Author(s)
David S. Evans and Jorge A. Padilla
Source
Journal of Competition, Law, and Economics, Spring 2005; CEPR Discussion Paper No. 4626, September 2004
Summary
This paper looks at how to tell if a large firm’s prices are too high.
Policy Relevance
Here, experts disagree, and competition authorities will make the fewest harmful errors by leaving most pricing decisions alone.
Main Points
- In the European Union, Article 82(a) outlaws a dominant firm’s unfair prices.
- There is no economic consensus on how to define “unfair.” Courts will make errors.
- In theory, prices should fall to the cost of producing one more item (“marginal cost”).
- But when past research and other costs are high, if prices fell to marginal cost, no one would invest in new goods of that type.
- In competition policy, false negatives (aquittals) are better than false positives (convictions). False negatives can be corrected as businesses and consumers learn how to bypass the dominant firm.
- The best rule assumes that a dominant firm’s pricing decisions are usually legal (per se legality), the legal standard in the United States.
- One exception might be a firm that has a legal monopoly, like the Post Office.
