[By Priyal Jain & Harshita Jindal]
The authors are students of Rajiv Gandhi National University of Law.
Introduction
Digital platforms have emerged as a focal point of debate in the evolving digital economic landscape, especially in the context of predatory pricing, where determining the cost of services remains an idea that defies consensus. It has again made headlines as the Competition Commission of India (CCI) notified the (Determination of Cost of Production) Regulations, 2025 (hereinafter, “New Cost Regulations”) which replaced its 2009 predecessor. These regulations assume high significance as they try to cater to the changing pricing strategies that have been on the rise with the advent of digital markets. The Indian Competition Watchdog, i.e., CCI, has been using the dual test of assessing predatory pricing as provided in the case of MCX v. NSE, focusing on prices below cost measure and the likelihood of recovering losses incurred.
The assessment criteria needs to be outlined with refined discernment as deep discounting, which is done to expand the network of customers by giving heavy discounts and incentives, is a fundamental characteristic of digital markets and often leads to atypical deductions while determining predatory pricing in these markets. Consequently, to regularize the concept of cost, CCI adopted a mechanism based on the Areeda-Turner test, according to which the price of the product should be below Average Variable Cost (“AVC”) to establish predatory pricing. However, jurisprudence laid down in Bharti Airtel and Fast Track Call Cab (Ola case) takes an opposite stance where zero pricing was not a determining factor in accessing predatory pricing. These cases mark differential standpoints taken by CCI in applying cost regulation to e-commerce or digital platforms and create an ambiguous haze around the subject.
This blog delves into the implications of the newly introduced cost regulations on the digital marketplace and what dual-edged effect it can create for the future of pricing strategies.
Analysis of the New Cost Regulations
The CCI in its recently notified New Cost Regulations has brought several changes with respect to the framework of cost determination, which it has also explained through its General Statement, used to assess predatory pricing in any market. The new regulations have amended the definitions of various cost benchmarks like Long Run Average Incremental Cost (“LRAIC”), Average Avoidable Cost (“AAC”), etc., removed the term market value, and introduced Average Total Cost. Moreover, CCI has adopted a sector agnostic, cost based framework allowing for case-by-case assessment of predatory pricing, as proclaimed by the General Statement.
Predatory pricing is one of the many pernicious forms of abuse of dominance where a dominant entity, sets the prices of goods/services below the cost of production where an “as-efficient competitor” could not match the prices without incurring significant losses. Such conduct is taken by a dominant enterprise to drive existing market players out of the market, thereby hampering competition. Thus, to establish a case of predatory pricing, establishment of a dominant position in the relevant market, pricing below cost, and intention to reduce or eliminate competitors is essential. To satisfy the pre-requisite of demonstrating pricing below cost, an appropriate measure of determining the cost of the product is imperative, hence, CCI has formulated the Cost Determination Regulations to provide a structured and uniform framework for assessment of the same.
The Cost Determination Regulations, elucidate various cost measures like LRAIC, AAC, AVC, etc., although CCI has only been using AVC to examine whether the pricing was below cost or not. However, now with the New Cost Regulations accompanied by the General Statement, CCI has stated that it will examine predatory pricing using other cost measures as well depending upon each case. How will CCI translate its statement into practice is yet to be seen.
A Forward Step: Impact of the New Cost Regulations on the Digital Market
Digital markets are characterised by certain unique features with respect to their cost and prices due to which the traditional Areeda-Turner or AKZO rule can notbe applied to them. The new regulations have opened a fresh chapter in competition compliance by such industries. CCI has clarified that the case-by-case assessment would enable the consideration of unique features and evolving dynamics of digital markets while evaluating predatory conduct.
The cost structure of digital markets, particularly characterised by network effects, is quite different than most other industries since they are distinguished by higher fixed costs, lower variable costs, larger common and joint costs, etc. For instance, Instagram incurred high initial costs in developing the app but it does not incur any additional cost with an increase in the number of users, Netflix incurs costs for acquiring global content, and building algorithms and interface, however, these costs are not tied to any individual subscriber or content piece. Hence, in such a kind of market using the conventional AVC concept contradicts the intended reasoning. In digital markets, relying exclusively on the cost benchmark established in the AKZO rule may allow the pricing strategies to bypass scrutiny as prices can easily be set above AVC and still cause genuine harm to the competition.
In various judgments of India as well as European Union (“EU”) , courts have concurred with the above-mentioned rationale. In MCX v NSE, the Director General report stated that since stock exchanges work on the basis of the high level of network externalities and incur huge sunk costs, the use of ATC or LRAIC to assess predation in their cases is more justified. Moreover, in the Qualcomm case, the General Court of EU while endorsing the LRAIC standard, expressed that technologically intensive markets are marked by substantial fixed costs, primarily from R&D, while variable costs remain low and since these fixed costs are closely associated with the specific product sold, LRAIC would be a suitable measure to assess below-cost pricing as it incorporates both fixed and variable costs along with the sunk cost. The European Case of Post Danmark also establishes that in certain cases pricing below AAC and AIC displays evidence of a plan for eliminating competitors and can raise a presumption of abuse. Therefore, it would be apt to say that the New Cost Regulations by opening doors for the application of multiple cost measures, is a step in the right direction.
Scope for Refinement: Limitations of the New Cost Regulations
Although the New Cost Regulations are intended to improve accuracy and efficacy in evaluating anti-competitive behaviour, they also raise important concerns that could make enforcement more difficult in the nuanced domain of digital marketplaces.
While they have opened the door for the application of different cost benchmarks in the predation assessment, the difficulty with respect to identifying, measuring and allocating costs only intensifies. Firms in digital markets are often multiproduct in nature, offering a wide range of products and services interconnected with each other. For instance, Google, along with its core business of Google Search, also offers Google News, YouTube, Google Chrome, etc. and similarly, Amazon provides an e-commerce platform, video streaming service, and music streaming service, etc.
In such types of firms, while assessing predatory pricing, allocation of cost poses a significant challenge due to joint costs, common costs and, cross subsidisation.[1] With complex cost measures like LRAIC, it becomes difficult for the competition authorities to calculate the costs with respect to the required benchmark, potentially leading to subjective decisions.
Furthermore, the increased compliance costs with the advent of these New Cost Regulations cannot be ignored. With flexibility of the cost benchmarks to be used for the assessment of below-cost pricing, companies have to walk on eggshells, uncertain about which one might be used against them. For the same reason, businesses might have to hire experts in the field for multiple cost-based analyses in order to save themselves from this legal minefield, which can significantly impair the ease of doing business. Consequently, the litigation would also become prolonged and costlier as the companies might challenge the benchmark used against them since there is no structured method for the selection of the appropriate cost measure in this case-by-case assessment framework.
Lastly, as has also been expressed by a stakeholder, the New Cost Regulations also have the potential to reduce the aggressive price competition, which businesses in digital markets often indulge in, since they would always be living under a ticking time bomb that their conduct could instigate proceedings against them. This would thereby adversely affect the consumer benefits by limiting access to lower prices, discounting practices and dynamic pricing innovations.
Even though CCI has defended its stance by claiming that cost is not the sole basis for initiating the proceedings of predatory pricing, it remains one of the most important and preliminary factors that spark the investigations under the predatory pricing provisions.
Conclusion
The New Cost Determination Regulations mark a progressive yet not an ironclad shift in the determination of predatory pricing in the digital markets. These new regulations are welcoming as they try to cater to the booming era of digital markets but the procedural uncertainties still shower the market terrain. In order to promote healthy competition and effective pricing strategies amongst the firms, CCI should issue detailed guidelines on the lapses felt in the regulations, to dispense with the uncertainty. The digital market firms themselves should also try to build their pricing strategies in line with CCI’s revised vision to create seamless compliance that benefits both the marketplace and competition regulation. When all is said and done the aim should be to foster healthy competition among the marketplace without compromising the inherent features of digital markets.
[1] Joint costs : Cost of two or more products that are produced simultaneously, where costs cannot be directly traced to individual products.
Common Costs: Cost of services employed in the creation of two or more outputs which is not allocatable to those outputs on a justified basis.
Cross subsidisation: Cross-subsidization is a pricing strategy where the profit from one product or service subsidizes the losses or lower profits of another product or service within the same organization