Answer to Question #46363 in Economics for Jafta

Question

Identify the exclusionary pricing practices and why and when they are prohibited by the Competition Act. What are the economics rationale and efficiency effect of these strategies?

Answer 1

The assessment of exclusionary abuses by dominant firms is by no means an easy task. This is particularly true for pricing abuses, as there is no clear-cut way of distinguishing a price cut that is abusive from one that instead is pro-competitive. We argue that there are several shortcomings in the way the European Commission as assessed exclusionary pricing abuses in two important decisions concerning Internet access service markets: Deutsche Telekom AG and Wanadoo Interactive. First of all, in computing downstream costs to apply the price squeeze test the incumbent's economies of scale and unavoidable costs should be factored in, as the test is only meant to establish whether an as-efficient competitor has been unlawfully foreclosed. Secondly, since the price squeeze test provides only for a necessary condition for predation to occur, it is also necessary to prove that the recoupment of initial losses is a plausible scenario so that the conduct under examination may indeed turn out to be harmful to consumers. This is all but a trivial task, as there are some sources of endogeneity that may cause a radical change in the underlying market structure. Particularly, in markets at early stage of development, entry barriers that may facilitate the recoupment of initial losses ex-ante may cause a change such that market structure no longer supports recoupment ex-post.