The Antitrust Authority will impose fines on monopolies that charge excessive prices. This emerges from a policy document released by the Authority this morning that for the first time sets out guidelines for enforcement of the prohibition on over-pricing that applies to owners of monopolies.
The document details the legal and economic tests and the considerations that will be applied by the Authority in acting against a monopoly that charges an excessive price for its products. The Authority will not impose criminal sanctions, but there will be financial sanctions, while a monopoly that over-charges will also be exposed to lawsuits from anyone damaged by the excessive price, including class actions.
The document is a direct continuation of the policy of Antitrust Authority director Prof. David Gilo in recent years, of combating the high cost of living in Israel. Since taking up his post, Gilo has declared that he supports the consumer protest that broke out in 2011, and has adopted a pro-consumer stance that views the Authority as an agency for promoting competition, and not just preventing damage to competition.
"As a result of the fact that consumers pay a higher price than the competitive price, a transfer of wealth takes place from consumers to monopoly owners," the document states, "Charging an excessive price sharply exacerbates the problem of the cost of living, and constitutes a direct and immediate injury to consumers… the doctrine of excessive pricing seeks to put an end to anti-competitive pricing by firms taking advantage of their position in the market."
The Authority is in effect reviving an old section of the Restrictive Trade Practices Law (29a(b)(1)), which concerns the prohibition on abusing monopoly status. Up to now, this section of the law has not been enforced. The law forbids a monopoly owner to abuse his standing in the market in a way liable to reduce competition or harm the public, including by charging an unfair price.
The Authority's position is that an unfair price can be an unfairly low price designed to eliminate competitors from the market, or an excessively high price that awards a monopoly owner significantly higher profits that he could gain in conditions of a competitive market.
So what in fact is an excessive price? According to the Authority, a monopoly that makes a profit of more than 20% on a product is liable to be in breach of the law. The Authority will apply three tests to examine whether a price is excessive.
The first test is the test of the gap between the product price and its production cost. The working assumption behind this test is that there is a normative limit to the profit that a monopoly can derive from its customers.
The second test is the profitability test. In this test, the Authority will examine the monopoly's actual profit against external, objective criteria. Among other things, the risks of the industry in which the monopoly operates, the capital it requires, and the debt it raises, will be examined.
In the third test, the comparison test, the Authority will compare the price the monopoly charges with prices of competing products, or the price charged to different customers, or the price of a similar product in a different geographical market. Another possible comparison is between prices the monopoly charges for the same product at different times.
To ensure as much certainty as possible and enable the monopoly to conduct its business in a way that does not transgress the law, the Authority provides in its policy document for a "safe harbor". If a monopoly comes within its terms, the Authority will not take enforcement steps against it. This defense will be available to the monopoly when the gap between the product's price and its production cost, calculated according to the guidelines in the document, does not exceed 20%. If the "safe harbor" conditions do not apply, the Authority will continue to apply the other tests to the monopoly's pricing, to see whether it is in fact charging an excessive prices in the circumstances of the case.
Published by Globes [online], Israel business news - www.globes-online.com - on April 10, 2014
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