This article has been written by Manoj Purohit pursuing Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution and has been edited by Oishika Banerji (Team Lawsikho).
This article has been published by Sneha Mahawar.
Table of Contents
Competition means that a seller works hard in order to buy a buyer’s patronage and to sustain in the market with other similar sellers and also maximise his profits. A buyer always tries to buy a product or hire a service at the lowest price available with decent quality but a seller always tries to sell his product at the most profitable price in order to maximise his profit. Sellers use various methods to achieve buyers’ patronage. One of such way is the pricing of goods. Sellers price the goods at such a low price that other competitors shall not be able to compete with the price and will be forced to exit from the market. This is called “predatory pricing”. Thus “predatory price” is understood as the selling of products or amenities below the floor price as set by regulation with the intention of reducing the competition or eliminating the competitors out of the market. Competition is considered as one of the most efficient ways to make sure that the end-users are exposed to a wide range of products and amenities at the basic price which is available. Enterprises will have the urge to innovate, sell by means of cost-effective goods thereby meeting consumers’ demand and achieving consumer satisfaction. Competition thus increases the quality of goods and services and the efficiency of the goods as well as services. But in order to achieve this market conditions must be competitive and governments all around the world are struggling hard in order to remove deformity in the market through appropriate regulations and to promote competition. One such regulation is Section 4(b) of the Competition Act, 2002, which speaks about predatory pricing. In this article, we are going to discuss the concept of predatory pricing in detail.
Competition kills competition
In the existing world, each and every person tries to overthrow their competitors for survival in the market and for expansion. In this process, every enterprise shall make sure it stands unique by using smart techniques to do so. Sometimes they even tend to eliminate competitors. This can be highlighted as COMPETITION KILLS COMPETITION. There are various ways to do so and one of such ways is predatory pricing which helps to kill the competition in the market.
Abuse of dominant position
A dominant position means a position that is generally above others. It is always appreciable to be in the dominant position and not considered disagreeable. But abusing such a dominant position or superiority is considered as a wrongful act. The Competition Act, 2002 defines “dominant position” as a place in which an enterprise enjoys its strength in the market, which enables the firms to work without any dependency of any competition that may be persuaded in the market or which shall affect other enterprises or end users in marker and has the market in its favour under all circumstances. The Competition Act, 2002 prevents firms from abusing their dominant position. Predatory pricing is one of the ways of abusing a dominant position.
Conditions precedent to bringing a case within the ambit of predatory pricing
The conditions precedent to predatory pricing are:
- Vending goods or facilitating services at a price that is below the floor price mentioned.
- This is done to make sure other enterprises are thrown out of the market and the competition is reduced.
The “Competition Commission of India” has been authorised to decide whether any enterprise or firms abuses the “dominant position” or not in the pertinent market by “predatory pricing” of goods and also to decide if it is in the “dominant position” or not. It may be noted that “predatory pricing” should not be frowned upon unless the firm abuses it while in the dominant position.
Phases of predatory pricing
There are two main phases that exist in the clock of predatory pricing.
- The first is the sacrifice phase
In this phase the firm incurs losses. It tries to sell the product at the lowest price. It sells the product with good quality and with the lowest price. It tries to keep the price so low that no firm has ever sold the product at such a low price. Here it sacrifices all the profits and the firm incurs huge amounts of loss. The firm considers it to be a marketing strategy and utilisation of capital for marketing just like advertisement expenses or marketing expenses.
- The second phase is the recovery phase
Once the firm makes sure that all the competitors are thrown out of the market it starts increasing the prices. It recovers all its losses or expenses that were incurred in the first phase. The firm makes sure that it has achieved monopoly in the market and that there are no powerful competitors left in the market before increasing the prices in the recovery phase.
Legality of predatory pricing
Predatory pricing is illegal but is very difficult to prove. Predatory pricing violates antitrust laws. The laws intend to make sure there is fair competition in the market. Just by lowering the price it doesn’t prove to be predatory pricing. There are various other reasons for which the prices of the goods can be lowered. In order to prove that lowering of the price is violating Section 4 of the Competition Act, 2002, it has to be proved in a court of law that the lowering of the price was done in order to cause an “appreciable adverse effect” on the competition of the market. The burden of proof lies on the opposite party and should bring evidence that the competition is causing appreciable effects and is increasing monopoly. The firm should be proven guilty that it just did not intend to compete but intended to eliminate the competition.
Effects of predatory pricing on the market
Competition increases the quality of goods and services and the efficiency of the goods as well as services. But in order to achieve this, market conditions must be competitive and governments all around the world are struggling hard in order to remove deformity in the market through appropriate regulations and to promote competition. In case they fail to do so then the predatory pricing shall have the following effects on the market:
- There shall be no competition in the market. When the person with the dominant position eliminates the competition by pricing goods below floor price other competitors shall be forced to exit because of losses.
- Monopoly shall prevail. When all the competitors are exited from the market monopoly shall increase and the person with the dominant position shall be the only seller.
- Enterprises shall neglect technological development. Such enterprises shall not care what the consumers want and will not strive for any sort of development.
- There shall be no efforts of cost reduction by the enterprises in the market since he will be the only seller in the market.
- There shall be no innovation in the market as the goods shall be sold at their price without any efforts to buy the consumers’ patronage.
- High prices shall be charged by the enterprises once all the competitors are eliminated from the market and there is no competition.
Predatory pricing of Reliance Jio
Reliance Jio entered the Telecom sector on September 5th, 2016. The regulation of telecommunications in India is carried out by the Telecom Regulatory Authority of India (TRAI). It, along with the Competition Commission of India, ensures that there shall be fair competition in the telecommunication sector and there is appreciable adverse effect on competition in the telecommunication sector.
Bharti Airtel Ltd. had presented a case against Reliance that the holding company i.e. Jio practised a strategy that was anti-competitive and had caused “appreciable adverse effect” on the competition of the market. This allegation was made as Reliance Jio had free services from September 5th, 2016 which amounted to predatory pricing. Airtel had also alleged that the free services that were rendered by Reliance Jio were amounting to the abuse of the dominant position of the Reliance group. It alleged that Reliance was indulging in “predatory pricing” with free services to eliminate competition in the telecom market.
Considerations of Reliance’s behaviour as predatory
- The data-centric works on 4G mobile handsets. It thus ends up with consumers paying more for Jio services for free voice calling.
- Initially, free service was for a trial period till December 30, 2016. But they kept on increasing the deadlines until they introduced the Jio Prime.
- This affected the competition of the market as the other service providers of telecom industries were not able to compete with the free services which were provided by Jio.
Defence taken by Reliance Jio
Jio presented its latest annual report of Airtel before the Competition Commission of India which stated that it did not differentiate any service which was provided by it in the telecom sector. Mere funding by the host company for the purpose of expansion by the new sector entry into the market can not be termed as predatory. Just because it had the funding from the company which had a dominant position in the market which was reliant it wouldn’t amount to Jio having a “dominant position” in the market as it was a new entrant into the telecom sector. Existing competitors had given sufficient choice for customers to shift from one service provider to another without any material cost of switching.
Decision by the Competition Commission of India
Competition Commission of India rejected all the allegations of Bharti Airtel, as it stated that “…in the absence of any dominant position enjoyed by Jio in the relevant market, the question of alleged abuse does not arise…”
The CCI stated that just by providing free services in the market does not amount to be anti-competitive in nature. For Reliance to be held guilty of “predatory pricing”, it must be in a dominant position as per Section 4 of the Competition Act 2002. Since Jio was a new entrant in the Telecom market it can not be said that Reliance Jio was in a “Dominant Position” and can not be held guilty of “predatory pricing”. Even though it had a negative effect on old operators and it did not have a suitable business model to sustain lower tariffs for a very long period of time the accused was not in the “Dominant Position” and cannot be held guilty.
Competition is the most essential thing in the market to protect the consumer interest. It helps consumers from not being exploited. As long as there is competition in the market sellers struggle hard for buyers’ patronage. They use innovative techniques and more options shall be available for the consumers. Techniques like predatory pricing would cause an appreciable adverse effect on the competition of the market. The essentials like “Abuse of Dominant Position” must be present in order to prove that the strategy used results in predatory pricing and shall contravene Section 4 of the Competition Act of 2002. Thus, predatory pricing is considered to be illegal and shall increase the monopoly of the market which leads to high concentration of competitors and there shall be homogeneity of products with a high dependency of consumers on a single enterprise which is not good for the market.
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