The document discusses asset valuation methodologies that can be used to construct price-cost tests for assessing excessive pricing under competition law. It summarizes the Sasol case, which established that "economic value" refers to the competitive market price in a hypothetical competitive market. It also notes that the court called for additional evidence on asset valuation, capital returns, and cost allocation, which are areas where regulatory economics provides tools. The document then examines the concept of long-run competitive equilibrium referenced in the Sasol case and explores alternatives to perfect competition models that are relevant to assessing excessive pricing.
The facts suggest bid rigging occurred in both scenarios. In scenario 1, the private company likely engaged in complementary bidding by submitting an inflated bid to facilitate being awarded a subcontract. In scenario 2, the two major companies divided the market and fixed prices through their quarterly meetings, and later included the local company to maintain their collusive scheme. The CAK should investigate both scenarios further for violations of competition laws prohibiting bid rigging, market allocation, and price fixing agreements that harm consumers.
Estudio de Subasta de Energia Firme de Peter Crampton y CREGEquipoRegulacion
The document compares two auction formats - descending clock and sealed-bid - for Colombia's firm energy auctions. The descending clock format currently used asks generators in rounds if they will supply at lower prices until supply is less than demand, paying all winners the clearing price. The document argues the sealed-bid format may be preferable, as it is simpler and prevents strategic supply reduction in later rounds of descending clock auctions. Overall, the sealed-bid approach better balances efficiency, transparency, simplicity and fairness for Colombia's auction objectives and market features.
RESEARCH Opinion - Predatory Pricing - Shourya BariShourya Bari
The document discusses predatory pricing and establishes cause of action against a respondent. It analyzes several factors:
1) The respondent quoted an unrealistically low price to gain entry into the market for supplying wagons to Indian Railways, indicating possible predatory pricing.
2) Two tests for predatory pricing are examined - pricing below cost and the ability to recoup losses through later monopoly profits. Barriers to entry and market share trends are also considered.
3) The appropriate measure of cost is analyzed, including average variable cost, average avoidable cost, and long-run average incremental cost.
This presentation basically tells how the firm makes decisions in a competitive market. To make concepts here more understable, I have prepared graphs and mathematical equations.
This presentation by South Africa was made during the break-out Session 1, “Techniques and evidence for assessing market power” in the discussion “Economic analysis and evidence in abuse cases” held at the 20th meeting of the OECD Global Forum on Competition on 7 December 2021. More papers and presentations on the topic can be found out at oe.cd/eac.
Competition policy, cartel enforcement and leniency programDr Danilo Samà
Competition policy, cartel enforcement and leniency program
Author:
Dr Danilo Samà (LUISS “Guido Carli” University)
Abstract:
The present assessment focuses on the antitrust action in detecting and fighting oligopolistic collusion, analyzing the development of the innovative and modern leniency policy. Following the examination of the main conditions and reasons for cartel stability and sustainability, our attempt is to comprehend under which circumstances leniency program represents a functional and successful tool for preventing the formation of anti-competitive agreements.
Keywords:
cartels enforcement, competition policy, game theory, leniency program, oligopolistic markets
JEL classification:
C70; K21; L13
Year:
2008
Pages:
1-12
Citation:
Samà, Danilo (2008), Competition policy, cartel enforcement and leniency program, LUISS “Guido Carli” University, Rome, Italy, pp. 1-12.
ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEG...Luciana Ramondetti
This document provides an economic analysis of loyalty discounts and rebates. It begins with an introduction to different types of loyalty discounts, including fidelity rebates, target rebates, and bundle rebates. It then discusses recent legal cases involving loyalty discounts in both European and US competition law. The document analyzes the economic and legal implications of loyalty discounts, including potential anticompetitive effects like foreclosure of competition. It also considers potential procompetitive efficiencies. Finally, it examines alternative legal tests that have been used in Europe and the US to assess the legality of loyalty discount schemes.
The facts suggest bid rigging occurred in both scenarios. In scenario 1, the private company likely engaged in complementary bidding by submitting an inflated bid to facilitate being awarded a subcontract. In scenario 2, the two major companies divided the market and fixed prices through their quarterly meetings, and later included the local company to maintain their collusive scheme. The CAK should investigate both scenarios further for violations of competition laws prohibiting bid rigging, market allocation, and price fixing agreements that harm consumers.
Estudio de Subasta de Energia Firme de Peter Crampton y CREGEquipoRegulacion
The document compares two auction formats - descending clock and sealed-bid - for Colombia's firm energy auctions. The descending clock format currently used asks generators in rounds if they will supply at lower prices until supply is less than demand, paying all winners the clearing price. The document argues the sealed-bid format may be preferable, as it is simpler and prevents strategic supply reduction in later rounds of descending clock auctions. Overall, the sealed-bid approach better balances efficiency, transparency, simplicity and fairness for Colombia's auction objectives and market features.
RESEARCH Opinion - Predatory Pricing - Shourya BariShourya Bari
The document discusses predatory pricing and establishes cause of action against a respondent. It analyzes several factors:
1) The respondent quoted an unrealistically low price to gain entry into the market for supplying wagons to Indian Railways, indicating possible predatory pricing.
2) Two tests for predatory pricing are examined - pricing below cost and the ability to recoup losses through later monopoly profits. Barriers to entry and market share trends are also considered.
3) The appropriate measure of cost is analyzed, including average variable cost, average avoidable cost, and long-run average incremental cost.
This presentation basically tells how the firm makes decisions in a competitive market. To make concepts here more understable, I have prepared graphs and mathematical equations.
This presentation by South Africa was made during the break-out Session 1, “Techniques and evidence for assessing market power” in the discussion “Economic analysis and evidence in abuse cases” held at the 20th meeting of the OECD Global Forum on Competition on 7 December 2021. More papers and presentations on the topic can be found out at oe.cd/eac.
Competition policy, cartel enforcement and leniency programDr Danilo Samà
Competition policy, cartel enforcement and leniency program
Author:
Dr Danilo Samà (LUISS “Guido Carli” University)
Abstract:
The present assessment focuses on the antitrust action in detecting and fighting oligopolistic collusion, analyzing the development of the innovative and modern leniency policy. Following the examination of the main conditions and reasons for cartel stability and sustainability, our attempt is to comprehend under which circumstances leniency program represents a functional and successful tool for preventing the formation of anti-competitive agreements.
Keywords:
cartels enforcement, competition policy, game theory, leniency program, oligopolistic markets
JEL classification:
C70; K21; L13
Year:
2008
Pages:
1-12
Citation:
Samà, Danilo (2008), Competition policy, cartel enforcement and leniency program, LUISS “Guido Carli” University, Rome, Italy, pp. 1-12.
ECONOMIC ANALYSIS OF LOYALTY DISCOUNTS AND REBATES AND THE ECONOMIC AND LEG...Luciana Ramondetti
This document provides an economic analysis of loyalty discounts and rebates. It begins with an introduction to different types of loyalty discounts, including fidelity rebates, target rebates, and bundle rebates. It then discusses recent legal cases involving loyalty discounts in both European and US competition law. The document analyzes the economic and legal implications of loyalty discounts, including potential anticompetitive effects like foreclosure of competition. It also considers potential procompetitive efficiencies. Finally, it examines alternative legal tests that have been used in Europe and the US to assess the legality of loyalty discount schemes.
Kohutek shall selective, above-cost price cutting in the newspaper marketMichal
This document summarizes a case comment on a 2009 Supreme Court of Poland ruling regarding selective price cutting by a newspaper publisher. The key issues discussed are:
1) The Supreme Court found the publisher's selective, above-cost price cuts in one region to be "unfair" even though EU law defines predatory pricing as below-cost. However, the Court provided little justification for this finding.
2) Public restrictions on above-cost price cuts by efficient firms can conflict with consumer welfare. There are also reasons like preventing "cherry-picking" that support the legality of above-cost price cuts.
3) The Supreme Court saw the selective nature of the price cuts as abuse, but price
This document summarizes a study on surge pricing in transportation network economies. It begins by explaining how dynamic pricing allows prices to change quickly based on demand without significant costs. Dynamic pricing is common in sharing economies and industries with digital sales. The transportation industry, including ridesharing services, uses dynamic pricing where prices surge to match supply and demand. However, consumers have complained about excessive surge pricing in some cases. The document aims to analyze surge pricing as a potential case of excessive pricing and how authorities should regulate dynamic prices. It provides background on dynamic pricing applications and benefits across industries before focusing on its use and effects in the transportation sector.
The document discusses tax valuations and market value in the Australian tax system. It provides background on why tax valuations are important, examines contexts where market value is relevant for taxes like capital gains tax and thin capitalization. It discusses the meaning of market value, the ATO's guidelines, and provides examples of how market value applies in contexts like CGT rules, scrip for scrip transactions, and the market value substitution rule.
Insights for rate design using a retail gas utility’s rate filing 12 2-13bobprocter
This document provides an overview and analysis of utility retail pricing and ratemaking. It discusses the role of utility commissions in setting just and reasonable rates based on legislative and court guidance. It also examines economic theory relevant to determining costs, distinguishing between fixed and variable costs, and assigning joint costs. The document uses a utility's recent rate case as an example to critique assumptions in the utility's testimony and analyze how economics, policy and legal issues intersect in the ratemaking process.
This document discusses some key economic considerations for designing framework agreements in public procurement. It emphasizes the importance of competition and outlines how framework agreements can impact competition in procurement markets. Specifically, it addresses:
1) The critical role of the first stage in defining the procurement "market" and setting boundaries on competition at subsequent stages.
2) Key economic dimensions procuring entities should analyze, including demand patterns, the nature of the goods/services, and market characteristics, in order to determine the appropriate framework agreement model and structure procedures to maximize competition.
3) How bidders factor different cost components into their bids, including private production costs as well as common costs outside their control that still impact their pricing. Careful
D bove and a yokwana 'the role of competition advocacy in shaping 20 years of...Daniela Bove
12th Annual Conference on competition law, economics and policy (2018)
A paper presented by Daniela Bove and Azania Yokwana on "the role of competition advocacy in shaping 20 years of competition law in South Africa."
The paper shows how competition advocacy played a significant role in cases in the Antiretroviral market, in the construction sector, in markets that employ procurement or bidding processes and in market inquiries. The paper also highlights some of the strategic alliances formed through the competition advocacy initiatives of the Competition Commission of South Africa.
Merger Review process has evolved over a period of time. This is evident from the changing focus on consideration of efficiencies in merger analysis. However, a cross-country comparison shows that as of date consideration of efficiency has become almost an integral part of merger review. The article details this discussion.
This presentation by Kenya was made during the break-out Session 3, “Techniques and evidence for assessing predatory pricing, margin squeeze and exploitative abuses” in the discussion “Economic analysis and evidence in abuse cases” held at the 20th meeting of the OECD Global Forum on Competition on 7 December 2021. More papers and presentations on the topic can be found out at oe.cd/eac.
Does the capital assets pricing model (capm) predicts stock market returns in...Alexander Decker
This document examines whether the Capital Asset Pricing Model (CAPM) can predict stock returns in Ghana using data from selected stocks on the Ghana Stock Exchange from 2006-2010. The results found no statistically significant relationship between actual and predicted returns, indicating CAPM with constant beta cannot explain differences in returns. It was also found that some stocks were on average undervalued while one was overvalued over the period studied. The conclusion is that the standard CAPM model cannot statistically explain the observed differences in actual and estimated returns of the selected Ghanaian stocks.
Economies (Efficiencies) – An Essential Consideration in Merger Analysis - KK...KK SHARMA LAW OFFICES
While the purport of competition law is to preserve and promote competition, the
essential object of competition is to ensure optimal allocation of available resources,
produce more while using less resources and thus, achieve efficient market
outcomes. Generally, the efficiency is accepted as a defence in competition law.
Ignorance of economies (efficient use of resources) by competition law and
competition enforcement agencies would prejudice the very object of preserving
competition. However, one should also acknowledge that scientific quantification and weighing of efficiencies are complex tasks.
Economies (Efficiencies) – An Essential Consideration in Merger AnalysisKK SHARMA LAW OFFICES
The document discusses the evolving consideration of efficiencies (economies) in merger analysis under competition law. It notes that while competition law aims to preserve competition, the essential objective is efficient market outcomes. Most jurisdictions now accept efficiencies as a justification for approving mergers. However, quantifying and weighing efficiencies can be complex. The document examines how the US, Canada, and Australia incorporate efficiencies in their merger analysis, representing three approaches: as part of substantive assessment, as a defense, and through authorization. It concludes there is need for transitional economies like India to recognize efficiencies in competition law and policy.
This newsletter includes brief reports about the initiatives taking place within the OECD-Korea Policy Centre Competition Programme. It includes overviews of meetings held by the OECD in Paris and provides an opportunity for participating economies from the Asia-Pacific region to exchange their latest experiences on competition law and policy issues.
News, case studies and articles from Asian-Pacific competition authorities are welcome. If you have material that you wish to be considered for publication in this newsletter, please contact ajahn@oecdkorea.org.
1) A firm holds a dominant position if it can behave independently of competitors, suppliers, customers, and consumers. Market share is one indicator but not sufficient on its own.
2) While not illegal to hold a dominant position, it confers special responsibility to avoid impairing competition. Dominance is assessed using market shares, constraints on pricing, and other factors like product differentiation.
3) Market shares above 40% are an indication of dominance, though shares below this can also indicate dominance depending on other market conditions and constraints from competitors. Both volume and value shares are considered.
A Revision Of The Theory Of Perfect Competition And Of ValuePedro Craggett
1) The classic economic theory of perfect competition is built on the flawed assumption that individual firms face perfectly elastic (horizontal) demand curves. This paper argues this assumption is incorrect and leads to inconsistencies.
2) In reality, individual firm demand curves are sloped and sum to the market demand curve. Equilibrium should be determined by the intersection of total marginal costs and total marginal revenue derived from the demand curve, not total supply and demand.
3) With sloped individual demand curves, the market exhibits monopolistic characteristics even under perfect competition. Firms share the total profits of the industry. Entry and exit leads to zero economic profits in long run equilibrium, not perfectly competitive assumptions of the classic theory.
Garret Farrelly, head of the Energy and Infrastructure Group, wrote an article on the I-SEM Capacity Remuneration Mechanism for the Energy Ireland Yearbook 2016.
This article first appeared in the Energy Ireland Yearbook 2016.
This presentation by Bruce LYONS, Professor of Economics and Deputy Director of the ESRC Centre for Policy, University of East Anglia was made during the roundtable discussion on geographic market definition held during the 124th meeting of the OECD Working Party No. 3 on Co-operation and Enforcement on 28 November 2016. More papers and presentations on the topic can be found out at www.oecd.org/daf/competition/geographic-market-definition.htm
This document discusses the economic analysis and regulation of the legal profession. It begins by outlining the traditional view of self-regulation as a cartel that restricts competition. However, it also discusses the market failure perspective, which argues that information asymmetry between lawyers and clients justifies some regulation. The document then examines different regulatory tools, such as controlling entry, advertising, fees, and organizational form. It focuses on empirical studies testing the effects of these regulations.
Health And Human Services 2005 Legal Program Announcementlegaladvice
This document discusses the economic analysis and regulation of the legal profession. It begins by outlining the traditional view of self-regulation as a cartel that restricts competition. However, it also discusses the market failure perspective, which argues that information asymmetry between lawyers and clients justifies some regulation. The document then examines different regulatory tools, such as controlling entry, advertising, fees, and organizational forms. It focuses on empirical studies testing the effects of these regulations.
Deloitte Comments on Discussion Draft on Risk Recharacterization and Special ...Philippe Penelle
This document is a letter from Deloitte Tax LLP and Deloitte LLP submitting comments to the OECD regarding proposed revisions to Chapter I of the OECD Transfer Pricing Guidelines. The letter includes:
1) An executive summary highlighting key concerns with the discussion draft, including that some proposals move away from the arm's length principle and do not align with economic analysis of risk and returns.
2) A response to specific questions from the OECD regarding the risk-return tradeoff and the ability of associated enterprises to have different risk preferences.
3) A restatement of the principles of the arm's length standard and how it relies on the concept of equal risk equaling equal
This document discusses factors that influence the adoption of electric arc furnace steelmaking technology. It examines the adoption of this technology within the framework of a growth model of technological diffusion. The results indicate that the adoption of electric arc furnace technology follows an S-shaped growth curve over time. The trend rate of adoption is stable with respect to changing factors like input prices and production levels. Inertial aspects seem to have a strong influence on the diffusion process.
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1) The Supreme Court found the publisher's selective, above-cost price cuts in one region to be "unfair" even though EU law defines predatory pricing as below-cost. However, the Court provided little justification for this finding.
2) Public restrictions on above-cost price cuts by efficient firms can conflict with consumer welfare. There are also reasons like preventing "cherry-picking" that support the legality of above-cost price cuts.
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This document provides an overview and analysis of utility retail pricing and ratemaking. It discusses the role of utility commissions in setting just and reasonable rates based on legislative and court guidance. It also examines economic theory relevant to determining costs, distinguishing between fixed and variable costs, and assigning joint costs. The document uses a utility's recent rate case as an example to critique assumptions in the utility's testimony and analyze how economics, policy and legal issues intersect in the ratemaking process.
This document discusses some key economic considerations for designing framework agreements in public procurement. It emphasizes the importance of competition and outlines how framework agreements can impact competition in procurement markets. Specifically, it addresses:
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12th Annual Conference on competition law, economics and policy (2018)
A paper presented by Daniela Bove and Azania Yokwana on "the role of competition advocacy in shaping 20 years of competition law in South Africa."
The paper shows how competition advocacy played a significant role in cases in the Antiretroviral market, in the construction sector, in markets that employ procurement or bidding processes and in market inquiries. The paper also highlights some of the strategic alliances formed through the competition advocacy initiatives of the Competition Commission of South Africa.
Merger Review process has evolved over a period of time. This is evident from the changing focus on consideration of efficiencies in merger analysis. However, a cross-country comparison shows that as of date consideration of efficiency has become almost an integral part of merger review. The article details this discussion.
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This document examines whether the Capital Asset Pricing Model (CAPM) can predict stock returns in Ghana using data from selected stocks on the Ghana Stock Exchange from 2006-2010. The results found no statistically significant relationship between actual and predicted returns, indicating CAPM with constant beta cannot explain differences in returns. It was also found that some stocks were on average undervalued while one was overvalued over the period studied. The conclusion is that the standard CAPM model cannot statistically explain the observed differences in actual and estimated returns of the selected Ghanaian stocks.
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While the purport of competition law is to preserve and promote competition, the
essential object of competition is to ensure optimal allocation of available resources,
produce more while using less resources and thus, achieve efficient market
outcomes. Generally, the efficiency is accepted as a defence in competition law.
Ignorance of economies (efficient use of resources) by competition law and
competition enforcement agencies would prejudice the very object of preserving
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The document discusses the evolving consideration of efficiencies (economies) in merger analysis under competition law. It notes that while competition law aims to preserve competition, the essential objective is efficient market outcomes. Most jurisdictions now accept efficiencies as a justification for approving mergers. However, quantifying and weighing efficiencies can be complex. The document examines how the US, Canada, and Australia incorporate efficiencies in their merger analysis, representing three approaches: as part of substantive assessment, as a defense, and through authorization. It concludes there is need for transitional economies like India to recognize efficiencies in competition law and policy.
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News, case studies and articles from Asian-Pacific competition authorities are welcome. If you have material that you wish to be considered for publication in this newsletter, please contact ajahn@oecdkorea.org.
1) A firm holds a dominant position if it can behave independently of competitors, suppliers, customers, and consumers. Market share is one indicator but not sufficient on its own.
2) While not illegal to hold a dominant position, it confers special responsibility to avoid impairing competition. Dominance is assessed using market shares, constraints on pricing, and other factors like product differentiation.
3) Market shares above 40% are an indication of dominance, though shares below this can also indicate dominance depending on other market conditions and constraints from competitors. Both volume and value shares are considered.
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1) The classic economic theory of perfect competition is built on the flawed assumption that individual firms face perfectly elastic (horizontal) demand curves. This paper argues this assumption is incorrect and leads to inconsistencies.
2) In reality, individual firm demand curves are sloped and sum to the market demand curve. Equilibrium should be determined by the intersection of total marginal costs and total marginal revenue derived from the demand curve, not total supply and demand.
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This document discusses factors that influence the adoption of electric arc furnace steelmaking technology. It examines the adoption of this technology within the framework of a growth model of technological diffusion. The results indicate that the adoption of electric arc furnace technology follows an S-shaped growth curve over time. The trend rate of adoption is stable with respect to changing factors like input prices and production levels. Inertial aspects seem to have a strong influence on the diffusion process.
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China's steel industry has grown rapidly in recent decades, making China the third largest steel producer in the world behind the CIS and Japan. While China has significantly increased domestic steel production, demand has outpaced supply, resulting in China becoming an importer of steel, accounting for up to 30% of its consumption. China's role in global iron ore and steel markets has expanded as its industry has integrated further into world trade. As China's steel production continues to rise, its imports of iron ore are projected to increase substantially to meet growing demand, presenting opportunities for major iron ore exporters like Australia. Future trade will depend on China's economic growth and development of a liberal policy environment.
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Under AEC liberalization, Thailand's energy sector is expected to undergo reforms including third party access to transmission and distribution networks and competition in retail segments. This will require unbundling of tariffs within the electricity supply chain.
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• Multi-site Baseload Independent Power Producer
Programme (‘Baseload IPP Programme’)
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The primary role of the RDT is to provide a tool for selecting the form(s) of price regulation appropriate for industry specific application.
The available forms of price regulation span a spectrum of options – with the minutia of detailed application often having a material impact on performance.
It would not be feasible or useful to build an RDT that recommended one unique form for a given application.
The RDT will typically provide a narrowed set of workable options that provide broadly consistent outcomes
The RDT allows the operator to set out in what circumstances one would tend towards specific forms within the sub-set of options
An overly mechanistic approach to price regulation is not generally robust to practical application
The RDT has been built with the understanding that application to industry specific analysis would be further assessed by ESCOSA against a range of less tangible factors not amenable to assessment within the RDT.
The RDT has been designed such that it is robust to the range of industries ESCOSA may have regard to in the foreseeable future.
The RDT has been designed to a level of detail that balances robustness against usefully detailed findings.
Regulatory Design Toolkit for Utilities, Stephen Labson slEconomics
LABSON Asset Valuation and the Test for Excessive Pricing Invited Paper ACER MARCH 2016
1. Asset Valuation and Pricing – Some Popular Myths and Misconceptions
Stephen Labson1
Director, SLECONOMICS AFRICA
ACER MARCH 2016 LIVINGSTON, ZAMBIA2
“Economists are people who know the price of everything and the value of nothing.” George
Bernard Shaw.
_________________________________________________________________________
I Introduction
The conclusion of Sasol Chemical Industries Limited v Competition Commission (“Sasol ”) heard before
the Competition Appeal Court (“the Court”) has further clarified the meaning of excessive pricing
under section 8(a) of South Africa’s Competition Act 89 of 1998. Importantly, the Court ruled that the
standard in which actual price is to be compared to under section 8(a) is that of a hypothetical
competitive market, and in calculating cost a notional objective market standard is to be utilised. On
this basis the test of excessive pricing was considered within a price-cost framework.
While one finds a considerable body of knowledge related to normative analysis of tests of excessive
pricing such as provided by das Nair (2008), 3
Evans and Padilla (2005) 4
; and Roberts (2008)5
there
appears to be less to draw on in regard to positive analysis of price-cost tests. By this I mean the
practical aspects of constructing price-cost tests taking as given the particular framework under which
excessive pricing is to be assessed.
1 Dr Labson is a consulting economist with international experience in advising regulators in design of
pricing methodologies, governments in development of major infrastructure reform initiatives, and
utilities in implementation of regulatory strategy. In South Africa he is currently on the Department of
Transport’s panel of expert advisors on rail regulation, and has been a lead regulatory advisor to South
African State Owned Enterprises since 2004.
2 Presented at the 2nd Annual Competition and Economic Regulation Conference in Zambia 2016
3
des Nair (2008), Measuring Excessive Pricing as an Abuse of Dominance – An Assessment of the Criteria Used in the Harmony
Gold/Mittal Steel Complaint, South African Journal of Economic and Management Sciences.
4
Evans, D., and A. J. Padilla, Excessive Prices: Using Economics To Define Administrable Legal Rules.Jnl of Competition Law
& Economics (March 2005) 1 (1):97-122
5
Roberts, S. (2008) Assessing Excessive Pricing: The Case of Flat Steel in South Africa, Journal of Competition Law &
Economics, Vol. 4, issue 3 p 871-891
2. Indeed, the need for additional analysis in this area was highlighted by the Court in conclusion to its
Judgment noting that had additional evidence been provided “with regard to the evaluation of capital
assets, the level of capital reward / return on capital, the allocation of group and commotion cost, this
evidence may well have shed a different light on this case.”6
Notably, these are matters familiar to
regulatory practitioners and which a considerable body of thought can be applied.
It is this aspect of the Sasol Judgment that provides the focal point of analysis, and joins together
relevant aspects of competition law and regulatory economics while also addressing fundamental
differences between the two fields of study. In this regard one is reminded of the words of Abraham
Maslow in that “I suppose it is tempting, if the only tool you have is a hammer, to treat everything as
if it were a nail.”7
Having due regard for the warnings suggested, above explicit attention is given to the criteria in which
the Court made its ruling on excessive pricing, and what that might imply in utilising the tools of
regulatory economics. More specifically, I have aimed to create a logical and internally consistent
framework in which to undertake a comparative assessment of asset valuation methodologies as
applied to constructing tests of excessive pricing. While this study was undertaken within the context
of the Sasol case, it is envisioned that the approach would be appropriately applied to a range of cases
where price-cost tests are utilised.
Following the broad scope of study summarised above, the structure of this paper is as follows. First,
the basis of the Sasol case is briefly summarised as it relates to the assessment of excessive pricing
under section 8(a) and construction of the price-cost test. Salient aspects of the regulatory approach
to cost based pricing are then presented and areas in which the tools of regulatory economics can be
appropriately applied to the price-cost test are identified. This framework for analysis is then used to
undertake a comparative assessment of asset valuation methodologies as applied to the price-cost
test for excessive pricing under section 8(a) of South Africa’s Competition Act 89 of 1998.
II. Excessive pricing within the context of the Competition Act
The starting point for this analysis – and the basis of the Sasol case is summarised in the paragraph (1)
of the Judgment.8
“(1) This case concerns the meaning and the scope of s 8(a) of the Competition Act 89 of 1998
(the Act”) (sic) which provides that a dominant firm may not charge an excessive price to the
detriment of consumers. Section 1(1) defines an ‘excessive price’ as a price for a good or
service which (aa) bears no reasonable relation to the economic value of that good or service,
and (bb) is higher than the value referred to in sub paragraph (aa).”
The Court then framed the two fundamental issues of debate in application of section 8(a) of the Act
in terms of (i) the proper interpretation of the phrase ‘economic value’; and (ii) the manner in which
6
Competition Appeal Court South Africa, Sasol Chemical Industries Limited and Competition Commission. Judgment, 17 June
2015. Case 131/CAC/Jun14 (para 183)
7 Abraham. Maslow,(1966) The Psychology of Science: A Reconnaissance. Harper and Row
8
Para 1, op cit
3. the reasonableness of the relation between price and economic value is to be assessed” As
summarised by Oxenham and Currie the Court further determined that:9
“,, the “economic value” of a product is its competitive market price, that is, its price in a
hypothetical competitive market and that for the purposes of calculating costs, a notional
objective standard should be utilised. “
In constructing a price-cost test within this context we need to further understand what is meant by
a ‘competitive market price’ or as others have put it – a price that would occur under ‘effective
competition’.
At the risk of covering ground well-travelled, the Sasol Judgment points to the case of Mittal Steel
South Africa Ltd and Harmony Gold Mining Company Limited (hereafter referred to as “Mittal”) in
which the concepts of a long run competitive equilibrium and a competitive market price are given
practical meaning within the context of section 8(a).
[40] “,,, What the legislature must be taken to have intended by ‘economic value’ is the
notional price of the good or service under the assumed conditions of long-run competitive
equilibrium. This requires the assumption that, in the long run, firms could enter the industry
in the event of a higher than normal rate of return, or could leave the industry to avoid a lower
than normal rate of return. It does not imply perfect competition in the short-run, but rather
competition that would be effective enough in the long run to eliminate what economists
refer to as ‘pure profit’ – that is a reward of any factor of production in excess of the long-run
competitive norm which is relevant to that industry or branch of production.”10
The ‘long-run competitive equilibrium’ considered in Mittal is of course different from the competitive
general equilibria presented by mathematical economists such as Pareto, Cournot, Walrus, Debreu,
and Arrow, and the models of partial equilibria developed by Marshall, Hicks, and others. The key
point to be made here is that standard textbook prescriptions related to the optimality of a
competitive equilibrium and welfare maximisation cannot be assumed to hold a priori.
Of course the point above is neither novel or unique to the application of section 8(a). The Theory of
the Second Best comes to mind whereby standard prescriptions for enhancing economic efficiency
are made invalid if moving away from the assumptions of a perfectly competitive market. 11
In any
case, given that the Court has explicitly moved away from the assumptions of a perfectly competitive
market one must be careful if attributing standard dictums of economic theory that depend on those
stringent assumptions.
By way of example, pricing at marginal cost has little or no intrinsic meaning for an economist – and
only comes to life within the context of well-defined economic model. Some of the more commonly
cited alternatives to the model of perfect competition, and their relevance to the test of excessive
pricing are explored below.
9
Oxenham, J., and D. Lewis, South Africa Excessive Pricing – An Evaluation of the Sasol Chemical Industries Decision. American
Bar Association Fall Forum.
10
Competition Appeal Court of South Africa, Mittal Steel South Africa Ltd and Harmony Gold Mining Company Limited. Judgment
29 May, 2009. Case No. 70/CAC/Apr07
11 Lipsey, R. G.; Lancaster, Kelvin (1956). "The General Theory of Second Best". Review of Economic Studies 24 (1): 11–32.
4. An imperfectly competitive norm
While not explicitly referenced in this manner, the competitive norm formed in Mittal and Sasol could
be seen as a synthesis of related models of imperfect competition such as those developed by
distinguished economists such as Robinson, Chamberlain, Kaldor, and Harrod, and which others since
have built on.
Importantly, in citing Mittal, the Court speaks to the long run equilibrium in which entry and exit is
assumed to eliminate pure profits. While not referenced in the summary Judgment of Mittal or Sasol
– this may have been inspired by work such as that of Baumol, Panzar and Willig (1982) in which they
develop the concept of contestable markets and conditions of frictionless entry and exit in which pure
profits are driven to zero.12
That the Sasol Judgment did not explicitly speak to these models of
imperfect competition or contestable markets does not make them entirely irrelevant to our analysis.
Indeed, it is more likely that the Court fully understood the tenuous link between entry and zero profits
of Mittal (see, for example para 40, op cit) and simply referred to a competitive norm in which pure
profits are eliminated – no matter what the causal factor. Within the context of testing for excessive
pricing under section 8(a) this assumption allows us to set aside matters of structure and conduct that
might have otherwise been warrented. Ours is a (relatively) simple matter of constructing a price-cost
model consistent with zero excess profits.
Application of the price-cost test
‘A job worth doing is worth doing badly’ ( Attributed to G.K. Chesterton)
And
“Measuring whether a price is above the level that would exist in a competitive market is
rarely an easy task. The fact that the exercise may be difficult is not, however, a reason for not
attempting it. ,,,”13
As referenced in the Mittal Judgment (para 48) the difficulties associated with construction of the
price-cost test do not provide sufficient reason to dismiss the exercise. While perhaps not directly
relevant to the study at hand, it is perhaps worth noting counter arguments such as that of Evans and
Padilla (2005).14
“Consequently, any policy that seeks to detect and prohibit excessive prices in practice is likely
to yield incorrect predictions. In some instances, the authorities may conclude that prevailing
market prices are competitive when they are not. In some others, they may conclude that
prices are excessive when in reality they are competitive.”
While we would question whether “any policy,,, is likely to yield incorrect predictions” one can see
the merit in applying the concept of type I and type II error in normative analysis – particularly where
the legal standard is based on concepts of consumer welfare. The same study also considers
‘pragmatic legal rules’ such as where “a price is excessive if it is X percent greater than cost” which (if
12
Baumol, WJ, JC Panzar, and RD Willig, Contestable Markets and The Theory of Industry Structure, Harcourt Brace Jovanovich,
1982
13
Napp Pharmaceutical Holdings Pty & Others v Director General of Fair Trading (2002) CAT para 392.
14
Evans, D., and A. J. Padilla, Excessive Prices: Using Economics To Define Administrable Legal Rules. CEMFI Working
Paper No. 0416 September 2004
5. taking a bit of liberty in restating this in terms of X percent or greater) would be similar to that of the
price-cost test of section 8(a). In this example Evans and Padilla conclude that the test is;
“,, bound to cause errors: supra-competitive prices will be blessed in some instances, while
competitive prices will be condemned in others. Any legal standard for excessive pricing will
therefore result in “false convictions”— or “type I errors” in the standard terminology of
decision theory—and/or “false acquittals – or type II errors. To use the criminal justice system
as an example, a type I error would be the equivalent of jailing an innocent person, whereas
a type II error would be allowing a guilty party to go unpunished.”
It is tempting to use similar logic in questioning if the guilty are never convicted, and the innocent
never set free? Nevertheless, it is important to construct a test with sufficient probability of rejecting
the null when it is indeed invalid, and a matter we will come back to when considering the calculation
of excess profits.
II Economic regulation and cost based pricing
Economic regulation of prices has as its basis perhaps more commonality with competition law than
might be generally assumed. For example, in review of Bonbright’s seminal work on Principles of
Public Utility Rates one finds familiar discourse on the value of service as defined by consumer demand
theory; the competitive market standard in which both consumer demand and cost of production
determine value; the ‘workably competitive’ standard in which recovery of fixed costs and other
norms of the industry are accounted for; and the cost of service as an objective standard for
determination of regulated prices.15
In discussing these various standards Bonbright references the often cited case, Federal Power
Commission v. Hope Natural Gas (1945) 16
in which the US Supreme Court established the following
(cost of service) standard for setting regulated tariffs..
“From the investor or company point of view it is important that there be enough revenue not
only for operating expenses but also for the capital costs of the business.
These include service on the debt and dividends on the stock... By that standard the return to
the equity owner should be commensurate with returns on investments in other enterprises
having corresponding risks.
That return, moreover, should be sufficient to assure confidence in the financial integrity of the
enterprise, so as to maintain its credit and to attract capital.“
Of course Bonbright was speaking to US ‘rate making’ and as described by Grout and Jenkins (2001)17
these matters were the subject of numerous court cases in the US reaching back over 100 years. With
this in mind it may be helpful to look at a more recent example of economic regulation of prices in
South Africa.
One example is found in the Electricity Regulation Act 4 of 2006 in that the setting or approval of
prices,
15
James C. Bonbright, Principles of Public Utility Rates, Columbia University Press. 1961.
16
US Supreme Court, Federal Power Commission v. Hope Natural Gas 321 U.S. 591 (1945).
17
Grout, P.A. and A. Jenkins, (2001) Regulatory Opportunism and Asset Valuation: Evidence from the US Supreme Court and
UK Regulation, CMPO Working Paper Series No. 01/38
6. “ (a) must enable an efficient licensee to recover the full cost of its licensed activities, including
a reasonable margin or return;
(b) must provide for or prescribe incentives for continued improvement of the
technical and economic efficiency with which services are to be provided;
(c) must give end users proper information regarding the costs that their consumption imposes
on the licensee's business;
(d) must avoid undue discrimination between customer categories; and
(e) may permit the cross-subsidy of tariffs to certain classes of customers.”
Noticeably, these conditions make no mention of competitive outcomes and prices. In their place one
finds conditions related to the recovery of costs (where returns are typically thought of as the cost of
capital).
If continuing with the example above, the National Energy Regulator of South Africa published
regulatory methodology provides that regulated tariffs are to be determined on the basis of the cost
of supply. Importantly, the relationship between costs and regulated tariffs is based on economic
value – not strict adherence to accounting standards or factors unique to the financial reporting
conventions of the regulated entity. Practically speaking, allowed (annual) revenue, and thus price is
built up from deemed values of operating costs; depreciation (as an annualised recovery of capital
expenditure); return on capital; and tax.
In casting our net across various regulated sectors and jurisdictions one finds that regulators typically
utilise a combination of recent actual costs of the regulated entity and benchmark values representing
a notionally efficient comparator firm in construction of cost based prices. In the case of asset value
(thus depreciation and return on capital) regulators often apply a ‘used and useful’ criteria in build-up
of the asset base, although other criteria come into play as well and a combination of actual and
benchmark values might be used in build-up of the asset base.
Asset valuation and tariff setting
Asset value is a key input to the cost-price build-up of economic regulation, and the price-cost test of
excessive pricing. While not directly relevant to the discussion of asset valuation methodology per se,
it may be helpful to remind that asset value enters the calculation of cost based prices in two forms
– (i) as an annualised return on capital; and (ii) as an annualised return of capital. These two concepts
are easily explained if we quickly agree, as the Court did in Sasol, that the Weighted Average Cost of
Capital (WACC) is an appropriate way in which to represent a company’s cost of capital.
Keeping in mind that we are working with annualised values of costs, revenue, and excess profit, the
return on capital is expressed as the product of the WACC and asset value, and represents the
economic opportunity cost of invested capital. The return of capital is the amount in which asset value
is depreciated in a given year and represents the consumptive use of fixed assets.
The discussion might end here were it not for the that fact that there are various methods to choose
from in valuation of fixed assets – that the application of competing methods often has a material
impact on the assessed value - and there is not a global standard in which to guide the choice of
valuation methodology.
7. In Sasol the Court considered two broad methods of asset valuation - commonly referred to in practice
as Historic Cost, and Replacement Cost valuation.18
As a starting point only, the following passage on
International Accounting Standards on Property, Plant and Equipment sets out how these are to be
applied for the purpose of financial reporting:19
“ An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to an entire class of property, plant and equipment.
Cost model: After recognition as an asset, an item of property, plant and equipment shall be
carried at its cost less any accumulated depreciation and any accumulated impairment losses.
Revaluation model: After recognition as an asset, an item of property, plant and equipment
whose fair value can be measured reliably shall be carried at a revalued amount being its fair
value at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses. Revaluations shall be made with sufficient
regularity to ensure that the carrying amount does not differ materially from that which would
be determined using fair value at the end of the reporting period.”
The “cost model” (i.e. Historic Cost) references the original construction cost of the asset, and when
applied to regulated tariffs just recovers the return of and on invested capital. The “revaluation
model” (i.e. Replacement Cost) is an estimate of the current cost of replacing an asset of the same
service characteristics as the asset being valued.
Application to Section 8(a)
To place the matter of asset valuation back in its rightful context we go back to the Court’s review of
the Tribunal’s Decision in which it referenced a short passage from evidence provided by the
Commission stating that:
“the book value of the assets of a company need bear no relation to their market value and
tells one nothing about the cost of replacing them today or at the end of their lives. “(sic) ,,,,
the historical cost basis of accounting provides only for the replacement of the asset at the
end of its life at its original historical cost. It makes no provision for the impact of inflation,
because it values assets at the price at which they were purchased.”20
While perhaps literally correct, the statement above is without useful meaning until placed within
its rightful context.
First, it is important to note that the term ‘historic cost’ is one of convenience only. If looking at
International Accounting Standards (IAS 16. op cit) it is the cash price equivalent of an asset at the
recognition date. Or alternatively put – the cost at an asset at the time costs are incurred. In replacing
assets one does not look back to some point in history to place a value on these newly recognized
assets – one applies the costs of the day. It is true however, that book value (based on historic cost)
will not signal current or future asset values – but that is not the objective we have in mind. In
18
Noting that in Sasol replacement cost was calculated on the basis of actual costs indexed over time – which is best thought of
as a proxy for Replacement Cost and is observed often in regulatory practice.
19
IAS 16, Property, Plant and Equipment para 30 and 31
20
Competition Tribunal South Africa, The Competition Commission of South Africa and Sasol Chemical Industries Limited
Decision. Case no. 48/cr/aug10. para 245
8. constructing a price-cost model of excessive pricing we are attempting to compute a price in which
excess profits are zero over the long run, and which the historic cost model is well suited to achieve.
The point above also speaks to the matter of financing the replacement of assets over time. If pricing
is based on the cost of production, then by definition when an asset is replaced its pricing would adjust
accordingly to the new cost level. This is exactly as done in regulatory practice and which is aptly
summarised by G. Bertram in review of New Zealand’s experience with Replacement Cost valuation
in stating that:
“The crucial incentive requirement is that all new capital expenditure is rolled into the ratebase at
actual prudent cost so that a competitive return can at all times be reasonably expected on a going-
forward basis”.21
However, the Tribunal appears to have had other concerns as illustrated in para 247 of that Decision.
“The book value of an asset, at historical cost less depreciation, declines over its life and then
spikes when the asset is replaced. ,,, Economic value based on these costs would follow the
same spike every time that there is a replacement. At a conceptual level it therefore cannot
be correct that one adopts a system of economic costing which inevitably allows the economic
value of a product to decline over time and then spike when capital assets are replaced”.
As well understood by regulatory practitioners one does indeed obtain a series of spikes (or ‘saw
tooth’ relationship over time) in both asset values and price when using depreciated historic costs as
the basis for pricing. Moreover ( keeping in mind that we are talking about depreciated asset value) a
saw tooth price dynamic will be obtained when using Replacement Cost or Historic Cost valuation
methods for pricing as the return on capital component of costs (i.e. WACC times depreciated asset
value) diminishes over time as the asset is depreciated.
Nevertheless, given the apparently unattractive price dynamic provided by regulated markets, it is
more likely that that the Tribunal assumed that competitive markets would not provide a saw-tooth
shape in prices over time. Regardless of the intuitive appeal of this premise (i) it can neither be
supported as a general characteristic of competitive markets, or (ii) in the Court’s notional model of
‘workable competition’.
(i) In regard to a general statement we can imagine factors that lead to saw tooth price dynamics
within competitive markets. By way of example, one well understood example as developed by
Halbrook Working and others through the first half of the 1900’s is the case of storage of agricultural
commodities whereby factors such as convenience yields and carrying costs drive up price of a
storable commodity in a systematic manner - only to fall on the next year’s harvest.22
(ii) For the notional ‘workably competitive market’ of section 8(a) all but one characteristic of the
market remains undefined (i.e. no excess profits in the long run). Lacking needed definition, one is not
able to obtain an analytical solution to intertemporal pricing in our notional market. The point being
that one cannot make a general statement on price formation in our notional market based on
analytical reasoning alone, and one cannot say whether or not such spikes would be found in a
notionally competitive market without considerably more information.
21
Bertram, G, “The Optimised Deprival Value Methodology and the Objectives of Utility Sector Reform in New Zealand”, 2000
22
Working. H, (1949) The Theory of Price of Storage The American Economic Review, Vol. 39, No. 6 (Dec., 1949)
9. At this point it is probably worthwhile to examine characteristics attributed to the Replacement Cost
methodology (both perceived and real). Starting with regulatory applications, there is a recurring
stream of thought found in regulatory practice in regard to the role of Replacement Cost valuation in
price signalling. As an example the following passage was taken from a regulatory determination of
Ireland’s Commission for Energy Regulation and which we could find in a number of similar regulatory
determinations:23
“Using some form of replacement value has a very strong economic foundation. A precise
valuation results in tariffs that provide an accurate price signal of the cost of using the
transmission network. Therefore, if tariffs were based on asset value that were too small, the
value of the network would be understated with a dilution of the impact of any locational
signals. Further, it would also encourage inefficient investment in the future. Thus, taking a
replacement cost approach is more likely to result in the correct level of network investment.”
First, as a sunk asset the ‘economic cost’ of using the transmission asset is zero so we would question
the precise economic foundation being referred to. In terms of signalling future investment one would
need to think more deeply as to the nature of investment in that particular market. While not meaning
to diminish the potentially powerful role of price signalling and its impact on behaviour, in a regulated
market, current price need have no bearing on future price levels, and investments will take place on
the basis of expected regulatory outcomes (which may or may not result in the “correct” level of
investment.)
Moreover, as noted by Johnstone (2003) if the aim is to obtain a price that promotes new investment
one will likely be disappointed.24
Again reminding that we have been assuming the use of depreciated
asset values when determining price, the price obtained from a depreciated asset will be less than
that of the cost to an entrant purchasing new assets. It is not clear that a price ‘closer’ to the new
entrant price (i.e. as compared to that using Historic Cost) would be helpful or not.
Authors such as Ezrachi and Gilo (2010) question the validity of these assumptions in general, and
question the assumed “self-correcting” role to be played by excessive prices in eliminating pure profits
in the long run by promoting entry to the market25
In their study they discuss the importance of post-
entry prices as opposed to pre-entry prices and describe examples whereby even though the pre-entry
price provides excess profits to the incumbent, the expected post-entry price would be reduced
(perhaps due to a ‘price war’ as referenced by the authors, or where entry leads to excess supply and
reduced profits). In this case, the application of Replacement Cost valuation methodologies and
associated higher levels of price may have less impact on investment then otherwise assumed.
Indeed, this is an area in which economists such as Fudenberg and Tirole (1984) 26
and others have
developed game theoretic models to assess strategic behaviour, and that highlight issues of pre-
commitment and investment behaviour fundamental to understanding the impact of valuation
methodology on investment.
23
CER, Transmission Price Control Review, 2005.
24
Johnstone, D., (2003) Replacement Cost Asset Valuation and the Regulation of Energy Infrastructure Tariffs, CRI International
Series 8.
25 Ezrachi, A, and G. Gilo (2010), Excessive Pricing, Entry, Assessment, and Investment: Lessons from the Mittal Litigation,
Antitrust Law Journal No. 3, Volume 76. p 873 – 897.
26
Fudenberg, D., and J. Tirole, The Fat Cat Effect, The Puppy Dog Ploy, and the Lean and Hungry Look, American Economic
Review, Vol 74, No2 (May 1984.
10. Concluding thoughts
In looking at methodological issues inherent to the price-cost test of excessive pricing under section
8(a) it appears that one can form a robust and internally consistent approach to asset valuation. In
this case, the historic cost valuation method appears to satisfy the objective standard set by the Court
in assessing excessive pricing, whereby replacement cost would not likely do so. We have not
provided a direct proof of this outcome in this paper, but the conditions in which excess profits are
exactly zero are easy to present when using depreciated historic assets values in a cost based build-
up of price.
The broader aim of this initial study has been to demonstrate how the tools of regulatory economics
might be appropriately applied to cases of competition law – and in this regard perhaps the ‘regulatory
hammer’ inspired by Maslow has proved to be useful in a comparative evaluation of asset valuation
metrologies as applied to the construction of price – cost tests. The same is expected to follow from
an examination of profitability measures, depreciation, and return on capital to be carried out as an
extension to this study.
In returning to other thoughts referenced in this paper – construction of the price-cost test will always
struggle under information constraints and be subject to some level of estimation error. As a
practitioner, one must therefore be committed to the words of Chesterton and appreciate the job
worth doing badly.
Whether economists ultimately know the price of a thing or its value – I would suggest that Mr Shaw
was miss-guided. I think that economists know much about value, but it is indeed very difficult to put
a price on it.
Stephen Labson
Director, slEconomics Pty Ltd
slabson@sleconomics.com
+27 (0) 76 099 2805