India: Predatory Pricing: A Synopsis On The Indian Telecom Sector

Last Updated: 15 March 2017
Article by Himanshu Sharma and Martand Nemana

Most Read Contributor in India, July 2017

INTRODUCTION:

Predatory pricing poses a dilemma that has perplexed and intrigued the antitrust community for many years. On the one hand, history and economic theory teach that predatory pricing can be an instrument of abuse, but on the other side, price reductions are the hallmark of competition, and the tangible benefit that consumers perhaps most desire from the economic system.13

As the name suggests, Predatory pricing is the practice pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. Thought this practice was mostly used by the government agencies to put a check on the unlawful activities and control monopolies of the agencies, it acted as a redressal mechanism rather than a threat to the equality and freedom as promised under the law.

The Competition Act, 2002 outlaws predatory pricing, treating it as an abuse of dominant position, prohibited under Section 4. Predatory pricing under the Act 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. Predatory pricing is pricing one's goods below the production cost, so that the other players in the market, who aren't dominant, cannot compete with the price of the dominant player and will have to leave the market. The CCI in InRe: Johnson And Johnson Ltd.14 said that "the essence of predatorypricing is pricing below one's cost with a view to eliminating a rival."

ROLE OF COMPETITORS IN PREDATORY PRICING:

When a single entity in the market rises almost instantaneously, it is mostly because of the abuse of dominant position and predatory pricing which follows. These two principles are seen to intertwine to form a bridge between legal and economic boundaries, and overlap over the existing players in the market. Such activities are basically found to be illegal, however it is just one of the many most frequently used ways in which that enterprise or group may abuse its position of dominance.

Predatory Pricing is mostly dependent upon the use/misuse of dominant position. As per the Section 4(2) of the Competition Act, 2002 dominant position has been described as:

"DOMINANT POSITION" means a position of strength, enjoyed by an enterprise, in the relevant market, in Bohemia, which enables it to-

i) Operate independently of competitive forces prevailing in the relevant market; or

ii) Affect its consumers or competitors or the relevant market in its favour;

For an entity to attain a dominant, it is important that the entity has control and has the influence to affect the relevant sector of market to the tune of 50 per cent or more, provided that the other rival players hold a much less share in the active market. Thought the economic strength of the entity does play a vital role, however conditions like the presence of other players in the relevant section of the industry/market plays an important role in ascertaining whether the entity is capable of exercising a dominant position.

Michael E. Porter of the Harvard Business School15 developed an analysis of the name

Porter's 5 forces, which shows that the five conditions mentioned below are prerequisite to show abuse of dominance:

  1. The bargaining power of customers (buyers)
  2. The threat of the entry of new competitors
  3. The bargaining power of suppliers
  4. The threat of substitute products or services
  5. The intensity of competitive rivalry

In Hoffmann-La Roche & Co. AG v Commission of the European Communities the concept of 'abuse of dominant position' has been defined 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."

Though it has been repeated iterated, but being in a dominant is not illegal per-se. Further, "Abuse" is an objective term and it comprises every conduct which might adversely affect the structure of a market in which competition is weakened. Hence, the being on a entity in a business in a dominant position is not illegal but the misuse of such dominant position is illegal. The position of the company has also been laid down in Section 2 of the Sherman Act, 1860 and under Art 82 of the EC Competition Law. Predatory pricing by such an enterprise which spans enough business to be classified as a dominant player, can be one such abuse.

LEGAL REMEDIES AGAINST PREDATORY PRICING:

To ensure a 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, 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, have been borrowed from the English Competition Act, 1998 and the Clayton Anti-Trust Act, 1914. 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. Explanation.- For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or service referred to in Sub-clause

  1. and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub- clause
  2. shall not include such discriminatory condition or price which may be adopted to meet the competition;

As per explanation (b) at the end of Section 4 predatory pricing refers to a practice of driving rivals out of business by selling at a price below the cost of production.16 Denial of market access briefly referred to in this section, if read conjunctively, is expressly

prohibited under Section 4 (2) (c) of the Competition Act, 2002.

The Section 4 of the Competition Act, 2002 corresponds to Clause 4 of the Notes in clauses of the Competition Bill, 2001 which reads as follows:

This clause prohibits abuse of dominant position by any enterprise. Such abuse of dominant position, inter alia, includes imposition, either directly or indirectly, or unfair or discriminatory purchase or selling prices or conditions, including predatory prices of goods or services, indulging in practices resulting in denial of market access, making the conclusion of contracts subject to acceptance by other parties or supplementary obligations and using dominant position in one market to enter into or protect other market.17

However, in 2007, Section 4 of the Competition Act, 2002 was amended by the Competition (Amendment) Act, 2007. The objects and reasons of such amendment were given in the Notes on clauses of the Competition (Amendment) Bill, 2007 which says that: This clause seeks to amend Section 4 of the Competition Act, 2002 relating to abuse of dominant position. The existing provisions of Section 4 apply only to an enterprise and not to the group of enterprises. Clause (c) Sub-section (2) of Section 4 states that there shall be an abuse of dominant position if an enterprise indulges in practice or practices resulting in denial of market access.

CASE STUDY:

The Indian Telecom in the past 6 months has witnessed a turmoil, which was caused by a new entrant in the telecom market by the name of "Jio", a product of the conglomerate of Reliance Group of Industries. The services under the offer which was first launched as an "employee-only" offer (i.e. Unlimited Calling for life and Unlimited Data Benefit) were made open to the general public which this

resulted in the torrent and surge of the masses to avail the proposed benefits. From what was already prognosticated not only did the move trigger profusion of clientele, but also instilled the rivals with a sense of fierce competition.

This further resulted in multifold reduction in the prices of the services of all other leading service providers which then painted this insurgence of competition as an act of intentional sabotage. Though the allegations can't be discarded as foul cry, but the consumer centric market has welcomed the new entrant and the competition with open hands which further makes it difficult for others to form a basis of competition.

Predatory pricing as the name suggests is the pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. Thought this practice was mostly used by the government agencies to put a check on the unlawful activities and control monopolies of the agencies, it acted as a redressal mechanism rather than a threat to the equality and freedom as promised under the law.

WHETHER CASE STUDY FITS INTO THE DEFINITION OF PREDATORY PRICING:

Concentration of the power has time and again been proven to be the least effective remedy to prevent it from falling into the hands of the undeserving. In a scenario where development and business economy form two different sides of the coin, money always changes the equation and the outcome goes for a toss. Despite repeated denials by the Reliance Group of Industries about the "Predatory Pricing" & being a dominant player in the market, the conglomerate has surely affected the Indian telecom sector and the major players, left right and centre; it would be worth waiting to understand the course of events which follow. However at present given the illustrious reputation and the sky rocketing user base, coupled with throw away prices breaking the market stereotype of telecom sector

LEGAL PRECEDENTS:

The most valuable observation relating to predatory pricing and abuse of dominance was made by Lord Denning, M.R. in Registrar of Restrictive Trading Agreements v. W.H Smith & Son Ltd.,18 while construing the English Law in Restrictive Trade Practices Act, 1965 that there was a time when traders used to join hands, and combine, so as to keep the trade all for themselves, so that prices can be decided according to them, because of the monopoly. This also lead to the shutting down of all new entrants who might cut prices or even produce and sell better quality goods. Therefore, the Parliament had to step in, both for the benefit of the new entrants and the consumers, and had to hold these trade practices void unless they were done in the interest of public interests. Therefore, the law made any such agreement void and also asked the traders to get all their trade practices registered. However, Lord Denning observes that the traders who combined did not tell the law about it, and it was done in dark; without the law or the consumers knowing about it. Neither putting such agreement in writing, nor words were required, "a wink or a nod was enough" for them to combine and turn the whole market into a monopoly and control everything in it. Therefore, the Parliament came up with another law to get rid of these practices, and so, it included not only agreements but also arrangements to keep the predatory pricing in control. This observation by Lord Denning was aptly discussed when Parliament of India amended Section 4 of the Competition Act, 2002 by the Competition (Amendment) Act, 2007 and is also reflected in the amendment.

In MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd19, the CCI while laying down the test for predatory pricing said that:

"before a predatory pricing violation is found, it must be demonstrated that there has been a specific incidence of under-pricing and that the scheme of predatory pricing makes economic sense. The size of Defendant's market share and the trend may be relevant in determining the ease with which he may drive out a competitor through alleged predatory pricing scheme-but it does not, standing alone, allow a presumption that this can occur. To achieve the recoupment requirement of a predatory pricing claim, a claimant must meet a two-prong test: first, a claimant must demonstrate that the scheme could actually drive the competitor out of the market; second, there must be evidence that the surviving monopolist could then raise prices to consumers long enough to recoup his costs without drawing new entrants to the market."

CONCLUSION:

Market has always been a consumer centric business model which harnesses the potential of the players in a fair and healthy competitive environment. Amongst many other challenges present, the most important is to abolish the system of concentration of power. As essential it is for the consumer to derive the value for money for the goods they want, it is equally important that the companies have a fair playing ground to establish themselves as a reliable and trustworthy entity.

Whilst all the competitors in the market have diverse backgrounds and economic portfolios, it should be understood that principles of fairness apply to each of them individually. Predatory Pricing may in some cases be implemented and considered as a check by the Govt agencies to rule out unlawful market entities or business practices. Interestingly given the developing affairs of the Indian Economy the market is often vulnerable to new entrants who struggle to establish themselves, however the same doesn't seem to the case with "Jio" a part of the conglomerate of the Reliance Group of Industries. Thought what may have been

appearing as an act of predatory pricing, as has been accused by the other major players in the relevant market sector, it shall be interesting to watch what the course of actions which further go on in the sectors of telecommunications in India.

Footnotes

13 PREDATORY PRICING:STRATEGIC THEORY AND LEGAL POLICY - Patrick Bolton, Joseph F. Brodley and Michael H. Riordan

14 In Re: Johnson And Johnson Ltd., (1988) 64 Comp Cas 394 NULL

15 Michael E. Porter, The Five Competitive Forces that Shape Strategy, Harvard Business Review 86 (1979)

16 Hovenkamp, H., Federal Antitrust Policy-The Law of Competition and its Practice 339 (3rd ed., 2005)

17 H.K. Saharay, Textbook on Competition Law, (1st ed., 2012)

18 Registrar of Restrictive Trading Agreements v. W.H Smith & Son Ltd., (1969) 3 All ER 1065

19 MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd , 2011 Comp LR 0129 (CCI)

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