The Concept of Predatory Pricing
The Concept of Predatory Pricing. The natural tendency of competition is to create a monopoly which is driven by factors like consumer welfare, technological innovation, reduced prices and social obligation. But when a dominant firm deliberately reduces prices to a loss-making extent with a view to drive out existing players and foreclose the market for new entrants, the probable chances of the hike in prices, in the long run, are deemed as misuse of market power. Predatory pricing is a paradoxical offence. Although antitrust law values low prices and abhors high ones, the “predator” stands accused of charging too low of a price of doing too much of a good thing. It enables the dominant entity to operate independently of competitive constraints. Initially, the entity which was appearing to consumer-friendly turns to generate consumer detrimental effects and it gains the ability to withstand the constraints of competitors, suppliers or customers.
There are various methods available with the predator to engage in this practice, namely: greater cash reserves, better financing or cross-subsidization from other markets or other products. Potential benefits are not only confined to future gains, but it is an investment in reputation (recoupment) which is hindered time and again by the entry of new players which provide competitive constraints.
Predatory pricing is classified under Section 4 of the Competition Act, 2002 as an abuse of dominance. The Competition Commission of India in In Re: Johnson And Johnson Ltd. said that “the essence of predatory pricing is pricing below one’s cost with a view to eliminating a rival.” In MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd., DotEx International Ltd. and Omnesys Technologies Pvt. Ltd, the CCI defined predatory pricing as the conduct, “where a dominant undertaking incurs losses or foregoes profits in the short-term, with the aim of foreclosing its competitors.” The law on predatory pricing in India is in pari materia with Article 102 of the Treaty of the functioning of the European Union. The Concept of Predatory Pricing. how to change company address
Predatory pricing poses a dilemma that has perplexed and intrigued the antitrust community for many years. On the one hand, history and economic theory teach that predatory pricing can be an instrument of abuse, but on the other side, price reductions are the hallmark of competition and the tangible benefit that consumers perhaps most desire from the economic system. In this way, it is more difficult to ascertain whether it is anti-competitive or pro-competitive. Establishing the dominance in jurisdictions like India and EU is the pre-requisite for sustaining the predatory price claim. But this approach has become a lacuna in curbing the problem of predation. There are cases whereby financially sound non-dominant players have tried the practice but were not dealt with accordingly at par with the existing competition policy. Predatory pricing by Ola Cabs is one such case where the aggregator was saved from the infliction of the baton of the authority because of this lacuna.
Every firm before entering the market enquires about the existing information to understand the structure of the market in order to assess profit or loss from such entry. For creating barriers for competitors, a predator with a good market hold portrays a weak market structure with lower prices, thus ends up barring the firms from entering into the market. But predation did not reward the predator with any benefits as he would be unable to recoup its short-term losses, in the long run, owing to the ability of rivals to re-enter the market. “Perpetual entry barriers” are extreme consequences of predatory pricing whereby price-cutting lead to the predator’s dominance thereby resulting in high market share.
There are some efficiency justifications to the act of predatory pricing provided that the pro-competitive agreements outweigh the anti-competitive agreement. These include low pricing or other forms of aggressive conduct that help in achieving economies of scale or efficiencies related to expanding the market, such as promoting a shop location, reducing costs through learning effects or increase the value of its product through network externalities. However, in the case of alleged predatory conduct, an objective justification cannot be applied as long as, directly or indirectly, a sacrifice has been established.
Predatory pricing is an underexplored antitrust aspect which requires a deep understanding of the economics and psychology of the market behaviour. It forms typical psychology of the market which on one hand depicts that the psychologically tempting benefits of the price reduction to consumers is so immediate, and on the other hand, depicts that the potential for abuse is simultaneously great.