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Predatory Pricing

In common parlance, Predatory pricing may be defined as pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run. It is a practice that harms both competitors and competition. Normally price cutting is aimed simply at increasing market share, predatory pricing has as its aim the elimination of competition and creating monopoly.

· Concept and determining Predatory Pricing
The concept of predatory pricing is difficult to define in precise economic terms. In simple terms it is sacrificing of present revenues for the purpose of driving competitors from the market with the intent of recouping lost revenues through monopoly profits thereafter.

Determining Predatory pricing
In order to prevail as a matter of law, a plaintiff must at least show that either (1) a competitor is charging a price below his average variable cost in the competitive market or (2) the competitor is charging a price below its short-run, profit-maximizing price and barriers to entry are great enough to enable the discriminator to reap the benefits of predation before new entry is possible. 1

It was further clarified that, the standard of profit maximization price should be applied only when the barriers to entry are extremely high i.e. if the barriers for an entry in a specified are lower the firm set the price closer to the marginal cost. For instance, Entry barriers for setting food outlet are very low, hence the prices charged for edible food at these food outlet is nearly close to the marginal cost.

Case No. 1
· Fast Track Call Cab Pvt. Ltd. and Ors. (Informant). vs. ANI Technologies Pvt. Ltd. (Respondent) dated July 19,2017

Facts of the case
The aforesaid case adjudged by Competition Commission of India (“Commission”) dated July 19, 2017. The Informant alleged that the Respondent has abused the dominant position and offered the relevant market by offering heavy discounts to the passengers and incentives to the cab drivers associated with them which amounts to predatory pricing. The Commission directed the Director General (“DG”) to conduct detailed investigation into the matter.

Observation and Findings
The issue before the DG under this case were:- (i) whether, Respondent held a dominant position in the relevant market or not; and (ii) if it held a dominant position, whether its conduct would amount to abusive practice (predatory pricing) within the meaning of Section 4(2)(a)(ii) of the Indian Competition Act(“Act”).

The DG has opined that for a player to have a dominant position in the relevant market, it should be able to hold its market share for a reasonable period of time whereas the market share of the Respondent declined due to entry of another participant i.e. Uber.

The DG noted that in the absence of dominance of an entity, the question of abuse would not arise. However, the DG analyzed the pricing strategy of Respondent vis-à-vis its competitors and rather found Uber to be a more aggressive player, in terms of below-cost pricing, in the relevant market than the Respondent. Thus, DG opined that both Respondent and Uber have adopted 'below-cost pricing strategy'. However, since the scheme of the Act only attracts the provisions of Section 4 when an incumbent is found to be dominant, the DG stated that OP can be said to have indulged in abuse by way of predatory pricing, only if it is found to be dominant in the relevant market. Since OP was not found to be dominant, the DG concluded that Respondent did not contravene the provisions of Section 4 of the Act.

The Informant contended placing reliance on General Court’s decision in Astra Zeneca v. Commission (Case T-321/05) and British Airways plc v. Commission (Case T-219/99) case, wherein it was noted that decline in the market share cannot be taken as an evidence that the entity is not dominant. The Informant further contented that dominant position cannot be judged based on the fact that enterprises ability to increase price but also on the ability of the enterprise to suppress it for a longer period of time which adversely affects the competition. In the alternative, the Informants have stated that it is not necessary that only one entity can be dominant in a particular relevant market. There is a possibility of two entities exercising dominance at the same time.

Comment
· A new entrant armed with new idea, superior technology or a superior product or technological solution that challenges the status quo in a market and shifts a large consumer base in its favour would cannot always be as held dominant.

· If we analyze the provision of the Act i.e. Section 4 it is restricted to the dominant position held by only one enterprise or one group. In the present case presence of more than one dominant entity (i.e. OLA and UBER) none of those entities would be able to act independent of one another.

Case No. 2
· Deutsche Post AG (Case COMP/35.141) Commission Decision of March 20, 2001

Facts of the case
Deutsche Post AG (“DPAG”) activity was delivery of letter post. DPAG has a statutory exclusive right to the "speciifed area", that is to say the conveyance of letters. The revenue generated by DPAG is substantial and amounted to significantly to its total turnover.

United Parcel Service (“UPS”) alleged that DPAG was using revenue from its profitable letter-post monopoly to finance a strategy of below-cost selling in parcel services, which are open to competition. Without the cross-subsidies from the specified area, DPAG would not have been able to finance below-cost selling there for any length of time. UPS therefore called for a prohibition of sales below cost and the structural separation of the reserved area and the parcel services open to competition.

Observation and Findings
The Commission observed the DPAG revenue for the specified period and observed that the cost charged by DPAG was below the incremental costs of providing this specific service. This would mean that every sale of parcel services business represented a loss which comprises all the capacity-maintenance costs and at least part of the additional costs of providing the service.

Every sale not only would entail the loss of at least part of additional costs, but made no contribution towards covering the carrier's capacity-maintenance costs i.e. variable cost. In the medium term, such a pricing policy is not in the DPAG's own economic interest. DPAG could increase its overall result by either raising prices to cover the additional costs of providing the service.

Additionally it was observed that DPAG adopted a strategy of fidelity rebates which had the same effect as the exclusive purchase obligations. The strategy in relation to fidelity rebates deterred mail-order traders from setting up alternative delivery structures as that might conflict with their duty of fidelity and thus jeopardise the special price. This prevented the development of potential competition from alternative infrastructures.

Comment
· An interesting concept in relation to Cross Subsidization is highlighted herein. In common parlance cross subsidization would occur when revenue from a specific service does not match with the cost involved in providing such specific service and the service for which revenue exceeds stand-alone cost is the source of the cross subsidy for the specific service in which revenue does not cover the costs. This concept was also discussed is an order issued by CCI in June 2011 2 wherein it was opined that :-

“Cross subsidisation itself has no connection to leveraging by dominance in one relevant market, as it is basically a fiscal or financial transfer from any source.”

· Loyalty Rebates may lead to benefit for consumers. Such loyalty rebates would be anti competitive only if they prevent large share of the relevant market such that they exclude rivals or act as a substantial restrictions to entry and/or expansion.

Conclusion
Predatory Pricing is a complex form of an anti-competitive conduct. The prevailing market conditions play a vital role in determining predatory pricing i.e. entry conditions in the market, abuse of dominance, monopolization conduct etc.. Predatory pricing shall not be only strategy adopted by firms to gain market dominance. Firms may also enter into strategy of non price predatory pricing i.e. raising the cost of competitors or acting in collaboration with competitors in price cutting strategy.

End-notes
1 - International Air Industries, Inc. v. American Excelsior Co. 517 F.2d 714, 724 (5th Cir. 1975)
2 - MCX Stock Exchange Ltd. Vs National Stock Exchange of India Ltd. & Dot Ex International Ltd.

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