Predatory Pricing and Cooperative Capitalism

[By Sanidhya Bajpai]

Dr. Ram Manohar Lohiya National Law University, Lucknow.

Introduction

In a globalized world where big capitalists are fighting tooth and nail to dominate the market, it becomes essential to curb their anti-competitive practices. In this blog, the author demonstrates how certain aspects of Predatory Pricing are restrictive and how they are not fruitful in prohibiting anti-competitive practices. The strategic lowering of prices by a firm to oust competitors is known as Predatory Pricing. The intention behind predatory pricing is to eliminate/oust the competitors and create a monopoly in the market. Not all discounts and sales are seen as predatory pricing. According to section 4(2)(a)(ii) of the Competition Act, 2002 (“Act”), the enterprise needs to hold a dominant position in the market to be charged with Predation. It is assessed by factors like (i) prices set by the firm being below the cost price, (ii) the sole purpose behind the predatory pricing being to eliminate the competition, (iii) competitors facing threats from such pricing, (iv) and, the firm aiming to regain the losses after creating the monopoly by jacking up the prices.

CCI’s ambiguous approach to dominant player and predatory Pricing

The Competition Commission of India (“CCI”) in numerous judgments has denied the allegations of Predatory Pricing on the basis of the firm being a new entrant in an established market and not being a dominant player or on the basis of the necessity of deep discounting in the market for network effect. However, this approach of the CCI towards Predatory pricing needs to be streamlined as a new entrant with hefty capital and funding from big capitalists can disrupt the whole market. The prerequisite of being a dominant enterprise in the relevant market to be charged with predation is restrictive and the country needs more holistic criteria in the interest of market and competition.

The Act defines the dominant position in Section 4 to be a position of strength that a firm enjoys in the relevant market which enables it to operate independently of the competition or take steps that affect its competitors, consumers, and market in its favour. The CCI explained in the Mcx Stock Exchange Ltd. & Ors. V. NSE NSE case that evaluation of the strength of an enterprise is not to be seen solely on the basis of the market share but rather on the basis of stipulated factors such as size and importance of competitors, the economic power of the enterprise, entry barriers, etc. as mentioned in Section 19 (4) of the Act. The CCI in the instant case further  enumerated that the indicator of the dominant position has not to be pegged down to a percentage but is to be construed in conjunction with other factors. This delineates that the Act and commission aimed to give a holistic and encompassing approach to the definition of the dominant position.

However, the fact remains that the commission in allegations related to predatory pricing by an enterprise has restricted itself to a narrower approach of dominant player and for these reasons it would be safe to alter the provisions in order to encompass the firms with substantive market power who have the power to oust the competitors by predatory pricing and other anti-competitive practices.

Market domination should not be a necessary criteria

The commission in various instances has denied the allegations of predatory pricing on the basis of the narrower approach to the dominant player term, like in Bharti Airtel Limited v. Reliance Industries Limited, the CCI held that simply providing free services cannot be seen as predatory pricing unless it was done by a dominant enterprise along with other anti-competitive practices to eliminate the competitors. The commission emphasized that the telecom market already had established enterprises and Jio’s practices were not anti-competitive as it was a new entrant.

It is evident from Jio’s growth that a firm backed up by big capitalists can disrupt the market even without being the dominant player. The market share of Jio stands at 36% and it is the market leader in the current times, which is a quintessential example of flawed predation assessment.

Shopee was alleged to be undercutting prices to loss-making levels in order to monopolize the market. It was alleged to be at the predation stage with deep pockets and a threat to Indian small businesses, however, CCI held in Vaibhav Mishra v. Sppin India, that Shopee is a new entrant in the established market and hence there was no predatory pricing.

In FHRAI & Anr. v. MMT & Ors., the CCI while imposing a penalty on MMT, OYO, and Go-Ibibo rejected DG’s finding on predatory pricing stating that nuanced assessment is required in such platform market cases, as the success of such platforms depends heavily upon network effect.

In the Shopee case, the CCI held that its deep discounting is not predatory as it is not a dominant player and thus, it is not anti-competitive. However, in close competitive markets like e-commerce, there is hardly any scope of being the dominant player. In such cases, the authorities should focus on the extent of harm such Predatory Pricing can cause to the market and not whether the firm is dominant or not. CCI mentioned in the MMT-Go judgment that a nuanced assessment is required of predatory pricing in such platform market cases, the same way it is difficult to adjudge a clear dominant firm in a market and all other aspects apart from market share need to be taken into consideration.

How predation adversely affects the market?

Predation adversely affects the market as a whole, after one firm monopolizes a market, the output decreases, and the prices rally up, which in turn negatively affects the consumers. Moreover, if one firm has control over a market the quality of the service or product also comes at its discretion, an example of this can be WhatsApp, it has a monopoly in the market as everyone uses it as a default messenger and because of that it is able to play with its consumer’s privacy, it has the power to change its policies without any consideration for the consumers because WhatsApp doesn’t have a worthy competitor in the market.

It was argued in Raghavan’s Report on Competition that due to difficulties involved in practical application and interpretation, predatory pricing will be seen as abuse only when it is unambiguously established that a dominant firm is engaged in it. However, such an approach overlooks the fact that in markets with big enterprises, there is hardly any scope to be a dominant player. There is neck-to-neck competition among the enterprises and such a hardball approach towards predatory pricing leaves small and medium enterprises at the mercy of big capitalists.

International Perspective and what we can incorporate from it

Section 46 of the Trade Practices Act of Australia restrains an enterprise that has ‘substantial degree’ of power in the market from abusing that power in order to eliminate or substantially damage a competitor. Section 46, prior to its amendment, was of limited usefulness as it applied only to monopolists or enterprises with overwhelming market dominance. However, amendments were brought in time to protect small and medium enterprises from big capitalists with deep pockets. In an Australian Competition and Consumer Commission judgement, the federal court charged Eurong Beach Resort Ltd. and others for anti-competitive practices and predation under section 46 of the Trade Practices Act as they had a substantial degree of power in the market.

Finland’s Restrictive Business Practices Act 1988, elucidates that the abuse of market power will be the criterion for assessment of anti-competitive practices, and one way a firm can abuse its market power is predatory pricing. It states that a price may be predatory if it is considered to distort competition by being either too high or too low.

The laws of Australia and Finland in regard to Predatory pricing are more encompassing and less restrictive. .. Even though a wider approach to the term “dominant enterprise” was elucidated in the NSE judgment, the CCI’s approach towards it has been restrictive. The Australian and Finnish laws have evolved through time to accommodate even the non-dominant market players with substantive market power to manipulate the market with anti-competitive practices. It is essential to understand that enterprises that do not hold a clear dominant position can also negatively affect the market with predatory pricing if they have substantive market power and deep pockets. Indian laws need to incorporate the “substantive power” approach in order to keep up with the growing competition among enterprises, before it’s too late.

Conclusion

The task of charging with predation is risky and daunting and there is next to zero scope for a mistake. The risk of charging an enterprise with predation when in fact there is none is much higher and more severe than predation going unnoticed by the authorities, but the authorities cannot have a relaxed attitude towards anti-competitive practices of an enterprise. There are broad provisions in the Act to encompass and charge firms with substantive degree of market power with predation, however CCI has taken a hard-line approach on market share criteria, which makes it difficult to charge firms with anti-competitive practices. Commission’s criteria of presence of a clear dominant position of a firm needs to be altered with presence of substantive power in the relevant market as with growing competition among multi-billion enterprises it would practically difficult to adjudge one dominant enterprise and this loophole would serve the enterprises to escape anti-competitive practices. Cooperative capitalism rather than competitive capitalism should be encouraged among the enterprises and for this, the CCI’s stance that predatory pricing can only be done by a dominant enterprise requires alteration.

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