Dangote Refinery and the Legal Test for Predatory Pricing: Key Considerations

Dangote Refinery’s recent strategic reduction in the price of petrol to ₦699 per litre raises significant legal questions as to whether this price point meets the legal requirements for the offence of predatory pricing. In the realm of competition law, predatory pricing is an illegal business strategy whereby a dominant operator intentionally reduces prices, often below the cost of production, with the goal of eliminating competitors from the market or preventing the expansion of competitors or entry of new competitors. While low prices are generally celebrated as pro-consumer, competition law draws a careful distinction between aggressive competition on the merits and exclusionary pricing by a dominant firm. 

How does the Federal Competition and Consumer Protection Commission (FCCPC) determine if a price is predatory? In this legal update, we examine the legal framework applicable to predatory pricing under Nigerian law and the factors the FCCPC would be required to establish before concluding that a firm’s pricing strategy is unlawful.

What is Predatory Pricing?

Under Regulations 13(1) and 13(2) of the Abuse of Dominance Regulations 2022, predatory pricing occurs where a dominant undertaking deliberately sets prices below cost for a period sufficient to discipline, eliminate, or deter the entry or expansion of competitors, with the expectation that losses incurred will later be recovered through higher prices once competitive constraints have been weakened. The legal gravamen of predatory pricing is not the mere existence of low prices, but the combination of economic sacrifice and exclusionary strategy. Predatory pricing may be explicit (through outright price cuts) or implicit (through rebates, discounts, or selective pricing mechanisms).

Case Study on Predatory Pricing: A pharmaceutical firm held a dominant position in the UK market for a medication. The case involved two different pricing strategies in two separate market segments. The firm offered massive discounts to hospitals to ensure their drug was the one prescribed to patients. Once patients left the hospital, they were usually kept on the same brand, allowing the firm to charge very high prices in pharmacies where there was less competition. The pricing strategies of the firm were decided to be predatory.

1. The Threshold of Dominance

Before any assessment of pricing conduct can be undertaken, the FCCPC must establish that the undertaking (in this case, Dangote Refinery) holds a dominant position in the relevant market. Under Section 70 of the Federal Competition and Consumer Protection Act (the “FCCPA”), dominance is not illegal, however, it confers a "special responsibility" on the firm not to distort competition.

In the context of the downstream petroleum sector, dominance cannot be presumed. The FCCPC would first need to determine:

1. The relevant product market (e.g., refined PMS supply, wholesale refining, or downstream distribution);

2. The relevant geographic market (national, regional, or import-competitive coastal zones); and

3. The extent of competitive constraints, including import parity pricing, the role of NNPCL, independent importers, and the residual effects of price regulation and subsidy reforms.

2. How Does the FCCPC Determine Whether a Dominant Firm Engages in Predatory Pricing?

Where dominance is established, Regulation 13(3) requires the FCCPC to apply an economic rationality test. The FCCPC examines whether:

"the dominant undertaking incurs losses that it would have avoided when compared to economically rational and practical alternatives that may realistically be expected to be more profitable, but for the effect of eliminating or deterring competition."

In other words, the FCCPC must assess whether the dominant undertaking incurred losses that it would have avoided by choosing economically rational and practical alternatives, but for the objective of eliminating or deterring competition. In practical terms, this involves a cost-based analysis coupled with an examination of likely exclusionary effects.

Regulation 13(4) establishes Average Avoidable Cost (the “AAC”) as the primary benchmark for assessing economic sacrifice. Where a dominant firm prices below AAC, there is a strong presumption that the pricing is predatory. This is because selling below the costs that could have been avoided by not producing the specific output is viewed as an irrational economic sacrifice, justifiable only by an intent to exclude rivals. 

However, this presumption is not absolute and a dominant firm may escape liability if it can demonstrate that the price is supported by a legitimate efficiency rationale or a pro-competitive benefit that outweighs the anti-competitive harm. In this context, AAC is defined legally as the costs that could have been avoided if the refinery had not produced the specific units of fuel in question. These typically include variable costs like raw crude oil and energy, but may also include fixed costs specifically incurred for that production run. 

Importantly, whether a cost is classified as "avoidable" depends in part on the duration of the alleged predation. Thus, the longer the period of low pricing, the more costs (such as certain maintenance or labor contracts) become avoidable, potentially raising the Average Avoidable Cost benchmark and making a finding of predation more likely under the Section 13(4) test.

3. No Absolute Safe Harbour Above AAC

It is equally important to note that a firm can still be held liable if it sells above AAC but below the total cost, if the FCCPC establishes an exclusionary strategy using the "other factors" provided for in Regulation 13(5). While pricing below Average Avoidable Cost triggers a strong presumption of predation under Regulation 13(4), the Abuse of Dominance Regulations 2022, does not create a "safe harbor" for prices that fall between AAC and the total cost of production. Thus, the FCCPC may pursuant o Regulation 13(5) shift its focus to procuring direct or indirect qualitative evidence (such as internal documents or strategic communications) of a "predatory strategy" by examining whether the price cut was selectively targeted, timed to block a rival's entry, or hampers the ability of an Equally Efficient Competitor to have entered the market in the absence of the conduct in question. Crucially, Regulation 13 (4) (b) ensures that once this exclusionary intent is proven, a dominant firm cannot escape liability by arguing that it had no realistic prospect of recouping its losses.

4. Recoupment, Consumer Benefit, and Market Exit

It is not a defence to predatory pricing that prices are temporarily “consumer-friendly,” nor is it strictly necessary to prove that competitors actually exited the market. However, in practice, the FCCPC may still be required to demonstrate likely foreclosure effects, to the  degree that the said conduct was capable of disciplining competitors or materially impairing competitive conditions. Additionally, a dominant firm cannot escape liability for predatory pricing by claiming that it never intended to recoup its losses. Thus, the legal focus remains on the exclusionary effect of the pricing, not the eventual profitability of the predator. 

Key Takeaways

1. Dominant firms should not price in isolation: Where an undertaking may be dominant, pricing decisions, particularly significant price reductions, should be preceded by a structured competition law analysis and implemented alongside a defensible competition strategy that assesses cost benchmarks, likely foreclosure effects, and regulatory risk, rather than being treated as a purely commercial decision.

2. Low prices are not illegal, but sustained economic sacrifice is high-risk: Nigerian competition law does not prohibit aggressive or consumer-friendly pricing. However, sustained pricing that falls below avoidable cost, or that cannot be justified by efficiency or capacity-utilisation rationales, may be characterised as predatory where it reflects an irrational economic sacrifice aimed at excluding competitors.

3. Predatory pricing enforcement is fact-intensive and evidence-driven: The FCCPC’s assessment will turn on granular evidence, including internal decision-making, cost data, duration and targeting of price cuts, and their impact on equally efficient competitors. Informal justifications or post-hoc explanations are unlikely to suffice in the absence of contemporaneous competition analysis

This publication is based on the authors' independent analysis, observations, and experience advising clients on regulatory and compliance matters. It is provided solely for informational purposes. The views expressed herein do not constitute legal advice or an official recommendation, nor do they represent the position of any institution or client. Readers should seek specific professional advice before relying on any part of this publication.