Table of Contents
Introduction
Predatory Pricing is very much in news from the last some years in India as the enterprises tried to penetrate in the market, applying various kinds of pricing techniques as pricing has a very important role in a developing nations like India. The government’s initiatives to encourage and safeguard competition in the Indian market can be credited with the establishment of predatory pricing rules in India. The 2002 Competition Act was passed with the purpose of preventing anti- competitive behavior and advancing consumer welfare. One such activity that the Act aims to address is predatory pricing.
Throughout the years, a number of major businesses in several industries have emerged on the Indian market. These dominating firms have a history of engaging in predatory pricing and other actions that have the potential to stifle competition and create monopolies. This may result in greater costs, a decline in quality, and fewer options for consumers. In this context, the introduction of predatory pricing provisions in the Competition Act was seen as an important step towards ensuring a level playing field for businesses in India. By regulating anti-competitive practices such as predatory pricing, the Act aims to promote competition and consumer welfare in the Indian market.
Furthermore, the Indian government has been keen to attract foreign investment and promote economic growth in the country. An environment that encourages healthy competition is seen as an important factor in achieving these goals. The introduction of predatory pricing provisions in the Competition Act is part of the government’s efforts to create such an environment.
Predatory pricing in India and its evolution
Predatory pricing is a type of pricing strategy, used by the firms in order to enter into a market, with an intention to capture the respective market. The Competition Act of India prohibits any enterprise which is dominant in the said field to resort to predatory pricing as it will be termed as abusing the dominant position held by the enterprise under section 4(1) of the Act. Section 4 of the Competition Act specifies the conditions under which the practices of an enterprise can be termed as the violation of the said section and predatory pricing is one of the condition’s mention under section 4(2)(ii)[1] of the Act.
The Competition Act was drafted to regulate the competition within India, in order to improve the competitiveness within India and predatory pricing can be beneficial to the customers in the initial stages as the products are available at a very cheap prices, but will be detrimental to the competition and the Act is market centric and tries to create the balance between Consumer welfare and Market competitiveness. The Act’s preamble makes it very apparent that it seeks to prevent actions that have a negative impact on competition and to foster and maintain market competition[2] and consecutively it does not prohibit dominance per se and proof of dominance is a prerequisite in order to check the abuse of dominance and if the former is affirmative, then only there is a need to check the latter[3].The factors listed in Section 19(4) of the act must be used to determine an enterprise’s dominance, and on the basis of these factors, it must be determined whether the enterprise’s dominance allows it to operate independently of the competitive forces in play or whether it would benefit it over its rivals or the relevant market[4].
India has penalized predatory pricing under the Act to promote fair competition and protect consumers from anticompetitive behavior. Predatory Pricing is considered an anticompetitive practice because it harms both competitors and consumers in the market. When a dominant player in the market engages in predatory pricing, it can drive smaller competitors out of business and create monopoly or a dominant position in the market. This can harm consumers by reducing choice and innovation, and also by allowing the dominant player to raise prices and lower quality.
Predatory Pricing has been defined as the sale of Goods and Services below the cost, the cost which have been defined by the Regulators keeping in mind the cost of the production of Goods and services, with the sheer intention to reduce the competition or to eliminate the competitors from the market[5]. The CCI has defined various types of “cost” in (determination of cost of production) Regulations, 2009)[6]. The CCI have defined “Total cost” as the actual cost of production, which includes items like the cost of materials used, direct labor costs, direct expenses, work overheads, quality control costs, costs associated with research and development, packaging costs, and finance and administrative overheads attributable to the product during the referred period[7]. And “Total variable cost” refers to “the total cost minus the fixed cost and share of fixed overheads, if any the referred period[8].
It must be noted that CCI has not given any unique form of below cost pricing. Also, there is no unique concept of “cost” under the Act. Reading the regulation “below cost pricing” could be broadly divided into “below average total cost pricing” and “below average variable cost pricing”. “In case the prices are above average variable cost but below average total cost, even then it is possible that the pricing behavior of the enterprise could make some business sense and therefore “intent” in the sense of mala fide could be positively established”[9].
So even in cases where the firm sells below total cost then it has been considered as an alarming condition and if any mala fide intention appears then it would be termed as predatory pricing[10]. Also in the case of H.L.S. Asia Limited, New Delhi v. Schlumberger Asia Services Ltd.Gurgaon and Oil & Natural Gas Corp. Limited, New Delhi[11], According to CCI, “where the aggrieved party is seeking a remedy for claimed predatory pricing, the calculation of the average variable cost is the most relevant criterion.”. But before analyzing whether the pricing policy
constitutes predatory pricing by an enterprise, the dominance of said enterprise have to be proved and It’s important to remember that the Act only forbids misuse of the dominating position and not the dominant position of an entity and proof of dominance is a prerequisite in order to prove the Abuse of dominance[12]. Act specifies that only an dominant enterprise can abuse its market power and the enterprise which does not hold any dominant position are safeguarded as their practices are deemed necessary in order to penetrate in the market and establishes their business.
It is very important for the Adjudicating body to take a holistic approach in deciding the dominance of an enterprise. “A wide range of elements listed in section 19(4) suggest that the CCI must adopt a highly comprehensive and practical approach when determining whether a company has a dominating position before drawing any conclusions from such an investigation”[13] and only if the Hon’ble court is satisfied with respect to the dominance of an enterprise then the Court will proceed to analyze the pricing policy, in order to ascertain the Abuse of dominance by the enterprise in the market. But the Hon’ble Supreme Court in deciding the case of Uber India Pvt Ltd v. CCI & Ors[14] have applied the different approach by not analyzing the dominance initially and took pricing policy of the Uber India Ltd to held that it will itself be considered as a proof of dominance of an enterprise in the market.
The Hon’ble Court determined that it makes no economic sense than to suggest that Uber wants to limit competition in the market after considering the fact that it was losing Rs. 204 per trip for each journey that the vehicles owned by fleet owners made[15]. Court also held that “the loss made by Uber is itself a proof of dominance as it would certainly affect the competitors or the relevant market in its favour”[16].
Clause (b) of Section 19 provides for Size and Resources of an enterprise as an factor to determine the dominance of the said enterprise, which consequently allows the enterprise to either operate it independently in the market or affect its competitors in its favor, but this size and resources should be ascertain in the market in which the enterprise is conducting business.
If an enterprise (X) is a well established company in sector (Y) and have entered in (Z) business, then its dominance in sector (Z) will have to be ascertained in the relevant market, which will be
(Z) and not on the basis of its position in sector (Y). That is the reason, why it’s important to ascertain the relevant market of the enterprise, so that the position of the enterprise and its competitors has to be ascertained in that relevant market only.
The Hon’ble Competition Commission of India in the land mark judgment of Bharti Airtel Ltd. v. Reliance Industries Ltd & ors[17] in analyzing the pricing of Jio for the violation of section 4 held that “not the only determinant in determining an enterprise’s dominating position, financial strength is important. The effectiveness of Reliance Jio Infocomm Ltd. in handling big scale investments does not indicate that Reliance Jio is in a dominating position when compared to comparable investments and the financial strength of competitors”. The Commission also held that there are various big players in the market, which are comparable to the Reliance in terms of resources and have years of experience in the field. Further, “the market is characterized by the existence of several companies, giving customers enough choice and allowing them to easily switch between different service providers. This suggests that there is little to no major customer dependency on any one telecom company”[18]
A diverted approach undertaken by the Supreme Court (SC)
The Hon’ble SC did not considered these factors in analyzing the situation in Uber India Ltd. case and held that if an enterprise is able to spend too much by giving huge discounts to the consumers and incurring loss for considerable period is itself as the proof, that the enterprise have considerable amount of resources and it signifies about the size of the enterprise and can be considered as a proof of dominance under section 19(4) (b). Hon’ble held that the loss incur by the Uber on per trip in the month of June only is a proof of their intention to eliminate competitors from the market and there is a prima facie case against the Uber under section 4 of the Act as it will certainly affect the appellant’s competitors in the appellant’s favour or the relevant market in its favour[19].
Drawing analogy from this case to Bharti Airtel, the reliance was providing their service free of cost to the whole nation for the period of one year and consecutively raised the price after one year on all of their services, in order to recover from the losses incurred from providing the free services, which eventually derived various players from the market and Reliance is the biggest player in the telecom sector, which itself is a proof that they have ample of resources and investment from the parent company and they can also be considered as the dominant enterprise in the market based upon their pricing policy like Uber was considered as dominant. But the commission did not analyze the pricing policy of Reliance to determine the abuse of dominance only because Reliance was considered not a dominant enterprise in the relevant market.
In the case of Bharti Airtel the pricing policy of the Reliance has not been considered as abuse of dominance as the Commission determined that “in a competitive market with established major players, a new entrant’s use of enticing offers and promotions to draw clients to its own services would not be anti-competitive[20]”. “This type of short-term business plan is crucial for a new entrant to enter the market and build their brand, but it cannot be characterized as anti- competitive and as a result cannot be the focus of an inquiry under the Act”[21]
The current Judgment by the Hon’ble Supreme Court in Uber India Ltd. took a reverse approach and construed the pricing policy in itself the proof of dominance of Uber and as abuse of dominance as it was considered as predatory pricing under section 4(b) of the Act, unlike following the traditional approach of finding the dominance of an enterprise in the relevant market and then looking whether the enterprises abuse its dominance by resorting to predatory pricing.
Conclusion
The current judgment puts more onus on the new entrant in the market as they have to be careful in pricing of their product & service as even if they are new in the market and are not dominant per se but if their goods & services are available below the average variable cost for the considerable period of time then they can be deemed as a dominant in the market and hence, could also be the proof of abuse of dominance. Now it will also be more challenging for the adjudicating body to check whether the policy of enterprise violates section 4 of the Act or is safeguarded by the explanation as provided under section 4(2) which says that unfair and discriminatory condition in purchase or sale of goods and services as provided under clause (a) (i) (ii) shall not include such discriminatory condition or prices which may be adopted by the enterprise to meet the competition as it allows the new entrant to resort to such pricing for their product and services which is required to penetrate in the market, make space and meet the existing competition, otherwise as it will be very difficult for new entrant to enter into a market without violating section 4 of the Act.
This article is authored by Mr. Abhinav Singh, a student of Marwadi University.
[1] Sec. 4(2) (a) (ii) price in purchase and sale (including predatory pricing) of goods and services.
[2] Competition Act, 2002, Preamble, No. 12, Acts of Parliament, 2002 (India).
[3] Bharti Airtel Ltd. v. Reliance Industries Ltd, 2017 SCC OnLine CCI 25.
[4] Competition Act, 2002, s 4(a), No. 12, Acts of Parliament, 2002 (India).
[5] Competition Act, 2002, s 4, No. 12, Acts of Parliament, 2002 (India).
[6] Determination of Cost of Production Regulations, The Competition Commission of India, 2009.
[7] Determination of Cost of Production Regulations, 2009, s 2(c)(i), No. 6, Acts of Parliament, 2009 (India).
[8] Determination of Cost of Production Regulations, 2009, s 2(c)(ii), No. 6, Acts of Parliament, 2009 (India).
[9] 2nd S M DUGAR, Guide to Competition Law (LexisNexis 2016).
[10] Id.
[11] H.L.S. Asia Limited, New Delhi v. Schlumberger Asia Services Ltd. Gurgaon and Oil & Natural Gas Corp. Limited, New Delhi Case No. 80/2012, 2013.
[12] Supra note 2.
[13] Belaire Owner Association’s v. DLF Ltd, Case no 19 of 2005, decided on 2011.
[14] Uber India Pvt Ltd v. CCI & Ors Civil Appeal No. 7012 of 2019.
[15] Id.
[16] Supra note 12.
[17] Supra note 2.
[18] Id.
[19] Supra note 11.
[20] Supra note 2.
[21] Supra note 2.
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