[Shubham Gandhi and Tanish Gupta are IV year and III year students respectively at National Law University, Jabalpur]
The Competition Commission of India (‘CCI’) in the recent case of In Re: Vaibhav Mishra v. Sppin India Pvt. Ltd.(‘Shopee case’), has dismissed the allegation regarding the exercise of predatory pricing carried out by ‘Shopee’, an online marketplace. The CCI, while dismissing the complaint, held that though Shopee was involved in the practice of predatory pricing, it is not liable to be fined under section 4(2)(a)(ii) of the Indian Competition Act, 2002 (‘Act’) since it does not hold dominance in the online market or platform economy. The CCI has missed an opportunity to evaluate the existing predatory pricing scheme, which has become redundant in the current market sphere.
In this post, the authors will highlight the loopholes in the present scheme of predatory pricing and evaluate the impact of predatory pricing in the offline market and will lay down new factors under section 19(4) of the Act, which should be considered to establish dominance under section 4 of the Act.
Analysis of Judgement and Proof of Dominance
The Information in the present case has been filed by Mr. Vaibhav Mishra (‘Informant’) under section 19(l)(a) of the Act alleging contravention of sections 3 and 4 of the Act by Sppin India Pvt. Ltd. It was alleged that Shopee offers deep discounts on various products and sells them below the cost price, and “that some of the products, such as Kurtis, mugs, wallets, etc., are sold at Rs. 9/-.” The Informant alleged this practice adopted by Shopee amounts to predatory pricing and “…is driving small players out of the marketplace and thus amounts to unfair trade practice.”.
The practice of indulging in predatory pricing is expressly stated to be anti-competitive in terms of section 4(2)(a)(ii) of the Act. The aim of indulging in predatory pricing is to obtain a sufficient hold in the market by keeping the prices below cost and eliminating competitors from the market. The CCI, in Transparent Energy Systems (P) Ltd. v. TECPRO Systems Ltd., laid down four factors to determine the predatory pricing policy:
- The prices set by enterprises are below the cost price;
- The sole purpose is to drive out the competition from the market;
- After the market rises again, the enterprise plans to recover the losses significantly; or
- The existing competition is being driven out.
The CCI dismissed the complaint in terms of section 26(2) of the Act, since Shopee does not form a dominant entity, which is a prerequisite as laid down in section 4(2), and therefore, no prima facie opinion can be formed.
In the present case, the stance adopted by CCI is problematic in two aspects. Firstly, in the case of the platform economy, where there exist enterprises such as Amazon, Flipkart, Myntra and Nykaa, , there can be no sole dominance of any one enterprise. Secondly, such an approach ignores the anti-competitive effect the predatory pricing of Shopee has on small sellers, in particular, the offline retailers who, due to economic costs, are not in a position to provide deep discounting. Even Amazon, with all its resources, is not dominant in the relevant market, as held by CCI in Re: Lifestyle Equities C.V. v. Lifestyle Licensing B.V.
This leads to a very peculiar situation, where the Act, by virtue of section 4, promotes the practice of predatory pricing, as the enterprise will not be fined until they are proven dominant, which is nearly impossible in a market where there exists toe-to-toe competition.
Case of Dominant Entity & Predatory Pricing
The factors to be considered by the CCI while assessing the dominant position of an entity under section 4 are laid down in section 19(4) of the Act. In Fast Track Call Cab Private Ltd. v. ANI Technologies Pvt. Ltd., while clarifying on “dominant entity,” the CCI held that for an entity to be characterized as dominant, it should have a market share for a reasonable period of time. Furthermore, in Bharti Airtel Ltd. v Reliance Industries Ltd., the CCI declined to hold Jio dominant due to the presence of several market players possessing similar financial and technical capabilities and that the share of Jio did not account for more than 7% in each of the 22 telecom circles in India.
It is argued that the concept of “dominant entity” is primarily based on the enterprise’s market share and does not consider other factors, such as investments and strategies, underlying the need for reconstruction of the concept. In Uber India Systems Pvt. Ltd v CCI, the need for reconstruction was showcased for the first time, where the Supreme Court found Uber to be in a dominant position, since the discount offered would affect the competitors and the market in Uber’s favor as provided under explanation (a)(ii) to section 4. Herein, the Supreme Court considered predatory pricing as a factor to establish dominance instead of traditionally construing predatory pricing as an after effect, thus flipping the coin.
Though the approach adopted by the Supreme Court eases the factors of establishing “dominance,” it is problematic since every enterprise engaging in heavy discounting affecting competitors will be at risk of being held to be dominant and, consequently, engaging in predatory pricing as a result of heavy discounting. The necessary implication is that such a view makes heavy discounting ‘per se’ illegal and may result in the end of deep discounting, a strategy adopted by new entrants to penetrate the market and establish their position.
New market players provide goods and services below the cost price to enter and establish themselves in the market. The ‘Bolton test’ discussed in MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd. prescribes two types of below-cost pricing:
- defensive and competition-compelled price-cutting, and
- market expanding price cutting.
It is with the latter that we are concerned here. The CCI had held that “in a competitive market scenario, where there are already big players operating in the market, it would not be anticompetitive for an entrant to incentivize customers towards its own services by giving attractive offers and schemes.” Moreover, such a strategy may also prove to be pro-competitive by allowing the new entrant to compete in the market.
The Factors: Penetrating Pricing & Position of Strength
The pricing strategy adopted by an enterprise of lowering the prices of goods and services below cost to promote and establish itself in the market is commonly referred to as ‘penetrative pricing.’ It is an established practice of giving discounts adopted by various enterprises like Amazon, Flipkart, and Jio. However, this common idea of ‘penetrative pricing’ is seldom known in the Indian competition regime.
Although penetrative pricing is a useful tool in the hands of new entrants in the relevant markets, especially startups, to increase their share of the market, it becomes problematic at the hands of enterprises with high financial muscle and established brand image in other markets. This is because these enterprises have the potential of causing an anti-competitive effect, in particular, on the offline retail market. To this effect, the authors suggest that penetrative pricingand the position of strength of an enterprise should be considered while analyzing the dominance of any enterprise in the market under section 19(4).
While elucidating upon the position of strength, the CCI in Belaire Owners Association v. DLF Limited held that the ‘strength’ has to be perceived through a host of factors, such as its economic power, the size and importance of competitors, entry barriers in the market, which need not necessarily be the market share and that would empower it to “operate independently of competitive forces prevailing in the relevant market” or to “affect its competitors or consumers or the relevant market in its favor.” The CCI further clarified that “strengths derived from even other markets, if they give an enterprise such abilities as mentioned above, would render the enterprise dominant in the relevant market.” Though ‘position of strength’ has always been considered while assessing “dominance” under section 4, the phrase misses mention in section 19(4), which lays down the guiding factor for the CCI.
For the above-discussed reasons, the authors argue that ‘penetrative pricing’ and ‘position of strength’ shall be added to section 19(4) as factors to be considered to establish the dominance of an enterprise.
Conclusion
The jurisprudence regarding penetrative pricing in the Indian competition law regime is still to find its feet. The Act safeguards the enterprises’ action of indulging in predatory pricing by prescribing a prerequisite of not being dominant in the market, making the provision redundant. Interestingly but not surprisingly, after the Bharti Airtel case, Jio has emerged as the largest telecom player in terms of revenue as well as subscriber base, with its market share increasing significantly. In the present case, the CCI held Shopee to indulge in predatory pricing, but cannot proceed against the same, as the enterprise is not dominant.
The authors argue that the CCI should consider adding certain factors, including what is suggested herein, to tighten the grip on an enterprise that, though not dominant, may hamper the market by giving deep discounts to outrun the existing competition. Furthermore, there is a need to provide a statutory definition of penetrative pricing and to differentiate it from the idea of predatory pricing.
– Shubham Gandhi & Tanish Gupta