Volume 5, Number 12, Page 3

Predatory Pricing Under Mexican Law

As a consequence of changes in economic policy that took place in the mid- 1980s, Mexico entered a new era of economic competition. The surge of activity which followed led to the enactment of the Federal Law of Economic Competition (FLEC) on December 24, 1992. Some competitive business practices, such as predatory pricing, are still not clearly regulated under Mexican law.

Predatory Pricing

Predatory pricing is conduct (1) connected with the sale of products or services below an appropriate measure of cost and (2) intended to drive competitors out of the market. Once the competitors drop out of the market, the predator is able to recoup its losses and obtain additional earnings exercising its new power as a monopoly.

The basic elements of predatory pricing are: (1) the practice of pricing below cost; (2) the possibility that the alleged predator will be able to recoup its losses and obtain monopoly profits; (3) the existence of a market structure; (4) the intent to drive out competitors; (5) injury to competitors; (6) injury to the competition process (antitrust injury); and (7) substantial power enjoyed by the predator over the relevant market.

Predatory Pricing under the FLEC

The FLEC bans monopolies and those monopolistic practices which produce economic harm or impede competition and free participation in the production, processing, distribution and marketing of goods and services.

The FLEC distinguishes between "absolute" and "relative" monopolistic practices. Absolute or horizontal monopolistic practices are defined as agreements between economic agents in competition with each other and which are intended to or in fact fix prices, exchange information or restrict the output or distribution of goods. These agreements do not have any evident economic justification, and are prohibited per se by the FLEC. Examples of other types of unlawful agreements include those intended to divide markets, assign clients or gain an advantageous position with regard to bids, auctions, and public offerings. The FLEC imposes severe monetary penalties for such conduct.

In contrast, relative or vertical monopolistic practices are those unilateral or multilateral activities which do not violate the FLEC per se. In order to establish the existence of a relative monopolistic practice, it is necessary to evaluate certain essential elements of the claim (such as substantial power in the relevant market), certain generic elements and those specifically required in the description of the conduct. Therefore, it is necessary to show that the object of the conduct is to unduly drive out competitors, substantially impede their access to the market or establish exclusive advantages in favor of one or more persons in the following cases: vertical division of markets, resale price maintenance, tying agreements, exclusive agreements, refusal to supply and boycott (FLEC, Article 10 (I-VI).

FLEC Article 10 (I-VI) sets forth the types of practices prohibited by the FLEC:

• Subject to a showing of the existence of substantial power over the relevant market, monopolistic practices are deemed to include all acts the object or effect of which is or may be to unduly displace other economic agents, to substantially impede their market access or to establish exclusive advantages in favor of one or various persons.

This list is not exhaustive, however. Article 10 (VII) contains the following catch-all provision which prohibits:

• Any act that, in general, unduly impairs or impedes the process of competition and free participation in the production, processing, distribution and marketing of goods or services.

Providing a detailed description of every act that could have a detrimental impact on competition would be a practical impossibility, both because of the continuous development of business practices and the quantity of cases that could arise as a result. The general language of FLEC Article 10 (VII) allows the Federal Competition Commission, a decentralized agency of SECOFI in charge of enforcing the FLEC, to adapt to changing economic conditions. The Commission could determine the existence of predatory pricing under Section VII, provided that the essential elements of the claim were shown.

Predatory pricing can be established under the FLEC only where the following elements are shown: i) existence of very low prices and ii) an intent to drive out competitors or impede their entry into the market or their expansion. However, predatory pricing can only violate the FLEC where there is a reasonable possibility that the predator will recoup its losses for selling at very low prices. Whether the practice in question constitutes predatory pricing will depend upon an objective analysis of the circumstances of each specific case. Factors to be examined include actual differences between prices and costs, duration of the practice, function of prices and benefits to consumers. Predatory pricing can be found to exist only if the alleged predator has substantial power over the relevant market.

In its 1995-1996 yearly report, the Commission set forth the following characteristics of predatory pricing:

a) Establishing prices below a level required to maximize profits, under conditions of current competition;

b) Decreasing profits or inducing losses in competitors through pressure designed to overthrow their prices or restrict their expansion in order to drive them out of the market:

c) Fixing prices which are unsustainable in the long run;

d) Obtaining substantial power over the relevant market, during the stage in which predator seeks to drive competitors out of the market

e) Capacity of the predator to sustain losses or decreasing profits in the affected market;

f) Existence of various factors that delay or prevent the market entry and exit of actual and potential competitors, such as sunk costs.

The Commission has issued administrative criteria suggesting that predatory pricing constitutes the prohibited conduct under FLEC Article 10, Section VII. Nevertheless, the FLEC does not clearly define the elements of predatory pricing and the federal courts have not yet rendered any ruling in this respect. Accordingly, the existence of predatory pricing must be determined on a case-by-case basis. It is important to note that FLEC Article l0 (VII) may pose constitutional problems, given the great discretion the Commission possesses in determining the elements of monopolistic practices.

Where a violation of the FLEC is found in administrative proceedings, monetary fines of up to one hundred thousand times the minimum wage in force in the Federal District may be imposed by the Commission. In particularly egregious cases, the Commission may impose, in lieu of the fine previously mentioned, a fine of up to 10 percent of the yearly sales obtained by the alleged predator during the prior fiscal period or l0 percent of annual sales or value of assets, whichever is higher. In addition, individuals who directly participate in monopolistic practices, on behalf of or following the instructions of legal entities, may be subject to a fine of up to 7,500 times the minimum wage in force in the Federal District.

Conclusions:

Vigorous competition assumes that rival companies will offer lower prices to consumers in order to acquire a greater share of the market. The distinction between vigorous competition and conduct violating the FLEC can often be unclear. Thus, the common practice of companies with strong economic resources to initiate a “price war” in order to displace competitors may result in unintended and unwanted consequences.

The law firm of Barrera Siqueiros y Torres Landa, S.C. is a multiple service firm in Mexico City. They may be contacted at Tel. (52-5)548-8000; Fax (52-5)520-5115; and by e-mail at bstlmex@mail.internet.com.mx