… seemed to be the stance taken by the Romanian Competition Council in 2006, when it found UPC liable of abusing its dominant position on the TV cable market by “imposing increased tariffs not justified by cost growth”.

The competition authority argued that UPC had breached its contractual commitment with subscribers according to which tariffs were to be adjusted in line with cost increases. The authority investigated the monthly tariffs and costs registered by UPC during a 4—year period and characterized as “unfair” the price increases not accompanied by a simultaneous cost raise. Since the proof of abuse did not relate to the level of prices but rather to a lack of synchronization between prices and costs increase, the Competition Council claimed that the case was not pursued on excessive tariff grounds but on unfair pricing imposed to subscribers, the latter being a distinct form of abuse of dominant position under article 6 of the Competition Law (article 6 of the Competition Law No. 21/1996, letter a) prohibits unfair prices and commercial conditions while letter e) puts a ban on excessive or predatory prices).

We now fast forward another three years and … a trial later to see the Bucharest Court of Appeal overturn the Competition Council`s finding of dominant position abuse upholding that the market definition employed by the authority was too narrow and inconsistent with the previous case law - the TV cable market was defined at local level and each service provider was considered a monopolist in the city areas not overlapping with the other cable operators’ networks; the court dismissed this narrow market definition inconsistent with its previous case law and held that UPC was not a dominant player since it only held less than 25% on the national market of TV cable services.

The court went audaciously further and held that the Competition Council failed to provide evidence that prices were unfair by reference to the EC standards according to which unfair prices are either excessively high (excessive pricing) or too low (predatory pricing). UPC had neither achieved higher profits by reference to its main competitor RCS&RDS nor applied higher tariffs in the areas not overlapping with other competitors’ networks. Moreover, the court held that the monthly analysis of costs was irrelevant, a cost analysis made on a sufficiently long term to catch the seasonal variations of service costs being more appropriate.

What`s Unfair Unless Excessive?

The court`s approach is reasoned from an economic perspective: unfair prices must relate to the level of prices as being excessively high as to exploit clientele or exclude competitors or irrationally low, below costs, predatory towards competitors. As far as exploitative prices are concerned what would be unfair unless excessive? The fact that a dominant company breaches the price adjustment mechanism agreed with its clients may trigger the contractual or consumer protection liability but cannot substantiate an abuse of dominant position if the increased prices are still at a competitive level.

What is the Competitive Level of Prices Dominant Companies Must Care For?

Quite often, identifying the competitive price benchmark against which the dominant firm’s prices should be appraised proves difficult in practice. A first test would be to compare the price charged for a product and the cost for manufacturing such product. Under EC law, a price was considered to be excessive “because it has no reasonable relation to the economic value of the product supplied”. “The excess could, inter alia be determined objectively if it were possible for it to be calculated by making a comparison between the selling price of the product in question and its cost of production, which would disclose the amount of the profit margin” as per Decision of the Court of Justice in United Brands case 27/76 (1978).

In industries such as pharmaceutics and IT which involve heavy and risky investments in intellectual property rights, price may significantly exceed the unit cost of production given the need to recover upfront investments.

While profits are then the reward of innovation, the difficulty lies in assessing what an appropriate reward by reference to the risk involved is. For this reason, under US Federal Law there is no excessive pricing offence, as the regulator chose a non—interventionist approach, believing that monopolist’s profits shall spur innovation by competitors and attract new entry on the market and that, eventually, the problem will be solved by competition.

Moreover, in industries where demand is cyclical, prices may vary depending on the level of demand. Where demand is significantly above industry capacity, increased prices reflect normal competitive behavior and the fact that customers value more and are willing to pay more for the under—produced commodity. When difficulties related to the internal cost allocation arise, a comparison of prices can be made across various services offered by the dominant firm. Based on this test, the European Commission found Deutsche Post’s prices for onward transmission of cross border mail as excessive by reference to the domestic tariffs. Other tests for excessive pricing may consist in comparisons across different firms in the industry (this test was applied by the Bucharest Court of Appeal in UPC`s case) or different geographical markets. Without having a universal application, all such tests need to be addressed with care, given the relevant differences among the terms compared and the specificities of each case. This explains why the European Commission has rarely intervened on pure excessive pricing grounds, i.e. resulting in the exploitation of customers. More often, the Commission focused on unfairly high prices applied by vertically integrated dominant companies, having exclusionary effects towards competitors (margin squeeze abuses).

The test is somehow more obvious in such cases: margin squeeze occurs where a dominant firm sells to competing downstream firms at a wholesale price that, given the prevailing retail prices, does not allow even an efficient downstream firm to cover its cost. Under the Romanian competition law, given the distinction of unfair prices and excessive prices as two separate forms of abuse, perpetuated under the recent law revision in August 2010, a larger grey zone still floats on what is illegal or not. Failure to make a clear—cut distinction leaves room for the Romanian Competition Council`s “I know an abuse when I see it” approach, providing for little legal certainty on how dominant companies should price their products on the Romanian market.