In June 2016 the commissioner of the Israel Antitrust Authority (IAA) announced that the IAA would formally re-evaluate its policy on the prohibition on excessive pricing by monopolies and review, among other things, the merits, enforceability and effectiveness of the policy.
The excessive pricing policy was introduced in 2014 by the former commissioner and met with strong criticism from many antitrust scholars and practitioners. The IAA's re-evaluation was thus well received by many, yet harshly criticised by the media, which generally viewed the re-evaluation as an unnecessary weakening of an important enforcement tool in the battle against the high cost of living.
The IAA recently concluded its initial re-evaluation and published draft guidelines on the factors that it will consider in enforcing the prohibition on excessive pricing. The draft guidelines structure the IAA's decision-making process in enforcing the excessive pricing prohibition and are expected to reduce significantly the number of cases in which the IAA will take action on the grounds of excessive pricing.
In April 2014 the commissioner published Guidelines 1/14 on the Prohibition of Excessive Pricing by a Monopoly, which cancelled a long-standing IAA policy to concentrate enforcement efforts on exclusionary practices by monopolies. The guidelines established that the IAA views the charging of excessive prices by monopolies as a violation of the prohibition on charging unfair prices under Section 29A(b)(1) of the Restrictive Trade Practices Law – a sub-clause of the general prohibition on the abuse of dominant position by monopolies.
The guidelines determine that a price is deemed to be excessive if it exceeds the price that would have been set in a competitive market. To identify such a price, the IAA applies several tests. The most important test examines the margin between production costs and product price, and sets a safe harbour according to which the IAA will not view a margin of up to 20% between production costs and product price as an infringement of the prohibition on excessive pricing. If the margin exceeds 20%, a more complex analysis will be required to determine whether the price is excessive. This analysis may include comparing a firm's profits with an industry benchmark or comparing a product's price with that of similar products in other jurisdictions.
After the guidelines were published, the Central District Court rendered its decision in the Naor class action suit. The decision referred to the guidelines and stated that the prohibition set under Section 29A(b)(1) of the Restrictive Trade Practices Law prohibits charging excessively low, predatory prices, as well as charging excessively high prices.
In March 2016 a new commissioner took office. Soon after assuming the position, the new commissioner announced that the IAA would be re-evaluating its policy on excessive pricing (for further details please see "Antitrust authority re-evaluates policy on excessive pricing"). Following the re-evaluation, the IAA published draft guidelines on the factors that it will consider when enforcing the prohibition on the charging of excessive, unfair pricing by monopolies.
The draft guidelines state that, in principle, the charging of excessive, unfair prices may constitute an abuse of monopoly position, depending on the circumstances. However, the enforcement principles that the draft guidelines establish indicate that public enforcement of the prohibition on excessive pricing will take place only in exceptional cases and as a last resort.
Factors that the IAA will consider in enforcing the excessive pricing prohibition include the following:
- The lack of alternative competition remedies – in cases where it is possible to promote competition as a means to deal with a monopoly's ability to raise prices (eg, structural remedies, regulatory changes and monopoly instructions), the IAA will prefer these methods over direct intervention in a monopoly's pricing. In other words, enforcing the excessive pricing prohibition will serve as a last resort.
- The price is significantly higher than that which would likely be determined under competitive circumstances – the IAA makes clear that determining that prices are excessive is conditioned on the existence of clear indications that the relevant prices are significantly higher than those that would have been set in a competitive market. Such indication may stem from the prevailing circumstances or may be based on accepted methodologies in antitrust literature for determining excessive pricing. These tests include:
- the comparative test ? which compares the price charged by the monopoly to the prices of competing products, the prices charged to different customers, the prices charged for similar products in other geographic markets or the price charged before or after the period under review; and
- profit analysis ? which juxtaposes exceptionally high returns to those of other firms whose products are similar or analyses the existence of an irregularly large difference between a product's price and its cost of production (the cost test).
However, the IAA has stressed that it will generally refrain from basing a conclusion on the cost test alone, as it raises significant theoretical difficulties and may also negatively affect desired incentives (eg, incentives to increase efficiency, cut production costs, innovate and take risks in releasing new products). This is especially the case in high-risk markets, as opposed to markets in which a firm achieved a monopoly position due to historic or regulatory factors, or anti-competitive practices.
The IAA expressed its position that, contrary to its previous stance on the matter, a 20% margin between the cost of production and a product's price (the safe harbour mentioned above) is arbitrary, incorrect and economically baseless. Thus, the fact that the margin exceeds 20% cannot provide any meaningful indication that the price is excessive.
- The high price charged is unfair – it is not sufficient to prove that a monopoly charged prices that were excessive. It must also be proved that such prices were unfair. This is not merely an issue of economics, but also a matter of public policy. It must therefore account for factors that are external to the product's price, including:
- the bargaining power of the monopoly's customers;
- the existence of alternatives to the monopoly product;
- the effect of such excessive prices on the development of products and services in the market or the exclusion of competitors in competing or tangential markets; and
- the extent of direct harm caused to consumers (was the excessive price charged for a long period? Is the product in question an essential good?).
In cases where the above analysis leads to the conclusion that excessive, unfair prices were charged by a monopoly, the IAA may consider additional factors prior to making a final decision on whether to enforce the prohibition. These may include the following:
- The existence of a sector-specific regulator – in cases where there is a sector-specific regulator with the appropriate tools to regulate prices charged by monopolies, the IAA will prefer not to exercise its authority to enforce the excessive pricing prohibition. Further, when the relevant sector regulator regulates or supervises a certain price in practice, the IAA will refrain entirely from taking enforcement measures. However, the IAA retains the power to present its position on such a regulated price before the relevant regulator.
- Allocation of resources – as with all administrative activities, before taking enforcement actions, the IAA will consider what is an efficient allocation of resources, especially considering that cases involving excessive, unfair pricing are known to require significant resources.
The infringement of monopoly prohibitions under the Restrictive Trade Practices Law exposes the infringing party and certain of its officers to criminal, administrative and civil liability. However, the IAA clarifies in the draft guidelines that for monopolies charged with excessive, unfair pricing, it will use its authority to impose financial payments (an administrative measure) rather than criminal penalties.
The policy laid out in the excessive pricing guidelines was a significant change from previous IAA policy and stood contrary to the regulatory antitrust policy of many prominent jurisdictions. Significant doubts were also raised regarding the policy's effectiveness and the theoretical foundations on which it was based.
Following the IAA's announcement that it would re-evaluate the excessive pricing policy, it was unclear which aspects of the policy would come under review and how far the IAA would take the re-evaluation. Based on the draft guidelines, the IAA has not changed its fundamental position that excessive, unfair pricing is an infringement of the Restrictive Trade Practices Law; yet, by introducing the enforcement principles outlined above, it significantly reduced the spectrum of cases in which it will enforce the policy.
Private enforcement of the prohibition on excessive pricing, which has gained momentum in recent years, may also be affected by the policy changes introduced in the draft guidelines. However, until courts have had the chance to deliberate the implications of the IAA's revised policy regarding the manner in which courts should approach excessive pricing claims, private enforcement in the field – at least in the short term – is likely to remain active.
For further information on this topic please contact Shai Bakal, Nava Karavany or Irit Brodsky at Tadmor & Co Yuval Levy & Co by telephone (+972 3 684 6000) or email ([email protected], [email protected] or [email protected]). The Tadmor & Co Yuval Levy & Co website can be accessed at www.tadmor.com.
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