1 August 2009

Competition Appeal Court rules on ArcelorMittal excessive pricing case

The Competition Appeal Court (CAC) recently handed down its judgement in the appeals lodged by ArcelorMittal (Mittal) and MacSteel International against the landmark 2007 ruling of the Competition Tribunal in which the Tribunal found that Mittal had been charging excessive prices in the local flat steel market, through its infamous international parity pricing system.

The CAC declined to bring finality to the matter and instead referred the matter back to the Tribunal for redetermination (a reconsideration of the evidence already before the Tribunal, but applying the CAC's statement of the law of excessive pricing). In so doing, the CAC has made an authoritative pronunciation on the law of excessive pricing, as a form of abuse of dominance.

The CAC found the Tribunal's exposition of excessive pricing to be "fundamentally flawed". The Tribunal had adopted an approach based upon the premise that where a price charged by a dominant firm could not be justified by any factor other than the pure exercise of market power, the price would be excessive within the meaning of the Act. Because such prices would not be the result of any "cognizable competitive constraints" only a super-dominant firm would have the ability to charge an excessive price and, on the Tribunal's reasoning, excessive pricing would be a form of misconduct that very few firms would have the ability to engage in. Indeed, only those that trade in "uncontested and incontestable markets" could engage in behaviour designed to take advantage of that structural circumstance.

The CAC has stated that the prohibition against excessive pricing actually invites a four part enquiry based more on the assessment of actual figures than in the abstract, conceptual enquiry favoured by the Tribunal. To determine whether a dominant firm (which need not be super-dominant) has engaged in excessive pricing, the following enquiry must be made: (i) what is the actual price charged by the dominant firm, (ii) what is the economic value of the good or service being sold (expressed as a monetary value), (iii) is there a reasonable relationship between the actual price charged and the economic value (which means that the two must be compared and then an assessment should be made of whether the difference is comprised of 'pure profits', and (iv) if not, is the excessive price charged to the detriment of consumers (which can be assumed, but requires a value judgement)?

The CAC admits that determining 'economic value' is not an easy exercise, but indicated this might be determined by calculating the notional price that would have been charged under assumed conditions of long-run competitive equilibrium (ie competition that in the long run could eliminate 'pure profit' taking). In other words, the enquiry would be to determine the price that the firm would have had to charge to sustain itself in the long run, in the face of competition. To achieve this, a "fairly robust" approach may have to be taken, which could involve a detailed consideration of actual costs and assessment of comparator figures.

All dominant firms are now placed on warning that their pricing strategies should not be aimed at extracting 'pure profit' from consumers (which can be actual customers or end users of the product being sold, or its derivatives) and that consideration should be given to the degrees of difference, if any, in the prices actually being charged and those that would more closely reflect the economic value of the good or service concerned.

Nick Altini,
Director, Competition

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