PRICE DISCRIMINATION – THE AIRPORTS CASE
Catarina Vieira Peres
Morais Leitão, Galvão Teles,
Soares da Silva & Associados
SUMMARY: 1. INTRODUCTION. 2. INTRODUCTORY CONCEPTS. 2.1. Definition. 2.2. The different types of price discrimination. 2.2.1. First, second and third Degree price discrimination. 2.2.2. Primary and secondary line injury. 2.3. Incentives for firms to price discriminate. 2.4. Conditions for price discrimination to take place. 2.4.1. Is price discrimination possible in a competitive market? 2.4.2. Limited opportunities for arbitrage.
2.4.3. Information on the reservation price of consumers or of a group of consumers. 3. IS PRICE DISCRIMINATION BAD? 3.1. EU Competition Law Goals. 3.1.1. Economic Welfare. 220.127.116.11. Consumer versus Total welfare. 3.1.2. Effective Competition. 3.1.3. The Single Market Aim. 3.1.4. Fairness and social equity. 18.104.22.168. Redistribution.
22.214.171.124. The protection of small firms. 3.2. Implications of price discrimination. 3.2.1. Efficiency and economic welfare effects. 126.96.36.199. Marginal cost pricing and fixed cost recovery. 188.8.131.52. Ramsey pricing. 184.108.40.206. Welfare effects under first, second and third-degree price Discrimination. 3.2.2. Effects on competition. 3.2.3. Effects of price discrimination on Market Integration. 3.2.4. Fairness. 220.127.116.11. Income distribution. 18.104.22.168. Protection of small firms. 4. ANALYSIS OF ECJ CASES ON DISCRIMINATORY PRICES. 4.1. Belgian, Portuguese and Spanish airports. 4.1.1. Economic analysis. 22.214.171.124.
Why are discounts an abuse? 126.96.36.199. Discrimination on grounds of nationality. 188.8.131.52. Is Article 82 c) the right legal basis when dealing with discrimination on grounds of nationality? 4.2. Final remarks. 5. CONCLUSION.
Price discrimination, what is it? Ask a lawyer and an economist and you might get very different answers. Lawyers will associate discriminatory practices with unfairness, while for economists price discrimination simply refers to the individualization of prices paid by different customers. 1
Price discrimination is a broad concept, for which it is difficult to give a single and exact definition. It is often intertwined with the firms’ pricing and marketing strategies. Nonetheless, it is a common practice in business.2
It is normal for businesses not to charge the same price to all their costumers: airlines charge different prices for their tickets; in cinemas, students are frequently entitled to discounts; a packet of a dozen donuts is cheaper than donuts bought individually; bars have happy hours; the same restaurant might charge a different price for the same meal depending on whether it is served at lunch or at dinner time3. All these are examples of price discrimination.
Not only is discriminatory pricing common, it is becoming increasingly important as a business practice. This is the result of the growth of a digital
1PERROT, A., “Towards an effects-based approach of price discrimination”, in The Pros and Cons of Price Discrimination, Swedish Competition Authority, Stockholm, 2005, p. 161.
2BISHOP, S., “Delivering benefits to consumers or per se illegal?: assessing the competitive effects of loyalty rebates”, in The Pros and Cons of Price Discrimination, Swedish Competition Authority, Stockholm, 2005, p. 65.
3CHURCH, J. and WARE, R., Industrial Organization, A Strategic Approach, McGraw Hill, Ontario, 2000, p. 156.
economy where most commodities are supplied through technologies with huge fixed costs and extremely low marginal costs.
Further, modern information technology has also facilitated the conditions necessary to allow discriminatory pricing schemes to function. As we shall see, the more information an undertaking has about its customers the better it will be able to discriminate amongst them. As modern technology has dramatically reduced the price of acquiring, storing and processing customer information, it has made it easier for undertakings to have more information about their customers.4
Amazon.com or Wine.com are good examples of this trend, which allows e-commerce retailers to track the purchasers of each individual buyer and then make special individual offers to each customer based on that information.5
Although a common business practice, price discrimination is considered abusive under Article 82 of the EC Treaty when carried out by dominant firms. Price discrimination is described in paragraph (c) of the Article 82 as “applying dissimilar condition to equivalent transactions with other trading partners, thereby placing them at a competitive disadvantage”. There are various Commission Decisions and Community Court cases condemning such practices. In fact, both the Commission and the Courts seem to take quite a hostile approach to discriminatory practices when carried out by dominant firms. In various cases, price discrimination is treated as a per se prohibition. In other words, the sole fact that the firm offers different conditions to its trading costumers is seen as constituting enough evidence of an abuse of a dominant position, without carrying out an effects analysis, without looking at whether the discriminatory behaviour does in fact harm the competitive process and ultimately whether it is detrimental to consumers.
4GEHRIG, T. and STENBACKA, R., “Price discrimination, competition and antitrust”, in The Pros and Cons of Price Discrimination, Swedish Competition Authority, Stockholm, 2005, p. 132.
5PEPALL, L., RICHARDS, D. and NORMAN, G., Industrial Organisation: Contemporary Theory and Practice, 3rd ed., Thomson South-Western, Ohio, 2005, p. 114.
Recently, there have been many claims that the “Commission’s policy towards price discrimination is at odds with basic economic principles and ignores the business reality”.6Indeed, the Commission’s approach to Article 82 has been much less based on economic reasoning compared to its policies on vertical restrictions and mergers.7Many argue that the Commission should not sanction discriminatory behaviour adopted by a dominant firm before carrying out a careful microeconomic effects analysis of such conduct.8
The problem is that such an effects approach does not please those who like clear and certain rules. Thus, it is sometimes argued that a per se rule provides a clear and certain rule for businesses and one should not be very worried about its costs in terms of economic efficiency because under EC law it will only apply to dominant undertakings. In the same sense, some claim that effects analysis of allegedly abusive conduct might contribute to a weakening of antitrust enforcement.9 Frequently heard are also fears about the valuable time spent in cases where the effects of conduct have to be analysed, especially if the behaviour under examination is ultimately found to be anti-competitive.
This paper seeks to draw a comparison between the treatment given to price discrimination by economists and by EC competition law and the EC institutions. Having in mind that the Commission and the Community Courts take quite a hostile stance towards price discrimination, we will discuss whether such an approach is justifiable. In order to do so, we will look at the objectives underlying EC Competition law and the potential
6BISHOP, S. and WALKER, M., The Economics of EC Competition Law: Concepts, Application and Measurement, Sweet & Maxwell, London, 2002, pp. 204-205.
7LANG, J., “Anticompetitive Non-Pricing Abuses under European and National Antitrust Law”, International Antitrust Law & Policy, (2003) 240.
8PERROT, A., “Towards an effects-based approach of price discrimination”, in The Pros and Cons of Price Discrimination, Swedish Competition Authority, Stockholm, 2005, p. 164.
9BISHOP, S., “Delivering benefits to consumers or per se illegal?: assessing the competitive effects of loyalty rebates”, in The Pros and Cons of Price Discrimination, Swedish Competition Authority, Stockholm, 2005, pp. 98, 99.
implications that price discrimination might have on the attainment of such objectives.
We will start by looking at the economic definition of price discrimination; the necessary conditions and incentives that lead undertakings to discriminate; the types of discrimination found in practice and the doctrinal classification of price discrimination. This classification will help us to deal with the second part of this paper where we will then look at EC competition law objectives and the economic implication of price discrimination on the achievement of such objectives, in order to see whether a per se prohibition on such a practice when taken by dominant undertakings is justified. In the last section, we will take three cases and will subject the reasoning adopted by the ECJ and the Commission to an economic analysis and look at what other motives might have justified the decisions. All these three cases (Spanish, Belgian and Portuguese airports) deal with the same problem: discriminatory prices applied by a state-owned firm with a legal monopoly.
2 INTRODUCTORY CONCEPTS.
Definition, conditions, incentives and different types of price discrimination.
Economists usually define price discrimination as the charging of “different price-cost margins on different transactions, typically to reflect different demand conditions”.10 Put more simply, price discrimination describes a situation where the same product is sold to different buyers at different prices, when these differences in price do not exactly reflect differences in
10RIDYARD, D., “Exclusionary Pricing and Price Discrimination Abuses Under Article 82 – An Economic Analysis”, European Competition Law Review 6 (2002) p. 286.
the costs of supply.11The reverse situation – where the same price is charged to all the costumers, even though the costs...