Predatory Pricing

As you go through this section relate and have in mind that, as mentioned in the course introduction, pricing is one contentious issue to be implemented in the interconnection simulation. All the key role players as mentioned in the course introduction (i.e NCC, Nattel, DomCell, IMN and the Consumers) should be able to consider how their role relate to pricing negotiations.

What effect does pricing have on the ICT market?

Why does it matter?

What does your role think or relate to pricing?

Predatory pricing is the practice of providing services at prices that are low enough to drive competitors out of a market, so as to monopolise the market. There is considerable debate about what prices and what conduct constitute predatory pricing. While the competition laws of various countries differ, it is generally agreed that a number of elements must exist to constitute predatory pricing. Typical elements are set out in Box 1-8.

 

Box 1- 8:

What is Predatory Pricing?

Generally, the following elements must exist to constitute predatory pricing: The predator must have market power to unilaterally increase its prices. The predator must charge prices that fall below a predatory price standard. (This standard varies somewhat between countries.) Generally, in competition law, prices in this sector must be below average Total Costs, and near or below Average variable Costs. In the telecommunications sector, prices must usually be below Long Run Incremental Costs (LRIC) or Total Service Long Run Incremental Costs (TSRIC). (See Appendix B for a discussion of these costs standards). There must be evidence of a clear policy of selling at predatory prices, not just sporadic or reactive price cutting. Normally, there must be a reasonable expectation that the predator will be able to recoup its losses after its predation ends (e.g. after competitors are driven out of the market)

Predatory pricing is often prohibited under national competition laws. It may also be prohibited under the laws or policies applied by a telecommunications regulator. Either way, it will be necessary for the regulator to have the means to investigate and stop instances of predatory pricing and to implement suitable penalties or remedies.

Remedies vary. Predators may be penalised, competitors which have been the victims of predatory pricing may be compensated, or both. Another regulatory approach is to anticipate predatory pricing by implementing price regulation to deter predatory behaviour. Wholesale cost imputation requirements, which are discussed in the previous section, provide an example of the approach.

Predatory pricing is a particularly difficult type of conduct to prove in the telecommunications industry. As previously discussed, the industry is characterised by substantial joint and common costs which are difficult to assign to particular services. The economic cost tests used to determine predatory pricing, such as Average Variable Costs and Long Run Incremental Costs, are difficult to apply to many types of telecommunications prices. Again, these tests and related costing issues are discussed in Appendix B

Predatory Pricing: Example of a Complaint

The case study provided in Box 1-9 summarises Oftel's investigation into certain of BT's Internet services after a competitor raised predatory pricing concerns. It illustrates some of the problems of establishing that low pricing amounts to predatory pricing.

 

Box 1- 9:

Oftel Investigation of BT’s Internet Services

The Complaint:

A competing internet service provider complained to Oftel that BT was engaging in predatory pricing. The complaint was that BT was offering its BTNet services at a price 9 times less than other comparable BT services (X.25 packet services). Other elements of the complaint were that BTNet was not recovering an appropriate measure of costs and that BT was offering a free period of subscription.

The Analysis:

Oftel observed that barriers to entry were low in the Internet services market, and so predatory behaviour was not feasible (BT would not be able to raise prices and recoup early looses in the longer run) Oftel also noted that the BTNet service was distinguishable from X.25 packet service, which the complainant relied on the demonstration of unreasonably low pricing. Oftel looked at the business plan for BTNet and performance against plan, and concluded that early losses were consistent with being a start up business and that projected results indicated a move into profitability. Finally, Oftel observed that free subscription periods were common in the industry and that BTNet had limited these offers to its initial launch.

The Conclusion:

Oftel concluded that BT was not engaged in predatory pricing in its BTNet offers, Oftel did state its intention to continue to monitor the situation closely (given BT’s potential influence over the market).