ALL YOU NEED TO KNOW ABOUT PREDATORY PRICING

Introduction

Pricing is a strategic tool that companies employ to strengthen their competitiveness. One of the best ways to uplift and raise company sale’s growth is being strategic with the pricing. Lowering your prices just the right amount gives you a better shot at market penetration and at being competitive in a tightly contested field.
There comes a point when such competitive pricing becomes problematic when it becomes predatory pricing.

Predatory pricing is a strategy in which the goods and services are sold at a very minimum price with the motive of lowering completion and creating barriers to entry. It is a practice where the firm offers good and services at a price which is below the cost or at a very cheap price with a motive of forcing the rival firms out of the business.

The low prices of the good offered and operating at loss will let the new firms out of the business. Initially, it a strategy to attract customers but then it will harm the public because it will lead to higher prices in long term. 

Companies that practice predatory pricing will incur losses initially but eventually, it benefits by driving competitors out of the market and raising their prices again. The practice of Predatory pricing often leads to the formation of a monopoly which in turn helps in controlling the market. Predatory pricing occurs when a firm lowers its price to make it so difficult for the competitor to remain in the market. 

How does this chain work?

A company that can bear initial losses incurred by Predatory pricing have an advantage in the long run. A good way to raise the market share, increase the prices and create equally extreme profitability further down the line is by offering a lower price for the goods and services in the beginning. So as long as the firms and companies are sure about the future cash flows and long term profits, the investors may be ready to bear this burden for the short term. 

The strategy of Predatory pricing drives out rival firms and creates the barrier to entry much difficult for news businesses. In many ways, predatory pricing can be thought of as an anti-competitive pricing practice that can only be used in the short run.

At some point, businesses that practice predatory pricing will have to continue charging higher prices as they were before, which puts their dominant position as a price leader in jeopardy. The main motive behind this predatory pricing strategy is to create a strong market position in the market and to force rival firms out of the market. 

Effects of Predatory Pricing on an Industry

• Short term effects

In short term, Predatory Pricing benefits the customers but affects all the companies in the industry. Predatory Pricing attracts the buyers and creates a market for them helping them to obtain goods at a lower price as compared to other companies. 

For companies, profitability decreases as competitors actively lower the price of the good and services and divert buyers to their own business. The companies that survive this war remain in the market and enjoy long term benefits. 

• Long term effects

Once the rival firms and the competitors are driven out of the market, the remaining firms can increase the profits and cover all the losses incurred due to predatory pricing. Now they will form a monopoly having now successfully undercut the competition. 

Prices are most likely to increase to compensate for the initial losses.  As there are no competitors in the market quality also tend to drop. Buyers will not only suffer from high prices but also a decrease in the quality of goods and services. 

LEGAL REMEDIES AGAINST PREDATORY PRICING:

To ensure healthy competition in the market amongst the players the Competition Act, 2002, has been introduced in replacement of the Monopolies and Restrictive Trade Practices Act, 1969, which seeks to ensure the welfare of the consumers. Upon realizing the risk and challenges posed by predatory pricing, which mostly a clear abuse of the 'dominant position' in the market, which per-se is illegal; the dealings of predatory pricing in India, as expressed under the Competition Act, 2002. The provision reads as below:

Section 4(2) (a) of the Competition Act, 2002 states that: There shall be an abuse of dominant position under Sub-section (1), if an enterprise,-

(a) directly or indirectly, imposes unfair or discriminatory-

(i) condition in purchase or sale of goods or service; or

(ii) price in purchase or sale (including predatory price) of goods or service. 

Predatory pricing is prohibited under Section 4 (2) (c) of the Competition Act, 2002 and treating it as an abuse of dominant position. 

Case laws of Predatory Pricing

MERU TRAVEL SOLUTIONS PVT LTD V. UBER INDIA SYSTEMS PVT LTD

Meru Travels Solutions Pvt. Ltd started providing taxi services in 21 cities across India in 2008. An information was filed by Meru Travels Solutions Pvt. Ltd with the competition commission of India under sec 19(1)(a) against UBER INDIA SYSTEMS PVT LTD alleging uber in engaging in predatory pricing and abuse of dominance to make a monopoly in the market and drive out existing competition. 

Further Meru Travels Solutions Pvt. Ltd alleged that uber gave heavy discounts to its customers and also that uber has entered into a contract with taxi owners to restraint them from getting associated with any other radio taxi operators which are in the competition which led to huge losses for Meru. It was also disclosed that uber had 50.1% of the market share in Delhi NCR. 

However, not only did CCI question the findings of New Age TechSci by comparing it with the findings of 6W research but also argued that the relevant geographical market was Delhi and not Delhi NCR, as contented by Meru. CCI observed that as far as Delhi is concerned, there exists stiff competition in the radio taxi service market and hence, Uber was not dominant in the relevant market.

Subsequently, Meru filed an appeal under Section 53B of the Act before the Competition Appellate Tribunal (COMPAT). COMPAT observed that consumers are not concerned with political demarcations and hence, the distinction between Delhi and Delhi-NCR made by the CCI was unnecessary.

COMPAT further observed that the fact that the two reports showed contradictory findings was all the more reason to probe into the matter. COMPAT then directed the Director-General to conduct an investigation into the allegations and submit a report to the Commission.

Uber filed an appeal before the Supreme Court of India against the order of COMPAT.

The decision of the Supreme Court:

The Supreme Court found no reason to interfere with the investigation. The fact that Uber was losing Rs. 204 per trip also caught the Court's attention and solidified its view that it would be difficult to state that there is no prima facie case under Section 26(1) as to infringement of Section 4 of the Competition Act, 2002.

The Supreme Court relied on the definition of 'Dominant position', as laid down in Explanation (a) of Section 4, as a position of strength, enjoyed by an enterprise, in the relevant market, which

1. enables it to operate independently of the competitive forces prevailing; or
2. is something that would affect its competitors or the relevant market in its favour.

The Court also remarked that if a loss is made for the trips, Explanation (a)(ii) would prima facie be attracted, as this would affect Uber's competitors in its favour or it would affect the relevant market in its favour.

The Hon'ble Court thus dismissed the appeals and decided to not interfere with COMPAT's order

IMCX Stock Exchange Ltd. v. National Stock Exchange of India Ltd. 

In this case, the competition commission of India  CCI held that predatory pricing is a subset of unfair price and as the unfair price has not been defined anywhere, the unfairness has to be determined based on the facts of the case. The unfairness has to be examined concerning the customer or the competitor. The CCI stated that there is no justifiable reason for the National Stock Exchange of India (NSE) to continue offering its services free of charge for such a long duration and stated that the conduct of zero pricing, in this case, is beyond promotional or penetrative pricing. 

Bharti Airtel Limited vs Reliance Industries Limited 

A case was filed by Sunil Bharti Mittal who owned Bharti Airtel against Mukesh Ambani who owned Reliance Jio alleging that the entrance of Jio was indulging in predatory pricing with free services intending to eliminate competitors in the market. Airtel had alleged that free services offered by Reliance Jio since the commercial launch from September 5, 2016, amounted to predatory pricing.

It had also said Reliance Industries (RIL) had used its financial strength in other markets to enter telecom through Jio. However, CCI, in its order said that in a competitive market scenario, where there are already big players operating in the market, it would not be “anti-competitive for an entrant to incentivise customers towards its services by giving attractive offers and schemes.”

Such short-term business strategy of an entrant to penetrate the market and establish its identity cannot be considered to be anti-competitive and as such cannot be a subject matter of investigation, CCI said

Competition Commission of India (CCI) rejected the case of alleged “predatory pricing” against Reliance Jio.