Low Pricing Regulation: Remaining issues

Regulating excessive low pricing, which is a key function of competition law, is considered important in order to maintain competition. At the same time, however, it has also been pointed out that the regulation should be restricted to such an extent as not to suppress price competition excessively. In the late 1970s when the Chicago school of economics began to have a significant impact on competition policy, concerns about excessive regulations became the main focus for the competition law community, and the problem of excessive regulations appeared to have been resolved by adopting the average variable cost (AVC) as the threshold of excessiveness and applying some additional criteria to narrow down the scope of low pricing practices that are potentially illegal and thus subject to regulations. More recently, however, there has been doubt over the appropriateness of the AVC as the threshold in certain industrial sectors. Specifically, in those sectors that have experienced significant deregulation, privatization, and/or digitization, there has been an increase in the number of cases in which prices are not below the AVC threshold, yet are likely to be anti-competitive. These cases have triggered discussions (in the United States and Europe) as to i) whether the AVC threshold actually results in insufficient regulation and ii) whether setting the threshold criteria based on costs is appropriate to begin with. In Japan, efforts have been made recently to clarify the rules on low pricing in the form of case laws and the relevant guidelines of the Japan Fair Trade Commission. However, the issue of how to regulate gray cases—such as those described above—has been seldom examined and the criteria for the regulation remain unclear. In this article, I examine the rationale of the cost-based criteria and consider what regulation should be used in the above mentioned industries, where insufficient regulation is the issue.