This article is written by Lakshmi Menon pursuing Crack NCA – Canada Examination – Test Prep Course at Lawsikho.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
In simple language, the word predatory means a) relating to or practising plunder, pillage or rapine or b) inclined or intended to injure others for personal gains.
The predator is a firm that sets its price so low for a certain period that its competitor has no choice but to leave the market. This also deters new players from entering the market. The loss is also evident but the predator is not bothered about the same.
Understanding predatory pricing
Predatory pricing is a method of pricing in which a seller sets a price which is so low that other sellers or suppliers cannot compete with him and they are forced to exit the market. Predatory pricing not only forces other sellers to leave the market but such an act also restricts others from entering the market. Because of such a nature, predatory pricing is not allowed and is banned in many countries. Such an act is considered a violation of competition laws. On the face of it, it is not possible to make out whether there is any predatory pricing activity involved or it is a mere competition between the sellers.
Example: If my business competitor was selling a computer at 40000 and I sold the same computer for 25000 as I knew that my competitor would never sell for such a low price, then I am acting in predatory pricing.
Legality of predatory pricing
Yes, Predatory pricing is illegal in many countries and it violates the antitrust laws set up in those countries which intend to protect the consumers from predatory business practices and ensures fair competition. It is very difficult to prove predatory pricing. Companies will never agree that they have slashed the prices to eliminate competition and would argue that the measures which they have taken are to be competitive.
Components of predatory pricing
Predatory pricing thus includes the following:
- The act of illegally setting the prices so low that any competitor is eliminated from the relevant market.
- There is a violation of anti-trust law as predatory pricing paves the ground for monopoly by making the market vulnerable to it.
- The lower price benefits can be availed by consumers only in the short term.
- In the long run, the customer suffers as the entities succeed in raising the prices thereby eliminating competition from the market.
- When the price rises there is a decline in choice.
- The Competition Commission of India eliminates such practices like predatory pricing treating it as an abuse of dominant position which is prohibited under the Act.
What does the competitor do in a predatory pricing
The competitors in a predatory market have a particular mindset. They do business with the intention of capturing the entire market. For that, they are ready to go to any extent. The aim of the competitor is to target the consumers by giving them lucrative offers. By succeeding in doing this, the competition has a dominant position in the market. It also means that no other player in the market can beat him. The strength of the competitor in the relevant market decides his position in the market.
The competitor rules the market by operating independently and all the customers are dependent on him. The customers have no choice and the competitor rises in the market instantly. The main reason for his rise in the relevant market is because of the abuse of the dominant position and predatory pricing.
In the case of predatory pricing, the competitor is said to have abused its dominant position by imposing unfair prices, lowering the prices, and restricting the production of goods or services in the market.
Basically, by restricting technical or scientific development relating to goods or services, creating barriers to entry, denying access to the market, by using a dominant position, the competitor gains access to other markets.
If an entity wants to attain a dominant position, it should have control and should influence 50% or more of the relevant sector of the market and other rival players hold a much less share in the active market. Even if the entity is powerful in the market whether it is dominant or not depends on the strength of the other players in the market. Therefore dominant position depends on the rival players and the strength they impose in the market. If there is only one enterprise in the market and there is no rival player that means there is no competition in the market and therefore there is no dominant position.
Competition Law perspective
The Government of India, in order to curb the practice of unhealthy competition between various entities passed laws that were further amended. The purpose was to have healthy competition within the framework of the new laws. The first law that was passed by the Government was the MRTP Act of 1969. It was the first type of completion law as its purpose was to prevent the monopoly created by certain sections of the market.
The MRTP Act was based on the Directive Principles. With the onset of globalization and liberalization, the need was felt for improvisation in the existing Act. However since it did not work, the framers decided to design a law that was in tune with the development of the country. The MRTP Act became obsolete in certain areas and a need was felt to shift to promoting competition.
A high-level committee was appointed by the Central Government and the objective of the committee was to frame a law that would curb the illegal practices adopted by the competitors to create a monopoly in the relevant market and regulate them if they are wrong by imposing penalties and punishments which would deter others from falling in their shoes.
Competition Act, 2002
In the year 2002, the Central Government passed the Competition Act to protect the competitive market in India. The purpose was not to prevent competition but to stop the unfair trade practices which lead to monopolies and dominant positions in the market. The Competition Act also states that anti-competition agreements are void as it has an adverse effect on the market. The Competition Act was amended twice once in the year 2007 and then in the year 2009.
The object of the Act is to create an environment that shall protect the consumers from being exploited by the dominant player and also bring economic growth and progress to the country.
The term “Competition” is not defined in the Act. In the corporate world, it means the economic enterprises compete with each other and secure customers for their products. The purpose is to kick the competitors thereby eliminating rivals. It thus gives way to monopoly.
The Competition Act prevents certain agreements which are anti-competitive in nature. It prohibits abuse of dominant position, which regulates the acquisition, amalgamation and mergers which cause or are likely to cause an appreciable adverse effect on competition within India. It thus regulates combinations. The Competition Appellate Tribunal was established and was headed by Dr. Justice Arijit Pasayat (Retd. Judge of the Supreme Court of India). It dealt with appeals against the decisions of CCI and adjudicated compensation claims.
In place of the Competition Appellate Tribunal (COMPAT), National Company Law Appellate Tribunal (NCLAT) was formed in 2017.
Statutory definition of ‘Predatory Pricing’
“Predatory price” means 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 vide Explanation (b) to Section 4 of the Competition Act, 2002.
As per Section 4(2)(a) of the Act, there shall be an abuse of dominant position if any enterprise directly or indirectly imposes an unfair or discriminatory condition in the purchase or sale of goods or services; or unfair or discriminatory price in purchase or sale (including predatory price) of goods or services.
Competition Commission of India
For the administration, implementation and enforcement of the Competition Act, 2002, the Competition Commission of India also known as CCI was established by the Government of India on March 2009. It is a statutory body and its job is to ensure that fair and healthy competition prevails in the economy.
Whether the company or enterprise is indulging in any unfair or discriminatory pricing in the sale or purchase of its goods including predatory pricing of services resulting in an abuse of its dominant position is considered by the CCI in reaching a conclusion. Its job is to protect small players in the market thereby acting as an antitrust watchdog.
When does CCI consider low pricing predatory
When a complaint is received by the CCI, the Commission considers the information received and the allegations levelled in it and calls for a meeting to decide whether prima facie any case is made out for investigation in the matter.
Thereafter, the Commission directs the office of the Director General (DG), the investigative wing of the CCI to investigate the matter and submit their report. The Director General starts the investigation only after an order is received from the Commission.
On the basis of the report filed by the DG and the submissions made by the parties, the Commission reaches a conclusion.
For pricing, the average variable cost as defined under the Competition Act is taken and if it is found that the price is below the cost and the purpose is the elimination of competition, then it is considered predatory pricing.
Case laws related to predatory pricing
The issue of dominant position and predatory pricing was discussed in the following cases:
MCX Stock Exchange & Others vs. National Stock Exchange, 2011
In this case, a complaint was filed by MCX against NSE under Section 19(1)(a) of the Competition Act for violating Section 4 of the Act.
The issues were:
- whether zero pricing including waiver of data fee, transaction fee, and admission charges by NSE in their currency derivative segment (CD) amounted to an abuse of dominant position in the relevant market.
- whether NSE has directly or indirectly imposed unfair predatory pricing in the sale of services.
In its finding, CCI stated that the zero pricing set by the National Stock Exchange in its currency derivate segment was a part of its sound business strategy and not for eliminating competition and it cannot be said that the pricing was unfair or predatory. CCI, therefore opined that there was no violation of Section 4 of the Competition Act, 2002.
Vaibhav Mishra vs. Sppin India Private Ltd. (known as ‘Shopee Case’), 2022
Sppin India Pvt Ltd is an online marketplace. In this case, Vaibhav Mishra had filed a complaint with CCI alleging contravention of Sections 3 and 4 of the Competition Act.
The issue was Spinn India was selling products below the cost price and was offering huge discounts which were nothing but predatory pricing as they intended to eliminate competition from small players and this resulted in unfair trade practices.
CCI in its decision stated that though Shopee was involved in predatory pricing, it was not holding any dominant position in the online platform market. So it cannot be fined under Section 4(2)(a)(ii) of the Competition Act.
Fast Track Call Cab Pvt. Ltd. vs. Ani Technologies Pvt. Ltd., 2015
In this case, the informant ie Fast Track, a radio taxi service company had filed a complaint before CCI against the opposite party Ani Technologies, a radio taxi service company that ran their taxi under the brand name OLA.
The issue was that OLA was offering heavy discounts to its customers and its cab drivers were also given good incentives. Because of this, the competitors were finding it very difficult to match OLA and it affected their business and that this amounted to predatory pricing under Section 4(2)(a)(ii) of the Competition Act.
The Commission, prima facie found that OLA held a dominant position in the market and therefore the DG was directed to investigate the matter. On the basis of analysis, DG concluded that OLA was not dominant in the relevant market as its share in the market had declined due to the entry of Uber and therefore the question of abuse does not arise.
CCI considered the size and resources of the competitors rather than the market share of OLA and opined there was no abuse of Section 4 of the Competition Act.
C. Shanmugham and Manish Gandhi vs. Reliance Jio Infocomm Ltd., 2017
In this case, the informers (Mr. Shanmugham and Mr. Gandhi) had alleged that Reliance Jio was indulging in predatory pricing as they were abusing their dominant position and this was a violation under Section 4 of the Competition Act. The informers further said Reliance Jio had infused huge investments and used free voice services, roaming services, data services and heavy discounts to its customers as a tool to penetrate into the market. This was causing losses to other telecom operators.
The issue was whether Reliance Jio had violated Section 4 of the Competition Act by indulging in anti-competitive practices through predatory pricing.
CCI observed there are many players in the relevant market. Some are domestic and some are foreign. In this case, the competitors are not excluded. These players have capabilities, capital and economic resources. So customers have wide options to choose from. CCI concluded that Reliance Jio has not abused its dominant position so prima facie there is no case against Reliance Jio.
Transparent Energy Systems (P) Ltd. vs. TECPRO Systems Ltd., 2013
In this case, CCI has laid down the four important factors which determine the predatory pricing policy. They are as follows:
- Whether the price which is set by enterprises is below the cost price;
- Whether the purpose of any enterprise is to eliminate competition from the market;
- Whether there is any plan to recover the losses once the market rises;
- Whether the existing competition is eliminated.
Instances when the CCI passed orders related to predatory pricing
The following are some of the instances when the CCI passed orders related to predatory pricing:
- In June 2012, CCI imposed a fine of Rs. 63.07 billion on eleven cement companies for cartelisation. CCI claimed that these cement companies met regularly and fixed prices, controlled market share and they were deliberately holding back the supply as it earned them illegal profits.
- In 2013, CCI imposed a penalty of ₹522 million on the Board of Control for Cricket in India (BCCI). CCI concluded that IPL Team ownership agreements were pro-BCCI as its clauses were only in favour of BCCI. This was unfair and discriminatory as IPL team owners had no role to play in the said terms of the contract. Thus CCI held BCCI responsible for abusing its dominant position.
- CCI imposed a penalty of Rs. 1337.76 crores on Google for violating Section 4 of the Competition Act. CCI opined that Google should refrain from unfair business practices and should modify its conduct as it was abusing its dominant position in multiple markets in the android mobile device ecosystem.
- CCI had fined Amazon Inc. to deposit a penalty of Rs. 200 crores as it has misrepresented and suppressed information related to disclosures with regard to its acquisition of a 49% stake in Future Coupons of Future Retail Ltd. This order of CCI was challenged by Amazon Inc. with the NCLAT and the NCLAT upheld the order of CCI.
- In the case of Uber, CCI observed that the market share of different competitors was fluctuating. There was tough competition between Ola and Uber and the taxi service market was competitive. CCI held that Uber was not in a dominant position and closed the case under Section 26(2) of the Competition Act. However, in appeal, the COMPAT observed that the size of discounts and incentives could either mean improvements in existing business models or it could be anti-competitive and COMPAT directed the DG to conduct an investigation. Later, Supreme Court noted that Uber was involved in predatory pricing as it was providing huge discounts to its customers and high incentives to its driver-partners. The court also observed the dominant position in operating independently and its effect on competitors. The appeal was dismissed as the court did not feel any need to interfere with the order of COMPAT.
Conclusion
It can be said that in many cases CCI has been instrumental in preventing anti-competitive and monopoly attitudes of big players by curbing predatory pricing and abuse of dominant position. Under the current scenario, the Act has surpassed its previous laws. But considering the various market segment, sectors and entry of foreign investors, it will be a challenge for CCI to maintain healthy competition in the future too.
References
- https://www.indiacode.nic.in/handle/123456789/2010?sam_handle=123456789/1362
- https://indiacorplaw.in/2022/04/gauging-the-scheme-of-predatory-pricing-the-case-of-shopee-pvt-ltd.html#:~:text=The%20aim%20of%20indulging%20in,Energy%20Systems%20(P)%20Ltd
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