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Predatory Pricing

Concept of Predatory Pricing under Competition Act

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Indian Competition law framework did not have explicit clauses on predatory pricing until the Competition Act came into force. It was not identified as one of the forms of abuse of dominance under the Monopolies and Restrictive Trade Policies ( MRTP ) Act. In the year 1999, a report of the Raghavan Committee came which first talked about the concept of predatory pricing as one of the forms of abuse of dominance. The recommendations given by the Committee was incorporated in the Competition Act, 2002 which treated predatory price as “unfair or discriminatory pricing” which pertains to one of the forms of abuse of dominance. 

Predatory Pricing is the practice where the goods and price are placed at such a low level that the other parties could not compete. Section 4 of the Competition Act, 2002 which deals with the abuse of dominant position treats predatory pricing as one of its forms. Explanation (b) to that Section states the definition of Predatory Pricing as  “the sale of goods or provision of services, at a. price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.”1 

Though predatory pricing acts as the technique for the company to enlarge its market and hence abusing its position, there could arise circumstances where the companies are adopting predatory pricing to enter into the already competitive market. This often leads to the confusion to the competition law authority and hence Indian Competition law added an exception to the predatory pricing. Explanation to clause (a) of Section 4(2) of the Act added the exception to the concept of predatory pricing and states that if the enterprise or the group has used the predatory pricing for the sole purpose of meeting the competition then it won’t be treated as abuse of dominant position. 

The Competition Commission of India in the case of In Re: Johnson and Johnson Ltd.2 said that “the essence of predatory pricing is pricing below one’s cost with a view to eliminating a rival.”  Predatory pricing is considered as a severe form of dominance. It is considered as an anti-competitive offence in most nations’ competition regulation principles. Previously Article 82 of the Treaty establishing the European Community(TEU) used to regulate and prohibit it.  In the USA, Section 2 of the Clayton Act prohibits predatory pricing.

How Predatory Price Works?

There could be various reasons for adopting the practice of Predatory Pricing viz., barrier to new entrants, removing competition among the existing competitors or to push the competitors out of the market. The strategy of Predatory Pricing adopted by the enterprises not only kicks out the new entrants but also creates the barrier to enter the market much harder for the businesses. 

Predatory pricing is a temporary arrangement in which the price of the commodity is held back to lower the production cost to hamper the competition and draw more profits in the long term. It is a strategy used to enlarge the market of the predator. This strategy is different from other strategies as in this type of market setup, the aim is to hinder the competition by meeting the price and beating the competition. This strategy aims to either restrict the entry of new entrants or eliminate the existing market contender.3 

The primary aim of Predatory pricing is to capture and influence the market terms. It takes place when a dominant market player in the market lowers its selling price below the standard price ( or sometimes cost price ) to push the competitors out of the market and gain higher benefits from the reduced competition. There is a high amount of risk involved in this strategy as the recoupment is not certain in the long run and the company could fall into losses. It is because of this reason that this arrangement is often viewed as a kind of “abuse of dominance”.

Though the practice of Predatory Pricing may be beneficial for the consumers as they could avail the same product now at lower price than before. But the effect of it would be there only for the short span of time. The company would come back to its original price or increased prices once the market is dominated by it. Hence, it could impact the consumers in the longer run. 

Factors Establishing Predatory Pricing

Dominance

To establish Predatory Pricing, the predator has to bear losses in the initial period when it is selling the goods at a price lower than the standard price, therefore sustaining in such a situation is possible only for those market players who have huge capital reserves and are dominant in their respective market. Hence the dominant position becomes the foremost requirement for the execution of this strategy.“This position of dominance can be examined in connection with the geographic market and the relevant product and by analysing the demand of the product and its substitutability. The market power of the dominant player can be determined by the position he has in other markets.”4 

Roadblocks to entry as well as re-entry 

Once the dominant predator adopts the predatory pricing, it starts building a roadblock to stop the new entrant from entering the market so that the potential competitors do not try to come back in the market when the predator increases the prices to recoup the losses. The roadblock ensures the stoppage of new entrants in the market as the dominant player which already holds the market does not have to bear the initial expenses like fixed costs which the new entrant has to bear.

Excess Capacity 

The third requirement for the smooth execution of predatory pricing is that the dominant predator must have enough goods or commodities to meet up the demand of the consumers. If there would not be enough goods then the demand will exceed the supply and the competitors would get a chance to re-enter the market.  

Why is Predatory Pricing illegal under the Act?

India is a developing nation and it requires foreign investment and other such incentives to move towards the tag of a developed nation. But at the same time, India is a house for more than 130 million of the population and developing them is the primary aim of the country. Hence the government has adopted various mechanisms and policies to foster the Indian market. Making predatory pricing illegal is one such move.

The Indian companies especially the MSMEs or the startups would be the first victims if there would not have been provision for predatory pricing under Competition Act. The Multinational companies would hamper the growth of the Indian companies by adopting this pricing and hence the new startups would face a lot of difficulties to enter any market. 

Also, there always remains the fear that through the mechanism of predatory pricing, the power of the whole market could fall into the hands of few or a single company, making its monopoly. The victims of a monopolistic market are the consumers itself and for the same reason, the monopoly is not suggested in any markets. 

Legal Remedies available against Predatory Pricing

The Competition Act, 2002 replaced the Monopolies and Restrictive Trade Practices Act, 1969 after taking into consideration the various recommendations ( related to the problems faced by the companies and consumers ) and to ensure the healthy competition in the market among the enterprises. The new addition in the Competition Act from the erstwhile MRTP Act was the concept of predatory pricing which was borrowed from the English Competition Act, 1998 and the Clayton Anti-Trust Act, 1914.

Section 4(2) (a) of the Competition Act, 2002 states that:

There shall be an abuse of dominant position under Sub-section (1), if an enterprise,-

(a) directly or indirectly, imposes unfair or discriminatory-

(i) condition in purchase or sale of goods or service; or

(ii) price in purchase or sale (including predatory price) of goods or service. 

Explanation.- For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or service referred to in Sub-clause (i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub- clause (ii) shall not include such discriminatory condition or price which may be adopted to meet the competition;

As per explanation (b) at the end of Section 4 predatory pricing refers to a practice of driving rivals out of business by selling at a price below the cost of production. Denial of market access briefly referred to in this section, if read conjunctively, is expressly prohibited under Section 4 (2) (c) of the Competition Act, 2002.5

However, in 2007, Section 4 of the Competition Act, 2002 was amended by the Competition (Amendment) Act, 2007. The objects and reasons of such amendment were given in the Notes on clauses of the Competition (Amendment) Bill, 2007 which says that: This clause seeks to amend Section 4 of the Competition Act, 2002 relating to abuse of dominant position. The existing provisions of Section 4 apply only to an enterprise and not to the group of enterprises. Clause (c) Sub-section (2) of Section 4 states that there shall be an abuse of dominant position if an enterprise indulges in practice or practices resulting in denial of market access.6

Case Laws

Transparent Energy Systems (P) Ltd. v. TECPRO Systems Ltd.7

The CCI provided that the following findings are relevant for the identification of predation :

  1. The prices of the goods or services of the enterprise are at a very low level; 
  2. the objective is to drive out competitors from the market, who due to the low pricing would be unable to compete at that price;
  3. there is significant planning to recover the losses if any, after the market rises again; or 
  4. the competitors have already been forced out. 

MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd.8

The CCI held that predatory pricing is a subset of unfair price which is not defined anywhere therefore it has to be determined on the basis of the facts of the case. The CCI stated that there is no justifiable reason for the National Stock Exchange of India (NSE) to continue offering its services free of charge for such a long duration and stated that the conduct of zero pricing, in this case, is beyond promotional or penetrative pricing.9 

Further, the CCI in the instant case, while laying down the test for predatory pricing,  said that:

“before a predatory pricing violation is found, it must be demonstrated that there has been a specific incidence of under-pricing and that the scheme of predatory pricing makes economic sense. The size of Defendant’s market share and the trend may be relevant in determining the ease with which he may drive out a competitor through alleged predatory pricing scheme-but it does not, standing alone, allow a presumption that this can occur. To achieve the recoupment requirement of a predatory pricing claim, a claimant must meet a two-prong test: first, a claimant must demonstrate that the scheme could actually drive the competitor out of the market; second, there must be evidence that the surviving monopolist could then raise prices to consumers long enough to recoup his costs without drawing new entrants to the market.”

Fast Track Call Cab Pvt. Ltd. and Ors. vs. ANI Technologies Pvt. Ltd.  ( OLA Case )10

The informant i.e. Fast Track Call Cab filed a petition against the ANI Technologies which runs the OLA Service in India. The CCI directed the Director-General to investigate the case by virtue of Section 26(1) of the Competition Act,2002. During the investigation, it was found that the company used to give discounts and other such inducements to their consumers and drivers which exceeds the revenue that the company generates. The commission believed that the company is using predatory pricing, but it was found out that the company did not have a dominant position in the market  as the market share of the company is very low. Therefore, the commission came to the conclusion that though the company is using predatory pricing, it is not illegal as it is not dominant and hence no abuse of dominant position comes into the picture. 

Bharti Airtel Ltd. v. Reliance Industries Ltd.11 

In this particular case, the information was filed before the CCI against the tactics adopted by the Reliance Jio Infocomm Limited (RJIL). It used to provide free telecom services including voice calls, messages and 4G internet data since its inception. The CCI took into consideration the predatory pricing adopted by the company and held that the order under 26(1) for the investigation would be passed once it would prima facie be found that the company is in a dominant position. 

It was observed by the CCI that the company is a new entrant and there is no reduction of competition or elimination of any competition due to the action of the company. Also, it was observed that the competitive pricing of Reliance is a short-term business strategy to enter into the market. Therefore, CCI closed the case by virtue of Section 26(2) of the Competition Act, 2002. 

Conclusion

The limitation on predatory pricing is one of the most important aspects of the Competition law framework. It has not only prevented many abuses of dominant position but has also provided safe and free entry to the new entrants to establish their market. 

In today’s scenario, economic policies of the Indian Government tends towards promoting the MSMEs or the startups to establish their market. The provisions for predatory pricing plays a crucial role to ensure the smooth execution of those policies. It prevents the big companies from abusing their position which hampers the new entrants from entering into the market. 

The Act has held predatory pricing illegal but created an exception for legitimate strategies adopted by new entrants to enter the market and establish themselves by attracting the customers to a new product or service. However, CCI in various cases has taken the stand that the legitimate strategy could become abusive when it is continued for a long period of time with an intention to drive out the existing customers out of the market.  

Endnotes

  1. Explanation (b) of Section 4 of the Competition Act, 2002.
  2. In Re: Johnson And Johnson Ltd., (1988) 64 Comp Cas 394 NULL.
  3. Sriraj, It’s all Dominance that’s crucial in Predatory Pricing, LEGAL SERVICE INDIA, available at http://www.legalserviceindia.com/article/l267-Predatory-Pricing.html.
  4. Mohsin, Kamshad, Predatory Pricing in India (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3552135 or http://dx.doi.org/10.2139/ssrn.3552135.
  5. Hovenkamp, H., Federal Antitrust Policy-The Law of Competition and its Practice 339 (3rd ed., 2005).
  6. https://www.mondaq.com/india/antitrust-eu-competition-/576894/predatory-pricing-a-synopsis-on-the-indian-telecom-sector.
  7. 2013 SCC OnLine CCI 42.
  8. 2011 SCC OnLine CCI 52.
  9. https://www.scconline.com/blog/post/2020/02/07/predatory-pricing-not-only-abuse-but-also-proof-of-dominance/#_ftn8.
  10. 2017 SCC OnLine CCI 36.
  11. 2017 SCC OnLine CCI 25.
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Archit Jain

Student, NLIU, Bhopal

Archit Jain is a 4th-year law student at National Law Institute University, Bhopal. He has developed his interest in corporate and commercial laws and is very enthusiastic and keen at making a career out of it. Apart from the corporate, he has an interest in Antitrust/Competition Law as well. For any Clarifications, feedback, and suggestion, you can reach him at archit.nliu@gmail.com

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