The Law and Economics of Excessive and Unfair Pricing:: A Review and a Proposal

• Author: Vivek Mani,Peter Davis
• DOI: 10.1177/0003603X18807804
• Published date: 01 December 2018
• Date: 01 December 2018

Article

The Law and Economics of

Excessive and Unfair Pricing:

A Review and a Proposal

Peter Davis* and Vivek Mani*

Abstract

The law on excessive pricing by a dominant firm derives from Article 102 of the Treaty on the Functioning of

the European Union (TFEU), considered in the United Brands (UB) decision by the European Court of

Justice (ECJ). The UB decision described a test that requires an assessment of whether prices are excessive

to the point of being unfair in the sense that it has no reasonable relation to economic value of the product

supplied (either in itself or in comparison to other products). In this article, we describe a coherent

microeconomic framework for understanding the proper relationships between price, economic costs, and

economic value. In particular, we propose an economic approach, which we believe courts should adopt

to help structure their consideration of allegations of excessive and unfair pricing. While the economics can

be very helpful in structuring analysis under both limbs of the UB test, it also makes clear that ultimately

judges will need to make a judgment about what is, and what is not, fair pricing by a dominant firm.

Keywords

Article 102, abuse of dominance, exploitative abuse, unfair pricing, excessive pricing, cost benchmark,

price comparator, profitability, consumer surplus

1. Introduction

Pricing by a dominant company that is excessive to the point of being unfair can amount to an abuse of

dominance under Article 102 of the Treaty on the Functioning of the European Union (TFEU).

1

This

provision, mirrored in the competition law of Member States, means a clear long-standing but also

highly controversial policy tool is available to competition agencies in Europe, if they wish to pursue

excessive pricing cases.

Even so, historically there has been a deliberate and significant reticence by national competition

authorities and the European Commission to pursue excessive pricing cases. The conventional wisdom

*Cornerstone Research, London, UK

Corresponding Author:

Peter Davis, 4 More London Riverside, 5th Floor, London, SE1 2AU, UK.

Email: pdavis@cornerstone.com

1. Consolidated Version of theTreaty on the Functioning of theEuropean Union – Part Three: UnionPolicies and Internal Actions

– Title VII:Common Rules on Competition,Taxation and Approximationof Laws – Chapter 1: Rules on Competition– Section

1: Rules Applying to Undertakings – Article 102(ex Article 82 TEC), OFFICIAL JOURNAL 115, May 9, 2008,P. 0089-0089.

The Antitrust Bulletin

2018, Vol. 63(4) 399-430

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DOI: 10.1177/0003603X18807804

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is that it is better to focus agency resources on firm conduct that seeks to exclude existing or future

competition rather than to focus action directly against market outcomes, in particular, prices. Indeed,

many ofthe past cases where excessivepricing has been consideredhave primarilyinvolved allegationsof

exclusionary abuse.

2

Following the financial crisis, the political climate in Europe is markedly more skeptical about the

benefits of free markets. A consequence is a reduced consensus about the proper limits to the deploy-

ment of competition policy tools in general and on the role of excessive pricing cases in particular. The

nexus of a less clear-cut policy approach and political concerns arising from significant price rises for

older pharmaceutical products has manifested itself in the recent resurgence of excessive pricing cases

in the pharmaceuticals sector.

In particular,the Italian Competition Authority(ICA) fined Aspen Pharmacare €5 millionin 2016 for

increases of between 300%and 1,500%in the price of several oncology drugs.

3

Subsequently, in May

2017, the European Commission opened an investigation into the price of Aspen’s oncology drugs in

severalMember States.

4

In the UK,the Competition and MarketsAuthority (CMA) finedPfizer and Flynn

£90 million in December 2016 for increases of up 2,600%in the price of an epilepsy drug.

5

Pfizer and

Flynn appealed,and on June 7, 2018, the CompetitionAppeal Tribunal (CAT) set aside partsof the CMA

decision and provisionally remitted thematter back to the CMA for further consideration.

6

The CMA is

also currentlyinvestigating ConcordiaInternational for increasesof up to 6,000%in the price of a t hyroid

drug.

7

In November 2016,Commissioner Vestager argued that pricescan get so high that they cannot be

justified.

8

She referred to cases brought by the Italian antitrust authority and by the CMA as cases that

showed that“there can be times when competitionrules need to do theirbit to deal with excessiveprices,”

albeit “carefully.”

9

Concernover excessive pricing in pharmaceuticals has also garneredattention outside

of Europe. In the United States, the increasein prices of the antiparasitic drug Daraprim from $13.50 to

$750 a pill

10

drew media attention, as did the price rise associated with the EpiPen.

11

2. Flynn Pharma Limited v. Competition and Markets Authority and Pfizer Inc. v. Competition and Markets Authority, Nos.

1275-1276/1/12/17, [2018] CAT 11, at {282 (hereinafter, Flynn Pharma Limited, [2018] CAT 11), https://www.catribunal.

org.uk/sites/default/files/2018-08/1275-1276_Flynn_Judgment_CAT_11_070618.pdf.

3. Press Release, AGCM, A480 Price Increases for Cancer Drugs Up to 1500%: The ICA Imposes a 5 Million Euro Fine on the

Multinational Aspen (Oct. 14, 2016), http://www.agcm.it/en/newsroom/press-releases/2339-a480-price-increases-for-

cancer-drugs-up-to-1500-the-ica-imposes-a-5-million-euro-fine-on-the-multinational-aspen.html.

4. Press Release, Eur. Comm’n, Antitrust: Commission Open Formal Investigation into Aspen Pharma’s Pricing Practices for

Cancer Medicines (May 15, 2017), http://europa.eu/rapid/press-release_IP-17-1323_en.htm.

5. Press Release, CMA, CMA Fines Pfizer and Flynn £90 Million for Drug Price Hike to NHS (Dec. 7, 2016), https://www.

gov.uk/government/news/cma-fines-pfizer-and-flynn-90-million-for-drug-price-hike-to-nhs.

6. Flynn Pharma Limited v. Competition and Markets Authority and Pfizer Inc. v. Competition and Markets Authority, Nos.

1275-1276/1/12/17, [2018] CAT 12, http://www.catribunal.org.uk/files/1275-76_Flynn_Judgment_CAT_12_260718.pdf.

7. Press Release, CMA, Drug Company Accused of Abusing Its Position to Overcharge the NHS (Nov. 21, 2017), https://

www.gov.uk/government/news/drug-company-accused-of-abusing-its-position-to-overcharge-the-nhs.

8. Eur. Comm’n Speech, Protecting Consumers from Exploitation (Nov. 21, 2013), https://ec.europa.eu/commission/

commissioners/2014-2019/vestager/announcements/protecting-consumers-exploitation_en.

9. Presumably referring to the Italian Aspen excessive pricing case and the CMA Pfizer-Flynn excessive pricing case. Around

one month later, the CMA issued a statement of objections in the Actavis excessive pricing case which involves

hydrocortisone tablets.

10. See, for example, Andrew Pollack, Drug Goes from $13.50 a Tablet to $750, Overnight,N.Y.T

IMES, Sep. 20, 2015, https://

www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html (hereinafter

“Pollack”); Carolyn Y. Johnson, What Happ ened to the $750 Pill That Catapulted Martin Shkreli to Infamy,W

ASH.

POST, Aug. 1, 2017, https://www.washingtonpost.com/news/wonk/wp/2017/08/01/what-happened-to-the-750-pill-that-

catapulted-pharma-bro-martin-shkreli-to-infamy/?noredirect¼on&utm_term¼.210b7a6b5d71.

11. See,e.g., Pollack, supra note 10; and James Paton & Naomi Kresge, EpiPen’s Cost in Britain Shows Other Extreme of Drug

Pricing,B

LOOMBERG, Sep. 29, 2016, https://www.blo omberg.com/news/articles/2016-09-29/e pipen-s-69-cost-in-britain-

shows-other-extreme-of-drug-pricing-itnvgvam.

400 The Antitrust Bulletin 63(4)

The new openness to excessive pricing cases is not limited to the pharmaceutical sector. Specifi-

cally, in September 2017, the European Court of Justice (ECJ) delivered its judgment on the Latvian

collecting societies case relating to excessive pricing of copyright levies.

12

An excessive (and dis-

criminatory) pricing investigation of Gazprom’s prices in several eastern Member States resulted in

final commitments accepted in 2018.

13

In this article, we describe the coheren t microeconomic fra mework, developed o ver centuries,

available for courts to understand the relationships between price, economic costs, and economic

notions of value. In particular, we propose an economic approach, which is consistent with European

case law, that we believe courts should adopt to help structure their consideration of allegations of

excessive and unfair pricing. While the economics can be very helpful in structuring analysis under

both limbs of the UB test, it also makes clear that ultimately judges will need to make a judgment

about what is, and what is not, fair pricing by a dominant firm.

2. The United Brands Test

The canonical European case inv olving an allegatio n of pricing which is ex cessive to the point of

being unfair arises from the ECJ’s judgment in United Brands (UB).

14

The ECJ laid out a

structured legal test, known as the United Brands test (UB test), which has provided fertile

ground for a significant debate in more recent cases. The ECJ held that, when evaluating whether

a dominant firm had charged excessively high prices to the point of being an abuse of that

dominance:

15

It is advisable ...to ascertain whether the dominant undertaking has made use of the opportunities arising

out of its dominant position in such a way as to reap trading benefits which it would not have reaped if

there had been normal and sufficiently effective competition. ...In this case charging a price that is

excessive because it has no reasonable relation to the economic value of the product supplied would be

such an abuse.

The ECJ also describes a two-limbed test to evaluate these criteria:

1. Is the difference between the price actually charged and the cost actually incurred excessive?

If yes:

2. Has a price been imposed which is:

i. unfair in itself? Or

ii. unfair when compared to competing products?

16

12. Autortiesı

¯bu un komunic¯

esˇan¯

as konsult¯

aciju aent¯

ura/Latvijas Autoru apvienı

¯ba v. Konkurences padome, Nos C-177/16,

[2017] (hereinafter, AKKA, [2017] C-177/16), https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri¼CELEX:

62016CJ0177&from¼EN.

13. The commitments were made by PJSC Gazprom and Gazprom export LLC without acknowledgement that Article 102

TFEU was breached. Press Release, Eur. Comm’n, Antitrust: Commission Opens Proceedings Against Gazprom (Sep. 4,

2012), http://europa.eu/rapid/press-release_IP-12-937_en.htm?%20locale¼en; Proposals for Commitments COMP/39.816 –

Gazprom Commitments Under Article 9 of Council Regulation N1/2003, PJSC Gazprom, Gazprom Export LLC, and the

Eur. Comm’n (Mar. 15, 2018).

14. United Brands Company and United Brands Continental B.V. v. Commission of the European Communities, Nos 27/76,

[1978], (hereinafter United Brands Company, [1978] 27/76), http://eur-lex.europ a.eu/legal-content/EN/SUM/?%

20uri¼CELEX:61976CJ0027.

15. Id. at {{ 249–50.

16. In UB, the ECJ found that the Commission had not analyzed UB’s cost structure or profitability, so that the Commission

failed this two-limbed test at its first hurdle. Consequently, competition agencies and courts did not grapple with the second

limb of the test, and in particular, the question of what is meant by the terms “unfair” and “economic value” until later cases.

Davis and Mani 401