Excessive Prices: Using Economics to Define Administrable Legal Rules

29 Pages Posted: 16 Nov 2004

See all articles by Jorge Padilla

Jorge Padilla

Compass Lexecon

David S. Evans

Global Economics Group; University College London

Date Written: September 2004

Abstract

European competition laws condemn as 'exploitative abuses' the pricing policies of dominant firms that may result in a direct loss of consumer welfare. Article 82(a) of the EC Treaty, for example, expressly states that imposing 'unfair' prices on consumers by dominant suppliers constitutes an abuse. Several firms have been found to abuse their dominant positions by charging excessive prices in cases brought by the European Commission and the competition authorities of several Member States. Those cases show that the assessment of excessive pricing is subject to substantial conceptual and practical difficulties, and that any policy that seeks to detect and prohibit excessive prices is likely to yield incorrect predictions in numerous instances. In this Paper, we evaluate the pros and cons of alternative legal standards towards excessive pricing by explicitly considering the likelihood of false convictions/acquittals and the costs associated with those errors. We find that the legal standard that maximizes long-term consumer welfare given the information typically available to regulators would involve no ex post intervention on the pricing decisions of dominant firms. A possible exception to this general rule is discussed.

JEL Classification: K21, L40

Suggested Citation

Padilla, Jorge and Evans, David S., Excessive Prices: Using Economics to Define Administrable Legal Rules (September 2004). Available at SSRN: https://ssrn.com/abstract=620402

Jorge Padilla

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

David S. Evans (Contact Author)

Global Economics Group ( email )

111 Devonshire St.
Suite 900
Boston, MA 02108
United States

University College London ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

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