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Jeremy de Douhet, Axel Schulz, Jun 14, 2007
This article was originally published in Competition Policy Insight. It is republished here with permission.
On 14 March 2007 the French Competition Council issued a decision imposing a EUR 10 million fine on GlaxoSmithKline France (GSK France) for predatory pricing. The investigation was the result of a complaint by a generic manufacturer, Flavelab, and resulted in the first ever predatory pricing decision by the French Competition Council.
This decision is remarkable in several aspects. Firstly, the alleged predatory pricing did not take place in the market in which GSK was found to be holding a dominant position, but in another, allegedly related market. Secondly, in order to find a dominant position on the related market, the Competition Council adopted a very narrow product market definition, equal to ATC level 5. Thirdly, the accusation of predation was not based on GSK’s cost of production, but on the internal transfer price between GSK France and another subsidiary of the parent company GSK plc.
According to the decision, GSK France engaged in 1999 and 2000 in a predatory pricing strategy in the market for second generation injectable cephalosprines sold to hospitals. This market comprised GSK France’s product “Zinnat” and Lilly France’s product (Kefandol), as well as generic versions (the Zinnat market). Both GSK and Lilly had a turnover of just over EUR 1 million on this market. Hence, the decision found that GSK did not hold a dominant position. However, the Competition Council found that GSK was dominant in the market for injectable aciclovir sold to hospitals, a market equal to ATC level 5, where GSK sold its product “Zovirax” (the Zovirax market).
According to the Decision, the predation consisted of GSK France selling Zinnat to hospitals at a price below cost for the period between 1999 and 2000. The market concerned by the alleged predation (second generation injectable cephalosprines sold to hospitals) is relatively small (value below EUR 3 million) compared to other markets in which GSK France is active and compared to the overall sales of medicines to hospitals in France. But the Competition Council found that the predation was part of a wider intimidation strategy aimed at discouraging generic manufacturers from entering other hospital medicine markets where GSK France was active. The theory was that by using a predation strategy on one market (i.e. the Zinnat market), GSK was building an aggressive reputation and sending signals to generic manufacturers of what it was capable of doing in order to deter generic entry elsewhere (i.e. the Zovirax market where the patents were due to expire shortly). Moreover, the Council argued that once the generic competitor Flavelab exited the Zinnat market in 2001, GSK allegedly raised its prices in the following two years, allowing it to re-coup a large part of the losses from the predatory 1999 and 2000 sales.
Market definition and dominance
One of the noteworthy features of this decision is the narrow product market definition adopted by the Competition Council. The Decision comes to the conclusion that GSK France’s Zinnat did not hold a dominant position on the market for second generation injectable cephalosprines sold to hospitals. By contrast, the decision found that GSK France’s Zovirax constituted a market by itself on which it necessarily held a dominant position.
