Predatory pricing

What is predatory pricing?

Predatory pricing is a form of anti-competitive abuse of dominance contrary to section 5 of the Competition Act 2002, as amended, and Article 102 TFEU.  

Predatory pricing involves a dominant undertaking selling its products or services below-cost in the short-term with the aim of excluding competitors from the market. This may occur where competitors are unable to match the dominant undertaking’s short-term price and loses customers as a result.

Predatory pricing may also be targeted at specific customers or competitors. For example, a dominant undertaking may supply its goods and services to key (or potentially key) customers at a substantial discount to secure or protect a position in an emerging market. Depending on the circumstances, this may amount to predatory pricing.

How does predatory pricing harm competition?

Predatory pricing is typically implemented in two phases: the predation phase, and the recoupment phase.

During the predation phase, the dominant undertaking lowers the price of its good or services with a view to taking business from its competitors. A dominant undertaking may be able to withstand the losses it incurs from below-cost pricing due to its economic strength, with the ultimate objective of forcing competitors out of the market.

During the recoupment phase, having excluded competitors from the market or weakened competitive constraints, the dominant undertaking may subsequently raise prices above the competitive level. This allows it to recoup losses suffered during the predation phase and earn high profits from the market.

It is not necessary for the CCPC to wait until the recoupment phase to intervene in what it considers to be a predatory strategy. Nor is proof of recoupment required. A dominant undertaking may engage in predatory pricing and breach competition law once it sets out on the predation stage of the strategy.

What distinguishes predatory pricing from legitimate competition?

In a competitive market, businesses may respond to competitive pressure by reducing prices. Where an undertaking competes on the merits – for example, by offering lower prices as a result of greater efficiency or lower costs - this does not breach competition law.

Pricing below cost is not automatically unlawful. Short‑term loss‑making may occur for legitimate reasons, such as promotional offers, clearance sales, or entry into a new market. Competition concerns arise where below‑cost pricing forms part of a strategy by a dominant undertaking to exclude competitors rather than to compete on the merits.

Additionally, predatory pricing can only arise where the undertaking engaging in the conduct holds a dominant position in the relevant market. Businesses that are not dominant are generally free to set their prices as they see fit, subject to other areas of law.

The key difference between lawful price competition and predatory pricing is that, in the case of predatory pricing, the dominant undertaking:

(a)    prices below its costs; and,

(b)   sets prices at a level that an as-efficient competitor cannot match.

Examples of conduct that may raise concerns include:

(a)    sustained pricing below cost by a dominant undertaking;

(b)   targeted discounts aimed at removing or disciplining specific competitors;

(c)    below‑cost pricing combined with barriers to entry or expansion; or

(d)   pricing strategies that cannot be explained by efficiency or cost savings.

What is meant by “costs”?

In line with European practice and case law, the CCPC uses cost benchmarks when assessing whether a price charged by a dominant undertaking may be predatory.

Traditionally, where an undertaking prices below its average variable costs – that is, costs which vary with the level of output, such as raw materials, energy used in production, or wages linked to production levels – there is a rebuttable presumption of predation. This reflects the fact that the undertaking is making a loss on each unit sold.

Predatory pricing may also be established where an undertaking charges below its average total costs, which include both fixed and variable costs. Fixed costs are costs that do not vary with output in the short term, such as rent for premises, long‑term equipment leases, and certain administrative or management costs. In such cases, evidence of an intention to exclude competitors may be relevant.

In recent cases, the European Commission has used more rigorous benchmarks to assess an undertaking’s pricing practices. These include the long run average incremental cost (LRAIC) benchmark, which focuses on the costs specifically attributable to the production of a given amount of output, known as the increment.

While different cost benchmarks may be applied depending on the circumstances, the general principle remains that the CCPC will assess whether and to what extent the dominant undertaking is charging below cost.

If you believe you have evidence of an undertaking engaging in predatory pricing, please contact the CCPC.