Predatory Pricing has perplexed both the courts and the businesses. Whilst, the law and economic theories argue against predatory pricing, however, price reductions are the very trait of competition and are the most pleasing to the consumer. Predatory pricing although deemed illegal under the Indian Competition Act, much confusion regarding its criteria still exists. The author attempts to understand the concept of "penetrative pricing". In India, there is no legislation concerning "penetrative pricing" however the concept has been featured in multiple cases. The landmark case in this regard is the Bharati Airtel V Reliance Jio. The blog analyses the case and addresses the dilemma of whether the pricing strategy was predatory or penetrative. The author suggests the need for specific legislation addressing penetrative pricing. The blog concludes by emphasizing the evolutionary nature of competition law by emphasizing its continuing jurisprudence.
I. INTRODUCTION
Predatory Pricing is defined as "the sale of goods and services at a price which is below the cost of production of the goods or provision of services". In simpler words, predatory pricing refers to reducing the cost of a particular good or service unrealistically low that it ultimately achieves a dominant position in the market by creating a monopoly.
In the short run, the consumer may benefit from the discounts and free schemes but once the monopoly of the predator is established in the market all the other competition is eliminated. However, the consumer might suffer later if the predator company raises its price in the future (to regain its initial loss) and the consumer then will have no other alternative. Thus, the consumer herein is presented with a Hobson's Choice.
The main goal is to eliminate competition and create a monopoly, hence it can be said to violate the antitrust laws. Indian anti-trust laws which fall under the ambit of the Competition Act 2002, prohibit any agreement between companies, individuals, or association that could harm competition. In this case, the term "agreement" has a very broad interpretation. It must also be remarked, that with a reduction in competition in the market, the company has no checks and balances.
II. ESSENTIALS OF PREDATORY PRICING AND ITS CURRENT LEGAL CONNOTATIONS
The essentials of predatory pricing are the "dominant status of the enterprise in the market" limiting or restricting competition through setting prices below the cost, and there must be an intent to eliminate the competition. In the case of a price below the cost, the Competition Commission of India ("CCI") has specified the cost taken into consideration would be the average variable cost. This concept is said to be based on the Ardeen-Turner test.
However, the CCI in the case of Transparent Energy Systems vs. TECPRO Systems Ltd. (2013), much more clearly laid down the three conditions required:
1. The prices of the goods or services of the dominant firm are below the cost of production of such goods or acquisition of such service.
2. The reduction of prices intended to eliminate competition.
3. The enterprise intends to increase the price gain to recover its loss after driving out competitors.
III. PREDATORY OR PENETRATIVE?- A PERPLEXING DISTINCTION
A point of confusion that may arise is that if new entrants choose to set prices at a lower rate to gain entry into the market, will it also be considered predatory? Certainly, it wouldn't fall under the ambit of predatory pricing. Similar to predatory pricing, penetrative pricing also involves lowering the cost of commodities to gain market advantage however unlike predatory pricing, the company doesn't function at a loss and also doesn't intend to drive away the competition. Penetrative pricing typically is used by novice companies. A company that is in its initial stages may choose to keep its prices low temporarily to establish itself in the market. This is called penetrative pricing, if penetrative pricing is amplified, it can become predatory pricing which is illegal and unethical.
A landmark case where "penetrative pricing" was featured is the Bharati Airtel V Reliance Industries and Reliance Jio, popularly known as the Jio case brought to the CCI.
In this particular case, Bharati Airtel alleged Reliance Jio of predatory pricing. Its primary point of contention was the free services being offered by Jio since the launch of its business (i.e., from 5th September 2016) is a violation of section 4 (2) (a) (ii) of the Competition Act which speaks of abuse of dominant position. Airtel claimed that Reliance used its financial strengths in other markets to enter into telecom markets through Jio.
Airtel further stated that Reliance has deployed the largest amount of spectrum of 4G LTE services in India. It also stated that as of 31 December 2016, Jio had a subscriber base of 72.4 million surpassing all other telecom brands. Hence, establishing its dominant position.
Airtel further contended on the point of the "JIO Welcome offer" under which data, voice, and video calls were made free to subscribers till December 2016. Further, Jio through its "Happy New Year offer" gave its subscribers unlimited calling, texting, and data. Airtel claims such conduct to be predatory pricing hence violative of the Competition Act.
Jio contended that it was a new entrant in the telecom market facing competition from multiple players such as Vodafone, Airtel, and Idea. Considering their size and subscriber base, Jio cannot be attributed to their position of dominance in the telecom market.
CCI after carefully analysing the facts and allegations from both sides, concluded that Jio cannot be charged under predatory pricing. Their existed multiple players in the telecom market allowing consumers to shift from one choice to the other. Hence, it is difficult to place Jio as the "dominant" market player. The commission further emphasized in order to be booked under predatory pricing there must be an abuse of "dominant position". In the case of Jio, Airtel failed to establish Jio's dominant position. Moreover, there has been no proof of reduction of competition or elimination of it or an intent to do so has been established. The commission also noted the act of free-service per se isn't predatory unless it's offered by a dominant enterprise which is not in the case of Jio. The commission highlighted, that there exist several other market players in the telecom industry, allowing the consumer to shift between choices. Short-term business strategies such as the "Jio Welcome Offer" do not come under the ambit of predatory pricing, if they are a new entrant and using such incentives to attract customers, penetrate the market, and establish their identity.
Hence, it is observed, in the case of Bharati Airtel vs. Reliance Industries, more popularly known as the Jio case the concept of penetrative pricing was not only applied but the pricing strategy was also appreciated.
Furthermore, in this particular case the criteria for practicing predatory pricing weren't fulfilled. We observe when Jio began with its low-pricing strategy, it didn't hold a dominant position in the Market. However, concerning the price test (of predatory pricing), Jio's Zero Pricing Strategy is debatable. Additionally, it being a novice company, the intention of unrealistically low prices seems to be to establish its identity instead of a Monopoly. Moreover, after penetrating the market, Jio continued to charge minimal pricing, hence the allegation of recoupment which is essential to establish a case of predatory pricing was deflated. Hence, its lack of dominance in the market and no intention of recoupment made the case of Jio non-predatory.
What makes the case of Jio Sui Generis (or peculiar) is its initial "zero pricing strategy". This was also observed in the NSE case however it was seen as monopolistic due to its dominant position in the market and hence was termed as a violation of the Competition Act. But, in the case of Jio, it was accepted as it was a new entrant. The zero-pricing strategy allowed consumers to test and compare the service ousting the allegation of it being anti-competitive.
The CCI, however, did mention certain criteria about the 'Jio Case' "It emphasized that the very act of providing free services isn't predatory unless it is offered by a dominant enterprise to eliminate competition". In the case of Jio, the telecom market already had big competitive players. Hence, it was common and essential for Jio to incentivize its products to gain entry into the markets. This short-term pricing strategy cannot be termed as anti-competitive.
Additionally, Jio came to notice quickly due to its pricing and later owing to its quality was accepted by the consumer. Because of its low pricing, the reach of the internet was widened exponentially contributing to the 'Digital India' movement and bridging the digital gap between the poor and the rich. In essence, it benefits the Indian Consumer and contributes to the development of the Indian Economy.
It is imperative to note that Section 4 (b) (ii), prohibits any restriction or limitation on the promotion of technical or scientific goods and services; Section 19 of the Competition Act deals with conditions regarding the 'dominant positions' of enterprise, in its clause (3) (f) echoes the same thing that there must be no limitation on the promotion of technical, scientific development. Thus, restricting Jio's services and alleging it to cause an "Appreciable Adverse Effect on competition" would also be violative of the Indian Competition Act, 2002 as it was due to the Fiber optic networks and 4G towers built by Reliance (which are scientific developments) contributed to its success and the digital revolution. The nationwide Fiber optic networks allowed Jio to cut the charges of Fiber networks of other companies and also helped Jio with Bandwidth. Its decision to offer only 4G was an additional factor that helped lower its operational cost. These technological advancements paired with investments aided Jio to provide services at lower prices. Prohibiting Jio's services would mean denying the customers the benefit of the latest technological development which itself is a violation of the Indian Competition Act.
IV. CCI'S DICEY INTERPRETATION OF THE TERM "DOMINANT POSITION"
However, the interpretation of the CCI of the term "dominant position" is certainly questionable. Post JIO's "zero policy scheme", now when other telecom enterprises are operating at a loss, JIO is increasing prices gradually to recoup its initial loss. The very fact that RJIL is the only profit-making telecom enterprise with the highest market share of 37 % proves that initial loss has been gained back eventually.
Further, in the case of other markets such as e-commerce, wherein there are multiple existing platforms such as Amazon, Flipkart, Nykaa, and Myntra, the establishment of a dominant position can be challenging. Hence, an enterprise may practice predatory pricing but cannot be fined for doing so due to its non-dominant position. This creates a peculiar situation. It may have an adverse effect on small, local retailers.
V. CONCLUSION:
The Indian Competition Act certainly has ambiguity with regard to predatory pricing. The criterion to prove the "dominant position" of an enterprise certainly is a hurdle in cases of predatory pricing. Certain factors must be added to ensure the criteria of "dominant position" don't act as a loophole for enterprises to escape the consequences of predatory pricing. There also have been countless questions on the distinction between penetrative pricing and predatory pricing, hence, the need for proper legislation concerning "penetrative pricing" is equally required. There also exists very little jurisprudence on the same. Competition Law in India is still developing and so is the jurisprudence related to competition law.
References:
2. Bharati Airtel v/s Reliance Jio (2017)
3. MCX Stock Exchange Ltd. v. National Stock Exchange of India Ltd. (2011)
4. Transparent Energy Systems v/s TECPRO Systems Limited
(2013)5. Competition Act, 2000
6. Predatory Pricing or Predatory Behaviour",
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