Counterfactual Analysis in Predation Cases 12 June 2013

Overview Predatory pricing Counterfactual in NZ Criticism and proposal

Predatory Pricing Predation Phase: lowering prices in order to foreclose competition Recoupment Phase: Reap monopoly profits and recoup losses of predation phase

Established Rules Areeda-Turner: Pricing under cost (AVC, AAC) US: + recoupment test EU: + dominance, no recoupment test

Comparison Causality dynamic static Market Perspective High Low Market perspective and level of causality of predation tests EU AT US

NZ Supreme Court Sec. 36: A person with substantial market power must not take advantage of that power for an anti-competitive purpose Dominant position must have facilitated the behaviour: The dominant firm “would not have acted as it did … if it had not been dominant.” (Case Telecom 0867 [2010] NZSC 111)

Criticism Counterfactual too difficult Hypothetical market situation unrealistic Conduct of dominant firm might have different effects than that of other firms (≈ special responsibility doctrine)

Appraisal NZ counterfactual involves higher burden of proof for competition authority (CC) NZ = AT + EU + US: – Dominance – Loss and Recoupment (counterfactual)

Comparison Causality dynamic static Market Perspective High Low Market perspective and level of causality of predation tests Counterfactuals EU AT NZ US

Effects-based Approach Current debate in EU Involves counterfactual analysis: Comparing situation with dominant firm’s conduct in place with “an appropriate counterfactual, such as the simple absence of the conduct” (EU Com Guidance on exclusionary conduct, 2009)

Suggested Refinement Are foreclosure effects the basis for the conduct, and the conduct would not have been done but for the harm on competition? EU-Com profitability test insufficient (did conduct lead to lower revenues than alternative conduct?) Would the conduct be done if the foreclosure effects did not exist?

Comparison Causality dynamic static Market Perspective High Low Market perspective and level of causality of predation tests Counterfactuals EU AT NZ US EU Com Own

Conclusion Counterfactual analysis might be useful for assessing unilateral conduct Effects-based approach Would the conduct be done if the foreclosure effects did not exist?

Thank You Kay E Winkler PhD Candidate, Law & Economics School of Economics and Finance Victoria University of Wellington LinkedIn: Kay E Winkler