In this article, we will examine the influence of predatory pricing on both the customer and the corporate organisation.
Introduction
Competition law is made up of provisions that safeguard healthy and legally upright competition in order to increase consumer protection as well as new start-ups and businesses.
In recent years, competition law has evolved at a breakneck rate in response to massive shifts in political thoughts and commercial activities throughout the world. Competition law is concerned with the use of legal rules and regulations to correct market flaws and to preserve, stimulate, and frequently restore fair market conditions. In other words, it is the legislation to safeguard competition. Narrowing down competition through various means has always been a consumer-centric business strategy that leverages participants’ potential in a fair but healthy economic context.
Everyone has seen several items or services with significant discounts given by a large number of companies. It’s incredible how these items and services are being given at such low prices.
Predatory pricing is a technique in which a large firm with vast funds sells its goods or services at such low prices that its competing firms, specifically the ones established recently, can’t even compete with them.
Predatory pricing is a pricing strategy where a company sets very low prices for its products or services in order to drive competitors out of business or prevent new competitors from entering the market. The goal of predatory pricing is to achieve a dominant position in the market and increase profits in the long run. It is a strategy to prevent new competitors from sustaining in the market.
Online shopping festivals such as “The Amazon Great Indian Sale” and “Flipkart Big Billion Days” sell items at steep discounts and have long been a source of controversy, with severe antitrust and FDI policy breaches levelled against leading E-Commerce firms.
CAIT has long accused Flipkart and Amazon of engaging in deceptive and unfair trading practises, such as incurring losses and selling items at unfair or predatory prices in order to eliminate market competition.
What Is Predatory Pricing?
Predatory pricing is a short-term agreement in which the price of a commodity is held back to reduce production costs and increase profits in the long run. It’s a strategy for gaining market dominance. Because the goal is to stifle competition, the price to meet and beat the competition is different.
This approach tries to eliminate a market competitor or limit the entry of a new competitor. The primary goal of predatory pricing is to capture and influence market in own favour by eliminating competition. It occurs when a market leader provides a product at a lower price than the usual price in order to drive away competitors and reap more benefits from the reduced competition.
Although the predator may recover in the long run, he will have to give up some of his earnings in the short term because the possibilities of recoupment are uncertain. This method entails a high level of risk and is only feasible for the most powerful market participants. Because of this, this arrangement is frequently regarded as a kind of “dominance abuse.”
The predator has the ability to calculate the cost without considering the set price, resulting in an incorrect allocation of efficiency. There are also occasions where dominant market actors abuse their power and erect barriers to entry for newcomers. Alternatively, they try to frighten them away from the market.
How Predatory Prices Are Established
Predatory prices are established by the following factors.
1. Dominance
Because the predator must incur losses while selling the product at a lower price than the market norm, predatory pricing can only be used by market players with large cash reserves. This dominant position may be investigated in relation to the regional market and the relevant product, as well as the product’s demand and substitutability. The dominating player’s market strength is defined by his other market positions.
2. Entry as Well as Re-entry Roadblocks
To carry out a successful predatory pricing exercise, some sort of roadblock must be placed at the point of entry into the market, or potential competitors will immediately try to re-enter the market once the dominant player has increased product prices to recoup losses and then dragged the prices to a competitive level. The barrier to entry persists because the new company will be required to pay minimal expenses, such as fixed-cost investments, which the dominant firm now controlling the market will no longer be required to make.
3. Excess Capacity
The dominating company in the market must be able to attract all of the demand produced by artificially lowering prices, and the predator must also be able to attract competitors’ clients. If the predator fails to do so, demand will outstrip the predator’s output, allowing competitors to re-enter and survive the market.
4. Predation Without Regard to Price
It comprises product differentiation and innovation, with the goal of raising rivals’ costs. When competitors’ costs rise, the dominating company takes advantage of the circumstance and profits, even if the competition remains in the market.
What Does Not Constitute Predatory Pricing?
Price wars should not be confused with predatory pricing. A corporation that cuts expenses below its competitors, for example, might provide lower-cost items.
Walmart, Southwest Airlines, and D-Mart can continually sell at low costs because they have achieved cost leadership. If rivals match these prices, they will lose money and exit the market—but this is not predatory. Smaller or new enterprises giving temporary, substantial discounts are not deemed predatory because they are unlikely to push larger companies out of the market. It is frequently stated that predation can only be a sensible strategy for a dominating corporation with a large market share.
However, easy market power is insufficient. Predatory sales must make up a sizable portion of retail sales. Otherwise, loss-making rates will result in market-wide losses, rendering the scheme unworkable. Furthermore, eliminating one of the numerous competitors results in insufficient profits. That change of events, as well as each incumbent’s earlier investment in loss-making rates, would benefit them both. In summary, predatory pricing is a hot topic of discussion. It is possible, but only in particular situations, according to conventional thinking.
Impact on Consumers
A high-level committee known as the Raghavan Committee was formed to write a report on the issue of dominance abuse. One of these difficulties was predatory pricing, and the impact on customers was explored.
The impacts on consumers were explored, particularly regarding predatory pricing, by a high-level committee known as the Raghavan Committee, which was formed to address the issue of dominance abuse. The committee’s findings echoed those of the Supreme Court of India in the case “Haridas Exports vs All India Float Glass Mfrs. Association and Ors (AIR 2002 SC 2728),” where the court ruled that offering a product below its average cost is not inherently prohibited, as long as it does not impede ongoing market competition.
The court decided in this case that if a product is given for less than its average cost, it does not have to be forbidden all the time. The judgement was backed by the requirement that the price drop not obstruct continued market competition.
This is done in order to protect customers’ interests. In the committee’s findings, it was said that price reductions should be limited only when they are used to stifle competition and eliminate other rivals. It should not, however, impose restrictions on enterprises with a larger market share due to their superior efficiency and lower pricing. As a result, it’s important to distinguish between a purposeful endeavour to harm competition and diminution due to the dominant market player’s superior degree of efficiency.
In the first scenario, the consumer’s interests are impeded, and they suffer negative consequences. When a predator lowers the price of a product to stifle competition and eliminate competitors, the dominant firm will raise prices to compensate for the losses sustained during the period of decrease and to increase profits
Remedies in Court for Predatory Prices
The Competition Act of 2002, which replaced the Monopolies and Restrictive Trade Practices Act of 1969, aims to protect the welfare of customers by ensuring healthy competition in the market among businesses. After recognising the dangers and difficulties posed by predatory pricing, which is primarily an abuse of the dominant position in the market, which is illegal in and of itself, the Indian Competition Act, 2002, has been modelled after the English Competition Act, 1998, and the Clayton Anti-Trust Act, 1914.
In India, predatory pricing is considered an anti-competitive practice under the Competition Act, 2002. The act prohibits any conduct that has an appreciable adverse effect on competition (AAEC) within the relevant market. Here are some legal remedies for predatory pricing under the Indian Competition Act, 2002:
Section 4: Abuse of Dominance: Section 4 of the Competition Act, 2002 deals with abuse of dominant position, which includes predatory pricing. The provision prohibits dominant firms from abusing their position by imposing unfair or discriminatory prices, terms or conditions on their customers, which leads to a substantial lessening of competition in the relevant market.
Section 19: Inquiry into the anti-competitive agreements: Section 19 of the act empowers the Competition Commission of India (CCI) to inquire into anti-competitive agreements, including agreements on predatory pricing, which have AAEC within the relevant market.
Section 3: Anti-competitive agreements: Section 3 of the act deals with anti-competitive agreements, which include agreements on predatory pricing. It prohibits agreements between enterprises that have an AAEC in the relevant market and are likely to cause an appreciable adverse effect on competition.
Section 27: Penalty for abuse of dominant position: Section 27 of the act empowers the CCI to impose penalties on firms that abuse their dominant position, including through predatory pricing. The penalty can be up to 10% of the average turnover of the enterprise for the preceding three financial years.
It’s important to note that the CCI has the power to investigate and take action against any conduct that has an AAEC within the relevant market, including predatory pricing. The CCI may also issue orders to stop abusive conduct, impose penalties, or require the dominant firm to modify its behaviour to ensure fair competition in the market.
Related Law Note: What Are Vertical Agreements Under Indian Competition Act?
Jio Case
The Indian telecom industry has been in upheaval for the past three years, thanks to a new entry in the market known as “Jio,” a product of the Reliance Group of Industries conglomerate. The services under the offer, which were previously solely available to employees (i.e. Unlimited Calling for Life and Unlimited Data Benefit), were made available to the general public, resulting in a flood of people wanting to take advantage of the suggested perks. Not only did the change bring in a slew of new customers, but it also generated a spirit of heated competition among competitors, as predicted.
This resulted in a multifold drop in the pricing of all other prominent service providers’ services, portraying the increase in competition as an act of deliberate sabotage. Though the claims cannot be dismissed as baseless, the consumer-centric market has welcomed the newcomer and competition with open arms, making it even more difficult for others to establish a competitive foundation. Despite the Reliance Group of Industries’ repeated claims of “Predatory Pricing” and its position as a dominating player in the industry, the conglomerate has had a significant impact on the Indian telecom sector and its main participants.
Conclusion
The provision for the protection of consumers and rivals from the negative effects of predatory pricing has been systematically designed under the competition law. The Indian Competition Act and its authorities appear to have taken the age-old adage of “live in the moment” far too seriously.
To evolve towards a really fair and free market, a sense of requirement for a wise rule against predatory pricing is felt. The drafting committee did a good job of prohibiting predatory pricing, but it failed to provide the much-needed complete description of predatory pricing.
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