Predatory Pricing: A Comparative study Between Competition Laws of India, European Union and United States of America Submitted in partial fulfillment of the requirement for the award of the degree of Doctor of Philosophy By Swati Bajaj 90121111215 UNIVERSITY SCHOOL OF LAW AND LEGAL STUDIES GURU GoBIND SINGH INDRAPRASTHA UNIVERSITY DWARKA, SECTOR 16 C, NEW DELHI (2020)CHAPTERS CONCLUSION AND SUGGESTION The thesis is based on a comparative study between the competition laws of India, EU and USA. Within competition law, the researcher has critically analyzed the concept of “Predatory Pricing” which is a pricing strategy intends to eliminate competition from the market, The researcher has discussed the relevancy of competition in the market and whether predatory pricing strategy actually has any potential to harm market competition. After studying the essentials of predatory pricing strategy in detail as per the competition laws of India, EU and USA the researcher has tried to explain the irrationality of the business practices like predatory pricing (especially under the Indian competition law) and under what changed circumstances such behaviour can become rational, The thesis is alienated amid five chapters covering Introduction (Ch.1), Dominance and Predation (Ch.2), Establishment of Predatory Pricing (Ch. 3), Concepts related to predatory pricing (Ch) and lastly conclusion and suggestions (Ch.5). This chapter concludes all the relevant topics discussed in the thesis along with researcher's agreement and disagreement with the same, The researcher has given its suggestions along with the issues. The sugges jons given are mostly with respect to Indian Competition Act, 2002, 5.1 Relevance of competition in market “Competition is the basic mechanism of the market economy which encourages companies to offer consumers goods and services at the most favourable terms. It encourages efficiency and innovation and reduces prices. In order to be effective, competition requires companies to act independently of each other, but subject to the competitive pressure exerted by the others”. - DGCOMP 216The Porter in his Diamond theory of “National Competitive Advantage” talked about five forces which say that there are five basic sources on which the competition and the market depends. The below figure illustrates them: "TAT oF He eNTRA: feonome fe slonty nd conan Comal rearenets ety gon mete earns 2 Golem: 1 Gorman pss 1 seceatesebatan tna + seedings Pn BARGAINING POWER OF Coated Pita Eid xan POWER OF SUPPERS ‘aasaran pone oF BUYERS ies od est pes huiberotestomes * Unauenessofench suppers podt 1 Savoie ozone ober 1 Feateonpnjsatieyosubance 1 arenes tan ope 1 Feeenmity ‘Ar oF uestTUTE PRODUCTS: rsa ose Tunbercsibtie oducts walae UT Bue sinformaon aaah Buyer ones ste aeante Sotening ete DUCTS Figure 15: Porter's Five Forces (Diamond theory of National Competitive Advantage)” Hence, to sustain fair market field it is important to regulate market competition and for which almost every jurisdiction has their own competition laws in order to protect their domestic industry from being destroyed due to anti-competitive behaviour of market players. ‘The enterprises plays crucial role in the growth and development of the economy of its country. Even though its own growth depends on various factors including its goodwill in the market, maximum consumer satisfaction, market share, acceptance in the society, etc. The government of every country intends to provide equal sso that the best and opportunities and level playing field to all the enterpr ‘the proficient enterprises will be able to compete in the market effectively. However, while competing, enterprises may attempt to hamper market +19 Editorial, “Porter’s Diamond Theory on National Competitive Advantage”, Available at; ups:/wwa husiness-to-you.com/porters-five-forces! last visited on 15/01/2020) 217competition in an inorganic manner. To regulate such activities the countries have enacted competition laws in their jurisdictions to ensure fair battle field. 5.2 Brief understanding on the concept Predatory pricing strategy is an abuse of one’s strength or power in the market. In order to achieve monopoly or to retain its dominant market power, the predator tends to reduce competition in the market by throwing the existing competitors out from the market. In this practice, consumers bi some the gizmo ‘through which the predator targets other market players. The practice involves two stages; at first stage, the enterprise reduces its prices beyond a reasonable limit (price-cut) and at second stage, the enterprise raises prices beyond competitive level to recover losses suffered during first stage (recoupment). The concept of predatory pricing is very ancient in the world of market competition. Its findings have not been uncommon in the USA and later in the EU. In India, the concept is very new and its understanding is also very basic. Though, the theory of predation is generally based on “deep pocket” concept. Predatory pricing is defined under the Indian Competition law but not specifically in EU and US antitrust laws. Under Indian law, it has been defined as a pricing strategy wherein the dominant enterprise reduces its price below the cost of production with the intention of eliminating competition from the market. In EU and USA, the concept is defined by courts only through cases wherein it has been considered as a violation of Art, 102 of TFEU under E and the violation of Sec, 2 of Sherman Act and the provisions of Robinson- Patman Act, 1936 under US law 5.2.1. Theories and their eritique The theories sociated with predatory pricing illuminates the understanding of ‘the concept of predatory pricing from economists’ perspective. According to the traditional theory of predatory pricing, it’s a pricing strategy in which only 218those enterprises can enter which already have a large share of the market and who will be able to benefit from predatory pricing after inducing the exit of its competitors who are having less market share in comparison to the share of dominant enterprise. The antitrust authorities used to act against predation on the basis of allegations that a dominant enterprise is trying to abuse its dominant position by reducing its prices below the cost. The competition laws of many jurisdictions still consider predatory pricing a strategy of a dominant centerprise.* On this the Chicago Law School said that predatory pricing is unlikely to be @ profitable business strategy because the predator has a large market share, the losses incurred by a dominant firm that sets its prices below its costs will necessarily be larger than those of its intended victims. It might be argued that if a predator with superior financial resources (referred to as “deep pockets’) can sustain a period of losses to drive out its rivals then why can’t the prey also raise capital?*"? In the emerging capital market, any financing company can provide financial hand to the predator especially when they be familiar with the fact that the prey is an efficient market player. According to the Chicago School, there can be few instances where a monopolist will be able to recoup the profits they have sacrificed during the predatory drive; however, if the market is wider enough to hold more than one enterprise then an equally efficient prey can re-enter after the predator reverts, to above-cost pricing, or other firms could enter, possibly after acquiring the assets of the erstwhile prey. Hence, the School provides a more convenient and rational approach of buying the competitors rather than engaging in predatory strategy.*!? The view of Chicago school was criticized by game theory. Tt says that pre ‘tory pricing strategy can be # rational strategy if employed with © Aditya Bhattacharjea (ed), Multi - dimensional Approaches Towards New Technology’ Insights on Innovation, Patents and Competition (Springer, Singapore, 1/2018) °° bid, © id, 219asymmetric information wherein the predator knows the uniqueness of the market but its competitors does not. In this setting, the predator can reduce its price in such a way that the entrant cannot tell whether it has miscalculated demand or because it is engaging in predatory pricing strategy.*'* The law scholars asso ited with Chicago University has said that a firm’ having dominant position in a market means that the firm has larger share in that market; and a firm with larger market share if get indulged in predatory pricing strategy then it means that it will suffer huge lose during the stage of predation, Hence, whether that firm will be able to recoup those losses or not again depends on the fact that whether the market has small number of players or the larger number of players. If there are larger number of players then in such cases, itis difficult to, first of all, eliminate each and every player from its root and hence it leave the chan 's of their come back once the predator will start recouping its prices; also, instead of getting eradicate from the market, the competitors can raise capital from the market and can go into the stage of ‘status quo for the time being till the predator stops using below —cost strategy. 5.2.2. From Me Gee's theory of ‘irrational predation’ on the decision of US Supreme Court in Standard Oil Case to the modern economic approach to predatory pricing While discussing the theories on predatory pricing, it is very important to understand them with its emergence in United States as it is the first nation enacting antitrust law in the entire world ive. the Sherman Act, 1890. Also, the reason behind the enactment of the Sherman Act was the prevailing predatory pricing practices in US market. ‘Afier the enactment of Sherman Act, the first major decision of US court was in Standard Oil case (decided in 1911) where in a largest company called Rockfeller used predatory prices to harm its competitors. The Supreme Court, while accepting the matter as of predatory pricing, ordered for the dissolution of Standard Oil Trust. However, Me Gee in 1958 gave somewhat different approach towards the predatory pricing behavior and he discouraged the “pba, 220Supreme Court’s decision in Standard Oil Case. Me Gee said that, “predatory strategy by a large firm such as Standard Oil against a much smaller rival would have been economically irrational in view of the much larger market share over which the predator must cut price. Recognizing that the predator cannot sustain such losses indefinitely, the prey will not be induced to leave the market. Nor will lack of funds exclude even the smallest prey since capital markets will step in to supply funds to an efficient producer. But even if the predator could drive the prey from the market, the predator would gain little because when it later attempted to raise price, either the prey or a subsequent purchaser could reopen the failed plant”.*!> Me Gee's approach was applied by Supreme Court till Brooke Decision (1993) wherein the Court specifically rendered the strategy as an irrational one. However, Mc Gee's theory was criticised by Ronald Kohler‘, Zerbe and Cooper (the modern economists) etc. The modem economists approach towards predatory pricing behaviour is that it is a rational behaviour and can results profits to the predator. The economists also claimed that after the Brooke decision many predatory pricing strategies were prevalent in the market The more development in the concept has arisen wherein the strategic approach says that in the emerging and growing business traditions, whe the technology and innovation has added several developments, the occurrence of predatory pricing strategy has become more probable.“”” The new theories have claimed predatory pricing a rational and profit maximising strategy by including financial market predation and other signalling theories. The financial market predation challenges the claim put forward by Me Gee that the prey can raise financial support from the capital market. It says that firstly it would be difficult for the financer to identify the reason behind the decline of prey's profit. Is it becau: c of predatory pricing or because of lack of “® Patrick Bolton, Joseph F. Brodley and Michact H. Riordan, “Predatory Pricing: Strategic Theory and Legal Policy” Available at hups:liwww.justice.gov/atripredatory-pricing- strategie-theory-and-legal-poliey (last visited on 23/07/2020) © Tn its PRD thesis “The Myth of Predatory Pricing” thesis was considered by Supreme Court in many cases. It was also relied upon by Areeda and Tumer while giving Cost Test for the determination of Predatory Pricing cases © id, 22aefficiency? Hence, in such a case the financer would be more incline towards recovering its debts from prey instead of supporting it with finance. Further, the other signalling theories including reputation test predation, test market and signal jamming, and cost signalling. According to the: signalling theories, the predator is assumed to be a well aware market player and it reduces the prices to induce the prey to believe that the market conditions are not favourable. 5.2.3 Consumer Welfare It is an anti-competitive practice; however, it gives benefits to the consumers at its initial stage where the predator lowers its prices below the cost of production, Social welfare, in industrialization, can be achieved only through consumer gratification. Nevertheless, whether such gratification achieved purposely for a short-run will obtain social welfare or not decides the extent of rationality or irrationality of such pricing strategies. In predatory pricing, the prices are set at lower level, Though, initially it benefits the consumer by providing them cheaper or very low cost products; however, once the predator achieve its goal behind the strategy it will gradually increase its prices to such. a profitable level where it would try to recoup its loss suffered during the stage of predation, This increase in price will disturb the consumers at large and hence their welfare would come to an end.*"*The final/ultimate effect of the predatory behaviour (if successfully accomplished) will be to worsen welfare in the long-run, because it eliminates competition from the industry. 5.3 Essentials of predatory pricing strategy under Indian Law Predatory pricing, under the competition law, is defined as a pricing strategy wherein the predator reduces the prices of the products below the cost of production*!? with the intention to eliminate market competition." Though the definition nowhere says that the predator needs to be a dominant enterprise; however as the definition is covered under sec, 4 and sec. 4 prohibits abuse of © Massimo Motta, Competition Policy: Theory and Practice 12 (Cambridge University Press, Now York, I* Edn/2004) © Regulation 3, CCI (Determination of Cost) Regulation, 2009 ‘9 Competition Act, 2002 (Act 12 of 2003), exp.(b), 4 222dominant position so it is assumed that predatory pricing strategy is also an abusive business strategy indulged in by enterprises having dominant position srched on the in the relevant market, Hence, in chapter 2 the researcher has r question that why law necessitate dominant position here. Also, whether a non- dominant enterprise can adopt predatory pricing strategy? Predatory pricing is also called as ‘deep pocket’ theory because reduction in prices below cost means suffering of loss and an entity can suffer loss only when it has deep pockets to prolong itself during the predation stage. This is ‘the reason why law pressurizes on ‘dominant position’ because only a dominant entity can be supposed to have deep pockets and the capability to stand in the storm. However, here the law makers have ignored those two entities that may not have dominant position in the market but are strong enough to hinder the market competition; firstly, enterprise having dominant position in another market; and, secondly, enterprise which is as efficient as the dominant one in the market. Furthermore, the researcher has highlighted the definition of dominant position which says that it is a ‘strengthening position’ which enables the enterprise to operate independently and free from its competitors and consumers.“ The definition nowhere says that an enterprise requires deep pockets to become dominant, Also, the factors mentioned ws. 19(4) requires market share, enterprise's size and resources, economic power, vertical integration, consumer dependence, countervailing buying power, market structure, social obligation, relative advantage, efc. of and enterprise to be held as dominant. The factors nowhere ask for “deep pockets” as one of the criteria for the enterprise to be considered as dominant. Hence, it can be assumed here that being dominant may or may not mean maximum financial stability and financial stability does not mean power to dominate. Also, an enterprise may have more financial stability then the one enjoying dominant position in the market. Here at this point the researcher wants to foreground that there are possibilities where an enterprise which is not dominant in a market but is as efficient as the dominant one can also engaged in predatory pricing strategy. 1 Competition Act, 2002 (Act 12 of 2003), exp. (a), $4 23‘A non-dominant enterprise, having less market power, may also enter into predatory pricing strategy, but if it does not acquire market power during predation or after predation, then it would not be able to recoup losses and will cause harm to itself, then, by taking the benefit of this situation the new enterprises or the dormant enterprise would again enter into the market and compete with the predator A non-dominant firm can enter into predatory pricing strategy if it has the probability to acquire market share/market power in the relevant market; or, if it has considerable high market power/market share in another relevant market (leverage dominance). Besides dominant position, the other essentials of the strategy are reduction of price below cost and the intention of the predatory to eliminate competition or the competitor. As Massimo Motta note: “a very cautious approach by anti- trust agencies and courts is needed to avoid the risk that firms endowed with market power keep prices high to avoid being charged with predatory behavior. Suppose that in a certain jurisdiction a low standard of proof is accepted for a finding of predatory pricing. Anticipating possible anti-trust problems, a firm will have a lower incentive to cut prices, even though this would be due to normal competitive behavior. As a result, prices will be higher than they might otherwise be, causing an allocative efficiency loss, and inefficient competitors might feel encouraged to enter the market, adding a productive inefficiency to the welfare loss"? In chapter 3 of the thesis, the researcher has tried to analyze cost and price relationship. As, predatory pricing is a strategy where prices are reduced below cost; the researcher has studied various types of costs and the recovery of which cost is mandatory and which can be avoided. Besides, in the chapter the researcher has also discussed that considering the intention of the predator to remove competition from the market by eliminating its competitors. ‘Nevertheless, it clarifies firstly that only those reduced price will be bad for the Massimo Motta, Competition Policy: Theory and Practice (Cambridge University Press! New York! 1* Ed. /2004) 228competition which intends to eliminate competition or competitor. Hence, the price - cut by a new entrant can be defended as ‘penetrating price’. As explained by the competition regulatory authority in MCX stock exchange case that, “Nascence must be differentiated from immaturity or even infancy and it cannot be anyone’s case that until a particular market has matured, it should continue to be treated as nascent. The word nascence denotes the state of existence at the time of or immediately after birth. Infancy denotes a state after the nascent stage, Immaturity is the remaining time before maturity. For any market, the first few months can be said to be nascent stage, where players are faced with day to day developments and discovering new dynamics each operational hour. Thereafter, there may be # period of infancy, where almost all market situations have played out but the players are facing teething troubles. This may last even another year. After that would come the process of maturity, when the market cannot be said to be filly developed but it also cannot be taken as nascent anymore, The extraordinary measures required to keep the new-born market alive are no longer necessary in this stage. Excuses for promotional or penetrative pricing will lose their innocence of intent and start veering towards suspicious, if not mala fide conduct and have to be assessed accordingly” The European Commission also gives importance to intention of the predator however in Hoffman La-Roche case‘, the Commission observed that it is quite difficult to distinguish a good intention or a bad intention, Hence, while determining the case of predatory pricing the enterprise’ dominant position would be given relevance; because deep price by a dominant enterprise prima facie raises the likelihood of suspicious planning, Secondly, with respect to below cost price, Prof, Areeda and Prof. Turner gave a predatory pricing test where they said that the standard of cost which needs to be considered while investigating a case of predatory pricing is the Average Marginal Cost (AMC); however, as the entities does not mention their Marginal Cost in the books of accounts. So, the alternative of marginal cost ic. Average Variable Cost (AVC) would be considered as the standard, The explanation behind this is that the total cost (TC) incurred by an entity in the © Para 10,56, MCX Stock Exchange Ltd. vs. NSE Led & Ors, 2011 Indlaw CCL33 © Hoffinan La Rocke vs. Commission [1979] E,C.R.-461 25production’ manufacturing of their product and service is the sum of total fixed cost (TFC) and total variable cost (TVC); so the average total cost (ATC) would be the sum of average fixed cost (AFC) and average variable cost (AVC). Now, the prices offered by a predator below cost can be below ATC or below AVC. What constitutes predatory pricing? The test illustrates that if the price is below ATC then the other factors needs, to be taken into consideration for proving predatory pricing such as harm to the market competition etc. However, if the price is below AVC then it is presumed that the strategy is predatory pricing. The explanation behind this is that as per the economist, an enterprise usually sells its products at a price above the incurred cost; however, if they are selling the products at a price below cost that means the entity is suffering loss. However, it is not true exactly; an entity if selling products below cost can still escape the route of loss if it sells the product below ATC but above AVC (not in every case); but if it selling its products below AVC then it is surely causing loss to itself. Selling products below ATC but above AVC means that the predator is at least covering its variable cost which changes with the change in output; however, selling the product below average variable cost means that the predator is not even covering its variable cost and suffering losses Nevertheless, the second case is possible only in two circumstances either the enterprise is going to shut or the enterprise is acting adversely towards its competitors. The researcher has raised the second issue in the thesis where by the researcher has suggested a strategy alternate to below-cost pricing or to say alternate to the practice of “short term loss”. The European Court of Justice (ECJ) in the case of France Telecom said that in order to determine ‘cost’ in an allegation of predatory pricing, itis the ‘cost’ of predator which needs to be looked upon and not the cost of the competitors. Hence, if the price offered by predator is below the cost of competitor then also 226it will cause loss to the competitors but the act of predator is not an infringement of competition law. ‘At this point the researcher had focused on the intention of predator enterprise. Although as per the existing law the predator is supposed to sell its products below its cost; however, the law nowhere says mandate this that predator needs to suffer intentional loss. This aspect is something which is created by the enforcement agencies on theit own. The prima facie motive of predator is to cause harm to its competitors and for those enterprise which have achieved its economies of scale it is easy to offer prices by taking the advantage of gap between its own cost and the cost of its competitors. The difference between lower prices offered by a predator and the lower prices offered by the enterprise in normal course of conduct is that in the former case ‘the lower prices ate not fixed for any time period (it last till the predation lasts); while, in the latter case the lower prices are offered naturally and their time period is fixed such as discounts offered by a branded company every year in winter or summer seasons. Also, in the former case the benefits given to the consumers is for short-run; while, in the later case the benefits given to the consumer is also for short-run however consumers are aware of the nature of lower prices. Furthermore, in the former case the lower prices results into loss to the enterprise; while, in the later case the enterprise offering discounts do not suffer any intentional loss. 5.3.1 Rationale behind suffering short-term loss Judge Breyer asserted that, “aggressive prohibitions of predatory pricing throw away a bird in hand for a speculative bird in bush”. He meant that just to evade heavy pri ent. sin future you cannot overlook lower prices in pres © France Telecom SA (formerly Wanadoo Interactive SA) v Commission of the European Communities (T-340i03) BU:T:2007:22; [2007] E.C.R. 11-107; [2007] 1 WLUK 643; [2007] 4 CMLR. 21; [2008] AILER. (EC) 677; CFT 27Practically, the predatory pricing strategy is not exactly the same as it appears fiom the theory mentioned in competition law books. Though, the intention of the predator is to eliminate the existing competitors out from the market, however, it’s not an easy assignment. Had it been so easy, then the new entrants would also have entered in the market the moment predator raised the prices for recoupment of losses suffered during the predation. Rationality or Irrationality of predatory pricing strategy can be analyzed on the basis of three mixed approaches: firstly, an enterprise’s indulgence in predatory pricing strategy by reducing its prices; secondly, predator’s capability to bear losses during predation period in comparison to the same capability of its competitors; thirdly, the probability to recoup losses in future. The law says that the predatory pricing strategy involves short-term loss by the predator and for this reason the law mandates that predator needs to be a dominant enterprise. According to the law makers, only dominant enterprise has that financial power which can help it to sustain its business even when the business is at loss. The researcher has negated both the aspects of the strategy by putting firstly that what could be a justified reason for a dominant enterprise to eliminate its competitor. ‘The law defines ‘dominant position’ as a strengthening position where the enterprise is free from all the competitive forces surrounding it?” Hence, if the enterprise is free from all the competition then from where the threat is expected. It makes such pricing strategy by the dominant enterprise very absurd and bizarre, Secondly, even if it is assumed that dominant enterprise is facing threat from any enterprise in the same relevant market from its as equally efficient enterprise as the dominant one then in such case it would be difficult to say that the efficient enterprise would be deficient in its economic. strength. © Richard Whish, David Bailey, Competition Law 782 (Oxford University Press, UK, 8 Ed 2015) © Competition Act, 2002 (Act 12 of 2003), exp (a), 8.4 28Moreover, the enterprise can obtain funds from another source if it sense predatory pricing strategy in the market. Thirdly, if the predator adopts the strategy of “above from own cost” and “below from competitor's cost” then it would not only be able to cause effect to its competitor but would itself not required to suffer loss. The Indian competition regards a price as predatory one only if it is below predator’s own. cost that too Average Variable Cost (AVC) which ensures that predator is suffering loss. Hence, there might be a chance that enterprise are targeting their competitors by adopting a manipulated strategy such as “below from competitor's cost” and with this they are easily escaping the eyes of regulatory authorities. Also, if the dominant enterprise would target only those players in the market from whom it has threat (we are assuming that it has threat) then there would not be any need to play against all the market players as it does not make sense, Also, if the predator would succeed in eliminating all its competitors, from the market then it would become monopoly in the market which would definitely attract the sight of competition enforcement authority. Further by targeting only its competitor the predator may reduce its prices below the AVC of its competitors rather than reducing it below its own AVC 5.3.2 Preys potential to compete in the market, One assertion has been put forward by Me Gee that the mere fact that they prey is a small firm having less financial resource in comparison to predator would be enough for the predator to win, Me Gee asserts that the predatory pricing strategy is a short term strategy (economically even a dominant firm cannot sustain its business if suffer loss in long-run), hence, for that short term small firm can obtain financial help from another. While offering predatory pricing in the market, if the predator ensures that its financial resources are greater than the financial resources of its competitor then it would help the predator in putting financial pressure on the competitor. The rationale behind this strategy is that the prey can have dominant position in one market and not in another. Hence, if the predator which is a dominant 229enterprise of another market (where the prey is not dominant) enters into predatory pricing strategy then the prey can take advantage of its sound financial condition from the market where it is dominant and would be able to compete with predator at par and would render the pricing strategy of predator a ravage, 5.4 Comparison with EU and US law Where Indian law differs from US and EU law, the EU and US law and its enforcement also differ from each other to a much extent, It can be generally understood that unlike US, EU is a cartel of 27 European Countries which acts unanimously and promote and develop each other’s interest. Hence, there exists institutional divergence between the jurisdictions. Wherein on the one hand the competition law enforcers are primarily the courts, there the competition law regulators in the EU are primarily the administrative agencies and due to this divergence, the difference arises in regulating the relationship between competition law and its regulation. While enforcing their competition laws on the allegation of predatory pricing, their legal rules differs. Where, the EU law emphasize on the existence of dominant position of alleged predator and its sacrifice of short term profits; there, the US law emphasizes on sacrifice (i.e. suffering of loss below the cost) as well as the market conditions. The US emphasize that a conducive market is necessary for successful predation otherwise the predator would not be able to do recoupment and where the probability to recoup does not exist, the strategy would cause extensive loss to predator itself and not to the market or other competitors. Seeing that, the US antitrust law gives more importance to ‘recoupment’ rather than on dominant position. Prof. Areeda and Tumer while giving their thoughts on ‘price-cost relationship’ in predatory pricing explained that, “predatory pricing would make little economic sense to a potential predator unles s he had greater financial staying power than his rivals, and a very Germain Gaudin, Despoina Mantzari, “Margin Squeeze: An Above-Cost Predatory Pricing Approach” 12 Journal of Competition Law & Economic 151-179 (2016) available ar, itps/doiorg/10,1093,joclec/nhv042 (last visited on 15/10/2019) © bid, 230substantial prospect that the losses he incurs in the predatory campaign will be exceeded by the profits to be earned after his rivals have been destroyed”. In the competition guidance manual on the official website of Federal Trade Commission (FTC) it is mentioned tha “A firm's independent decision to reduce prices to a level below its own costs does not necessarily injure competition, and, in fact, may simply reflect particularly vigorous competition. Instances of a large firm using low prices to drive smaller competitors out of the market in hopes of raising prices after they leave are rare. This strategy can. only be successfl if the short-run losses from pricing below cost will be made up for by much higher prices over a longer period of time after competitors leave the market."4! The Indian and EU law has focused more on dominant factor while US law has focused more on recoupment factor. US law has clear in their aspect that a successfull predatory pricing strategy has two stages. The strategy becomes rational only if it clears both the stages otherwise the strategy is a big failure and hence it does not require the attention of regulatory authority. The US antitrust law determines predatory pricing in a somewhat different manner then India and EU. Instead focusing only on the monopoly power it simultaneously focuses on the ‘probabilities of recoupment’. While determining predatory pricing, other than applying the ‘Standard of cost’ test, the US antitrust authorities pay attention towards the recoupment test because without recoupment predator will never be able to accomplish its predatory strategy and simultancously the predatory will cause loss to itself due to its short-term profit sacrifice." In European Union, even though recoupment is not considered as a mandatory ondition to prove predatory pricing strategy, the ECJ in the case of © phillip Areeda and Donald P, Tumer, “Predatory Pricing and Related Practices under Scotion 2 ofthe Sherman Act” 88 Harvard Law Review 697 (1975) © Patrick Bolton, Joseph F. Brodley and Michael HT, Riordan, “Predatory Pricing: A Strategic Theory and’ Legal Policy"Department of Justice, USA, Available at htps://ww justice gov/atr/predatory-pricing-strategic-theory-and-legal-policy (last visited ‘9n 05/07/2020) "Louis Kaplow, “Recoupment, Market Power And Predatory Pricing” 82, Antiust Law Journal, 2018) 231France Telecom held that, “the fact that recouping losses is not a precondition to a finding of predatory pricing in EC law does not prevent the Commission from finding the possibility of recoupment (or the lack thereof) to be a relevant factor in assessing whether or not the conduct in question is abusive. In particular, in cases where prices are lower than AVC, it may assist in excluding economic justifications other than the elimination of competition, and where prices are above AVC but below average total costs, it may assist in establishing a plan to eliminate competition” Unlike US, the Indian Competition Act, 2002 has not even used the term “recoupment” in its Section 4 or in any other provision of the Act. In fact, it has focused only on two requirements to prove the case of predatory pricing; one is ‘that the enterprise must be having dominant position in the relevant market before getting engaged in predation and secondly, their prices must be below the cost of production for which they apply Areeda-Turner Test. 5.5 Pro-competitive price - cut vs. Anti-competitive price — cut Price — cutting implies lowering or reducing the price of a product! commodity for selling it in the market. Price- cutting is not always bad. Indeed, competition on pricy js always considered as a merit one, The Commission in Mé. Transparent case*hold that, “predatory pricing had to be assessed on the basis of an appropriate cost benchmark (ie. average variable cost), as reduction of prices in itself was actually the essence of competition”. Further in HLS Asia Limited, New Delhi case*it was held that, “essence of the competition that the firms/companies should compete and vie with each other for grabbing contracts by reducing prices Giving rebates and adopting similar practices are an essential component of competitive process and law cannot condemn such practic © France Telecom SA (formerly Wanadoo Interactive SA) v Commission of the European Communities (T-340/03) EU-T:2007:22; [2007] F.C. 1-107; [2007] | WLUK 643; [2007] 4.CM.LR.21; (2008) AIL E.R. (EC) 677; CFI Transparent Energy Systems Private Limited, Maharashtra v TECPRO Systems Limited, New Delhi, 2013 Indlaw CC139 9 HLS Asia Limited, New Deihi vs, Schlumberger Asia Limited, Gurgaon & ONGC 2013, Indlaw CCI7 232The New York Southern District rr also explained in a case that mere price cutting cannot be called as violation of sec, 2 of Sherman Act unless it has a significant anti-competitive effect in the form of exploitation of monopoly power, The court also explained that predatory pricing means “pricing its products in an unfair manner with an object to eliminate or retard competition and thereby gain and exercise control over prices in the relevant market"°* Nevertheless, the Supreme Court of India in the case of UBER has taken a contrary view. In an appeal filed by UBER against an investigation order passed by COMPAT based on the prima facie view that UBER might be engaged in predatory pricing, the Supreme Court while upholding the order of COMPAT said that, “Uber was losing INR 204 per trip in respect of the every trip made by the cars of the fleet owners....the above factor is sufficient by itself to show that there existed a prima facie case under section 26(1) as to infringement of section 4 of the Act relating to abuse of dominant position by UBER.” Referring to Areeda and Turner, it says that there may be legitimate business reasons for pricing below cost, but have not made clear how one tells “good” below-cost pricing from “bad”, Considering this, it can be put up here that price-cutting, though one of the most important but cannot be considered as the only factor for establishing the intention of the predator. The Competition Commission of India in the WharsApp case said that, “Even though WhatsApp’ can be considered to have a dominant position in the relevant market in India. However, there are several other communication apps in India such as Hike, Messenger and Viber which are available free of cost or at a very low price. Further, there were insignificant barriers for a subscriber to switch to any other similar apps as they are easily accessible, can be downloaded on most smart phones and can co-exist with other similar apps. Further, Hike Messenger had expanded its consumer base in India to 100 million users within three (3) years of launching and therefore, there are no barriers for entry of competitors in the relevant market, Given the foregoing, although © Cy of Long Beach v. Total Gas & Power N. Am, Inc., 2020 US, Dist. LEXIS 100804 7 UBER India Syatems Pvt. Ltd. vs. Competition Commission of India & Ors. 2019 Indlaw sc972 233WhatsApp is a dominant player in the relevant market, it cannot be held that WhatsApp has indulged in predatory pricing. Also, the subscribers had the option of opting out of sharing account details and other information with Facebook after agreeing to the new terms of service and privacy policy. Further, whether the new terms of service and privacy policy were in contravention of the Information Technology Act, 2000 was not under the purview of the Act more so as this aspect was pending for adjudication by India’s Supreme Court.™** The DG COMP* in its discussion paper has also discussed about the pricing, strategy of the predator enterprise wherein they mentioned that, “Pricing is not predatory just because a company is lowering its price...it’s not even predatory because the lower price means incurring losses or foregoing profits in short run. On this there exists a very famous theory of Ramond Vernon wherein he described the various stages of a product. This theory is called as ‘Product's Life Cycle Theory’. He has explained that there are five stages of a product’s life ile. introduction (also known as nascence stage), Growth, Maturity, Saturation, Decline.“ Predator may take a defense for offering excessive low price that its product is at introduction stage and the intent behind the strategy is only to make the product known in the market and not to ham market competition, 5.6 Sec. 4(2)(0) Another loophole in the law seems to be of absence of clarity. The law says that an enterprise needs to be dominant in the relevant market before getting alleged for predatory pricing because it is an abuse of dominant position only. However, the law nowhere says that in which relevant market the enterprise © Sh. Vinod Kumar Gupta, CA Fight for Transparency Society And WhatsApp Ine, 2017 Indlaw C133 8° Directorate General for Competition of the European Commission, available at: bhupi/e.europa.eu/competition/antitrusvoverview_en.anl (lat visited on 21/05/2019) “ Raymond Vernon, “Intemational investment and international trade in the product cycle” 80 Quarteriy Journal of Economics 190-207 (1966) 234need to be dominant, Even though it has always been assumed to be the one in which the abuse has been alleged; however, the assumptions cannot be taken as guaranteed. To put in simple words, the researcher wants to draw attention to clause (e) of s. 4(2) which says that the enterprise is also said to abuse its dominant position when it “uses its dominant position in one relevant market, to enter into or protect other relevant market”. The clause very clearly indicates the situation where an enterprise is abusing its dominant position in that relevant market where it is not even dominant. This is called leveraging dominance. 5.7 Irrational Strategy If an enterprise having large market share wants to engage in predatory pricing to eliminate and get rid of its competitors then in such case the enterprise could have merged its business with its rival as that would be more profitable as well as that would allow the preservation of high profits in the industry. Here, predatory pricing would have proved to be an inefficient tool because it destroys industry profits for the time predation lasts.“ John S. MeGee in his work gave a very interesting remark to make the readers understand that instead of acquiring monopoly power through predatory pricing, one could have done that through ‘purchase technique’ McGee, basically, re-analyzed the very famous US case of predatory pricing ie. Standard Oil Co. of New Jersy vs. United States“? wherein he used an assumption that, “assume Standard had an absolute monopoly in some important markets and was earning substantial profits there, Further assume that in another market there are several competitors, all of whom Standard wanted to get out of the way. Standard cuts the price below cost. Everyone suffers losses including Standard though it could have been earning at least competitive returns. The war could go on until average variable costs are not covered and are not expected to be covered by the competitors and eventually “1 Massimo Motta, Competition Policy: Theory and Practice 411 (Cambridge University Press, New York, 2006) “e221 US. 1911) 235until they have drop out. If instead of fighting, the Standard would have bought out his competitors directly, he could afford to pay them up to the discounted value of the expected monopoly profits to be gotten as a result of their extinction, Anything above the competitive value of their firms should be enough to buy them. In the purchase case, monopoly profits could begin at once; in the predatory case, large losses would first have to be incurred. Losses would have to be set off against the prospective monopoly profits, discounted appropriately.” In their economic cost-price test, Areeda and Turner also mentioned that predatory pricing strategy seems illogical if seen from an economist’s perception, Firstly, a predator can cause bankruptey to its rival competitors but cannot exclude them absolutely from the market. There are chances like the competitors can either get escape from the sight of predator and later on again enter into the market the moment predator increase its prices to recoup; and secondly, the predator can anticipate monopoly profits for only so long as its monopoly prices do not attract new entry because generally losses incurred through predation can be recouped in markets with very high barriers to entry. The economic literature on the rationality and effectiveness of predatory pricing is in a state of flux. Many economists have questioned the rationality of predatory pricing on grounds that: it can be at least as costly to the predator as to the victim; targets of predation are not easily driven out, assuming relatively efficient capital markets; and entry or re-entry of firms in the absence of barriers reduces the predator’s chances of recouping losses incurred during the period of predation. On the aspect of irrationality a successful predatory strategy would depend on the factor such as barriers to entry and barriers to re-entry by the eliminated entities If while reducing the prices, the predator successfully ensured that “©Hlerbert Hovenkamp, “Predatory Pricing under the Areeda — Tumer Test”, U Jowa Legal studies 2015), available at:_—_—iitps/ssm.comiabstract=2422120 or httpd doi org/10.2139/ssmn.2422120 (las visited at 01:44 on 01/12/2018) 236during the time of recoupment there would not be any comeback of eliminated entities or there would not be any entry of new entity then only it would be able to create or retain its monopoly in the market. As Bishop and Walker said ‘that the strategy is so irrational that the predating entity would not be able to make excess profits even if it did drive its competitors out of the market.“* They also said that in any case even if the predator would be able to raise the prices above the competitive level then also its profit depends on the facts that how much loss predator had incurred and for how much time and how soon and by how much above the competitive price level the predator can raise to recover those losses. Practically, it is not possible for a predator to look into such statistics before adopting predatory strategy." On this Bishop and Walker said that, “predation is more likely to be plausible strategy when the predator can target its low prices specifically against the firm it wants to exclude, rather than having to lower prices to the whole market. Equally obviously, the less the predator can raise prices post exclusion, the less likely the strategy is to be profitable”. With these words of Bishop and Walker, the researcher wants to state that if the predator adopts the strategy of “above from. own cost” and “below from competitor's cost” then it would not only be able to cause effect to its competitor but would itself not required to suffer loss. The Indian competition regards a price as predatory one only if it is below predator's own cost that too Average Variable Cost (AVC) which ensures that predator is suffering loss. Hence, there might be a chance that enterprise are targeting their competitors by adopting a manipulated strategy such as ‘below from competitor's cost” and with this they are easily escaping the eyes of regulatory authorities, Hence, the concept of predatory pricing needs more extended approach Another aspect which supports the allegation of irrationality on predatory pricing strategy is that every loss making act of an enterprise cannot be called as predatory even if itis intentional. There are many businesses wherein at the time of closing the entities suffer intentional losses as they try to get away with, “ Simon Bishop & Mike Walker, The Economics of EC Competition Law: Concepts Application and Measurement 183, (Sweet & Maxwell, London, 2" Ed.) “© id, 237the products, however at the time of opening they try to makeover their losses. Here, the step of making-over cannot be described as recoupment because here losses were not suffered with the intention of harming competitors and making over of losses is not done with the intention of harming consumer’s interest. In fact, consumers are here aware of the reasons behind deep-discounts offered at the time of closing and they are also aware of the increase in price at the time of opening, 5.8 Related Concepts 5.8.1 Margin Squeeze Margin squeeze, as explained by Simon Bishop & Mike Walker, occurs ‘when a dominant upstream firm sell input to its competitors at downstream market at the wholesale price (given prevailing retail prices) which unable the competitors to cover their costs’. The explanation sounds like a pricing strategy say predatory pricing, since in predatory pricing also the competitors’ faces challenges when their retail prices reach at a point where it becomes difficult for them to meet their cost which they had incurred in production and ultimately they are forced to leave market. The concept of margin squeeze brings two markets into the picture ie. upstream market and downstream market. It involves vertical integration between the enterprise engaged at both upstream level and downstream level. Vertical integration is not per se bad. In fact, it is competitive strategy of the market players. They strengthen themselves by spreading their roots in all the related markets. However, whether margin squeeze can lead to predatory pricing is what the researcher has focused in the thesis. Before that it is important to understand the concept of margin squeeze which the researcher would explain with the help of following flow chart: The figure illustrates that how enterprises at two different levels of the market are taking benefit of their vertical integration and causing harm to their “® Simon Bishop and Mike Walker, The Economics of EC Competition Law: Concepts, Application and Measurement 337 (Sweet & Maxwell, London, 2 Ed.) 238competitors by squeezing their profits. However, such strategy does not appears to be anti-competitive until any of the enterprise is having dominant position in the market as a dominant enterprise owe a responsibility towards ‘the market players to act indiscriminately. However, whether such practices can results into predatory pricing? The figure __ in Ch, 4 explains that at downstream level if enterprise X sells, its product to the consumer at a price lower than its competitors than it may pose threat to its competitors. However, to make this strategy predatory pricing low prices needs to full fill the requirement of current law related to predatory pricing in India i. the lower price must be wither below the ATC or below the AVC. Due to vertical integration between the enterprises at two levels it can be assumed that if the enterprise at downstream level sells its product below ATC then it may not be a case of predatory pricing before the enterprise must have been recovering its average fixed cost from its vertically integrated enterprise. However, if the enterprise is selling its products at a price below AVC than from the case of margin squeeze it would become the case of predatory pricing, 5.8.2 E-Commerce India is one of the major countries which has not only appreciated technology but also tailored itself accordingly. Where the life of the people is very demanding in working for growth and money, there the technology has helped them in feating their erstwhile exertion without going in the physical marketplace. They can do shopping online, they can call salon at home, they can book cabs through Apps, and they can also order food through various online Apps. Where this technology has become a boon in the life of the consumers, there it has also increased the scope of doing business for the entrepreneurs. Tt has amplified the understanding of the phrase ‘market’. Earlier, market used to be the place where sellers and buyers physically meet cach other and do transactions; conversely, now the sellers and buyers meet each other online either directly or through platforms. This enlarged 239elucidation of the word ‘market’ has made the role of fair competition regulators more difficult. Now, while determining the relevant market they have to keep in mind not only the product and geographical market but also the online market. In fact, online market is the fraction of product market. Different structure of e-commerce market players which are as follows: Platform Market Provider: In this market, there is a third entity which opens or provides platform for the two sides to meet virtually. This is also called as two- sided market. This platform provider charge both the seller and buyers. For instance, delivery charges charged from the consumers while placing order on say myntra, amazon or any other shopping website. Another instance be like ‘Netflix, amazon prime, disney hotstar and many more providing platform to producers and watcher and they charge member ship fee from the watchers. Third example can be like online food apps which provide online menu of all accessible restaurants to the foodies sitting at their comfort. These online apps also charge delivery charges from the customers and the commission from the restaurants, In case of platform market, the producers or the manufactures whose products are getting advertised on online platforms may or may not have a place in the physical market. Also, this new age market has innovate a new set of competitors i.e, platform market players. There is competition between netflix, hotstar, Zee 5, amazon prime efc. Then there is competition between swiggy, food panda, zomato etc. There is competition between amazon, flipkart, myntra ete. Hence, in case of platform market the anti- competitive behaviour can be adopted by the seller as well as by the platform. provider. Seller having access to both physical and virtual market: Besides platform market, there are many e-commerce websites which are started by the seller themselves. Here the seller is selling its product in both physical as well as virtual market. For instance, Bata which is a shoe seller sells shoes both online as well as offline. Also, it sells online through platforms as well as through its own portal, Apart from Bata their are numerous players which have their own online portal, In this category of online portal, discounts given through online 240websites are always same as given offline, In this category of market, anti- competitive practices can be adopted by the seller only. Sellers having access only to virtual market only: In present age and time, internet users find doing business through online mode easier and time budget rather then doing business in bricks and mortar form. Also, it involves le investment and more profit considering the increasing use of online modes among the society. Hence, their are many players in the market who are doing their business only through internet and are not having any place in the physical market, Deep-discounts theory Whether discounts and predatory pricing are same practices? The answer is no. They are not the same practices. Where practice of discounts is pro-consumer in both the short run as well as long run, there predatory pricing practices are pro-consumer only in short run and is harmful in long run. However, whether discounts and deep-discounts are same or is their any difference in them? What are deep-discounts? Whether deep-discounts can be categorized as predatory pricing? These are the few questions which cam in mind while observing an allegation of predatory pricing on any e ‘ommerce entity. Flipkart and ‘Amazon have remain in news for their deep-discount tricks. The Confederation of All India Traders (CAIT) alleged their involvement in predatory pricing. (discussed below in detail). The competition law necessitates two essentials in predatory pricing ic. dominant position and price below AVC. If even one essential would get miss then the allegation of predatory pricing would get nullified, This limited interpretation of the provision of predatory pricing has given an escape route to many players. The law has failed to acknowledge the concept of efficient competitor and the concept of abov is lacuna st predatory pricing. T created obstacles before CCI while determining the allegation of predatory pricing by e-commerce websites 241Besides, in cases of anti-competitive allegations on e-commerce websites especially the platform market, itis important to understand that who is giving discount or deep-discount to the consumers. Is it the platform provider or the seller? Ifthe discounts are given by platform provider then who is suffering the loss, the seller or the platform provider. In case of platform market, it is necessary to understand that the prices charged on the one side of the market influences the demand on the other side of the market. Also, in platform market, there are two sets of prices one which the seller charges and another which the platform provider charges. Hence, it becomes difficult to regulate such kinds of markets. UBER (Application based radio taxi service operator) Case Unlike traditional taxi services, UBER which is a US based company in India provide its taxi services in India on its online booking i.e. booking through UBER App. When UBE] market. Eventually, UBER also succeeded to made its place in Indian market. ‘came in India in 2013, OLA was already in Indian Nevertheless, on 9 Oct. 2015, another radio taxi service provider and the competitor of UBER ie. MERU Travels Solutions Pvt. Ltd. (MERU) filed a case against UBER before CCI alleging abuse of dominant position by indulging in predatory pricing practices. The allegation was that UBER has reduced prices for the customers and simultaneously offered incentives to its drivers thereby retaining both customers and drivers with them and creating its network effeets. In support of the allegations, MERU provided research studies of ‘New Age Tech Sci Research Pvt. Ltd.’ according to which UBER had 50.1 per cent market share in Delhi NCR as on 30" September 2015, However, CCI on making its prima facie study does not found UBER dominant in the market and hence dismissed the matter ws. 26(2) of the Act on 10" Feb. 2016.47 “ Meru Travel Solutions Private Limited v Uber India Systems Private Limited and others 2016 Indlaw CCT 10 242The matter went before the appellate tribunal COMPAT** which while rejecting the CCI order directed the DG to investigate into the matter. The appellate tribunal’s decision was based on the fact that the study reports shown, by New Tech Sci and 6Wresearch were contraty to each other and CCT had accepted the Tech Sci study previously in the Fast Track Case; hence, CCL could have considered the study of Tech Sci report in thr present case also at least for making a prima facie case.” The order of investigation as directed by COMPAT was challenged by UBER before the Supreme Court but it was of no use as the appeal was dismissed by the court while upholding the COMPAT direction to DG to investigate the matter. Although, the Supreme Court ignored many factors while deciding the appeal however the court relied on the fact that UBER was at loss at its each. single ride and it was get financial funding from its US based parent company and this can be sufficient to investigate against it for its indulgence in predatory pricing. + Amazon - Flip-kart case On 4% March 2020, in an editorial published in a much repudiated newspaper Live mint, it was mentioned that together Amazon and Flip-kart constitutes largest part of India’s $3 trillion economy**'. CCT has also shown its opinion that these two e-commerce giants have the potential to abuse the e-commerce market, Hence, it becomes important for CCI to look after the violation of platform neutrality. In Dec. 2018, the Ministry of Commerce also indicated ‘that Amazon and Flip-kart are violating the FDI guidelines. Considering the same, CCI issued investigation order against these both on receiving a complaint from CAIT, However, these companies got a stay order on 4° Since 26/05/2017, COMPAT ce appeals from Ci (cLaT) “© Meru Travels Solutions Put. Ltd., Mumbai v Competition Commission of India New Delhi and Others, COMPAT 29; 2017 (1) CPJ (Comap.AT) 1 © UBER india Syatems Pvt Lid. vs. Competition Commission of India & Ors. 2019 Indlaw sc on ©* Egitorial, “The Amazon-Flip-kart Antitrust Case”, The Live Mint, March 4, 2020 ed to be the Appellate Tribunal and from then onwards 's order ate filled before National Company Law Appellate Tribunal 243investigation from the Kamataka High Court“, Before this also, CCI was keeping an eye on e-commerce market players as CCI was having an idea that thes player would do or try to do some anti-competitive practices. Make My Trip (MMT) - Ibibo - OYO case The case was filed against MMT, Ibibo and OYO (collectively referred as OTAs i.e. Online Travel Agencies) by FHRAI ie. Federation of Hotels and Restaurants Associations of India alleging numerous anti-competitive practices against these Online Travel Agencies (OTAs). With respect to predatory pricing, the allegation was that, to calculate unit basis cost of rooms the © OTAs ha industry practices ‘average room rate’; however, the offered rooms to the customers at a price below ‘average room rate’. Not only this, in order to eliminate competition from the market of OTAs, the MMT and Ibibo have taken over other small OTAs and has tuned the market in their favor and this they have done by forcing the OAs to exit from the market as barriers were imposed by MMT and Ibibo by denying them the market access. Similar kind of allegation was made against OYO that it has targeted small budget market, Such prices fixed by OYO are approximately 30% lower than the price of the hotels rooms that are not listed on its platform, due to which OYO hotels command higher occupancy. For this reason, the non-OYO Hotels are compelled to join OYO's platform as they are unable to withstand OYO's anti- competitive strategies in the market. While answering these allegations, MMT and Ibibo put forward that in the travel market, the players play intensely on prices and hence offering low budget rooms constitutes a pro-competitive strategy rather then anti- competitive one. However, CCI found that deep-discounting is one of the weapon of online -platforms to establish network effects, Even though CCI does not have the cost structure of MMT and Goibibo, this cannot be ignored that these OTAs are in the market since 2000 and prime-facie seems to be © Delhi Vyapar Mahasangh v Flipkart Internet Private Limited and its Affiliated Entities, Beng aluru and another, 2020 Indlaw CCI 7 248dominant in the relevant market, Hence, CCI directed the matter further to the Director - General for further investigation.**° CCI’s Market study CCI suggested in the report on “Market Study of E-Commerce Market” that e- commerce companies should self-regulate them instead of CCI regulating them because it's still at the nascence stage. This suggestion seems inappropriate as e-commerce market is consisting of those enterprises which are very old in bricks and mortar business and through that they have already maintained their goodwill in the market. Also, considering their experience of manipulating demand and supply of goods and services in the market it can be submitted that it would not be difficult for them to use aggressive business strategies in e- market as well. Hence, the competition regulator needs to adopt a more comprehensive approach towards e-commerce giants and the strategies they can adopt. 5.8.3 Intemational Predation International predation is also known as dumping. It is an abuse of the very essence of intemational trade. Prof. Prabhash Ranjan has given another name to ‘dumping’ which is ‘international predation’ and he has explained the concept of international predation as a predatory pricing strategy in international market.*** Dumping is regulated and prohibited under Article VI of General Agreement on Trade and Tariff (GATT) (now WTO) which is further elaborated by Anti-Dumping Agreement ie. an Agreement on Implementation of Article VI of GATT 1994, The Article VI of GATT and Article 2.1 of Antic~Dumping Agreement under WTO defines dumping as: “the introduction of a product by a country, into the commerce of another country, at a price less than its normal “© Case no, 14/2019, Federation of Hotels and restaurants Association of India vs. MMT - GO & Ors, order passed under section 26(I), Competition Act, 2002 available dachtps:liwww.cci gov.insites/defaulv‘iles/140!2019_O.péf (ast visited on 07/07/2020) The matter is pending for investigation as on 12.July 3020 Ibid 245,value, The normal value is the comparable price, in the ordinary course of trade, of a similar product destined for consumption in the domestic market of the exporting country. Thus, dumping takes place when a product is sold in the export market at a price less than the domestic price of the same product in the exporting country”. To safeguards the domestic players from intemational predation in the form of dumping, the domestic government imposes anti-dumping duty as a tariff on foreign imports which it believes is priced below ‘fair market value’. In India, the anti-dumping duties are imposed under sections 9, 9A and 9B of the Customs Tariff Act, 1975 and the Anti-Dumping Rules, 1995. ‘These provisions were added in the Act by way of an amendment; hence, their purpose does not exactly correspond to the purpose of the Act. However, there purpose may correspond to the purpose of Anti-Dumping Rules which is to protect domestic producers from the effects of predatory pricing. Simultaneously, the purpose of competition law is to prevent practices having an adverse effect on competition; to promote competition; to protect the interests of consumers; to ensure freedom of trade; etc. Hence, both aim to prevent market distortions which are likely to impact perfect competition within the market, thereby in pursuance of the ideal of free trade. The ideology of Prabhash Ranjan was discussed by Prof. Aditya Bhattacharjea in his work “Predatory Pricing and Anti-dumping Revisited™®* wherein he used the word ‘cross border predatory pricing” for international predation. He mentioned that, “cross border predatory pricing means pricing of exports below costs with a view to drive out rival producers”. From this it appears that Prof, Bhattacharjea does not consider dumping and predatory pricing as one and the same behavior because the simple concept of dumping has no relation with cost of production and competition with rivals. World Trade Organization, Article VI, Anti-Dumping Code, available at: Ihups/ww.vto.org/englishtratop_efadp_e! adp_eshtm (last visited on 26/08/2019) “aditya Bhattacharjea, “Predatory Pricing and Anti-dumping Revisited”, Economics & Political Weekly (2003) 246Hence, the issue raised by the researcher in the thesis is that does Indian Competition Act, 2002 has jurisdiction to prohibit international predation as it affects competition in the Indian market? And, whether ‘dumping’ and ‘predatory pricing’ can be taken as one of the same behaviour or not? The rationale behind raising such issue is that more or less international predation in the form of dumping and predatory pricing results into harming, market competition, Further, the Indian Competition Act, 2002 in its section 32 provides extra territorial jurisdiction to CCI“ Dumping has been categorized as price based dumping and cost based dumping, where the price based dumping is different from predatory pricing, however cost based dumping is equivalent to predatory pricing as in both prices are reduced below the cost of production. Tivig T. (1998) in his al published work on “Dumping and Predatory Pricing in an Internati Duopoly” mentioned that, “Predatory pricing and cost-based dumping are thus economically symmetrical phenomena. They are, however, treated asymmetrically by law: Whereas the domestic producer may file an anti- dumping petition against his foreign rival, the foreign producer lacks such a possibility.” The Competition Commission of India has not yet dealt with any case involving international predation, However, such cases were there before the MRTPC. MRTPC had faced various cases where allegations were related to predatory pricing by foreign industries and therein MRTPC granted injunction “1 The provision reads as follows: “The Commission shall, notwithstanding that,— (@) an agreement referred to in section 3 has ‘been entered into outside Indiazor (b) any party to such agreement is outside India; or (c) any enterprise abusing the dominant positon is ontside India; or ()& combination as taken place outside India; or (e) any party to combination is outside India; or S4 Subs. by Competition (Amendment) Act, 2007 for: “ninety working days from the date of publication referred to in sub-section(2) of section 29" 55 Subs, by Competition (Amendment) Act, 2007 for “ninety days” (31) (f) any other matter or practice or action arising aut of such ‘agreement or dominant postion or combination is outside India, have power to inquire S6fin accordance with the provisions contained in sections 19, 20, 26, 29 and 30 of the Act) into such agreement or abuse of dominant position or combination if such agreement or dominant position or combination has, or is likely to have, an appreciable adverse effect on competition in the relevant market in India S7[and pass such orders as it may deem fit in accordance withthe provisions of this Act” © Tivig T. “Dumping and Predatory Pricing in an International Duopoly", In: Koch KJ., Jaeger K. (eds) Trade, Growth, and Economie Poliey in Open Economies. Springer, 1998) 247against foreign industries. One of the important series of cases involving the issue was related to import of Soda Ash in India, The cases involve industries from America, China and Indonesia, In 1996, the Alkali Manufacturers Association of India (AMAL) filed complaint before the MRTPC alleging that American Natural Soda Ash Corporation (ANSAC) had infringed provision under MRTP Act while exporting soda ash to India.***In respond to the complaint, MRTPC with an ex- parte interim injunction order restrained ANSAC from exporting to India, In June 1997, MRTPC rejected ANSAC’s appeal to vacate the injunction, The Commission confirmed that ANSAC was a cartel and also indicated that a letter from an executive of ANSAC setting lower prices for exports to India than to other countries raises possible inference in support of AMAI’s allegation of predatory pricing, ANSAC appealed before the Supreme Court which was dismissed in Sept. 1998 and was referred back to the MRTPC for regular hearing, In March 2000, MRTPC again dismissed ANSAC’s contention that the AMAI complaint involved dumping and it did not come under the jurisdiction of MRTPC or MRTP Act. In July 2000, ANSAC again appealed against the MRTPC order in the Supreme Court. Another injunction order was passed by the MRTPC against a Chinese firm restraining it from exporting at a price below “fair market value’**, The Commission opined that: “the export price would certainly be slightly higher keeping in mind the margin of profit and other factors. It would therefore be quite proper to consider the fair and normal price of Chinese Soda Ash to be imported into India at US $150 per metric tonne....the Chines firm was selling Soda "Alkali Manufacturers Association of India vs. American Natural Soda Ash Corporation [(1985) 3 Comp LI 153 and 173) “*4Ukali Manufacturers Association of India vs. Sinochem International Chemical Company ‘and Nahar Industrial Enterprise {1999 3 Comp LI 326] (Para 10 and 13) 248Ash at US $132 per metric tonne....... It is hereby clarified that the respondents shall not be permitted to export into India any Chinese Soda Ash below the fair and normal value of US $150 per metric tonne”. Third injunction order was passed by MRTPC against three Indonesian companies", The All India Float Glass Manufacturers Association alleged that the Indonesian company’s export of float glass to India had been priced far below the variable cost of production. The matter was placed before two- member MRTP Bench wherein the Chairman also gave its submission. The bench was divided on the issue “whether predatory pricing had occurred and whether relief should be granted?” The Chairman of MRTPC dismissed the contentions on the ground that, “other neighboring countries might not have MRTP-like provisions to counter predatory pricing: that if the government as part of its liberalization policy wanted {0 permit imports at predatory prices, it would have amended the MRIP Act; that although intention to eliminate competition could not be established, there could be no other reason for pricing below cost; the nonappearance of the respondents to dispute the cost calculation called for an adverse inference against them and established a prima facie case for interim relief to the complainants; and, although two per cent of the Indian industry's turnover was only a trickle: in the long run this trickle will turn into a ‘flood....ndian consumers can very well afford payment of about 12 per cent higher cost of float glass production manufactured and marketed by Indian companies rather than go for that imported from Indonesia. A marginal difference of 12 per cent in price of float glass might not be prejudicial to any public interest, What the caveators clamour in the name of public interest is continuance of their profiteering activities by import of float glass in India from Indonesia at predatory prices..If this trend is allowed to continue, a day would come that the Indian float glass industry will completely be ruined and the funds invested by investors would go to waste. To cap it all, thousands of “All India Float Glass Manufacturers Association vs. PT Mulia Industries, Jakarta and Others (2000 CTS 252 (MRTP)} 249people thriving on the Indian float glass industry will be deprived of their sustenance and might have to look for alternate means for livelihood in these days of the alarming proportion of unemployment. Even if the ban on import of float glass from Indonesia at predatory prices might not be in consumer interests it is certainly in public interests for the simple reason that the public interests in general should certainly outweigh consumer interests”. By saying this, the Chairman of MRTPC ordered injunction against the three Indonesian Companies. One of the members also supported this view and ordered injunction against the companies. These above discussed cases brought an issue in front that whether predation taking place in the export market is supposed to be taken care under anti- dumping rules or under the domestic competition law. Many analysts argued that the predatory pricing rules under the domestic competition law are much stricter then the anti-dumping rules under WTO Agreement. Also, WTO has framed common rules on anti-dumping duties imposed by different governments but it does not have any common rules for competition law. Every jurisdiction has enacted competition laws in their countries based on their market and its distortions. Hence, somewhere it does not practically seem possible to apply competition law principles internationally; however, whether country can apply its competition law in its own country in case dumping happens in that country? The Supreme Court of India has made an attempt to answer the questions in the case of Haridas Exporis'® ‘by avowing that while competition law is concerned with the competitive conditions in the market within the territory of the country, an antidumping measure is concerned with an international trade Practice that causes injury to a domestic industry. Even though the difference appears to be geographical however the purpose and the extent of the laws dealing with competition and the laws imposing anti-dumping tariff needs to be considered. Haridas Exports v. All India Float Glass Association, (2002) 6 SCC 600 250The court further observed that, “the jurisdiction of the MRTP Commission, in our opinion, is not ousted by the Anti dumping provisions in the Customs Act. The two Acts operate in different fields and have different purposes. The grievance of the respondents is that import is being made at predatory prices. The challenge is to the actual import. But allowing such a challenge will amount to giving the MRTP Commission jurisdiction to adjudicate upon the legal validity of the provisions relating to import, which jurisdiction the Commission does not have. It is not a Court with power of judicial review over legislative action. Therefore, it would have no jurisdiction to decide whether the action of the Government in permitting import of float glass even at predatory prices is valid or not. The Commission cannot prohibit import, its jurisdiction commences after import is completed and any restrictive trade practice takes place,” Hence, on the question whether Indian competition law can be applied on predation in the International market? The answer appears to be NO. It cannot be applied reason being the basis of competition law is socia/consumer welfare, It aims to protect consumer's interest. Even though, the definition of consumer under competition law is wider enough to include manufacturers, producers, distributors, etc, Contrary to this, anti-dumping under WTO is based on world economic obligation. Also, due to absence of a common model for competition law and policy at the WTO level; every nation has their own competition law based on the economic and social needs of their own jurisdiction. Hence, the anti-dumping matters at international level cannot be dealt by national courts or tribunals as per their national laws. It would limit as well as would manoeuvre the interpretation of WTO Agreement on Anti- Dumping. “Haridas Exports vs. Float Glass Manufacturers Association (Referred from an Article Rishab Khare, Anti Dumping Law And Competition Law : A Case Of Intersecting Lines, (2019) available at http://www mondag.comindia/x/78264/Antitrust+Competition/Anti+Dumping+Law+And Competition Law! A~Case! OF! Tntersceting Lines (last visited on 25/05/2018 2515.9 Suggestions (For improving the enforcement of predatory pricing strategies under Indian Competition Act, 2002) 5.9.1 Dominance as pre-requisite to a predatory pricing strategy is found to be a great fallacy to the allegations of predatory pricing. Certainly, a dominant enterprise always has ascendancy in a market over its competitors; however, the efficiency of its competitors cannot be overlooked. The fact that predatory pricing requires ‘below cost’ pricing has made it more irrational. The definition of predatory pricing shall also include ‘above-cost’ pricing also as it will increase the scope. According to the Indian Competition Act, 2002, a predatory pricing strategy requires the predator to reduce its own price below cost and suffer intentional loss. Considering the intention of the predator behind the strategy which is to force its competitors to reduce their prices to meet price competition prevailing in the market, one can suggest that the predator can acquire the same purpose by reducing its prices not below its own cost of production but below the cost of production of its competitors. Being a dominant enterprise in the market, one can assume that the cost of production incurred by dominant entrepreneur must be less than the cost of production incurred by other non-dominant entrepreneurs in the same relevant market, In fact, the critique of Chicago school has also supported the version that if the predator knows the cost incurred by its, rivals then it can take benefit of the same, For instance, suppose in a relevant market the following is the cost of production of different enterprises: Enterprise Cost of Production | Minimum price which it can offer to consumer without compromising _its profit (per unit) 252Ent. A (Dominant | RS. 1000 for 10 units] Rs. 1000 (at par) Enterprise) More than Rs, 1000 (at profit) Ent. _B (Non | Rs. 1200 for 10 units | RS. 1200 (at pary dominant enterprise) More than Rs. 1200 (at profit) Less than Rs. 1200 (at loss) Ent, © (Nom | RS. 1250 for 10 units | Rs. 1250 (at par) dominant enterprise) More than Rs. 1250 (at profit) Less than Rs. 1250 (at loss) In the above table, enterprise A is having minimum cost of production which is Rs, 1000. However, the cost of production of enterprise B is Rs, 1200 and of enterprise C is Rs. 1250, Here, according to the traditional theory of predatory pricing and as per the competition law of India, enterprise A can enter into predatory pricing strategy by offering ituation price to the consumer below Rs. 1000. However, if the above is considered appropriately, then enterprise A can offer price below Rs. 1200 but above Rs. 1000. It will not only save the predator from incurring loss but it will also achieve the purpose of causing loss to ent. B and C because the moment they will reduce their retail price below Rs, 1200, they will suffer loss and will not be able to cover its cost. Undoubtedly, in case of enterprises engaged in multi product production, the enterprise can reduce its prices below the cost for a single product and still does not suffer loss because it can adjust the loss with the profit eamed from other products. However, a predator can still initiate its strategy by trying to cause loss to the competitors instead of causing loss to it 2535.9.2 5.9.3 This concept of below AVC is only an economic rationale as there seems no reason behind such act besides the intention of harming market competition or eliminating competition, However, the law failed to acknowledge another perspective i.e. prices offered below the competitor's cost but above its own cost. Economically this is very much possible for those entities which have achieved their economies of scale and are indulging very less cost in production, Hence, for them there is no point in selling their products below their own cost when they can cause harm to their competitors by selling products at the price below the cost incurred by their competitors because in no case competitors would be able to sell the product at the predator's price without suffering loss. Entrepreneurs like Wal-Mart, Southwest Airlines, D-Mart efc. can sell their products or services at low price by taking the benefit of their low cost and their prices if get compared to ‘their competitors then they would eventually incur them (to their competitors) loss and would force them to exit the market. But this was not predatory. Predatory pricing can be separated from other exclusionary pricing strategies because it has a different analytical approach. Een though, it has been included by almost all the jurisdictions having competition law in their countries. However, it has always remained a debateable issue, In numerous research works also, the researcher has found that no one has considered predatory pricing as a rational strategy. “Collective Dominance” shall be recognized under the Competition Act, 2002, In the Uber-Ola case it was argued by the informants that the definition of dominant position in the Act is very wide and it also covers situation when such @ position is being held by two enterprises, able to affect market competition to their advantage, They also pleaded that Section 4 of the Act only uses the phrase “no enterprise shall abuse it dominant position” and if the General Clauses Act is applied for the interpretation of the same (singular terms in an Act would include it 25459.4 plural as well), then “an enterprise” can also be understood to mean ‘more than an enterprise. To provide with an analogy, the Informants cited the Canadian judgment on the two entities, Visa and MasterCard where both were held to be having the requisite market power in the same relevant ‘market simultaneously. However, the allegations were denied by the opposite party. They argued that the concept of collective dominance is not recognized in the ‘Act and hence, the allegation doesn’t stand in such case at all. ‘The CCI agreed with the pleadings of the OPs and said that Section 4 of the Competition Act only contemplates dominant position by one enterprise, Citing their earlier decision in a radio taxi matter, the CCT said that the understanding taken by the Informants from Section 27(b) of the Act, which is a penal provision and uses the phrase “persons or enterprises which are parties to such agreements”, is only in context to the parties who have entered into an anti-competitive agreement. It does not contemplate a situation where multiple participants are having dominant position in a relevant market ‘The concept of “leverage dominance’ needs practical appliance in case of predatory pricing. As already discussed in the thesis, the essence of the concept lies in the fact that the predator is a financially renowned enterprise which is having the capability and capacity of sacrificing short term profit. Hence, this financial stability can come from the background of the enterprise also. Like, in the case of Reliance Jio, the Commission shows its negligence while observing that the Zero price and after that the extremely lower prices offered by Reliance Jio were not predatory because Jio was not dominant in the market. The Commission failed to observe the background of Reliance Jio from where it not only brought the financial stability but also the good will 255.59.5 in the market. Hence, their cover that their pricing strategy was penetrative and not predatory does not withstand with other factors. Hence, the Commission needs to look into the other markets also before coming to the conclusion that whether the alleged enterprise has the competence to predate in a market or not and also before bequeathing the benefit of ‘penetrative pricing’ on the enterprise, The observation of the Commission in the Reliance Jio case can be cited here as, “providing free services cannot by itself raise competition concerns unless the same is offered by a dominant enterprise and shown to be tainted with an anti-competitive objective of excluding competition! competitors, which does not seem to be the case in the instant matter as the relevant market is characterised by the presence of entrenched players with sustained business presence and financial strength. In a competitive market scenario, where there are already big players operating in the market, it would not be anticompetitive for an entrant to incentivise customers towards its own services by giving attractive offers and schemes. Such short-term business strategy of an entrant to penetrate the market and establish its identity cannot be considered to be anti-competitive in nature and as such cannot be a subject matter of investigation under the Act”. CCI needs to adopt a Compassionate approach while investigating predatory pricing in ‘new age market’, While examining the question about gain to a consumer from deep discounts offered by e-commerce industries, the gains in the shorter period need to be seen from longer perspective. The recoupment test examines the extent to which market power can be achieved in the future, after which prives can be raised. If the CCI were to adopt this test in investigations relating to predatory pricing by ontine firms it would see that in certain areas, there are network effects, and once a small association of firms has acquired market power, it would be difficult for entrants to compete with them “Bharti Airtel Ltd. and Ors. Vs. Reliance Jia Industries Ltd. 2017 tndlaw CCU 37 256in the future. In that future scenario, it would be possible for incumbents to raise prices, and recoup eatlier losses. CCT suggested in the report on “Market Study of E-Commerce Market” that e-commerce companies should self-regulate them instead of CCI regulating them because it’s still at the nascence stage. This suggestion seems inappropriate as e-commerce market is consisting of those enterprises which are very old in bricks and mortar business and through that they have already maintained their goodwill in the market. 5.10 Additional suggestions: In appropriate cases, CCI could have relied on the essential facilities doctrine to mandate interoperability between a dominant player that is found to be indulging in the abuse of its position and other operators in the market. For instance, imposing interoperability requirements on a dominant payments network can help extend the network effects of digital payments to the economy as a whole, rather than being limited to a closed network. The imposition of any such requirements will, however, need to be balanced against factors such as the payment of fair and reasonable access fees, the complexity of institutional arrangements required to monitor such arrangements and assessment of the impact on future innovation, More generally, open standards are an important clement of interoperability, and various arms of the regulatory State need to push in favour of competitive markets through interoperable open standards. Fourth, given the fast-changing nature of online businesses, there are concerns about the elapsed time between a full-fledged investigation and the determination of a violation. We suggest a two-pronged approach to address this issue, On one hand, the CCT needs to work towards adopting stricter time frames for the disposal of cases, particularly those relating to new economy firms. On the other, we propose a voluntary settlement process that will allow a business that is under investigation to voluntarily alter its market behaviour, with the concurrence of 257the authority but without the need for a conclusive finding of violation by the cel Acquiring monopoly through mergers and acquisitions: Finding price-cutting an irrational strategy; one needs to recollect the Standard Oil co. case of USA wherein the Standard Oil was alleged to have entered into predatory pricing strategy. The court observed in the case that Standard Oil acquired monopoly in the market by entering into mergers and acquisition with its competitors. A. successfill predatory pricing strategy requires the predator to have its economies of scale so that its cost will be lesser then the cost incurred by its competitors. It will increase the margin gap between the one having less cost and the one having huge cost. McGee (the critique of Chicago School of thought) said that a larger firm if engages in predatory pricing would only destroy industry profits till the predation lasts. A larger firm’s loss (even for a short term) would be more than the loss suffered by small firms because the small firms can obtain funds from another source till the strategy lasts. Hence, in such scenario, Mc Gee suggested that, “taking over a rival would be a more profitable strategy, as it would allow the preservation of high profits in the industry”.** Apart from the above suggestions, while offering predatory pricing in the market, if the predator ensures that its financial resources are greater than the financial resources of its competitor then it would help the predator in putting financial pressure on the competitor. The rationale behind this strategy is that an entity can have dominant position in one market and not in another. Hence, if the dominant enterprise of another market (where the prey is not dominant) enters into predatory pricing strategy then the prey can take advantage of its sound financial condition from the market where it is dominant. However, here one assertion has been put forward by Me Gee that the mere fact that they prey is a small firm having less financial resource in comparison to predator would be enough for the predator to win. However, Me Chiara Fumagalli, Massimo Motta, Claudio Caleagno, Exclusionary Practices: The Economics of Monopolisation and Abuse of Dominance, (Camiridge University Press, UK, 1 Ed,2017) 258Gee also asserts that the predatory pricing strategy is a short term strategy (economically even a dominant firm cannot sustain its business if suffer loss in long-run), hence, for that short-term small firm can obtain financial help from another and can sustain itself in the market against the predator.*** Recoupment of short-run losses in future is one of the important factors which make predatory pricing a rational strategy. The Indian Competition Act, 2002 needs to be amended to include recoupment as one of the important and mandatory phase of a successful predatory strategy. In simple words, it can be explained as that predatory pricing is an “investment strategy” which says that investment in short term losses would provide the predator return in the form of long term profit. However, recoupment is possible only if the predator has the ability of not only to eliminate its competitors but also prevent them to re-enter or to prevent a new entry into the market. Only then the predator would be able to raise its prices above the profitable level. Hence, Bishop and Walker says that, “unless there is an expectation that any short run losses can be recouped in the long run, low prices should not to be held predatory. For this reason, the economics literature has held recoupment to be a central element in the discrimination betwes predation and normal competitive behaviour” The concept of predatory pricing as explained in Indian Competition law is based on old economic theories and hence in the modern time they are irrational. However, it does not mean that predatory pricing cannot be a rational business strategy. In fact, there are many set example of predatory pricing strategies happening in the market however the law protects them due to its older perspective. Also, from the consumer perspective it is important to make recoupment an essential pre-requisite of predatory pricing strategy because consumer welfare 6 iid, “" Simon Bishop & Mike Walker, The Economics of EC Competition Law: Concepts Application and Measurement 183, (Sweet & Maxwell, London, 259is one of the main objectives of competition law and policy and successful recoupment would cause harm to the consumer, Also, without recoupment, the price-cut phase of predatory pricing strategy is beneficial to the consumer's interest. The mounting notion of “market” and the ideas of mergers (an alternative to take control over competitor) have given inimitable ways to the entrepreneurs to harm market competition. The area of e-commerce as already dealt by the researcher necessitates the wider approach of competition laws to cover such widening areas. However, the existing competition law is week in obverse of emerging economy. Similarly, the impression of margin squeezes ensuing into predatory pricing is out of the ambit of the narrow conceptualization of the competition law and hence it call for amendments in the present law. 260