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

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.