Efficiency of Competition Law In Countering Predatory Pricing In India- A Critical Analysis.
Author: Rishav Ray
School of Law, Christ University Bangalore.
Perfect competition is a boon for a consumer as well as the economy. However, it is not so for a seller; since the primary objective of a business is profit maximization. A monopoly is a business entity’s paradise. Companies enjoy the position of monopolies since; they can control the market, increase the prices or reduce the volume of goods to be let out in the market. Business entities at times adopt certain methods which are violative of both business ethics as well as law, in order to reach that position of ultimate market control. Predatory pricing is one such method adopted by such unscrupulous undertakings. Predatory pricing in simple terms means setting the price of a commodity so low that the other firms are unable to sell at that price and therefore are eliminated from the market. In the first thought, this might not seem harmful rather it seems beneficial for the consumers since they are able to purchase the good at such a low price. However, this phase of consumer welfare does not last long. Once the other competitors have been eliminated, the predatory company starts exploiting the consumers in order to recover the losses it incurred in the initial phase. This is a very serious problem that violates consumer interests as well as adversely affects competition and therefore needs legal attention. This paper will address the concept of predatory pricing before attempting a narrative that can do justice to the title. It also engages in a study of the international legal perspective on predatory pricing. This paper aims to study and critically analyze how the competition laws of India, the Competition Act of 2002 to be more precise, deals with predatory pricing and also humbly puts forward certain suggestions for the same.
The term predatory pricing would mean setting the selling price of a commodity at such a low level that it would be less than the short run total cost of the rival firms and thereby eliminate competition from the market. Such activities are generally viewed as an element of offence as they make the market more vulnerable to monopoly. Though its definition might seem simple but to prove a company guilty of the same might not turn out to be so simple. Reason being price lowering is a normal practice in competition, which can be an argument used by the defendant quite successfully making it difficult to prove that the price cutting was a deliberate attempt to eliminate competition. In its initial stage the consumers might not feel such pricing to have any negative effect on them since it will create a buyer’s market where they would enjoy a wide range of choices as well as lower prices. The predatory firm initially shall run at a loss. The other companies shall too lower their prices in order to keep pace with the predatory firm as is the nature of a competitive market. The companies which are not capitally strong enough might not be able to maintain this rate of loss and therefore suffer and lose out on consumers. The quality of products would also be higher as every company is bent on gaining an advantage over the others. The situation might, however, change when competitors who are unable to sustain themselves, are driven out of the market.If not regulated, a monopoly would be established as other firms, unable to bear such huge losses which would be incurred in price competition with the predatory firm would have to leave.And once the market is captured then the price levels will be raised again in order to compensate for the short-term loss during the initial period and product quality is also likely to experience a drastic drop, transforming it to a seller’s market where the demand and welfare of the consumers would not be the concern of the firm.Consumers would, therefore, have to buy bad products at abnormally high rates. These are basically the short term and the long term effects of predatory pricing in a market. Thus predatory pricing which might seem harmless in the beginning slowly turns out to be quite dangerous for the consumers as well as the economy as a whole.
Legality of Predatory Pricing (International Perspective)–
In order to understand the legal status of predatory pricing in India and how efficient its laws have been in countering this problem, it is quite essential to study the international perspective and understand how predatory pricing is being dealt with in the global platform. The paper analyses the legal mechanisms of the European Union and the United States of America which deal with the problem of predatory pricing.
European Union –
The main focus of the legal institutions of EU is protecting effective competition, competitors and the consumers. Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits abusive conduct by dominant companies. The European Commission believes that there is a direct link between the protection of the competitors and the welfare of the consumers and thereby aims to enforce the laws in way which ensures that there is smooth functioning of the market and the consumers are able to get benefit in the process. In order to be liable for predatory pricing under the EU Antitrust laws, the company needs to be dominant, which is assessed based on several factors one of them being the market share held by the company. If it is less than 40% then it is less likely to be a dominant company. This process however is a complex one as it involves several other factors such as the situation in the market, ease at which other firms can enter the market, vertical integration and a lot more. It necessarily does not need to be a single company, a group of companies can also be held to be collectively dominant. It is to be noted at this juncture that the Commission assumes that the fact that a company is dominant, gives it the ability to recoup the losses incurred at the initial stage. Along with dominance, the company also needs to abuse its position in order to be held guilty. Since merely being in the position of dominance is not a legal offence in itself. The abuse of position may include acts like exclusive purchasing by the consumers, i.e., purchasing all units of a commodity from a single dominant company and/or predatory pricing by the company, etc. The investigation procedure, the decision-making process and the penalty in the form of fines are all regulated by Regulation 1/2003. Intention to predate is given a lot of importance by the commission while making their decision. This thereby makes the process even more complex as the intention is not an easy thing to prove especially in economic cases like this where it can be easily argued that price lowering is a common business practice. The decision by the Commission is not unchallengeable. The parties have a right to appeal to the General Court and if still unsatisfied, an appeal can be made to the Court of Justice. The victims whose rights under the EU regulations have been violated can seek redressal in front of the national courts. The EU legal institutions which deal with predatory pricing, though well designed, do suffer from certain complexities.
United States of America –
In the United States, the Antitrust laws aim at regulating various kinds of unscrupulous business activities such as price fixing, predatory pricing, market allocation etc. These laws smoothen the functioning of a competitive market where the consumers are able to avail a wide range of products at reasonable prices. There are three major legislations which make up the core of US Antitrust policies. i) The Sherman Antitrust Act of 1890 – it prohibits contracts which unreasonably restrain trade in an attempt to monopolise the market. This Act authorises the Courts to provide for remedies if there is a violation of the Act. Under this Act the Courts can declare a practice unlawful, impose civil penalties and criminal penalties on the offenders and award damages to the victims. ii) The Clayton Act of 1914 – This basically addresses the specific areas which were left out by the Sherman Act. It prohibits conduct that can substantially lessen the competition, thereby preventing discriminatory prices, wrongful mergers between big pocket companies to monopolizing markets etc. iii) The Federal Trade Commission Act of 1914- The Federal Trade Commission (FTC) which has the power to enforce the Sherman and Clayton Acts through the use of civil remedies, was created by this Act. The FTC not only possesses all the powers of the Department of justice, it also possesses three additional powers. The power to enforce statutory provisions, power to issue court order, power to conduct hearings in case of practices of unfair means of competition and other deceptive practices by companies. The antitrust laws of US are mainly focussed at maximizing social welfare and protection of smooth functioning of the market and not protecting the competitors. This statement can be better explained with a study of two very famous predation cases of the United States. The first case is the famous Matsushita case. The brief facts of this case were such that in a television market a group of Japanese allegedly were involved in a practice of predatory pricing aiming to drive competitors out of the market. The plaintiffs, in this case, were two American television companies. They alleged that once successful in capturing the entire market, the Japanese firms would form cartels, reduce the output and raise the price to extraordinary levels. The Supreme Court, in this case, was of the opinion that though predatory pricing policies might seem profitable for the predatory company, in the long run, they are quite unpredictable. It held that predatory pricing requires the predatory company to suffer losses in the initial period, these loses however are not guaranteed to get compensated in the long run due to the uncertainties, making such schemes more vulnerable to failure. Thus merely establishing a monopoly would not guarantee success for the predatory companies as alleged by the plaintiffs in the present case. The Second case would be Brooke Group Case where the Supreme Court held that even if the intention of the company was predatory, it would not be justified for the law to interfere and discourage price cut, raise the price to supernormal levels and thereby deprive the consumers of the benefit of lower prices in the interim level.
The problem of monopoly and restrains to competition in the market are not something new to India. These problems date back to the early age of British rule when the English East India Company had complete monopoly in trading with India. This monopoly, however, was not a result of predatory pricing as such. Post-independence, the Monopoly and Restrictive Trade Practices Act (MRTP) were established in 1969 as India’s first Competition law. However as the economy grew and there was economic liberation in 1991, the MRTP Act became archaic. Replacing it, the Competition Act was enacted in 2002 as an instrument to prevent anti-competitive trade practices. Predatory pricing is one such anti-competitive trade practice that is addressed by this Act. The dealings of predatory pricing under the Act have been borrowed from the English Competition Act, 1988 and Clayton Anti-trust Act, 1914.
Section 4 of the Competition Act deals with ‘abuse of dominant position’, which covers the aspect of predatory pricing. The Act defines ‘predatory pricing’ as “the sale of goods or provisions 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.”
The Competition Act prohibits a company that enjoys a ‘dominant position’ina relevant market from abusing its position of dominance. The Act has defined the ‘dominant position’ as a position of strength, enjoyed by an enterprise in the relevant market in India, which enables it to – i) operate independently of competitive forces prevailing in the relevant market, or ii) affects its competitors or consumers in the relevant market in its favour. In its basic sense a company enjoying a dominant position has the ability to act independently of it suppliers, wholesalers, customers, competitors and even the final consumer. It has the ability to sell an inferior quality good at a price higher than that existing in a competitive market and sell a good at much lower price that its market rate. It is this position of economic strength enjoyed by the dominant company which gives it the ability to damage fair competition between companies and exploit consumers. It is by this rational that the Competition Act prohibits the abuse of dominant power. However, dominance in itself is not illegal, only when there is an ‘abuse’ of that position, the act becomes illegal and therefore subject to the prohibition under the Competition Act. The concept of ‘abuse of power’ has been defined in the case of Hoffmann-La Roche & Co. AG v Commission of the European Communities as “The concept of abuse is an objective concept relating to the behavior of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.” By the virtue of Section 27 of the Act, the Competition Commission of India (CCI) after an inquiry into agreements or abuse of dominant position as specified under section 4 may pass orders direct any enterprise which is involved in such action to discontinue such practice and not to repeat it in the future.
Section 4(1) gives rise to a question on what exactly is “a dominant company” per se.The Competition Act of 2002 has not provided any exact yardstick to determine the dominant position of a company. It is not based on any single formula or mathematical calculations; rather it can be measured in a comparative environment. Under the Section19(4) of the Act, the CCI while determining shall inquire about the following factors such as how much market share does the firm hold, the size and resources of the firm and its competitors, the economic advantages it holds over its competitors, how much do the consumers depend upon the company, whether it has acquired a monopoly as a result of any statutory power or by the virtue of being Government company, the market structure, and size, entry barriers, social costs, and obligations or any such factor which the CCI may consider relevant for inquiry.
The main emphasis is laid upon the dominance of the company. Only after establishing that does the CCI delve into the inquiry of seeing if the dominant company has been involved in the abuse of its dominant position. As stated earlier, predatory pricing has two stages first the sacrificing stage where the predatory company lowers the price of its goods in order to drive out its competitors from the market. In this stage, the company suffers heavy losses. The next stage is known as the recoupment stage, in this stage, the company makes up for the losses it has suffered previously. It does so by increasing the prices of goods when the competitors have been eliminated. It is assumed that a company needs to have a dominant position in order to recoup the losses, which is not necessarily true. It is not the dominant position which is the key to predation, but the ability to fill the market, satisfy the increased demand of the consumers and reduce the prices, which plays a key role in predation. Therefore more attention should be paid to the financial capacities of the company and not its market share or its size or the position it holds in the market.
The economic development of a nation is depended upon the freedom of business activities and the protection of the rights of the consumers. The Competition Act of 2002 was established with a view of promoting the economic development of the country by regulating practices that have an adverse effect on competition, protection of consumer interests and ensuring freedom of trade. It is needless to say that the competition laws of India have been doing justice to their objectives. In matters of predatory pricing the CCI has been quite efficient in regulating it, however, upon a detailed analysis of the competition law provisions of India, it can be understood that the main emphasis lies upon the ‘dominant position’ of the company which is alleged of predatory pricing. Only if the company is established to have a ‘dominant position’, does the abuse of that position come into question. Determination of dominance of a company is a complex and unwieldy process as there is no straight-jacket formula by which it can be determined. This creates a possibility of erroneous determination which will have a negative impact on the competitiveness of the companies. The CCI should focus more on the abuse rather than the position of dominance since it is quite possible that a non-dominant company can eliminate market competition by indulging in the practice of predatory pricing.
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