The key issue of this test is to differentiate between business conducts that are part of a healthy competition in the market and those conducts that are part of an abusive strategy of the dominant company. The guidance paper of the EU Commission suggests using the “as-efficient-competitor-test” as a benchmark test: The aim is to investigate whether the critical conduct is capable of excluding a competitor which is as efficient as the dominant company.
The “as-efficient-competitor” is a hypothetical competitor having the same costs as the dominant company. Foreclosure of an as-efficient-competitor means that the dominant company is pricing below its own costs.
Since the as-efficient-competitor-test is a cost-benchmark-test, the choice of the appropriate cost benchmark is crucial for the analysis. The EU Commission chose as benchmarks the average avoidable costs (AAC) or the long-run incremental cost (LRAIC). According to the EU Commission, failure to cover the AAC indicates that the dominant undertaking is sacrificing profits in the short term and an equally efficient competitor cannot serve the targeted customers without incurring a loss. Failure to cover the LRAIC indicates on the other hand that the dominant undertaking is not recovering all the (attributable) fixed costs of producing the good or service in question and that an equally efficient competitor could be foreclosed from the market.
Other effects need to be considered as well as including the existence of economies of scale and scope, learning curve effects or first mover advantages which may favour declining costs. The exact application of the as-efficient-competitor-test as well as the chosen cost benchmarks vary on a case-by case basis.