ANALYZING THE CONCEPT OF  PREDATORY PRICING: A PREDATOR OF COMPETITION

INTRODUCTION

Anti-Trust Laws throughout the world and especially India promote Competition in the Market by prohibiting Anticompetitive Conduct which eliminates healthy competition among competitors. Abuse of Dominance by an enterprise (Defined u/s 2(h) of the Competition Act of India)  is one of the Anti-competitive activities prohibited by the Competition act of India,2002. Under the Indian regime, Dominance is not considered bad per se but its abuse is. Abuse is stated to occur when an enterprise or a group of enterprises uses its dominant position in the relevant market in an exclusionary or exploitative manner. Prominent Competition regimes around the world like the U.S, EU, and India prohibit Abuse of Dominance by an enterprise having a stronghold/dominance in the market to drive out all the competition. Competition Act of India, under section 4 per se prohibits Abuse of dominant position by an enterprise. Dominance can be abused in various ways like Denial of market access by an enterprise, limiting or restricting the production of goods, and denial of technical or scientific development. Predatory pricing is also one of the tools of an enterprise to abuse its dominance in the market to sway out the competition by incurring short-term losses and establishing a monopolistic market having an Appreciable Adverse Effect on the Competition(AAEC).

PREDATORY PRICING

The term “Predatory Pricing” is defined under Explanation (b) to section 4 of the Act as:

“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.

To simply put it, Predatory Pricing is a practice in which a dominant enterprise sells its products below the cost of production, thereby, intentionally bearing short-term losses. The purpose of predatory pricing is to reduce the competition or eliminate the competitors and monopolize the market by:

  • Restraining the new entrants in the market, or
  • Driving the existing competitors out of the market.

Even though predatory pricing leads to short-term losses to an enterprise but later on as the market is monopolized and competition is over, the Firm/Enterprise can increase the prices of the products as per its wish and cover its losses.

PREDATORY PRICING: UNDER FOREIGN ANTI-TRUST LAWS

The approach towards Predatory Pricing varies from country to country as far as the application of “rule of per se” is concerned, which means the conduct is presumed to be anti-competitive and prejudicial to the law. Under Domestic Law, the conduct of predatory pricing is considered per se illegal and anti-competitive. That is, if an Enterprise abuses its dominant position in the market and indulges in predatory pricing, the act will be considered anti-competitive no matter if the activity has adversely impacted the competition or not. By contrast, The United States Anti-trust law has refrained itself from adopting the per se rule concerning predatory pricing. Even though the US supreme court in Cargill Inc v Monfort of Colorado Inc 479 US 104 (1986) has condemned the practices of predatory pricing as it adversely affects both competition and competitors. However, owing to ambiguities and nonconsensus in respect to the measurement of predatory pricing it is still a point of discussion. Similarly, the European Commission, aligning itself with the American viewpoint, has also declined the application of per se rule to the practice of predatory pricing, though according to it, charging below cost price for a commodity shows predatory or anti-competitive intent.

DETERMINANT FACTORS TO CHECK PREDATORY PRICING:

Prominent elements for determining  Predatory behaviour are:

  • Dominant position – First and foremost, it needs to be determined whether the enterprise alleged to have practised predatory pricing is at a Dominant position in the relevant market or not. Because under section 4(1) of the Act it is mentioned that “No enterprise or group shall abuse its dominant position.” Therefore, if the enterprise is not a dominant one in the relevant market, then the alleged conduct cannot be said as an abuse of dominance, Hence, not having an Appreciable Adverse Effect on Competition. Dominance under the Act is defined as a position of stronghold enjoyed by an Enterprise in a Relevant Market in India, which enables it to:
  • operate independently of the competitive forces prevailing in the relevant market; or
  • affect its competitors or consumers or the relevant market in its favour.

Section 19(4) of the Act provides for certain factors by which CCI inquires the Dominance of an Enterprise in the relevant market. (Determinants of relevant markets are given in section 19(5), 19(6) & 19(7) of the Act)

  • Below Cost Pricing – The fundamental characteristic of predatory pricing is, charging for a commodity below its cost price. Even though what exactly is cost price and its calculation method is not defined under the Act and the approach of CCI determining Cost varies from case to case basis such as use Average Cost method, the relative price of other competitors in the relevant market.
  • The intent of Predation – Another important determinant is the Predatory Intent of an Enterprise. This means, the intention to reduce the competition or to sway competitors out of the market. As in Multi Commodity Exchange & Ors National Stock Exchange of India, CCI Case No. 13/2009 the CCI said that the establishment of predatory pricing is dependent upon the predatory intent behind such pricing. This Intent factor also becomes important because some smaller enterprises, to attract costumers, charges below the Cost price to survive the competition (Explanation (2) U/S 4 of the Act) without the intent to cause AAEC.
  • Financial Stability and Economic evidence  As stated above, the reasoning behind predatory pricing is the recoupment of short terms losses by long-term profits after monopolizing the market. Therefore, the dominant position of an enterprise shows its ability to survive & recoup its short-term losses by long-term gains.
ITS ADVERSE EFFECTS ON THE COMPETITION

Predatory Pricing adversely affects not only the Competitors but also the consumers. The damages caused by it are two-phased, In the first phase, the predator by way of predatory pricing drives out all the competition from the market, and in the second phase after monopolizing the market, increases the price of the commodity to earn unfair profits. Even though the first phase is beneficial to the consumers in the short run as they get low price deals but eventually in the second phase after the market is monopolized, the consumer bears the brunt of high pricing.

ISSUE OF NON-PRICE PREDATION

Another evolving approach of predatory Enterprises is the concept of Non-Price predation. This refers to the conduct of forcing or inducing the rival competitors to Increase the cost of their commodity, unlike predatory pricing where the predator enterprise decreases the prices for its commodities to eliminate competition.

Non-Price Predation can be done by:

  • Sham Litigation against the competitors, misuse of Government or other statutory authorities.
  • The undertaking of capital investment, research, and development, advertising or vertical integration, etc are likely to increase efficiency but it may lead to an increment in the cost of the rival enterprises.

CONCLUSION

The conduct of predatory pricing and now its evolved version of Non-Price predation brings up a great challenge to Competition regulators around the world and specifically greater to India (CCI) because of the lack of jurisprudential development around the concept and complexities in tackling the conduct due to evolving approaches(For Example, ‘Non-Price Predation’) to predatory pricing. Looking forward, to reduce ambiguities and bring some parity in the determination of Predatory Pricing, the CCI should rely on the set method of Intent, Cost & Economics to differentiate between illegitimate or legitimate competitive conduct by an enterprise.

Author(s) Name: Dhruv Pratap Bishnoi (Himachal Pradesh National Law University, Shimla)

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