§8.4 A firm's pricing decision

(174) As explained above in paragraphs 52 and 53, a firm's incentive to pass on an overcharge to its purchasers is determined by the type of demand and costs concerned (117). According to economic theory, a firm will adjust prices only where this will increase profits. However, in order to receive a higher price, a firm will usually have to accept reduced sales. The assessment of the trade-off between increased profit from higher prices and decreased profit from reduced sales is important to understand the extent of the passing-on effects in damages actions. (175) This trade-off is illustrated in Box 16 below. If a firm, for instance a direct customer of a producer of raw materials, increases prices, the effect on profit from higher prices may be illustrated by the area A in the left section of Box 16. The corresponding lost profit stemming from decreased sales is equal to the area B. When the effect of another small increase in the price is such that area A is equal to area B, there is no scope to earn additional profit through further price adjustments. If prices are increased beyond this point, the profit margin lost through the resulting reduction in sales volumes will outweigh the increased margins earned on the remaining sales. (176) If the direct purchaser faces higher costs of raw materials, for instance if the suppliers of raw materials increase prices in violation of Article 101 TFEU, this may alter the terms of the trade-off described in paragraph 175 above. An increase in the direct purchaser's costs will reduce the margins earned on the sales at the prevailing price. In profit terms, this makes it less costly to increase the price at the expense of losing some sales. The lost profit due to lower sales when costs have increased is represented by area D in the right section of Box 16 below. As area D is smaller than area B, the direct customer has an incentive to increase its price in response to the cost increase, i.e. to pass on the cost change, at least to some extent. Box 16 Trade-off between price increase and lost sales

← 8.3 · All articles · 8.5 →

Source: EUR-Lex (Cellar) · retrieved 2026-09-07