Introduction
For many Nigerian businesses, pricing is no longer only a commercial decision; it may also raise consumer protection, reputational and competition law considerations. For consumer-facing businesses in Nigeria, including those in the fast-moving consumer goods sector, pricing decisions such as discounts, rebates, promotions and regional price cuts may raise competition law questions where the business has significant market power. The ability to set or manipulate prices in ways that distort the market, rather than reflect it, lies at the heart of what competition law describes as an abuse of a dominant position. Predatory pricing is one form of such abuse, and involves a dominant business using below-cost pricing as an exclusionary strategy against competitors. In this article, we shall discuss predatory pricing under Nigerian law and the prohibitions under the Federal Competition and Consumer Protection Act 2018 (“FCCPA”) and its subsidiary legislation. This article discusses how predatory pricing is distinguished from legitimate competitive pricing, and reviews the framework which guides the Federal Competition and Consumer Protection Commission (“FCCPC” or the “Commission”) in its investigations and enforcement of the FCCPA.
What is Predatory Pricing?
Predatory pricing involves setting the price of a product below an appropriate measure of cost, with the effect or intention of incurring short-term losses for a period sufficient to eliminate or deter competitors. This conduct is performed with the expectation that the undertaking will thereafter recoup its losses by charging higher prices than would have prevailed without the predatory behaviour. By absorbing losses that a competitor with a smaller market share and financial resources cannot sustain, the dominant undertaking seeks to force its rival out of the market or deter potential entrants from competing in the relevant market.
The strategy is rational only where two conditions are met: first, the dominant undertaking must be capable of sustaining the period of loss-making longer than the target competitor; and second, the market must be structured in a way that makes future recoupment of those losses a plausible prospect.
Once the dominant undertaking has been able to suppress competition, it is able to recover its losses by raising the price of its goods or services significantly, at the expense of the consumers it had initially appeared to benefit. Thus, although the strategy appears to favour consumers in the short term, by making products cheaper, the long-term effect is negative for both the consumer and the market.. A good example of this is the Qualcomm case, which was investigated by the European Commission. Qualcomm was the dominant supplier of UMTS baseband chipsets and sold certain chipsets to Huawei and ZTE below cost price, a pricing position it could sustain by virtue of its substantial financial resources and market position. Internal documents recovered during the investigation revealed thepurpose explicitly, with communications showing that Qualcomm aimed to secure a 100% share at Huawei and to eliminate its main competitor, Icera, from the market entirely.
Predatory Pricing vs. Competitive Pricing
The challenge in any predatory pricing analysis is that low prices are, in the ordinary course, a sign of healthy competition rather than a signal for anticompetitive conduct by a dominant undertaking. An undertaking that reduces its prices in response to a new entrant, or that sets introductory prices to build market share for a new product, engages in behaviour that is more likely to be deemed competitive. There is, therefore, a thin line between predatory pricing and competitive pricing.
The analytical tool most widely used to make this distinction is the relationship between price and cost. An undertaking that prices above its relevant cost benchmark, however that benchmark is defined, is, in principle, recovering its costs and therefore competing on the merits. On the other hand, an undertaking that sets its price below that benchmark is incurring losses that only make commercial sense if the purpose is to inflict greater losses on a smaller market competitor. The relationship between price and cost is therefore the starting point for the analysis. Different jurisdictions, however, have adopted varying approaches to determining which cost benchmark is most appropriate, and the choice of benchmark can be decisive in whether a dominant undertaking’s conduct is found to be predatory or legitimate. The three commonly used benchmarks are: (i) Average Variable Cost (AVC); (ii) Average Total Cost (ATC); and (iii) Average Avoidable Cost (AAC).
Under the AVC approach, the relevant cost benchmark is limited to those costs that vary directly with the level of output, such as raw materials, fuel and labour. If a dominant undertaking prices below these costs, it is generally regarded as the clearest possible indicator of predatory intent, as the likely rationale would be to harm a competitor because the undertaking loses money on every additional unit sold. The most likely explanation is that the pricing is intended to harm a competitor rather than compete on the merits.
Under the ATC approach, the cost measure is broader. It includes both variable costs and a proportion of the undertaking’s fixed costs, representing the full cost of producing each unit. Pricing below this level is more ambiguous and is not automatically considered predatory. Businesses may legitimately price between AVC and ATC for commercial reasons, such as clearing excess inventory or responding to temporary market conditions. However, where a dominant undertaking deliberately maintains belowATC prices to target a particular competitor or that competitor's customers, the conduct is more likely to be regarded as predatory.
The AAC approach asks a different question. Instead of considering the undertaking's total production costs, it examines the costs that the undertaking would have avoided if it had not produced the output in question. These include variable costs and any fixed costs that are specific to the relevant product line, but exclude costs that would have been incurred regardless of whether the output was produced. AAC, therefore, focuses on the incremental costs associated with the allegedly predatory sales. Accurately identifying these cost measures is essential because they help distinguish predatory pricing from legitimate price competition. Different jurisdictions rely on different cost measures when determining whether pricing by a dominant undertaking is unlawful.
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