[Muskan Agarwal is a 3rd-year B.A. LL.B. (Hons.) student of National Law Institute University, Bhopal]
The Competition Act of 2002 [the “Act”] defines predatory pricing as the sale of goods or provision of services at a price which is below the cost of production, with a view to reduce competition or eliminate competitors. Predatory pricing is seen as abuse of dominant position under section 4 of the Act. Factors to consider while determining dominant position of an enterprise are provided under section 19(4) of the Act. These are, inter alia, market share of the enterprise, size and resources of the enterprise, dependence of consumers on the enterprise and existence of entry barriers. By taking into consideration these and other factors, the Competition Commission of India [“CCI”] zeroes in on the possibility of abuse of dominance under section 4(2)(a)(ii).
Once the dominance of an enterprise in a particular market gets established, the CCI goes into an enquiry of the existence of predatory pricing. In MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd [the “National Stock Exchange Case”], the CCI laid down a two-prong test to prove predatory pricing. The CCI noted that there should be a specific incidence of under-pricing. The pricing scheme should be one which could actually drive a competitor out of the market and, secondly, there should be evidence that the surviving monopolist can raise prices long enough to recoup the costs.[i] The requirement of recoupment shows that the predatory conduct will be profitable. In other words, the scheme of predatory pricing should make economic sense.
One of the recent cases which dealt with the issues of abuse of dominance and predatory pricing was Bharti Airtel Limited v. Reliance Industries Limited & Ors [the “Bharti Airtel Case”]. In this case the provision of free services by the service provider, Reliance Jio, was disputed. The CCI noted that “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 excluding competition” and “in a competitive market scenario, short-term business strategy of an entrant like offering attractive services and schemes to penetrate the market and establish its identity cannot be considered to be anti-competitive in nature.”
The above ruling has caused disruption in the telecom sector and has harmed the incumbent competitors in the market. Reliance Jio, a new entrant, with its 6.4% market share was considered as non-dominant in the market. However, it has become the second largest telecom operator in the market through its strategic pricing methods. Other market players such as Vodafone-Idea and Bharti Airtel are constantly losing customers to Reliance Jio and are suffering huge losses. The competition, as a result, has gotten hampered in the market.
Another case in point is M/s. Fast Track Call Cab Private Ltd. v. ANI Technologies Pvt. Ltd. The informants, Fast Track cabs and Meru Cabs, alleged that Ola was able to engage in predatory pricing because of the funds received from investors. The CCI noted that Ola was not in a dominant position in the market as there were no entry barriers in terms of access to finance. There existed a level-playing field for all the technology start-ups in terms of access to finance from various investors. Hence, Ola was not held guilty of predatory pricing. An important point to note here is that the CCI did not take into consideration that Fast Track Cabs was not a technology start-up; it did not belong to the dynamic innovation-driven markets of Ola and Uber and, unlike Ola, it could not have access to funding from the investors.
Start-ups and technology companies with their new business ideas possess the ability to capture significant market share in a short period of time and, therefore, attract huge investments. Take for example, e-commerce companies like Flipkart, Amazon, etc. They receive investments through private equity and venture capital funds and thereby offer deep discounts to the customers. It has become a global phenomenon, posing a great challenge to the offline retail companies to sustain in the market. This raises concerns of anti-competitive conduct. The draft national e-commerce policy released by the Government in July 2018 seeks to regulate this deep discounting/predatory pricing by the e-commerce companies.
In the European Union, predatory pricing is prohibited under Article 102 of the Treaty on the Functioning of the European Union. Predatory pricing occurs when the enterprise has a dominant position and set prices below-cost to eliminate competition.
The Supreme Court in the United States has set the bar high for predatory practices to qualify as an anticompetitive or an anti-trust conduct. In the case of Brooke Group Ltd. v. Brown and Williamson Tobacco Corporation,[ii] the Court has set out two prerequisites. First, the price complained needs to be below some measure of cost or “some measure of incremental cost” to be predatory. Second, reasonable prospects must be shown by the predator of recouping the investment in below-cost prices. Predatory pricing claims are seldom upheld in the United States.
Modern Economic Theory
As opposed to existing laws where predatory pricing claims violations are not easily found because of the high hurdles set by the courts, in modern economics the conduct of predatory pricing is regarded to be a business strategy. An enterprise enters into a new market and gains market power so that the power can be abused during the post predation period leading to entry barriers.[iii]
The National Stock Exchange Case mentions the Bolton test which describes predatory pricing as an economically rational strategy adopted by businesses. The aforesaid test provides for two kinds of below-cost pricing: (1) defensive and competition-compelled price cutting, and (2) market expanding price cutting. While defensive price cutting is in response to the competitor’s price, market expanding price cutting is to promote a new product or enter into a new market. For example, the below-cost pricing of services by Reliance Jio, Ola and Uber would qualify as a “market expanding price cutting” strategy. However, the strategy to set prices below cost to enter into a new market or to promote a new product can be more dangerous than defensive price cutting as it can either improve the competition or exclude or reduce the competition. This can be seen in the case of competition between traditional taxi operators and app based taxi operators. The traditional taxi operators will either try to compete at the level of app-based taxi operators or will be completely wiped out of the market.
The concept of dominance is rooted in an enterprise’s ability to influence the market. The market share, though an important determinant, is not the sole determinant of dominant position as the ability to influence stems not only from a strong foothold in the market but also from the investments, information or strategies an enterprise possesses. An understanding of dominance needs to be redeveloped to ensure fair price and fair competition in the market.
As noted above, predatory pricing can be a sound strategy which an enterprise can adopt to enter into a new market. A market expanding price-cutting strategy adopted by non-dominant firms has the potential do more harm than good to the consumers in the long run. Therefore in order to hold predatory pricing as anti-competitive, the CCI needs to look into the scheme of predatory pricing as iterated in the National Stock Exchange Case and see if it makes economic sense or not.
– Muskan Agarwal
[i] Para 22.214.171.124 of the National Stock Exchange Case.
[ii] 509 U.S. 209 (1993).
[iii] Patrick Bolton, Joseph F. Brodley and Michael H. Riordan, Predatory Pricing: Strategic Theory and Legal Policy.