Tuesday, April 6, 2021
The Prohibition of Excessive Pricing: Inherent Difficulties, Potential Mistakes, and Conditions for Application Michal Gal
The Prohibition of Excessive Pricing: Inherent Difficulties, Potential Mistakes, and Conditions for Application
The excessive pricing prohibition is recognized in many jurisdictions. In this article we use theoretical and practical considerations as well as experience from the implementation of the prohibition to shed light on its inherent difficulties, potential mistakes, and conditions for application. We begin by discussing five foundational principles that should affect the enforcement of the prohibition: (i) consumer welfare does not depend solely on price; (ii) incentives of firms to invest and innovate are crucial for consumer welfare; (iii) the prohibition increases the amount of uncertainty that firms face and impedes the efficient operation of markets; (iv) the competitive price is a valid benchmark only when perfect competition can exist; (v) currently the prohibition can be applied even if the monopolist gained its position by engaging in competition on the merit. We then apply these foundational principles to the prohibition. We also explore the fairness perceptions of consumers and the lessons learned from other types of price regulation. In the third part of the paper we analyze the inherent practical difficulties in applying the prohibition. We conclude with suggestions on the conditions under which the prohibition should be applied to ensure that its application enhances welfare. We also briefly summarize all EU and British excessive pricing cases to date.