The importance of competition in a healthy economy cannot be defined. It stimulate the consumer-centric environment where businesses are constantly struggling to improve their offerings and keep prices competitive. This not only benefits consumers with greater choice and potentially lower prices, but also unleashes the full potential of participating companies. However, the natural course of business can sometimes lead to situations where power becomes concentrated in the hands of a few dominant players. This can stifle competition and ultimately harm consumers. Here’s where competition law steps in. Competition law is a dynamic field that has undergone significant evolution in recent years. This is in direct response to the dramatic shifts in global political and economic landscapes. It functions as a set of legal tools and regulations designed to address market imperfections. These tools aim to maintain, promote, and, in some cases, restore fair market conditions. In essence, competition law acts as a safeguard against the concentration of power, ensuring a level playing field for all businesses. Predatory pricing is a tactic used by dominant companies to squeeze out competitors. They achieve this by setting prices so low that smaller businesses cannot compete, ultimately creating a monopoly. While this practice is illegal under the Competition Act 2002, proving a company’s dominant position can be challenging. This often leaves room for companies to engage in what some call “penetrative pricing” – aggressive discounting strategies – without legal repercussions. Online shopping festivals are prime examples of such aggressive pricing tactics. Events like “The Great Indian Sale” and “Big Billion Day” offer massive discounts, but raise concerns about potential antitrust violations and breaches of FDI policy[1]. The difficulty lies in proving these claims against e-commerce giants. While some argue these discounts stifle competition, a preliminary review of the evidence might not always reveal a significant negative impact on the market. This paper delves deeper into predatory pricing as an abuse of dominance, specifically within the context of online shopping. We will explore how this practice affects competition and what steps can be taken to ensure a fair and balanced marketplace for both consumers and businesses.
KEYWORDS- Healthy Competition, Dynamic Field, Predatory Pricing, Penetrative Pricing.
INTRODUCTION
The world of e-commerce is awash with online shopping festivals boasting massive discounts. Events like “The Great Indian Sale” and “Big Billion Day” attract consumers with incredibly low prices, but these practices have also ignited a firestorm of controversy. Critics argue that these deep discounts might be a form of predatory pricing, designed to eliminate competition and ultimately harm consumers. While the analogy might seem straightforward – lower prices always seem like a good deal – the issue hinges on the long-term consequences. Consider the example of newspaper production costs. While the production of a 40-page newspaper might only cost Rs 18-25, the real business lies in advertising revenue. This “cross-subsidization” allows newspapers to offer a product at a seemingly unsustainable price point. However, the key question lies in the intent: are these companies aiming to gain a dominant market position that allows them to exploit consumers later? Will these deep discounts ultimately lead to a lack of competition, stifling innovation and ultimately leading to higher prices for everyone?
This is the crux of the accusations against e-commerce giants like Flipkart and Amazon. The Confederation of All India Traders (CAIT)[2] contends that these companies leverage their vast financial resources to incur short-term losses by offering products at “unfair or predatory rates.” The aim, according to CAIT, is to drive smaller competitors out of business, leaving the e-commerce giants with a monopoly. While consumers revel in these short-term bargains, the long-term picture is concerning. Once competition is eliminated, the fear is that these companies will manipulate prices to their advantage, leaving consumers with fewer choices and potentially higher costs. However, determining whether these practices constitute predatory pricing requires a nuanced analysis. Predatory pricing, in essence, is the deliberate act of setting prices below production cost with the intention of driving competitors out of the market. The key lies in the intent – is the goal to establish a dominant market position and ultimately raise prices, or is it simply a strategy to gain market share and drive sales volume?
The Competition Commission of India (CCI) is tasked with investigating these allegations and determining if they violate antitrust laws. Their investigation will likely focus on several key factors:
- The impact on smaller competitors: Are smaller businesses being forced out of the market due to the deep discounts?
- The long-term impact on consumer welfare: While consumers enjoy short-term benefits, will they ultimately face higher prices due to lack of competition?
Ultimately, the question surrounding predatory pricing in e-commerce boils down to weighing short-term gains for consumers against the potential for long-term harm. The role of regulatory bodies like the CCI is critical in ensuring fair competition and protecting consumers from manipulative practices. Only through a thorough investigation can we determine whether these online shopping festivals are truly a celebration of bargains, or a calculated strategy to pave the way for future price manipulation and stifled innovation.
What is Predatory pricing [Sec-4(b)]
“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.
Lower prices and greater consumer choice are the important objectives of competition. Consumers benefit from lower prices which are generally the result of a competitive and regulated market. However, harm could be caused to consumers and competition if a player in the market uses unrealistically low prices to drive out other players and fulfil the objective of facing lesser competition in the market. However, there arises a certain difficulty (i.e. in distinguishing highly competitive pricing from predatory pricing) that a firm/company, which cuts its prices or substantially reduces its profit margin, may not necessarily be engaging in the predatory pricing practice. It may simply be responding to new competition or a change in market demand; thus there is a real danger in misjudging such beneficial practices as predatory.
However, Predatory Price has been explained to mean that the sale of goods or provision of service at a price which is below the cost of production of the goods or provision of services. The purpose of such dictatorial pricing is to reduce competition or to eliminate competitors .The cost production for this purpose is to determined by the applications of prescribed regulations.
First, Price below average variable costs must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of opponents, since each item is produced and sold entails loss for the undertaking.
Secondly, prices below average total costs but above average variable costs are only to be considered as abusive if an intention to eliminate a competitors can be shown.
The Indian marketplace thrives on healthy competition. To ensure this, the Competition Act of 2002 lays down clear rules to prevent companies from abusing their dominance. One such rule tackles the issue of “predatory pricing.”
Predatory pricing refers to a strategy where a company, usually a large one with a strong market position, deliberately sets prices below its production cost. This tactic aims to drive smaller competitors out of business by offering deals that are simply too good to refuse. Once the competition is eliminated, the dominant player can then raise prices freely, harming consumers in the long run. The Competition Act specifically prohibits companies or associations from abusing their dominant position in this way. This includes enforcing unfair conditions on customers or setting unfair and discriminatory prices, which can encompass predatory pricing. The Act clearly defines predatory pricing as selling products or services below the cost of production, with the main goal of minimizing or eliminating competition. Furthermore, even though predatory pricing is meant to win market share, it often backfires on consumers in the long run. With the competition weakened or eliminated, the dominant player can then raise prices freely, leading to a situation where consumers are left with fewer options and higher costs. Despite its illegality and potential drawbacks, some argue that predatory pricing can be a surprisingly ineffective way to win the market. The initial losses incurred to drive out competitors can be substantial, and there’s no guarantee that consumers will remain loyal to the dominant player once prices rise.
However, there have been instances where predatory pricing has been used successfully. Dominant players may use this strategy to capture a market and then leverage their newfound position to raise prices and generate higher profits. This highlights the potential dangers of such practices and the importance of strong legal frameworks like the Competition Act to protect fair competition.
PREDATORY PRICING DOES NOT INCLUDE WHAT?
Competitive price wars shouldn’t be confused with predatory pricing. Imagine a company that cuts costs to offer lower prices than competitors – this could be a legitimate strategy for achieving cost leadership, like the approaches of Walmart, Southwest Airlines, or D-Mart. Even if competitors are forced to match their low prices and potentially exit the market, it wouldn’t be considered predatory. Similarly, temporary deep discounts offered by smaller or newer players wouldn’t raise red flags, as they likely wouldn’t have the muscle to drive established giants out.
The key point is that predatory pricing is generally seen as a strategy only achievable by very dominant companies with a significant market share. However, even dominance isn’t enough. Predatory sales would need to make up a substantial portion of the market’s total sales for it to be a viable plan. Otherwise, the losses incurred would drag down the entire market, making it an unsustainable tactic. Additionally, eliminating just one of several competitors wouldn’t yield significant enough gains. In fact, both the remaining players could potentially benefit from the reduced competition, making the whole predatory pricing exercise pointless considering the investment in unsustainable low prices.
In essence, the existence of predatory pricing is a topic of much debate. The prevailing view acknowledges its possibility, but only under very specific circumstances. A truly dominant player would need to engage in widespread, loss-leading practices to drive out competitors, and even then, the long-term benefits are questionable. This complexity highlights the challenges in regulating and identifying predatory pricing in the real world.
ARE MASSIVE DISCOUNTS ONLINE SALES EQUAL TO PREDATORY PRICING?
Despite their financial strength, online retailers argue they aren’t dominant players in the overall retail sector. While they might have previously offered rock-bottom prices below even variable costs, stricter regulations are making this tactic harder. They also point out that traditional retailers haven’t disappeared with the rise of e-commerce, and new niche or regional players continue to enter the market easily. In response to demands for transparency, e-commerce giants revealed details about sellers on their platforms, including top sellers, preferential treatment, and seller support. However, they maintain they have minimal control over pricing. Sellers have access to live dashboards where they can see competitor prices and adjust their own discounts accordingly. While each individual sale might have a low profit margin, sellers benefit from the sheer volume of sales during peak seasons, leading to higher overall profits. Finally, the online giants claim their losses stem not from predatory pricing, but from strategic investments in building their businesses and developing cutting-edge technology.
The Competition Commission of India (CCI) established a three-pronged test in the case of M/s. Transparent Pvt Energy Systems. Ltd. v. TECPRO Systems Ltd[3] to identify predatory pricing by a dominant firm. According to the CCI, predatory pricing occurs when a company in a controlling market position deliberately sets its prices below the average cost of producing or acquiring the good or service. This aggressive pricing strategy isn’t driven by a genuine desire to compete effectively but rather with the calculated intent to eliminate rivals from the market. The ultimate goal is to establish a monopoly by forcing competitors out of business. The predator anticipates recouping its losses incurred during the predatory pricing phase by significantly raising prices once the competition is neutralized. This allows the dominant firm to exploit consumers by charging higher prices in the absence of market competition. In essence, the CCI’s framework highlights that predatory pricing is a strategic maneuver, not a sustainable business practice. It involves sacrificing short-term profits for the long-term gain of controlling the market and manipulating prices to the consumer’s detriment.
This isn’t the first time online retailers have faced accusations of predatory pricing. India’s Competition Commission of India (CCI) has reviewed similar claims before, but dismissed them because the evidence wasn’t strong enough to show real harm to competition. Here’s why online retailers often win these cases:
- Being a Dominant Player Matters: Predatory pricing is only illegal if the company doing it holds a dominant position in the market. The CCI considers a company’s market share to determine dominance. So far, the CCI hasn’t found online marketplaces to be dominant players, even with their large presence.
- Discounts Aren’t Always Predatory: Sales and discounts on online platforms are common, and the CCI doesn’t see them as predatory pricing in general.
- Cost Matters Too: Even if the online retailer funded the discounts, the complaining party also needs to prove that the final price was lower than the average cost of producing the goods being sold. This is a difficult hurdle to overcome.
- Long-Term Plan Needed: The final requirement for proving predatory pricing is the trickiest. The complaining party needs to show that the online retailer has a plan to raise prices significantly after driving competitors out of business, in order to recoup the money lost during the discount period. This is often hard to demonstrate.
In the latest instance of In Vaibhav Mishra v. Sppin India Pvt. Ltd[4] (the “Shopee case”), the Competition Commission of India (the “CCI”) rejected the claim that the online marketplace “Shopee” engaged in predatory pricing. Despite Shopee’s involvement in predatory pricing, the CCI dismissed the case, ruling that the company does not possess dominance in the online market or platform economy and so cannot be penalized under section 4(2)(a)(ii) of the Indian Competition Act, 2002 (the “Act”)[5] The CCI has squandered the chance to assess the current predatory pricing arrangement, which is no longer necessary in the current market environment.
In simpler terms, online retailers often win these cases because it’s difficult to prove that they’re the dominant player, that their discounts are strategically designed to eliminate competition, and that they have a plan to raise prices later. Just showing low prices isn’t enough – the complaining party needs to show a more calculated and harmful scheme.
IMPACT OF MARKET STATUS
Despite concerns about predatory pricing by e-commerce giants, history suggests a more nuanced picture. For decades, low prices on these platforms have benefited consumers. Additionally, there’s little evidence that efficient competitors are being driven out. In fact, the traditional newspaper industry, which might seem vulnerable, continues to face significant competition from online news sources. This raises questions about the effectiveness of predatory pricing as a long-term strategy for e-commerce businesses. Early signs suggest the market may be self-correcting, with some e-commerce firms struggling to stay afloat due to unsustainable practices. This points towards a natural market equilibrium emerging in the mid to long term. However, considering the potential impact on small and medium-sized enterprises (SMEs), the Indian government should consider establishing a high-level committee to address these concerns within the e-commerce sector. This committee could explore ways to ensure a fair and competitive marketplace that fosters innovation and growth for all players, including SMEs.
CONCLUSION
Legal challenges make it difficult to pin down predatory pricing against e-commerce giants. While initial evidence suggests minimal impact on competition, proving dominance in the vast and ever-changing e-commerce landscape is a hurdle. The Competition Commission of India (CCI) has, however, investigated Flipkart and Amazon for potential violations related to preferential treatment practices, which fall under different sections of the Competition Act.
Balancing consumer and competitor protection with encouraging competitive pricing by dominant players is a tightrope walk for competition law. The need for a foolproof test to identify predatory pricing is clear, yet key metrics used in such assessments are prone to error. For instance, accurately calculating a company’s costs within a single market, especially when it operates across multiple ones, can be near impossible due to cost allocation complexities.
Here’s a deeper dive into the complexity;
- Predatory Pricing Challenges: Establishing predatory pricing requires a dominant player to be selling below cost with the intention of eliminating competition and later raising prices. However, the current market share of e-commerce giants may not necessarily translate to dominance in the broader and dynamic e-commerce landscape. This makes proving dominance difficult.
- New Battleground – Vertical Agreements: While nailing e-commerce giants for predatory pricing might be difficult, the CCI has taken aim at potential violations related to vertical agreements. These agreements can involve giving preferential listing to certain sellers, striking exclusive deals with brands, pushing private label products, and favoring specific sellers. Such practices can be investigated under Sections 3(4) and 4(2) of the Competition Act, which crack down on anti-competitive agreements and the misuse of a dominant position, respectively.
- Balancing Act – Consumers vs. Competition: Competition law strives to shield consumers from unfair pricing tactics while also ensuring dominant players aren’t discouraged from offering competitive prices due to overly strict regulations. This balancing act necessitates a reliable test to identify predatory pricing. Unfortunately, key metrics used in such assessments, like cost calculations, are error-prone due to issues like dividing costs across multiple markets.
In essence, legal obstacles and the ever-shifting nature of e-commerce make it challenging to prove predatory pricing against e-commerce giants. The focus might be shifting towards investigating potential violations related to vertical agreements, where evidence of anti-competitive practices might be easier to establish. Finding the right balance between protecting consumers and fostering healthy competition remains a constant challenge for competition law, especially with the complexities involved in accurately assessing pricing strategies in a vast and evolving marketplace.
REFERENCES:
https://taxguru.in/corporate-law/cci-reject-complain-abuse-dominant-position-shopee.html
https://economictimes.indiatimes.com/industry/services/retail/government-says-has-received-complaints-against-online-firms-alleging-fdi-policy-violation/articleshow/89351333.cms?from=mdr
https://www.business-standard.com/article/opinion/when-a-huge-discount-is-not-anti-competitive-114101200700_1.html
https://www-scconline-com.eu1.proxy.openathens.net/Members/SearchResult.aspx
[1] https://economictimes.indiatimes.com/industry/services/retail/government-says-has-received-complaints-against-online-firms-alleging-fdi-policy-violation/articleshow/89351333.cms?from=mdr
[2] https://economictimes.indiatimes.com/small-biz/sme-sector/cait-fully-geared-up-to-fight-amazon-flipkart/articleshow/83501204.cms?from=mdr
[3] https://indiankanoon.org/doc/180689645/
[4] https://indiankanoon.org/doc/8342852/
[5] https://taxguru.in/corporate-law/cci-reject-complain-abuse-dominant-position-shopee.html
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