Working Paper: CEPR ID: DP4626
Authors: David S. Evans; A. Jorge Padilla
Abstract: European competition laws condemn as ?exploitative abuses? the pricing policies of dominant firms that may result in a direct loss of consumer welfare. Article 82(a) of the EC Treaty, for example, expressly states that imposing ?unfair? prices on consumers by dominant suppliers constitutes an abuse. Several firms have been found to abuse their dominant positions by charging excessive prices in cases brought by the European Commission and the competition authorities of several Member States. Those cases show that the assessment of excessive pricing is subject to substantial conceptual and practical difficulties, and that any policy that seeks to detect and prohibit excessive prices is likely to yield incorrect predictions in numerous instances. In this Paper we evaluate the pros and cons of alternative legal standards towards excessive pricing by explicitly considering the likelihood of false convictions/acquittals and the costs associated with those errors. We find that the legal standard that maximizes long-term consumer welfare given the information typically available to regulators would involve no ex post intervention on the pricing decisions of dominant firms. A possible exception to this general rule is discussed.
Keywords: excessive pricing; competition law; consumer welfare; market power
JEL Codes: K21; L40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Legal standard maximizing long-term consumer welfare (L21) | No ex post intervention in pricing decisions of dominant firms (L11) |
| No ex post intervention in pricing decisions of dominant firms (L11) | Detrimental effects on investment and innovation (O39) |
| Costs associated with false convictions (Type I errors) (K40) | Significant impact on dynamic industries (F69) |
| Costs associated with Type II errors (C12) | Limited impact on broader market (F69) |
| Likelihood and cost of regulatory errors (G18) | Guide design of legal standards for excessive pricing (K21) |
| Exceptional cases (entrenched monopolies) (L43) | Justification for intervention (F51) |