2nd Annual Conference on the Modernization of Article 82
Brussels, Belgium
16 June 2005
Hosted By: the Global Competition Law Centre
Dr. Mark Williams, Director of European Competition Policy at NERA, spoke on the economics of price discrimination" at the 2nd Annual Conference on the Modernization of Article 82 (now Article 102), organized by the Global Competition Law Centre.
Dr. Williams noted that, although there is extensive case law on price discrimination as an abuse of Article 82, the economics of price discrimination often show that price discrimination is economically efficient. Dr. Williams divided his comments into those on price discrimination as a stand-alone issue, and those on the interface of price discrimination with other antitrust issues.
Economic theory clearly shows that a perfectly price discriminating monopolist would set the efficient output level equivalent to that which would be set in a fully competitive market, although the monopolist would extract the consumer surplus. Indeed, this is reflected in the guidelines of various regulators, including the UK Office of Fair Trading, which recognizes that price discrimination could be output-expanding, and that in some cases, firms would be allowed to cover their fixed costs when, in the absence of price discrimination, these firms would not be viable. However, in cases where output is fixed, price discrimination would be inefficient. Dr Williams noted that price discrimination is also a feature of many competitive markets, and underpins the economics of markets such as airlines.
Price discrimination also plays a role in the analysis of various other antitrust issues. These include vertical foreclosure, where the high access price charged to an unaffiliated firm can be characterized as discrimination between the access price and the internal transfer price; predatory pricing, where the costs of predation can be reduced by targeting price cuts to the customers served by the entrant; and bundling, where one of the justifications of bundling, in some circumstances, is that it can facilitate output expanding price discrimination.
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