Predatory Pricing

This article has been reviewed on 05.03.2024

Predatory pricing is a business strategy for selling a product or service below cost to drive competitors out of the market. It also creates barriers to expansion and entry. It is often a temporary arrangement to hamper the competition and draw more profits in the long term by increasing market power.

The pricing strategy adopted by an enterprise of lowering the prices of goods and services below cost to promote and establish itself in the market is commonly referred to as ‘penetrative pricing.’ It is an established practice of giving discounts adopted by various enterprises like Amazon, Flipkart, and Jio. However, this common idea of ‘penetrative pricing’ is seldom known in the Indian competition regime.

In the Indian legal landscape, predatory pricing is prohibited under the Competition Act, 2002. Recognized as an abuse of dominant position, predatory pricing is explicitly prohibited under the Act to safeguard fair competition and deter the emergence of monopolies. The Act aims to prevent scenarios where firms leverage temporary price reductions to eliminate competition, paving the way for future exploitation through monopolistic practices. However, antitrust law does not mandate proof of higher prices later since even attempts are prohibited.This underscores the proactive stance of Indian antitrust law in curbing anticompetitive practices, emphasizing the importance of preserving market competition and protecting consumer interests.

Indian Landscape

The Competition Act, 2002

The Competition Act, 2002 prohibits predatory pricing, treating it as an abuse of dominant position under Section 4(2)(a)(ii) of the Act. Section 4 further outlines a basic definition of predatory pricing as follows: “predatory price” 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". Hence, predatory pricing refers to a practice of driving rivals out of business by selling at a price below the cost of production.

‘Cost’, for this purpose, has been defined in the Competition Commission of India (Determination of Cost of Production) Regulations, 2009

The scope of "cost" in the definition of predatory pricing is multifaceted and can include the following:

• i. “total cost” means the actual cost of production including items, such as cost of material consumed, direct wages and salaries, direct expenses, work overheads, quality control cost, research and development cost, packaging cost, finance and administrative overheads attributable to the product during the referred period ;
• ii. “total variable cost” means the total cost referred to in clause (i) minus the fixed cost and share of fixed overheads, if any, during the referred period;
• iii. “total avoidable cost” means the cost that could have been avoided if the enterprise had not produced the quantity of extra output during the referred period;
• iv. “average avoidable cost” is the total avoidable cost divided by the total output considered for estimating ‘total avoidable cost’;
• v. "long run average incremental cost” is the increment to long run average cost on account of an additional unit of product, where long run cost includes both capital and operating costs;
• vi. “market value” means the consideration which the customer pays or agrees to pay for a product which is sold or provided or can be sold or provided, as the case may be;

Judicial Trend

The scope of predatory pricing has evolved through judicial precedents since the enactment of the Competition Act in 2002.

The Competition Commission of India ("CCI") in the landmark case of In Re: Johnson And Johnson Ltd. (1988) held that “The essence of predatory pricing is pricing below one’s cost to eliminate a rival.”

However, mere selling of a product at a sub-average price does not automatically make it a case of predatory pricing. The Supreme Court in Haridas Exports v. All India Floating Glass Mfrs. Association (2002) held that the diminution in price becomes predatory pricing only when it hampers the competition in the market. This protects consumer interests and allows firms with higher efficiency to price accordingly.

In MCX Stock Exchange Ltd. v. National Stock Exchange of India Ltd. (2011), the 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 on the basis of the facts of the case. The unfairness has to be examined in relation to 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.

Dominant Position Criterion

It has been confirmed in various judicial holdings that for a pricing strategy to amount to predatory pricing, it necessarily needs to have a dominant position.

In the CCI's investigation of Ola in 2017 in Fast Track Call Cab v ANI Technologies (P) Ltd., the Commission held that existence of a dominant position and the abuse of this dominance is necessary for the sub-cost pricing to amount to predatory pricing and not mere promotional activities. It is observed from this case that the Commission is reluctant to prohibit firms from reducing prices since it benefits consumers, unless the harm being caused to competition would allow a dominant firm to abuse its position to profit. In this case, since Ola and Uber were not in a dominant position (individually or collectively) and could not profit from pricing below costs, the Commission allowed such pricing. The CCI did not accept the Informant's contention that predatory pricing was by itself evidence of a dominant position and held that "[N]ew entrants commonly engage in such practices to gain a toehold in the market and holding them dominant based on simple observation of conduct may have the undesirable result of chilling competition".

This was further confirmed in the Reliance Jio case of Bharati Airtel v Reliance Industries (2017) wherein Jio offered free services to consumers under various offers which allegedly amounted to predatory pricing. Having regard to its subscriber base, size, resources and economic power, the CCI held that Jio is not in a dominant position in the market and hence its offers are only in nature of promotion rather being predatory. CCI then concluded that mere provision of services at free of cost by itself cannot be termed as anti-competitive unless the same is evidenced by dominant enterprise and an anti-competitive objective of excluding competition / competitors which does not seem to be the current scenario after considering relevant market and competitors. The CCI noted that the alleged predatory conduct should be investigated only if Jio is prime facie dominant in the relevant market and in the absence of such dominance, there is no question of any investigation for predatory pricing. The CCI dismissed the case because there was no proof that Jio was in a dominant position.

The CCI has until now therefore not considered predatory pricing as proof of a dominant position but instead as an after-affect of it. This position was altered in the Supreme Court's Order against Uber in Uber (India) Systems (P) Ltd. v. CCI (2019), wherein the Court took predatory pricing as evidence for the existence of a dominant position since it affects competitors of the dominant firm.

However, CCI's decision in the Ola investigation is not overruled since there were other factors influencing that holding such as the fact that at that point the market for radio taxis was at a nascent stage and the low prices are not because of cost efficiency but because of the funding it has received from private equity funds. Therefore, predatory pricing can be considered proof of both dominance and abuse of that dominance in certain contexts.

This will especially be of paramount importance in the ongoing cases against Flipkart and Amazon which CCI has approved investigations for, namely All India Online Vendors Association v. Flipkart India Private Limited and another (“Flipkart”) and Delhi Vyapar Mahasangh v. Flipkart and Amazon .

CCI has often been seen taking strong stance on predatory pricing by companies, for instance, it imposed a penalty of Rs. 1,337.76 crore on Google for abusing its dominant position in multiple markets in the Android Mobile device ecosystem, apart from issuing cease and desist order. The CCI also directed Google to modify its conduct within a defined timeline.

Determination of a policy as Predatory Pricing

In Transparent Energy Systems (P) Ltd. v. TECPRO Systems Ltd. (2013), the CCI provided that the following findings are relevant for the identification of predation :

1. The prices of the goods or services of the enterprise are at a very low level;
2. The objective is to drive out competitors from the market, who due to the low pricing would be unable to compete at that price;
3. There is significant planning to recover the losses if any, after the market rises again; or
4. The competitors have already been forced out.

As Defined in Official Reports

Competition Commission of India Advocacy Series

"Predation is exclusionary behaviour and can be indulged in only by enterprises(s) having dominant position in the concerned relevant market."

In its report titled 'Provisions Relating to Abuse of Dominance' in the Advocacy Series, CCI delineates the major elements in determining predatory behaviour:

1. Establishment of dominant position of the enterprise in the relevant market.
2. Pricing below cost for the relevant product in the relevant market by the dominant enterprise [‘Cost’, for this purpose, has been defined in the Competition Commission of India (Determination of Cost of Production) Regulations, 2009 as notified by the Commission.
3. Intention to reduce competition or eliminate competitors. This is traditionally known as the predatory intent test.

CCI Journal on Competition Law and Policy

Flowchart for Investigation of SS. 3 & 4 Cases available here.

Types of Predatory Pricing

1. Single-product and Cross-Subsidising Predatory Strategies: Predatory pricing can be of a single product wherein after the competitors are forced out, the firm captures the market. On the other hand, it can also include cross-subsidising, wherein profits from one product are used to subsidise another product at a low cost to harm competitors. The aim is to capture overall market share even if there are losses on individual product lines.
2. Tie-in Sales: Refer to the page on tie-in agreements.

Research that Engages with Predatory Pricing

Academic Literature

1. Mohsin, Kamshad, Predatory Pricing in India (March 10, 2020). Available at SSRN.
   1. This article provides a good starting point for learning about predatory pricing in India and covers the Ola and Jio cases.
   2. It also explains the factors that lead to establishment of predatory pricing as a corporate practice:-
      1. Dominance - The predator has to sustain losses for the time as he is selling the commodity at a value less than the standard cost, therefore to last in such situation is only possible for that market player who has huge capital reserves, therefore predatory pricing can be only practiced by the player who dominates the market.
      2. Roadblocks to entry as well as re-entry - To execute a thriving predatory pricing exercise, some sort of roadblock at the stage of entry in the market is needed otherwise the potential competitors will instantly try to come back in the market once the dominant player increases the prices of the products to recoup the losses and then drag the prices to the competitive level.
      3. Excess Capacity - The dominant player in the market must be capable of attracting all the demand that is created by the artificial cutting down of prices, the predator must also be able to attract the customers of the competitors. If the predator fails to do this then the demand will outgo the output of the predator and resultantly the competitors will get a chance to re-enter and survive in the market.
      4. Non-price Predation It includes product differentiation, product innovation; the object is to increase the costs of the competitors. If the cost of the rivals grows, the dominant player takes advantage of the situation and gains profit even if the competitor stays in the market.
2. 'The Paradox of Predatory Pricing' by Daniel A. Crane discusses the harmful ramifications of having a stringent predatory pricing law which may make prices suboptimal and cause social losses to consumers.
3. 'Amazon’s Antitrust Paradox' by Lina Khan is a groundbreaking article that challenges the conventional antitrust frameworks (which focused on consumer welfare evidenced by low costs) in the context of digital platforms, particularly focusing on Amazon. Khan argues that traditional antitrust laws are inadequate for addressing the market dominance and potential anti-competitive behavior of tech giants like Amazon. She contends that Amazon's business practices, such as predatory pricing, vertical integration, and data-driven advantages, have led to significant market power that undermines competition and harms consumers in the long run. Khan's analysis calls for a reevaluation of antitrust enforcement strategies to better regulate digital markets and protect competition and innovation. Her work has sparked widespread debate and influenced policymakers, academics, and regulators in their approach to addressing the challenges posed by dominant tech platforms.
   1. Dominance through Loss-Leading pricing: Khan argues that Amazon has achieved market dominance by engaging in loss-leading pricing strategies, where it sells products below cost to capture market share and drive competitors out of the market. This practice, she suggests, enables Amazon to establish a monopoly position in various sectors, leveraging its scale and resources to maintain its dominance.
   2. Long-Term Harms to Competition: Khan highlights the potential long-term harms of Amazon's predatory pricing practices, arguing that while consumers may benefit from lower prices in the short term, these practices can lead to the elimination of smaller competitors and reduced innovation in the market. As Amazon becomes the dominant player, it may exercise unchecked power, stifling competition and limiting consumer choice in the long run.
   3. Vertical Integration and Data Advantages: Khan discusses Amazon's vertical integration across various segments of the e-commerce supply chain, from distribution to retail to cloud computing. This vertical integration, coupled with Amazon's access to vast amounts of consumer data, gives it a competitive advantage over smaller rivals. Khan suggests that Amazon's data-driven strategies enable it to engage in predatory pricing more effectively, further consolidating its market power.
   4. Market distortion and Regulatory Blind spots: Khan critiques traditional antitrust enforcement approaches, arguing that they fail to address the unique challenges posed by digital platforms like Amazon. She suggests that regulatory agencies have overlooked the anticompetitive effects of predatory pricing in digital markets, focusing instead on narrow conceptions of consumer welfare that prioritize short-term price effects over long-term market dynamics.
   5. Need for a new antitrust framework: Khan calls for a reevaluation of antitrust laws and enforcement practices to address the challenges posed by dominant digital platforms. She proposes a broader conception of antitrust that considers factors beyond short-term price effects, such as the impact on competition, innovation, and consumer choice. Khan advocates for a more proactive approach to antitrust enforcement that anticipates and prevents anticompetitive behavior in digital markets.
   6. The arguments made in this article highlight the complexities of predatory pricing and the need for a more nuanced understanding of its implications for competition and consumer welfare.

Data Challenges

Predatory Pricing poses a unique challenge to competition law because on one hand, history and economic theory teach that predatory pricing is an instrument of abuse, but on the other hand, price reductions are the hallmark of competition, and the tangible benefit that consumers perhaps most desire from the economic system. It is difficult to distinguish between a deliberate attempt to injure the competition and diminution due to the higher level efficiency of the dominant market player. The former needs to be prohibited because after pushing out the competition, the dominant player would elevate the prices to gain higher profits. Defendants may argue that lowering prices is a normal business practice in a competitive market rather than a deliberate attempt to undermine the marketplace, which makes it difficult to prosecute predatory pricing.

Furthermore, the prerequisite of dominant position for a firm to engaged in predatory pricing limits the CCI's ability to prevent anti-competitive behaviour from new entrants as confirmed in its past holdings in the Ola, Jio and Amazon orders. This is also known as 'penetrative pricing', evidenced in the Indian context with Jio later almost doubling its prices.

Predatory pricing in India is currently only prohibited if it is below-cost, this allows firms to engage in above-cost predatory pricing. If the low prices which are above cost are not recognized as predatory, the dominant Firm will keep the price at that level where profit cannot be maximised in the short run, long enough to drive out entrants and also competitors.

Cross-Subsidising is also a consideration that has been investigated by CCI in its order against Flipkart and Amazon which poses challenges in determining predatory pricing.

Way Ahead

The Indian Government has taken cognizance of the issue posed by marketplace and platform-based firms which have considerable market power in controlling both prices and the consumers' access to information and has sought to amend Foreign Direct Investment regulations to ensure that firms don't exhibit anti-competitive behaviour favouring their subsidiaries and disadvantaging smaller vendors.