member States may make it easier to demonstrate that a price is excessive.

• Alternatively, the territorial restrictions contained in distribution agreements may be considered illegal because they partition markets artificially (see, e.g., Article 4.b of the EU Vertical BER, which considers restrictions to passive sales as hardcore restrictions in breach of Article 101 TFEU).

Example 2: Price discrimination through geo-blocking • A dominant online digital content provider sells its monthly subscriptions at

different prices across countries with price differences that can be up to 10%. • Consumers located in high-price countries try to buy subscriptions in low-price

countries. • They are, however, unable to do so due to geo-blocking. When they provide their

credit card details, they are unable to complete the transaction and/or they are rerouted to the subscription webpage of their own country.

• From a competition law standpoint: • Small price variations (5-10%) will likely be insufficient to develop an excessive pricing claim. • But in the EU internal market, market partitioning may be illegal as per United Brands:

“These discriminatory prices, which varied according to the circumstances of the Member States, were just so many obstacles to the free movement of goods and their effect was intensified by the clause forbidding the resale of bananas while still green and by reducing the deliveries of the quantities ordered.”

• As abuse of dominance law does not catch geo-blocking by non-dominant firms, regulatory intervention may be needed.

• See, e.g., Commission Proposal for a Regulation on addressing geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market (2016)

Example 3: Price discrimination through personalized pricing

• An online retailer collects a large amount of information from buyers regarding their buying pattern, age and location, taste and preferences, etc.

• Data mining allows that retailer to distinguish between different categories of buyers on the basis of their anticipated income and the retailer charges higher prices to high-income consumers and lower prices to low-income consumers.

• From a competition law standpoint, it is not clear whether this scenario requires intervention.

• Does the conduct increases output? • In any event, there is little that can be done from a competition law

standpoint, except if the retailer is dominant and high-income consumers are subject to excessive pricing, but such claims will be difficult to run.

• Such practices may breach other legal regimes (date protection legislation, legislation on unfair contractual terms, etc.)

Distortionary price discrimination • Distortionary price-discrimination occurs in the presence of a “secondary-

line” injury, which arises when a supplier discriminates against one or several customers compared one or several other customers with which they compete on a downstream market.

• Some competition law regimes prohibit distortionary price discrimination. For instance, Article 102(c) TFEU prohibits as an abuse of dominance:

“applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage.”

• Besides a dominant position, the application of Article 102 TFEU (c) requires two conditions:

• The measure under investigation applies dissimilar prices to “equivalent transactions”, and

• It places the dominant firm’s trading parties at a “competitive disadvantage” over others.

Why would a dominant firm engage in distortionary price discrimination?

• In theory, it is hard to see why dominant firms would engage in that form of price discrimination:

• Upstream firms benefit from a competitive downstream market for distributing their goods. The possibility to grant a competitive price advantage to a distributor may, in the short run, give the latter a strong incentive to distribute the goods efficiently. But in the long run, the insulation of the distributor from competitive pressures may affect its efficiency in distributing the product.

• An upstream firm granting a competitive price advantage to a purchaser may send a risky signal to the market. Purchasers might be reluctant to order products from the seller in the future, if they face the risk of being discriminated against subsequently.

• The grant of a competitive advantage may lead to the exclusion of the discriminated purchasers and in turn to increased concentration on the purchasing market. This would increase the countervailing buying power of the seller’s downstream distributors and accordingly limits its own market power.

Example 1: Price discrimination and downstream market power

• A dominant firm is facing two different kinds of customers according to their purchasing power (e.g., large supermarket and small retail outlets) and discriminates in favour of the former, hence giving them a competitive advantage.

• Article 102(c) TFEU can apply, but: • Are we talking about “equivalent transactions”? The large downstream firm may get

a discount because it buys larger volumes. • Now, if the transactions are equivalent and the upstream firm is pressured to

offering a lower price to the large downstream firm, it is the purchaser, not the seller, that exploits its market power to place its competitors at a competitive disadvantage.

• The appropriate target for enforcement authorities should thus not be the price discriminator, but the firm benefiting from the price discrimination (abuse of buyer power).

• Note that the problem can probably be addressed when analysing the existence of upstream market power. In this case, the upstream firm may not be dominant given the presence of countervailing buyer power.

Example 2: Price discrimination on the ground of nationality

• In the Brussels National Airport case, Belgian legislation provided for a system of stepped discounts on landing fees, which favoured airlines that have a large volume of traffic at Brussels airport over airlines having a lower traffic.

• The thresholds established by the Belgian legislation were such that only a carrier based at the airport could benefit from the discounts to the detriment of other Community carriers. This had the effect of favouring the Belgian public carrier over its competitors.

• The Commission considered that Article 102(c) could be applied to cases where:

“an undertaking in a dominant position [gives] preference to another undertaking from the same State or another undertaking which is pursuing the same general policy.”

• In such a case, one however needs to determine whether: • The transactions at stake are “equivalent”; and • It distorts competition on a downstream market.

Example 3: Price discrimination in the shadow of litigation

• Firm A holds patents that are essential to a standard (“SEPs”). Assume that Firm A is dominant on the market(s) for the licensing of its SEPs.

• It negotiates a royalty rate with Firm B, which produces standard-compliant devices. Firm A’s “standard” royalty rate is 2%, but after months of unsuccessful negotiations and the filing of a costly patent infringement lawsuit, Firms A and B eventually settle for a rate of 1.5%.

• Then Firm A negotiates with standard implementer C and asks for its standard 2% rate.

• In theory Article 102(c) TFEU can apply, but: • Are the transactions equivalent?

• They are as even if B is a larger licensee than C, there are no economies of scale in licensing. • Does this place Firm C to a “competitive disadvantage”?

Conclusions • Price discrimination is one of the most complex areas of competition law. • It is important for a competition authority to identify whether the issue at

stake is a case of exploitative, distortionary or exclusionary price competition as the legal tests to apply will likely be different.

• The TFEU contains specific legal bases to address: • Exploitative discrimination (Article 102(a) TFEU); and • Distortionary price discrimination (Article 102(c) TFEU).

• Other jurisdictions may not have specific legal bases to address price discrimination, but abuse of dominance law is generally sufficiently flexible to deal with price discrimination cases.

• As in all abuse of dominance cases, competition authorities must base their findings on sound economic principles.

Prof. Damien Geradin

EDGE Legal 19, Rue de Crayer

1000 Brussels / Belgium Tel: + 32 471 17 95 25

Email: dgeradin@edgelegal.eu