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Predatory pricing: Lessons for India Inc

Predatory behaviour constitutes a class of anti-competitive action where prices are set so low as to eliminate competing undertakings and, thereby, threaten the competitive process itself. Even after more than a year of passing the Competition Law, the Centre has been reluctant to notify the Act in totality. While it is true that the Act will be a double-edged sword, what is important is that India Inc has to strategise the evolving position and ensure that it uses the sharper edge against others.

Man enters a car showroom. Asks the price of the car. The salesman insists on a test drive first. Man agrees. In the course of the test drive salesman explains the salient features of the car, when the man once again insists on the price. Then, the horn of the passing truck interferes while the salesman tells the price of the vehicle to the man. Only the man hears the price of the car. The man is stupefied by the low price and instantly writes out a cheque. Man rides away with the car. Happy ending.

WHAT is intriguing about this advertisement is that when the inflation is well above 8 per cent, with the prices of steel and crude (which means all types of plastic), at their recorded highs how could the price of the car be brought down, especially when steel and plastics remain the prime raw material for manufacturing a car.

What should interest many is that the car in question is manufactured by an Indian subsidiary of a multinational giant. Hence, the question of the company compromising on the quality to reduce prices is remote.

Pricing policies and size of enterprises
This article is not on the pricing policy of the Indian subsidiary of MNCs. Neither is it on the pricing policy of cars, in general. On the contrary, it is about the pricing policy adopted by enterprises within India so as to eliminate competition.

To that extent, the advertisement in question merely provides a context to the current discussion. However, what is important for Business India to know is that should the car in the above example be manufactured outside India and sold in India at a price lower than its cost, then the domestic industry could take recourse to the remedial measures offered under the anti-dumping provisions of the Customs Tariff Act.

However, this measure is a cross-border one and not applicable in cases where the production and sales takes place within India itself.

This pricing policy of reducing prices in the market where the goods are produced is called "predatory pricing" by economists, a policy adopted by firms to eliminate competition.

Further, what should interest the Indian business is that the recently enacted Competition Law does not approve of such a pricing policy.

Explanation (b) to Section 4 of the Competition Act defines "predatory price" as 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 reducing competition or eliminating the competitors.

Dominant undertaking
The Competition Law provides that any conduct in a market by an undertaking, which amounts to the abuse of its dominant position, and which may affect trade in India is prohibited by the said Act and may be subjected to consequential penalties as prescribed by the Act.

Thus, there is a two-stage test:

(1) whether an undertaking is dominant in a relevant market; and,

(2) if so, whether it is abusing that dominant position. The prohibition is only on the abuse of the dominant position, not the position itself.

This is the crucial difference between the Competition Law and the obsolete MRTP, where dominance by itself, would suffice.

The Competition Commission set up under the Competition Act would find an undertaking's behaviour an abuse after a detailed examination of the market concerned and the effects of the undertaking's conduct.

An undertaking may be dominant if commands a substantial share of the market. The essence of dominance is the power to behave independently of competitive pressures.

European courts have defined a dominant market position as: "A position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of consumers." As we move from the MRTP Law to the Competition Law, increasingly, courts in India too have to accept dominant position as an economic and, therefore, a subjective concept and not merely relate it to the size of the assets possessed by a firm.

High market shares and significant barriers to entry normally, are conclusive evidence of the effect of predatory prices and, consequently, that of abuse of the dominant position.

Another important consideration that needs to be kept in mind is that a dominant undertaking can be expected to recoup losses in a market where it is already dominant and would automatically remain the biggest beneficiary of the elimination of competition.

Predatory pricing
Predatory behaviour constitutes a class of anti-competitive action where prices are set so low as to eliminate competing undertakings and, thereby, threaten the competitive process itself.

In these circumstances, consumers may benefit in the short run from lower prices, but, in the longer term, weakened competition will lead to higher prices, reduced quality and less choice.

Distinguishing predatory behaviour from legitimate competition is difficult. Since the main objective of the Competition Law is to create conditions where consumers benefit from effective competition, the distinction must be drawn between low prices, which result from predatory behaviour and that which result from legitimate competitive behaviour.

This is not an easy distinction to make and there are no case laws in India on this matter. However, we need to look into some of the judgments of the courts of other countries, which have looked into similar matters.

The European courts have stated that where prices are below the average variable cost of production, predation should be presumed. They also held that if prices are above average variable costs but below average total costs, conduct is to be regarded as predatory where it can be established that the purpose of the conduct was to eliminate competition.

In the normal course of business, selling at below average variable costs is unlikely to be rational and could be taken as conclusive proof of predation.

In contrast, where prices fall between average variable and average total costs, one needs to consider other evidence on the intentions of the dominant undertaking before establishing whether its behaviour would be predatory. Again, pricing in this range for "short-run periods" will often be a rational strategy for an undertaking and represent legitimate competition. In that case, it would not be an abuse.

There are compelling lessons for India Inc here. Somehow, even after more than a year of passing the Competition Law, the Centre has been reluctant to notify the Act in totality (till date this has been partially notified).

Further, India Inc too seems to be indifferent in pressing for the immediate notification of this Act. While it is true that the Act will be a double-edged sword, it is important to note that one edge of the sword will be sharper than the other.

What is important is that India Inc has to strategise the evolving position and ensure that it uses the sharper edge against others.

Since it is expected that the government will notify the Act shortly (and India Inc must insist that the Government should notify the Competition Law at the earliest), industry simultaneously needs to gear quickly to meet the challenges and opportunities provided by the Competition Law. The earlier it is done; better for the economy.

Published at:
http://www.thehindubusinessline.com/2004/10/20/stories/2004102000091100.htm

Last modified on Sunday, 07 July 2013 07:36

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