Predatory pricing is the practice of paying less than the cost of production temporarily in order to hamper competition and make exorbitant profits in the long run. Predatory pricing must be distinguished from a pro-consumer pricing strategy. There is a difference between pro-consumer pricing and predatory pricing. Pro-consumer pricing is about meeting and beating the competition, whereas predatory pricing is about thwarting the competition.
In a predatory pricing scheme, the primary goal is to capture and control the market. The primary goal of a predatory pricing scheme is to eliminate a competitor or restrict a potential new entrant, or to reduce the cost of acquisition. When a company lowers its price, it is trying to drive out or punish a competitor and make more money from reduced competition. Although there is scope to recover in the long run, the predator must sacrifice a lot at first.
Furthermore, the returns of such an arrangement are uncertain. In practice, predatory pricing is highly risky and only feasible for dominant players.
As a result, most jurisdictions including India view it as an abuse of dominance.
Under Section 4, the Competition Act, 2002 prohibits predatory pricing as an abuse of dominance. Under the Act, predatory pricing means to sell goods or provide services at a price below their prescribed cost, as determined by regulation, to produce goods or provide services, in order to reduce competition or eliminate competitors. Predatory pricing involves setting the price of one's goods below the cost of production, so that other players in the market, who are not dominant, cannot compete with the price of the dominant player and will/must leave the market.
Statutory definition of ‘Predatory Pricing’
‘Predatory Pricing’ means the sale of a goods or provision of a service, at a price below the specified determinable cost, of the production of the good or provision of a service, in order to reduce competition or eliminate competitors.
- As per Section 4(2)(a) of the Act, an abuse of a dominant position occurs when an organization directly or indirectly imposes unfair or discriminatory conditions on the purchase/sale of goods or services; or unfair or discriminatory pricing in the purchase or sale (including exorbitant pricing) of goods or services.
Legality of Predatory Pricing
In many countries, including India, predatory pricing is prohibited by anti-trust laws/ Competition Act. These anti-trust laws are designed to protect consumers from predatory trade practices and ensure fair competition. But it is quite difficult to prove that predatory pricing has taken place. Businesses will never admit that they reduced prices to kill competition and will claim that the measures they took were to be competitive.
Constituents of predatory pricing
The
Competition Commission of India in the case of
MCX Stock Exchange Ltd. & Others vs National Stock Exchange of India held that:
‘To achieve the recoupment requirement of a predatory pricing claim, a claimant must meet a two-prong test: first, a claimant must demonstrate that the scheme could actually drive the competitor out of the market; second, there must be evidence that the surviving monopolist could then raise prices to consumers long enough to recoup his costs without drawing new entrants to the market.’Therefore, predatory pricing includes the following:
- Fix prices so low that competitors are excluded from the relevant market.
- There is a violation of antitrust law because predatory pricing prepares the basis for a monopoly by making the market vulnerable.
- The advantage of lower prices can only be used by consumers in the short term.
- In the long run, customers suffer when businesses try to raise prices, thereby removing competition from the market.
- When price increases, choice for customer decreases.
- The Competition Commission of India eliminates practices such as predatory pricing by treating them as abuse of a dominant position, which is prohibited by law.
Effects of Predatory Pricing
The short-term cost advantages provided to consumers by companies create competition between the competitors and the consumer benefits vis-à-vis lower prices and various options. However, if one company lowers its prices unconditionally, the competitors are forced out of the market and the company becomes a monopoly.
The company can raise its prices in the long run and the consumer will have no choice. The scavenger hunt carried out by the predatory companies is the primary long-term impact of predatory pricing on the market. The rest includes the reduction of competition within the market and hence no checks and balance on the company.
Concentrated markets also have entry barriers. Without entry barriers, predatory pricing is controlled by the threat or impact of frequent entry.
| De-concentrated Markets: Competitive and not compatible with any kind of anticompetitive practices. |
Every predatory pricing policy is aimed at absorbing rival sales. When the price is reduced, the demand for a predator’s product increases while the demand for a competitor’s product decreases. Without excess capacity, a predator wouldn’t be able to absorb its intended rival’s sales. Furthermore, if there’s no additional production, it doesn’t pressure the competitors and their survival.
Only firms with sufficient cash reserves can engage in predatory pricing. Firms with significant market shares, with relative efficacy and competitive costs, or with other advantages over competitors, or with independent relative markets would have easy access to funds from profits in other markets where they do well. In the first stage of the predatory scheme, when selling at low prices, it is obvious that the predator will suffer losses over a long period of time. Therefore, the predator’s cash reserves must be higher than the rivals, and the rival will not be able to withstand losses as well as the predator.
If the short-term losses are not recouped, predatory pricing becomes meaningless. There is a distinction between jurisdictions in terms of understanding and proving recoupment, and in most cases, recoupment does not involve the recovery of monetary losses suffered in the short-term, but rather the acquisition of market power, reputation, etc. Structural examination is a critical tool to identify the market that is likely to be vulnerable to recoupment.
Generally speaking, a dominant entity cannot really possess the mentioned attributes considering market dominance is a multi-faceted aspect. Besides, there is also a scope for a non-dominant entity to use predatory pricing considering it has a sound financial position.
| For instance, Jio Telecommunications had entered the market with predatory pricing. However, the CCI failed to recognize the predatory pricing of Jio at that point in time, as they were of the opinion that the telecommunication sector is not concentrated and, thus, Jio did not enjoy the dominant position, so there was no abuse of the dominance which didn’t exist in the first instance. However, if we see this from a long run perspective now, Jio made it difficult for other dominant market players to survive in the market and now holds a substantial market share after eradicating competitors by its earlier predatory pricing. |
Conclusion
On the issue of exorbitant pricing, the CCI has adjusted quite effectively. However, after a detailed analysis of India's competition law provisions, it can be understood that the main emphasis is on the ‘dominant position’ of the company alleged of predatory pricing. Only when the company is established in a ‘dominant position’ is abuse of this position suspected. But determining the dominance of a company is a complex and unwieldy process because there is no strict formula for determining it.
This creates the possibility of misidentification that will have a negative impact on the competitiveness of companies. CCI should focus more on abuse than on dominance as it is entirely possible that a company without a dominant position could eliminate competition in the market by engaging in exorbitant pricing, the same can be seen in the case of Jio telecommunication.
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