Abstract - Banning selective price cutting by dominant firms

Under European competition law (article 82 of the EC Treaty and similar provisions in national competition acts) a dominant firm has limited freedom to selectively cut prices for a subgroup of consumers targeted by competitors. Similarly, regulation in liberalised sectors across the world often imposes pricing restrictions on incumbent firms that want to win back customers lost to entrants. This paper studies the effects on competition of three different bans, each prohibiting some form of price discrimination by a dominant firm. We analyze these bans employing a two-period model where dominance is identified after period one and where the market displays two segments -- a competitive and a sheltered segment. We show that the results (i) are ban-dependent and (ii) hinge on the modeling framework. In particular, a ban to "protect sheltered consumers" relaxes competiton on the competitive segment and makes the rival's profits increase (the ban "relaxes competition"). While a ban to "protect competitors" that probibits price discrimination on the competitive segment relaxes second-period competition, it intensifies overall competition across the two periods (the ban "deters entry"). Finally a ban imposing uniform second-period prices deters entry when the sheltered segment is small, but enhances entry when the sheltered market's size is large. Our paper shows that the coming into effect of art. 82 through price discrimination bans or limiting the possibilities of incumbents to win back lost customers, may increase the dominant firms' share of the first-period market. 
(joint work with Jan Bouckaert and Theon van Dijk)

Hans Degryse
Tilburg University, CentER
16.May 2006

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