Mario Libertini

Limits to Freedom of Enterprise: the problem of prices that are inferior to production costs

  • Abstract

Informations and abstract

Keywords: Competition; Repeatable Price; "Incremental Cost" Criterion.

In principle, the fact that an entrepreneur applies for his goods and services a price not repeatable by other efficient competitors contrasts with the principle of fair competition. This rule, however, raises thorny issues concerning the burden of proof, since the input cost of a good it is not easy to calculate. The best solution would be to assume that commercial offers are rational (and, consequently, lawful), until proven otherwise by another competitor or by an antitrust or regulatory authority. Furthermore, the difficulties in calculating the real input cost of a good or a service have made the very same concept of "input cost" a vague notion, whose meaning is established, using different and wavering criteria, by administrative authorities and by Courts. In order to limit such a great degree of discretion and uncertainty, a specific normative intervention would be useful, stating practical criteria whereby the operators can figure out whether a price is repeatable or not. In particular, the best choice would be to adopt the "incremental cost" criterion: that is, to take into account the increase in costs (both short-term costs, SRIC, and long-term costs, LRIC, but not also general costs) which an efficient enterprise would necessarily cope with if it started offering a specific good or service in addition to its previous output. However, when the price applied by an enterprise is lower than the incremental cost, the presumption of regularity can no longer be applied: in such a case, having any information about the costs it has coped with, the most rational solution is to put the burden of proof on that enterprise, not on competitors.

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