Predatory Pricing and Need for its Revampment

The Legal Arc Volume 1 Issue 1 Articles

Jaivish Harjai

Jaivish Harjai is a fourth-year student of Amity Law School, Delhi. His areas of interest are Competition Law, Insolvency and Bankruptcy Law and Arbitration Law. He is an avid mooter and has a passion for research and writing.

Introduction

The Competition Act, 2002 (hereinafter “Act”) was enacted in India’s pursuit for globalisation and liberalisation of the economy. It was passed to provide healthy economic development in the Indian market with the aim to protect the competition and prevent abuse of monopolisation.

With the advent of Information Technology and Venture Capital, the traditional norms of the market have been disrupted, which has led several antitrust scholars to question whether the long-established antitrust principles are relevant or desirable in dealing with giant ICT-based firms.[1] These firms are prone to offering huge discounts as compared to traditional retail markets. Such below cost pricing coupled with an intent to eliminate competitiors is termed as predatory pricing. Scholars recommend that predatory pricing by a dominant firm should be treated as presumptively illegal, subject to a few ‘business justifications’ including ‘meeting the competition’. Interestingly, this approach has been enshrined in Section 4 of the Act, although the Competition Commission of India (CCI) has repeatedly rejected a definition of dominance based only on market shares.

CCI has, from time to time, defended its stance by stating that pricing can be called predatory only when it is done by a dominant enterprise with an intention to eliminate competition. This makes the market prone to such significant players who may not be dominant but have deep pockets to influence the market and act independently of other competitors. In recent times, it has become impossible or at least very difficult for a firm to be absolutely dominant in the market.

Many companies are involved in predatory behaviour and are spending huge amounts of money on discounts, sops etc. to destroy the competition which could otherwise have been spent on innovation and improvement. These practices restrict new players to enter the market as it creates huge entry barriers and lead to the destruction of small enterprises as they cannot offer astronomical discounts to consumers continuously. These companies often escape the CCI’s radar as they are not dominant in their relevant market. Therefore, to achieve the goal of Competition policy, which is to protect competition and consumers, a new policy to determine predatory pricing is needed as the big conglomerates are exploiting the lacunae in the present law.

Predatory Pricing

Predatory pricing is pricing goods below the cost with an intention to eliminate the competition and recoup the losses in the future. A firm’s freedom to price its goods cannot be challenged and that freedom has been recognised as an essential element of doing business. As per the antitrust laws, unless justified, selling a product by a dominant enterprise below the cost of production would be predatory pricing. However, no ‘strait-jacket’ formula can be laid down, and each case would depend on its facts and circumstances.

Further, pricing cannot be predatory just because the firm is pricing its products at a lower level. An investment in temporarily lower prices may be required to enter a market, to make more customers familiar with the product, or to meet the demands of competition. Nonetheless, when the firm is backed by huge investments and has the power to absorb all the losses incurred in order to eliminate competition, the competition regulator should not allow the firm to evade the sanctions merely because it is not dominant in the relevant market.

Position in EU and US

In Brooke Group[2], the US Supreme Court opined that ‘unsuccessful predation is in general a boon to consumers’, and laid down a stringent two-pronged test for identifying predatory pricing. The first condition to be satisfied was that the alleged predator’s prices were below ‘an appropriate measure of costs’. The court did not specify what measure would be appropriate, but later most courts employed the Areeda-Turner test, which takes Average Variable Cost (AVC) as the appropriate measure of cost to determine predatory pricing. The second condition laid down by the Supreme Court was a serious probability of recouping the money invested in below-cost prices.

On the other hand, the EU has not set such a high bar to to establish predatory pricing. InAKZO Chemie[3], the European Court of Justice (CJEU) held that while a price below AVC must always be regarded as abusive, even pricing above AVC may be abusive if the defendant had ‘a plan to eliminate a competitor’. In Tetra Pak[4], the CJEU again held that additional proof of recoupment is not required to establish and penalise predatory pricing.

This position was firmly restated in 2009 in the Wanadoo case[5], in which the CJEU declared that the probability of recoupment is not a precondition for determining predatory pricing. Thus, the price-cost test of EU allows for prices above AVC to be regarded as abusive if they are coupled with predatory intent and the risk of elimination of competitors.

Predatory Pricing in India

CCI defines predatory pricing as a conduct, “where a dominant undertaking incurs losses or foregoes profits in the short term, to foreclose its competitors.[6] The essence of predatory pricing is pricing below one’s cost with the intention to eliminate the competitors or reduce competition.[7]

Under the Indian competition regime, dominance per se is not bad but its abuse is bad.[8] Section 4 of the Act prohibits abuse of dominance and to determine predatory pricing, which is one the five abuses mentioned in Section 4, first, it must be established that the enterprise is ‘dominant’ in the relevant market in India.[9] Therefore, to determine abuse under the Act it is imperative to determine whether the enterprise is in a dominant position or not. Further, s 19(4) of the Act specifies certain factors to assess whether an enterprise can be held to be ‘dominant’, which includes market share, resources, enterprise’s economic power, and share of competitors and entry barriers.

Moreover, in determining whether the conduct is predatory, the question of intent is relevant to the offence of monopolization[10] and a mere offer of a price lower than the cost could not automatically lead to an indictment of predatory pricing.[11] In the absence of a plausible motive to engage in predatory pricing, predator charge cannot be sustained.[12]

Therefore, for the prices to be predatory, they must not merely be aggressively low, but actually below the seller’s cost. Commission prescribes a two-stage test resembling the Joskow-Klevorik test, which first assesses the market structure to determine whether a monopoly position attained by successful predation can be sustained, and then compare prices with costs.[13] The Commission generally looks at the ‘average variable cost’ as a proxy for marginal cost to assess whether a firm is selling below cost.[14]

Furthermore, in MCX-NSE case[15] CCI laid down a two-prong test for predatory pricing similar to the one in US Law. The two-prong test of recoupment and driving competitors out of the market, or having the intention to do so is necessary to determine predatory pricing in India. Interestingly, the Act does not prescribe for the test of recoupment to determine the predatory pricing. However, when dominance is established, this normally means that entry barriers are sufficiently high to presume the possibility to recoup.[16]

The problem with predatory pricing is that the consumers may benefit from the lower prices in the short term but in the longer term they will be worse off due to weakened competition resulting in higher prices, reduced quality and less choice.[17] Interestingly, the CJEU in Tetra Pak observed that: “it must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated…The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors”.[18]This philosophy is also enshrined in Section 18 of the Act according to which the commission is duty-bound to eliminate such practices which lead to or may lead to elimination of competition. Therefore, the CCI should take cognisance when there is an apprehension of the elimination due to predatory pricing without waiting for a firm to become dominant in the relevant market.

In present times, it is very difficult for a firm to be absolutely dominant in a relevant market and the CCI’s constant refusal to accept the concept of collective dominance has further lead to firms indulging in pricing below one’s cost with intent to eliminate competition. The competition amongst competitors has shifted to “capital” and the firm which can absorb maximum losses and offer huge discounts survives in the market. This strategy might sound like it is in the consumer’s interest but ultimately hampers competition in the long run. 

Capital as a Measure of Dominance

Predatory pricing can drive undertakings out of the markets which are perhaps as efficient as the dominant undertaking but which, because of their smaller financial resources are incapable of withstanding competition waged against them.[19] Vast amounts of capital, which could otherwise be utilised for innovation and development is being systematically burned to give discounts with a view to eliminate competition.  It is often believed that ‘firms operating in many markets can devastate their rivals through their potentially infinite capital resources’.

The Raghavan Committee (2000) clarified that the law cannot presume that possession of capital will always lead to harmful pricing practices. Access to greater capital resources should therefore not in itself be the basis for concluding that a firm’s practices are ‘unfair’ vis-a-vis its competitors. Recently, the CCI in Bharti Airtel v. Reliance Industries Ltd (Reliance Jio Case) held that mere investments cannot be regarded as leverage of a dominant position. It also noted that if such investment is declared as anti-competitive, the same would deter entry and expansion and limit the growth of markets. Also, in Fast Track Call Cab v. ANI Technologies, the CCI observed that it was the penetrative pricing policy of OLA and Uber which helped them gain substantial market shares in such a short span, however, the CCI could not delve into the legitimacy of pricing due to statuory compulsion of non-intervention when the eneterprise is not dominant.

However, the commission should not ignore company’s investments in giving up of profits which leads to elimination of small competitors and prevents firms from entering the relevant market as these practices create very large entry barriers. Therefore, it is high time that the CCI should start considering factors like the ability to acquire capital through venture funds, or deep pockets, or value of the parent company and its ability to absorb losses vis-a-vis its competitors while determining the dominance of company under the residuary clause of s 19(4) which gives the commission the power to take into account any other factor it deems fit.

A New Age of Deep Discounting

Capital as a competitive weapon gives rise to concerns that the market may eventually tip in the favour of the player that may not necessarily have the most innovative product or service, but one that succeeds in obtaining more capital and enticing more users in its early days, using subsidies.

In the Reliance Jio case, the CCI noted that providing free services cannot by itself raise competition concerns unless the same is offered by a dominant enterprise and shown to be tainted with an anti-competitive objective of eliminating competition. As Jio was not dominant in the relevant market, it escaped liability and has been successful in eliminating the competitors in the Indian telecom industry. Before the advent of Jio, there were more than 5-6 major telecom players which have now been reduced to three. Jio, which initially offered its services at a ‘zero’ price, has acquired a substantial market share by eliminating other competitors. Moreover, Jio now charges its substantial subscriber base a fee in the name of IUC (Interconnect Usage Charge) for all the calls to competitors, thus encouraging its users to use Jio only which is harmful to the competition.

Since the definition of predatory pricing is linked to the action of dominant player and deep discounts are not considered anti-competitive per se, Reliance Jio escaped the liability of antitrust regulations, even after disrupting the market.

Deep discounts have created a new class of concerns about predatory pricing, with unprecedented negative profit margins on a sustained basis, being supported by equity capital infusions. In the short run, discounts are popular, but recoupment is inevitable and market power will adversely affect consumers in the future.[20]

Many online businesses have resorted to practices like cash-back offers, deep discounting and other sops designed to draw new users and establish the network effect. Sometimes, huge losses have been sustained for years on end. In a world where there have been huge technological advancements in recent times and there are no boundaries left for markets, there is an urgent need for a regulatory mechanism which monitors e-commerce sales as they take on retail business.

Conclusion

The scale of the discounting practices, and the sustained periods for which they are continued, has created new barriers to competition. It is difficult to rationalise these sustained losses as being an introductory offer by a new player. Rather, these practices appear to be a systematic competitive strategy. This is visible from the trend in the telecom sector in which Jio, because of its parent company, disrupted the pricing and forced competitors to merge or to leave the market and simultaneously earned substantial market shares, thereby successfully recouping those losses by charging extra from its subscriber base. Jio did not come under the radar of the antitrust regulations because it was not in a ‘dominant position’ to cause harm to the competition. However, the present situation shows that harm has already been done as consumers are left with fewer choices and increasing prices.

The CCI should reconsider its policy of determination of dominance by taking a holistic view of the market by including funding status, global developments, network expansion strategies and associated discounts. Moreover, Section 19(4) of the Act which specifies criteria to determine dominance also happens to include a residuary clause. According to Section 19(4)(m), the CCI can inquire into any other factor which is necessary for the determination of the dominant position. Therefore, the CCI should also take cognisance of factors like financial status and funding from venture capital while determining dominance. 

The purpose of competition policy is to avoid situations where a few firms have market power, and new players are not able to enter. Society gains when firms obtain profits and valuation through innovation, not through the smart use of financial capital to kick off network effects. Online markets in India have many examples where players with access to significant capital resources are resorting to deep discounting tactics to derive the long-term benefits of scale and network effects. In many cases like those of PayTM and Zomato, these practices have formed an essential part of their business model which have made cashbacks their sole way of attracting consumers.[21] Therefore, it is high time to formulate a new policy for e-commerce companies and increase the ambit of dominance under the act to punish predatory pricing and regulate these discounting practices.


[1] Lina M. Khan, Amazon’s Antitrust Paradox, 126 Yale L. J. 710 (2017).

[2] Brooke Group Ltd v. Brown & Williamson Tobacco Corp., 509 US 209 (1993).

[3] Case C-62/86, AK AKZO Chemie v Commission of the European Communities, 1991 E.C.R. 286.

[4] Case C-333/94, P. Tetra Pak International SA v Commission of the European Communities, 1996 E.C.R. I-05951.

[5] Case C-202/07, P. France Télécom SA v Commission of the European Communities, 2009 E.C.R. 214.

[6] MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd,2011 Comp LR 0129 (CCI).

[7] In Re: Johnson & Johnson Ltd., Tax LR 1659 (1987). 

[8] Jupiter Gaming Solutions Pvt. Ltd. v. Government of Goa & Ors, 2012 Comp LR 56 (CCI).

[9] Fast Track Call Cab Pvt. Ltd. and Meru Travel Solutions Pvt. Ltd v. ANI Technologies Pvt. Ltd., 2017 Comp LR 667 (CCI).

[10] Aspen Skiing Co. v. Aspen Highlands Skiing Corp. 472 U.S. 585 (1985). 

[11] Re: Modern Food Industries (India) Ltd., 3 Comp LJ 154 (1996). 

[12] Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 US 574 (1986).  

[13] A. Bhattacharjea, Predatory Pricing in Platform Competition: Economic Theory and Indian Cases, in Multi-dimensional Approaches Towards New Technology 211, 216 (A. Bharadwaj et al. eds., 2018).

[14] Regulation 3, The Competition Commission of India (Determination of Cost of Production) Regulations (2009).

[15] MCX, supra note 7.

[16] EC Commission. “Tetra Pak II”, EC Commission Decision, 72 O. J. L. 1 (1992).

[17] OECD, Policy Roundtables on Predatory Foreclosure, 14 DAF/COMP 231 (2005).  

[18] Tetra, supra note 5.

[19] AKZO, supra note 4.

[20] Smriti Parsheera, Ajay Shah, and Avirup Bose, Competition Issues in India’s Online Economy, NIPFP Working Paper No. 194 (2017).

[21] Ibid.



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