- ITALY Question A: Fidelity discount and rebates not justified by the costs:
in which cases should a dominant enterprise be forbidden such
practices?
Fidelity Discounts – definition
1.1. The Italian Competition Authority has dealt with cases involving fidelity
discounts on several occasion. Most such cases concerned conduct by current or
former legal monopoly operators and, in any case, by firm having some market
power. Even though, as far as I know, the Italian Competition Authority has never
given a definition of “fidelity discounts” as opposed to other kind of discounts, in all
the cases it has dealt with discount schemes and practices appeared to clearly aimed at
securing the position of a dominant enterprise and preventing entry by new
competitors in liberalised markets. Therefore, even in the absence of a clear definition
of the category of fidelity discounts, the Italian Competition Authority has always
considered “fidelity discounts” as not cost-related discounts, having exclusionary
effects on the market, in the sense that the discount – price policy adopted by the firm
in a dominant position is impossible to match by the competitors.
Cost justification
2.1. No, I am not aware of any decision discussing evidence of the cost justification
underlying a discount policy.
Price discrimination
3.1. Yes. Section 3 (c) of Competition Act (Law n. 287 of 1990) considers as an abuse
the fact for one or several firms holding a dominant position of “applying dissimilar
conditions to equivalent transactions with other trading parties, thereby placing them
at a competitive disadvantage”. The Italian Competition Authority case-law indicates
that “dissimilar conditions” also includes “dissimilar prices”. Price discrimination
thus clearly falls within the scope of Section 3 (c) above, which is the rule defining
the forms of abuse of a dominant position which prohibited by antitrust law. Section 3
(c), as interpreted by the Italian Competition Authority, means that some forms of
price discrimination, not all, may be considered as abuses of a dominant position. In
particular, the application of Section 3 (c) requires that dissimilarly treated equivalent
transactions should place some of the dominant firm’s trading parties at a competitive
disadvantages against others. This condition clearly indicates that price discrimination
by a dominant firm is not prohibited per se, but only inasmuch as it actually distorts
competition in the market, in the sense that a competitive injury is imposed on one or
several of the dominant firm’s customers as against one or several other customers. In
the Assoviaggi - Alitalia case (2001), where the discounts granted by Alitalia (the
dominant buyer in the market for air transport travel agency services) to travel
agencies were calculated on the basis of the annual amount of tickets sold and if
match by competitors would have led to ticket price reduction of more of 50%, the
Authority also deemed that the incentive schemes adopted by Alitalia represented an
abusive practices within the meaning of Section 3 (c) because they permitted the
application of dissimilar conditions to equivalent transactions and discriminated
between travel agents. In particular, by ignoring the volume of tickets sold in absolute
terms, those incentive schemes produces different revenues for travel agents that sold
the same quantity of tickets when the quantities sold in the previous year were
different. This was a typical case where the market share held by the dominant firm
was significantly larger than those of its largest competitors, so that the longer the
period over which discounts were aggregated, the higher the burden imposed on new
entrants or smaller competitors for them to match the discounted price.
3.2. The only rule in my jurisdiction that prohibits price discrimination is Section 3 (c)
of the Competition Act, which expressly refers to firms in a dominant position.
Therefore, in my jurisdiction dominance is essential for price discrimination to be
considered abusive.
Exclusionary nature of “fidelity discounts”
4.1. According to the case-law of the Italian Authority, although the observation of
actual effect can reinforce a finding of exclusionary strategy, a case can be based on
the simple likelihood of such effects flowing from the discount policy adopted by the
dominant firm. However, it is not necessary that the discount scheme actually affects
the market share of competitors, provided it can be shown that the discount scheme
under scrutiny is capable of excluding an as-efficient competitor, making it
impossible for such competitor to match the dominant’s firm scheme.
4.2. In my jurisdiction the exclusionary nature of discounts is proved through a
comparison of costs and revenues. In particular, a pricing strategy adopted by a
dominant firm is considered as exclusionary when it led to prices below costs. The
exclusionary nature of fidelity discounts was particularly clear in the case
Associazione Italiana Providers /Telecom (former legal monopoly operator and main
supplier of network infrastructure services to other competing Internet Service
Providers). In this case, the dominant firm, besides offering discounts to strategic
customers, was also granting rebates that, in certain cases, resulted in prices for the
liberalised services equal to zero.
4.3. Average variable costs, i.e. the unit cost of producing a good or service taking
into account the costs of all variable inputs but not the costs of any fixed input, are
used as the standard benchmark in performing a comparison of costs and revenues. In
some cases, it may be more appropriate to make reference to the notion of incremental
costs, i.e. the costs which are specifically incurred for the incremental production.
Average total costs, i.e. the unit cost incurred to produce a good or service, is taken
into consideration, in case of pricing below such measure of cost, in the light of an
overall assessment of the firm’s conduct.
4.4. In my jurisdiction the costs over which the comparison is undertaken are the costs
of the dominant firm.
4.5. no cases providing elements to give an answer
Justification for exclusionary discounting policy
5.1 Efficiencies are taken into account by the Italian competition Authority in abuse
of dominance cases, provided they result in consumer welfare increases. Whenever
the overall net effect of the alleged abusive practice on consumer welfare is positive,
the practice will not be prohibited pursuant to article 3 of the competition act.
Objective necessity can be invoked by the dominant firm, though, as far as I know,
this has never happened in practice.
General / Additional comments
6.1. no
6.2. no