Subject : Competition / Antitrust

 
   Title :       An Analysis Of The Law Relating To Predatory Pricing In India
   Author : Mr. Kumar Harshvardhan  
   
 

Kumar Harshvardhan*

Despite having substantial and growing literature and case laws on predatory pricing, until recently, the law relating to predatory pricing has been characterized by vagueness and lack of precision. The vagueness and the paucity of an analytical framework reflect the failure of the Court's general price reduction rule. The article clarifies the concept of predatory pricing and its treatment under the Competition Act, 2002 whilst throwing light on the necessity of the prevailing laws. After reviewing the fundamental concepts and provisions relating to predatory pricing, the article discusses the obscure overlapping of predatory pricing with the abuse of dominant position. The article then discusses Court opinions of the United States of America and United Kingdom and their consensus on the cost-based rules, which has helped the courts in India in forming an analytical framework to examine the possible techniques of predation.

Background and Introduction to predatory pricing

The law of economics states that in a perfectly healthy market, the demand for a product, represented by the price the consumers are willing to pay and they think is correct, is exactly equal to the supply of the product, represented by the amount of money spend on actually manufacturing that product. Every player in the market has the same production mechanism, and even if they differ slightly, none of them are powerful enough to manipulate the economies of scale and bring in a difference in the already existing fixed price. However, in reality, on which the Competition Act, 2002 is based on, the supply of a product is more often than not, limited to the hands of a single market player, who, using his dominance has grown so powerful because of the low production cost he has, for the simple reason that his economies of scale are huge and research and development facilities better than most, he can determine the price without considering the fixed price, thereby misallocating efficiency. There are also situation in real-life, where the dominant players in the market, using their dominant position, create barriers for the new entrants or try to drive them out. One such method of driving out other players is called predatory pricing.

As per Explanation (b) at the end of Section (4), ‘predatory price’ means the sale of goods or provision of services at a price below cost with the subject to reduce competition or eliminate 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 In Re: Johnson And Johnson Ltd.1 said that “the essence of predatory pricing is pricing below one’s cost with a view to eliminating a rival.”

The Competition Act, 2002, which has been introduced in replacement of the Monopolies and Restrictive Trade Practices Act, 1969, seeks to ensure the welfare of the consumers by maintaining healthy competition in any relevant market. Therefore, predatory pricing, which is most certainly an abuse of dominant position, is made illegal. The dealing of predatory pricing in India, expressed in the Competition Act, 2002, has been borrowed from the English Competition Act, 1998 and the Clayton Anti-Trust Act, 1914.

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 (i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub- clause (ii) 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.2 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.3 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.4

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.,5 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.

Abuse of Dominant Position And Predatory Pricing: Why Do the Predatory Pricing Laws Exist

Abuse of dominant position and predatory pricing are two principles which are bound together by the an intricate web of legal rules and the economics of single-player control over a market and are so obscurely overlapped that they can only be severed from one another by the genus-species disengagement. Abuse of dominant position is the genus, whereas predatory pricing is the species. In simple terms, an enterprise or a group may, illegally, abuse its dominant position; predatory pricing is just one of the many, however the most frequently used, ways in which that enterprise or group may abuse its position of dominance.

Therefore, to understand and analyze predatory pricing, comprehending the meaning of dominant position is a necessity. Dominance is 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, its customers and ultimately of the consumers.6 As per the explanation to Section 4(2) of the Competition Act, 2002,

“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;

An analysis of the Porter’s 5 forces, developed by Michael E. Porter of the Harvard Business School,7 shows that the five conditions mentioned below are prerequisite to show abuse of dominance:

i. The threat of substitute products or services

ii. The threat of the entry of new competitors

iii. The intensity of competitive rivalry

iv. The bargaining power of customers (buyers)

v. The bargaining power of suppliers

It is very likely that very high markets shares, which have been held for some time, indicate a dominant position.8 This would be the case where an undertaking holds 50 per cent or more of the market, provided that rivals hold a much smaller share of the market.9

“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.”10 The above paragraph from the ECJ judgment in Hoffman-La Roche defines in short the concept of ‘abuse of dominant position’. Moreover, “Abuse” is an objective term. It comprises every conduct which might adversely affect the structure of a market in which competition is weakened.”11 And it has been very clear, time and again, that dominant position is not illegal per-se. This is also position under Section 2 of the Sherman Act, 1860 and under Art 82 of the EC Competition Law.12 It must be accompanied by abuse for it to be illegal. Predatory pricing by an enterprise, can be one such abuse.

However, the laws exist not only for reasons of equity but also for efficiency. There are justifications for predatory pricing laws based on equity considerations. All the laws in the country need to be in consonance with the Part III of the Constitution and therefore, the government wants to ensure that no one in the market has an unfair advantage over the other and that everyone involved in the relevant market has equal opportunity to exist, without placing relevance on them being some or big competitors. In regard to efficiency, basic microeconomic theory holds that a commodity is priced efficiently only if there is competition. Without this efficiency, dominant players, like in old times, will easily drive the new entrants and small competitors out, and will then recoup. Regulators from most of the countries are certain that this practice has two controversies attached to it like the two sides of a coin, and have found it to be one of the most controversial issue but they consider it harmful for the consumers because of the recoupment policies and the small investors, and has therefore declared it illegal.

In the United States, the Clayton Act prohibits predatory pricing and price discrimination. Section 2 of the Clayton Act is the fundamental provision there, which prohibits both predatory pricing and discrimination. The Act says that it is unlawful for any market player, who is in a dominant position to discriminate in price between different purchasers of commodities of like grade and quality, and also says that pricing below the cost is not permissible. The need for this law arises because small competitors and new entrants would not be able to find their feet in the market if the dominant players use their dominance and attract consumers by pricing predatorily or discriminatorily. Predatory price discriminations are employed by the dominant players with the sole objective of immediate destruction of competition by driving out the new entrants and the small competitors. More often than not, once the competitors are driven out by these dominant players, they seek to recoup their losses by pricing the commodities at a much higher price, because of which the burden falls on the consumers.

Predatory Pricing in India: Deriving the Law from the ECJ and the United States of America

Since its inception, the CCI using the Competition Act, 2002, has given various decisions and imposed several sanctions on anti-competitive market forces. Although, India’s theoretical law is based on the UK model; but a careful study of the practical reality shows that the Indian judges have followed the US model. The drafting committee has said that, despite there being differences in emphasis and interpretation across countries and over time within countries, the purview of the law in most countries is generally restricted to anti-competitive agreements, abuse of dominance position and mergers, and therefore, it would be foolish to not look into the laws of the developed countries who have been tackling these anti-competitive behavior. However, the committee failed to come up with a satisfactory definition of predatory price and although, it has prohibited predatory pricing in India with an express provision, it hasn’t mentioned the clear-cut rule to identify predatory pricing. Neither has it defined the different kinds of predatory pricing, which may include pricing discriminately with or without a mala fide intention.

Therefore, the CCI and the Apex Court of the country had to depend on judgments given by the US’ Supreme Court and the ECJ to decide matters on predatory pricing.

One of the most important things that the Indian Supreme Court had to decide on was whether or not selling at a lower price is illegal per-se. Prima facie, the section has been divided into two parts and so both the parts/conditions need to be fulfilled, and therefore, only when the goods are priced below the cost with an intention of driving out the competitors, it can be said to be illegal and termed predatory pricing.

Moreover, as per the Competition Act, 2002 even dominant position in itself is not an abuse or a restrictive trade practice. This is also position under Section 2 of the Sherman Act, 1860 and under Art 82 of the EC Competition Law.13 In Alcoa Case14, the judge had held that-

“A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight, and industry. In such cases a strong argument can be made that, although the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is the prime object to foster: finis opus coronat. The successful competitor, having been urged to compete must not be turned upon when he wins.” Therefore, if the goods are placed at a lower price because of the economies of scale and even less profit from a single good gives them more profit, in total, as their sales are comparatively much higher, they cannot be accused for abuse or predatory pricing.

However, the Apex Court in India indentified that a definite test to check and identify predatory pricing in India was missing. Therefore, a relevance was placed on the CCI’s decision in In Re: Johnson And Johnson Ltd.15 where CCI said that “the essence of predatory pricing is pricing below one’s cost with a view to eliminating a rival.” It further looked into the decisions of US’ Supreme Court and the ECJ to come out with a two prong test of recoupment and driving competitors out of the market, or having the intention to do so. The Courts and Tribunals in India have said that the intention to recoup is the most commonly used anti-competitive policy, after driving a competitor out of the market by using predatory discriminatory pricing.

In Brooke Group Ltd v. Brown and Williamson Tobacco Corp.,16 it has been said that “the requirement for a claimant seeking to establish competitive injury resulting from a rival’s low prices was to prove that the prices complained of were below an appropriate measure of its rival’s costs.”In addition, to establish predatory pricing, it should be necessary to look for an element of mala fide, i.e., of eliminating competition by creating transitory phase of low pricing which a competition may not be able to withstand. Price reduction, which may have to be resorted to survive in the competition market, or to meet the predatory pricing policy pursued by other competitors, would not be a restrictive trade practice liable to be struck down. The CCI in In Re: Johnson And Johnson Ltd.15 said that “the essence of predatory pricing is pricing below one’s cost with a view to eliminating a rival.” In MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd,17 the CCI defined predatory pricing as the conduct, “where a dominant undertaking incurs losses or foregoes profits in the short term, with the aim of foreclosing its competitors.”

The Hon’ble Supreme Court of United States, in Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corporation18 the Supreme Court has required Plaintiffs in predatory pricing cases “to meet stringent conditions to prevail on their claims.” In Brooke Group Ltd. v. Brown and Williamson Tobacco Corporation19 the Hon’ble Supreme Court established a new framework for predatory pricing analysis. It was held that, “First, a price could not be predatory unless it was below some measure of cost or even some measure of incremental cost. Second, and most strikingly, predatory pricing required proof of recoupment- that the predator can later raise price sufficient to recoup its investment in below cost pricing.”

In Standard Oil Co. v. Trade Comm’n20, The US Supreme Court held that “Section 2(b) permitted a seller to retain a customer by realistically meeting in good faith the price offered to that customer, without necessarily changing the seller’s price to its other customers.”

The principle provided in 2(b) of the Clayton Act of US is contained in the explanation to Section 4(2) (a) of the Indian Competition Act. Moreover, the explanation of Section 4(2) (a) of the Competition Act, 2002 clearly states that a price which may be adopted to meet the competition is not included in Section 4 of the Competition Act, 2002 and cannot be termed as abuse of dominance. Price reduction, without indulging into predatory pricing is beneficial for the consumers. As the Court in Brooke Group Ltd v. Brown and Williamson Tobacco Corp.,21 held that “it is axiomatic that the antitrust laws were passed for the protection of competition, not competitors.” If price reduction is not allowed, it will be in against the interest of the consumers and the whole intent of the legislature to have competition in order to give alternative choices to the consumers will be defeated.

In the most recent decision in US, i.e., in Pacific Bell Telephone Co. v. Link Line Communications, Inc.,22 the Supreme court reconfirmed the analytical framework stated in Brooke Group, i.e. a Plaintiff must prove: (1) the alleged predator’s prices were “below an appropriate measure of its rival’s costs;” and (2) that the suspected predator had a “dangerous probability of recouping its investment in below-cost prices.” The ECJ in France Telecom, S.A. v. Commission23 established that “a detailed cost/price analysis is necessary to determine predation; prices below average variable costs must be regarded as abusive, while prices below average total costs, but above average variable costs, may be abusive if it is proven that the dominant undertaking’s intention was to eliminate a competitor.” In Tetra Pak International SA v. Commission of the European Communities24, it was held that, “prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown.”

Moreover, the court in Brooke Group Ltd v. Brown and Williamson Tobacco Corp.25 held that in the absence of evidence to support the likelihood of recoupment of predatory prices, there can be no reasonable prospect of recouping the investment, which is required to be proved under Section 2 of the Sherman Act. In MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd26, 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.”

In Brooke Group Ltd v. Brown and Williamson Tobacco Corp.27, the Court held that “Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced. The below-cost pricing may impose painful losses on its target is of no moment to the anti-trust laws if competition is not injured: it is axiomatic that the antitrust laws were passed for the protection of competition, not competitors.”

After carefully perusing through all these judgments, and citing them in various judgments of their own, the Courts and Tribunals in India, have been following the two prong test of recoupment and driving competitors out or having the intention to do so. However, all the tests laid down are very clear; there still is no clear stance by them on the word ‘below the cost’ mentioned in the definition of predatory pricing. Although, as of now, the cost is being interpreted as the average variable cost, and not the total cost, there are jurist on both sides of the coin, arguing why or why not shall cost be interpreted as average variable cost.

Concluding Remarks

The law relating to predatory pricing was introduced in India by the Competition Act, 2002, because most dominant companies from the West, before the enactment of the Act, chose predatory pricing as a tool to drive out Indian competitors from the market. The huge population of the country, which serves as a big market, coupled with the cheap labor meant that companies from the West who were dominant players in the relevant market only had to price predatorily to drive out the Indian companies from the market. The Indian companies never had too much capital and were generally small competitors. Although the quality of the Indian companies’ products were better, the enterprises from the West brought with them big reputation and cheap prices. The selling below price policy of the enterprises made sure that the Indian companies stumbled and eventually, sold their companies to these giant, dominant players. Therefore, they succeeded in driving out all the small Indian competitors from the market, and turned it into a monopolistic or a duopolistic market, instead of the earlier existing oligopolistic market. The choices of the Indian consumers were limited and many people were rendered jobless as most Indian companies were shut down or sold. Moreover, the dominant enterprises from the West had better R&D, which meant enhanced, and more machinery and less labor force. In addition, after driving the competitors out, the companies went for recoupment, which meant that the prices of the monopolistic or duopolistic market were sky high and it was the consumers who actually suffered from it, as they neither had the freedom to choose between products, nor were they paying the right amount for the essential or lifestyle products.

Therefore, a need was felt to control and curb this abuse of dominance and predatory pricing. Although, the drafting committee did a satisfactory job in expressly prohibiting predatory pricing, it failed to provide a much needed exhaustive definition of predatory pricing. The price below which the price would be predatory has nowhere been made available in the Act. The dispute in the ECJ and United State’s Supreme Court on average variable cost and average total cost still continues. The basic inference which anyone can make is that the only reason the CCI and the ECJ has stick to the average variable cost is because the average total cost fluctuates way too much and it would only add too much complexities. However, because of this approach many new entrants and small competitors are still being challenged, as the dominant enterprises are selling products below their total cost of manufacturing i.e., without causing any profit. Although it may seem consumer friendly, independent researchers suggest that these are anti-competitive behavior too and the only reasons the enterprises adhere to these are to drive out competitors. Therefore, the legislature should take a clear standpoint and make the law relating to predatory pricing a little more exhaustive. This will act as a stimulus to the new entrants and small competitors and will help in fostering competition and maximum welfare.

 

 

________________________

* 4th year, BA.LLB.(H), National Law University, Odisha

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

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

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

4 Supra at 2

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

6 Case 27/76, United Brands Company v. Commission of the European Communities, [1978] ECR 207, para 65, also see Case 85/76, Hoffmann-La Roche & Co. AG v Commission, [1979] ECR 461, para 38

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

8 arjorie Holmes & Lesley Davey, A Practical Guide to National Competition Rules Across Europe 283 (1st Ed. 2007)

9 Case C-62/86, AKZO Chemie BV v Commission of the European Communities, [1991] ECR I 3359, para 60

10 Case 85/76, Hoffmann-La Roche & Co. AG v Commission, [1979] ECR 461, p. 541

11 A Glleiss, Common Market Cartel Law 341 (3rd ed. 1981)

12 J. Sweeney, The Internationalization of Competition Rules (1st ed., 2010)

13 Salomon v. Saloman & Co, [1895-99] All ER Rep 33

14 US v. Aluminum Co of America (Alcoa), 148 F.2d 416 (2d Cir. 1945)

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

16 Brooke Group Ltd v. Brown and Williamson Tobacco Corporation, 509 US 209 (1993)

17 MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd, 2011 CompLR 129 (CCI)

18 Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corporation, 475 U.S. 574, 1986

19 Brooke Group Ltd. v. Brown and Williamson Tobacco Corporation, 509 U.S. 209 (1993)

20 Standard Oil Co. v. Trade Comm’n , 340 US 231 (1951)

21 Brooke Group Ltd v. Brown and Williamson Tobacco Corporation, 509 US 209 (1993)

22 Pacific Bell Telephone Co. v. Link Line Communications, Inc., No. 07-512, 555 U.S. 2009

23 France Telecom, S.A. v. Commission , C-202/07 France Telecom (2009)

24 Tetra Pak International SA v. Commission of the European Communities, Case C-333/94 P Judgment of the Court (Fifth Chamber) 1996.

26 Brooke Group Ltd v. Brown and Williamson Tobacco Corporation.,509 US 209 (1993)

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

27 Brooke Group Ltd v. Brown and Williamson Tobacco Corporation, (1993) 509 U.S. 209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Disclaimer : The views in this article are author's point of view. www.manupatra.com may or may not subscribe to the views of the author.

This article is not intended to substitute the legal advice. No portion of this article may be copied, retransmitted, reposted, duplicated or otherwise used, without the express written approval of the author.

The Copyright of the article is with the author.