Predatory Pricing – A Case Study on Reliance Jio

By Neha Anand, (Fourth Year), Chanakya National Law University, Patna

Predatory pricing constitutes a class of anti-competitive action where prices are set so low as to eliminate competing undertakings and, thereby, threaten the competitive process itself. In these circumstances, consumers may benefit in the short run from lower prices, but, in the longer term, weakened competition will lead to higher prices, reduced quality and less choice.

Distinguishing predatory pricing from legitimate competition is difficult. Since the main objective of the Competition Law is to create conditions where consumers benefit from effective competition, the distinction must be drawn between low prices, which result from predatory pricing and that which result from legitimate competitive pricing.[1]

Competition in the economy is the best way to ensure that the Common Man gets access to the widest range of goods and services at the most competitive prices. This more important for a developing economy like ours. With increasing competition in India, the producers have maximum incentive to innovate and specialize in their goods and services. A fair competition results in reduced costs and wider choice to consumers.

The Competition Commission of India is a statutory authority with the mandate to enforce the Competition Act of 2002. The objective of the CCI is to create and sustain fair competition in the economy which will provide a ‘level playing field’ to the producers, while making the markets work for the welfare of the consumers. The Competition Act, 2002, after amendment by the Competition (Amendment) Act, 2007, follows the ideals of modern competition laws. The Act established the Competition Commission of India (CCI), from 14th October 2003 to achieve the aforementioned objectives.

The Competition Act 2002 prohibits anti-competitive agreements between enterprises, or the abuse of dominant position by these enterprises.[2]

The Competition Act, 2002 outlaws predatory pricing, treating it as an abuse of dominant position, prohibited under Section 4. Predatory pricing under the Act means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. Predatory pricing is pricing one’s goods below the production cost, so that the other players in the market, who aren’t dominant, cannot compete with the price of the dominant player and will have to leave the market. The CCI in In Re: Johnson And Johnson Ltd.[3] said that “the essence of predatory pricing is pricing below one’s cost with a view to eliminating a rival.”

Predatory Pricing and the Law

The Competition Act, 2002 was passed by the Parliament in the year 2002, to which the President accorded assent in January, 2003. It was subsequently amended by the Competition (Amendment) Act, 2007. The Act has completely replaced the Monopolies and Restrictive Trade Practices Act, 1969. In accordance with the provisions of the Amendment Act, the Competition Commission of India and the Competition Appellate Tribunal have been established. The Competition Commission of India is now fully functional with a Chairperson and six members. The provisions of the Competition Act relating to anti-competitive agreements and abuse of dominant position were notified on May 20, 2009.[4]

The Act does not prohibit a “dominant position” per se but only its abuse unlike the MRTP Act, 1969. Any abuse of dominant position will be dealt by the CCI as per section 27 of the Act.[5]

Abuse of dominant position and predatory pricing are two principles which are bound together by the an intricate web of legal rules and the economics of single-player control over a market and are so obscurely overlapped that they can only be severed from one another by the genus-species disengagement. Abuse of dominant position is the genus, whereas predatory pricing is the species. In simple terms, an enterprise or a group may, illegally, abuse its dominant position; predatory pricing is just one of the many, however the most frequently used, ways in which that enterprise or group may abuse its position of dominance.[6]

The dealings of predatory pricing in India, as expressed under the Competition Act, 2002, have been borrowed from the English Competition Act, 1998 and the Clayton Anti-Trust Act, 1914.[7]

Section 4(2) (a) of the Competition Act, 2002 states that there shall be an abuse of dominant position under Sub-section (1), if an enterprise directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or service; or price in purchase or sale (including predatory price) of goods or service.

Explanation.- For the purposes of this clause, the unfair or discriminatory condition in purchase or sale of goods or service referred to in Sub-clause (i) and unfair or discriminatory price in purchase or sale of goods (including predatory price) or service referred to in sub- clause (ii) shall not include such discriminatory condition or price which may be adopted to meet the competition.

As per explanation (b) at the end of Section 4 predatory pricing refers to a practice of driving rivals out of business by selling at a price below the cost of production. Denial of market access briefly referred to in this section, if read conjunctively, is expressly prohibited under Section 4 (2) (c) of the Competition Act, 2002.[8]

CCI and Competition Appellate Tribunal’s interpretation of predatory pricing in India[9]

The COMPAT in the matter of MCX Stock Exchange Ltd. v. National Stock Exchange &Ors.[10]upheld the order of CCI and held that the fee waivers which are provided by NSE in the currency derivatives segment are unfair. It was held that NSE was abusing its dominant position and MCX was required to be protected against the same.

CCI and COMPAT have followed the test of recoupment and intention to decide the cases of predatory pricing. It was observed by CCI in the matter of H.L.S. Asia Limited, New Delhi v. Schlumberger Asia Services Ltd. Gurgaon and Oil & Natural Gas Corp. Limited, New Delhi[11], that in order to claim a remedy under predatory pricing, determination of the average variable cost is most important. It was further stated that average variable cost, so determined should be more than the current price of that product.

Further, in the order of M/s. Transparent Energy Systems Pvt. Ltd. v. TECPRO Systems Ltd.[12]the Commission held that to decide whether the dominant firm is engaged in the practice of predatory pricing, the following three conditions have to be satisfied:

  1. The prices of the goods or services of the dominant firm is below the cost of production of such goods or acquisition of such service.
  2. Such decline in the prices of the dominant firm was brought with the intention of driving the competitors out of the market.
  3. There is a significant planning in order to recover or recoup the losses that are incurred by increasing the prices again after the competitors are forced out of the market.

Reliance Jio – Predatory Pricing or Predatory Behaviour?

Regulation of telecommunications in India is carried out by the Telecom Regulatory Authority of India (TRAI), established in 1997. It’s not clear how much importance it gives to competition, even though the TRAI Act (1997) says that it should facilitate competition. Its own mission statement refers to protecting consumer interests and ensuring growth in telecommunications among its priorities.[13]

In December 2016, Airtel and Idea Cellular moved the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), alleging that the Telecom Regulatory Authority of India (TRAI) is favoring Reliance Jio by allowing it to continue with its free data strategy.

Bharti Airtel has taken the telecom war with its now biggest competitor Reliance Jio to the next step as it has filed a complaint against the company with Competition Commission of India (CCI). Airtel has accused Reliance Jio of “creating a monopoly for itself” with its “predatory pricing.”[14]Airtel, which is the country’s largest telecom services provider by market share, has also alleged that Reliance Jio is abusing its dominant position. The complaint was filed in the month of February, 2017.

In the month of January, 2017, Reliance Jio had moved the fair trade regulator against incumbent players for alleged anti-competitive practices. Hitting back at allegations of abuse of dominant position and predatory pricing, Reliance Jio said that the question of the offerings being predatory does not arise as all tariff plans of Jio have been found to be non-predatory by TRAI.[15]

Reliance Jio’s pricing – whether or not anti-competitive

RJio’s behaviour and the manner of its entry into country’s telecommunications industry may be considered as predatory for a few specific reasons;

  1. It acquired the BWA/4G spectrum in 2010 and benefitted as the government changed its rules retrospectively. Thus, enabling RJio to provide both voice calls and data services on the same spectrum.
  2. RJio is data centric and works only on 4G mobile handset. Therefore, consumers may end up paying more for RJio services under the guise of free voice calling than other providers.
  3. RJio’s free services of the trial period were supposed to be till December 30, 2016. However, they had constantly extended deadlines until the introduction of Jio Prime.

The situation is not same as it was during its inception i.e. September 1, 2016. As of April, 2017, Jio had garnered around 72 million subscribers and is being considered one of the top telecom players in the country. Its competitor Airtel has reported a fall in net profit by 54% last year. Further, Idea-Vodafone are planning to merge in order to compete effectively.[16]

The Competition Commission of India (CCI) has investigated a number of instances of unfair competition. For example, the CCI has investigated complaints of “predatory pricing” against transport-technology companies, Uber and Ola, as well as allegations made against e-commerce websites, Flipkart and Amazon. These complaints were made after these companies started offering large discounts to consumers. Each of these companies have since been exonerated of any charge of “predatory pricing” as none of them had a “dominant position” in their respective markets. While investigating these cases, the CCI considered a firm’s market share as the sole determinant of dominant position. The CCI is, however, expected to consider a range of factors while ascertaining market dominance.[17]

When Jio first launched its services in September, 2016 it was a fresh entrant in a market with several established players. Its price point of zero was certainly below cost but there was no question of it being a “dominant player”. Any regulatory intervention to stop the pricing plans at that stage, whether by the sectoral regulator TRAI or the CCI, would have been premature.

This position has come to change over the last few months. Jio has managed to acquire a sizable presence in the market for high-speed data services – it holds about one-third of the country’s broadband subscriber base and about 85 percent of the market in terms of mobile data traffic. Its share in the overall market for telecom services (voice plus data) still remains small since telecom subscribers continue to outnumber Internet users by a wide margin. The manner in which CCI delineates the “relevant market” will therefore form the crux of its analysis in this case.[18]

The first step for CCI would be to determine whether there is a market for data services that is distinct from the broader cellular services market. Next, CCI will need to examine whether Jio can be regarded as being dominant player in the identified market. The third challenge would be to assess whether its current prices are in fact “below cost”. Finally, CCI will have to determine whether Jio’s current pricing continues to be in the nature of a genuine “promotional strategy” by a new entrant or it is a deliberate attempt to reduce competition in the market.

In order to establish an allegation of predatory pricing, the complainant has to successfully demonstrate that the accused had priced goods or services with a view to reduce competition or eliminate the competitors. It seems that it is not necessary to establish or prove any “actual” reduction in competition or elimination of competitors. Once a case of predatory pricing has been made out, the CCI may pass any order as per section 27 of the Act.

For a mobile operator to be guilty of predatory pricing, it must be in a “dominant position” as per section 4 of the Act. Since the Indian market is all about numbers, no new entrant can be said to be in a “dominant position” and, therefore, may never be guilty of predatory pricing, even though it may have deep pockets to withstand lower tariffs as compared to other operators and successfully eliminate any future competition from other new entrants. This can also have a negative impact on the older and established operators, who may be in a dominant position, but may not have a suitable business model to sustain lower tariffs for a very long period of time. Therefore, competition can be negatively impacted even though the operator accused of predatory pricing is not “dominant “and as it turns out Reliance Jio has managed to do just that for quite long.

As far as Reliance Jio’s case is concerned, it is no more a fresh entrant in the business and has in fact gone on to hold about one-third of the country’s broadband subscriber base and about 85 percent of the market in terms of mobile data traffic, as discussed earlier.

Now that Airtel has filed a complaint against Reliance Jio before the fair trade regulator (CCI), it remains to be seen as to whether CCI holds it guilty of having pursued predatory pricing.

 


Bibliography

Primary source:

Ø  The Competition Act, 2002.

Secondary sources: (Webliography)

Ø  M. R. Venkatesh, Predatory pricing: Lessons for India Inc, BUSINESSLINE available at http://www.thehindubusinessline.com/2004/10/20/stories/2004102000091100.htm

Ø  Competition Commission of India, ECONOMICS STUDY MATERIALS AND NOTES available at http://exampariksha.com/read-offline/4446/competition-commission-india-economics-study-material-notes.pdf

Ø  Competition Act, COMPETITION COMMISSION OF INDIA available at http://www.cci.gov.in/competition-act

Ø  Competition Laws and the Telecom war-fare, PSA available at http://psalegal.com/upload/publication/assocFile/CommercialLawBulletin-IssueIII.pdf

Ø  Kumar Harshvardhan, An Analysis Of The Law Relating To Predatory Pricing In India, MANUPATRA available at http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=3e7817b5-23f9-4313-9ac0-fd94a329de45&txtsearch=Subject:%20Competition%20/%20Antitrust

Ø  Himanshu Sharma and Martand Nemana, India: Predatory Pricing: A Synopsis On The Indian Telecom Sector, MONDAQ available at http://www.mondaq.com/india/x/576894/Antitrust+Competition/Predatory+Pricing+A+Synopsis+on+the+Indian+Telecom+Sector

Ø  Atyotma Gupta, Legal Position Of Predatory Pricing: An Analysis In India, COMPETITIONLAWOBSERVER available at https://competitionlawobserver.wordpress.com/2016/08/11/legal-position-of-predatory-pricing-an-analysis-in-india/

Ø  Subhashish Gupta, Competition Policy in Telecommunications in India, available at http://www.cci.gov.in/sites/default/files/competition_policy_tel_20080508104446%20%281%29.pdf

Ø  Nandini Yadav, Airtel moves CCI against Reliance Jio’s ‘predatory pricing’, BGR available at http://www.bgr.in/news/airtel-moves-cci-against-reliance-jios-predatory-pricing/

Ø  Airtel moves CCI against RJio; alleges predatory pricing, BUSINESS STANDARD available at http://www.business-standard.com/article/pti-stories/now-airtel-moves-cci-against-rjio-alleges-predatory-pricing-117020600947_1.html

Ø  Anushka Kadiresan and Sakshi Malhotra, Changing Times Of Telecom Industry: The Rise Of Reliance Jio, COMPETITIONLAWOBSERVER available at https://competitionlawobserver.wordpress.com/2017/04/04/changing-times-of-telecom-industry-the-rise-of-reliance-jio/

Ø  Jai Bhatia and Advait Rao Palepu, Reliance Jio: Predatory Pricing or Predatory Behavior?, ECONOMIC & POLITICAL WEEKLY available at http://www.epw.in/journal/2016/39/web-exclusives/reliance-jio-predatory-pricing-or-predatory-behaviour.html

Ø  Smriti Parsheera, Building blocks of Jio’s predatory pricing analysis available at https://ajayshahblog.blogspot.in/2017/04/building-blocks-of-jios-predatory.html?m=0

 


[1] M. R. Venkatesh, Predatory pricing: Lessons for India Inc, BUSINESSLINE available at http://www.thehindubusinessline.com/2004/10/20/stories/2004102000091100.htm, last accessed on June 28, 2017 at 12:23 am IST

[2]Competition Commission of India, ECONOMICS STUDY MATERIALS AND NOTES available at http://exampariksha.com/read-offline/4446/competition-commission-india-economics-study-material-notes.pdf, last accessed on June 28, 2017 at 12:30 am IST

[3] (1988) 64 Comp Cas 394 NUL

[4]Competition Act, COMPETITION COMMISSION OF INDIA available at http://www.cci.gov.in/competition-act, last accessed on June 28, 2017 at 12:45 am IST

[5]Competition Laws and the Telecom war-fare, PSA available at http://psalegal.com/upload/publication/assocFile/CommercialLawBulletin-IssueIII.pdf, last accessed on June 28, 2017 at 1:07 am IST

[6]Kumar Harsh vardhan, An Analysis Of The Law Relating To Predatory Pricing In India, MANUPATRA available at http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=3e7817b5-23f9-4313-9ac0-fd94a329de45&txtsearch=Subject:%20Competition%20/%20Antitrust, last accessed on June 28, 2017 at 1:34 am IST

[7]Himanshu Sharma and Martand Nemana, India: Predatory Pricing: A Synopsis On The Indian Telecom Sector, MONDAQ available at http://www.mondaq.com/india/x/576894/Antitrust+Competition/Predatory+Pricing+A+Synopsis+on+the+Indian+Telecom+Sector, last accessed on June 28, 2017 at 1:23 am IST

[8] Kumar Harshvardhan, An Analysis Of The Law Relating To Predatory Pricing In India, MANUPATRA available at http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=3e7817b5-23f9-4313-9ac0-fd94a329de45&txtsearch=Subject:%20Competition%20/%20Antitrust, last accessed on June 28, 2017 at 1:34 am IST

[9]Atyotma Gupta, Legal Position Of Predatory Pricing: An Analysis In India, COMPETITIONLAWOBSERVER available at https://competitionlawobserver.wordpress.com/2016/08/11/legal-position-of-predatory-pricing-an-analysis-in-india/, last accessed on June 28, 2017 at 1:34 am IST

[10]Case No. 13 of 2009 (COMPAT, 5/12/2014)

[11] Case No. 80/2012, 2013

[12] Case No. 09 of 2013, (2013)

[13]Subhashish Gupta, Competition Policy in Telecommunications in India, available at http://www.cci.gov.in/sites/default/files/competition_policy_tel_20080508104446%20%281%29.pdf , last accessed on June 28, 2017 at 2:23 am IST

[14]NandiniYadav, Airtel moves CCI against Reliance Jio’s ‘predatory pricing’, BGR available at http://www.bgr.in/news/airtel-moves-cci-against-reliance-jios-predatory-pricing/ , last accessed on June 28, 2017 at 2:35 am IST

[15]Airtel moves CCI against RJio; alleges predatory pricing, BUSINESS STANDARD available at http://www.business-standard.com/article/pti-stories/now-airtel-moves-cci-against-rjio-alleges-predatory-pricing-117020600947_1.html, last accessed on June 25, 2017 at 2:44 am IST

[16]Anushka Kadiresan and Sakshi Malhotra, Changing Times Of Telecom Industry: The Rise Of Reliance Jio, COMPETITIONLAWOBSERVER available at https://competitionlawobserver.wordpress.com/2017/04/04/changing-times-of-telecom-industry-the-rise-of-reliance-jio/, last accessed on June 25, 2017 at 3:19 am IST

[17] Jai Bhatia and Advait Rao Palepu, Reliance Jio: Predatory Pricing or Predatory Behaviour?, ECONOMIC & POLITICAL WEEKLY available at http://www.epw.in/journal/2016/39/web-exclusives/reliance-jio-predatory-pricing-or-predatory-behaviour.html, last accessed on June 25, 2017 at 3:08 am IST

[18]Smriti Parsheera, Building blocks of Jio’s predatory pricing analysis available at https://ajayshahblog.blogspot.in/2017/04/building-blocks-of-jios-predatory.html?m=0, last accessed on June 25, 2017 at 3:33 am IST

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