The Hindu Business Line : Competitive launches may not come under ‘predatory pricing’

New Delhi, July 6 Companies bringing innovative products to the market at competitive prices would be able to do so without fears of indulging in ‘predatory pricing’ under the Competition Act.

The Competition Commission of India (CCI) has also proposed that the issue of predatory pricing will not be applicable to introductory offers, clearance sales, and stock disposal.

Predatory pricing — also known as destroyer pricing — refers to the practice where a firm sells a product at a very low price with the intention of driving competitors out of the market, or creating a barrier to the entry of potential new competitors.

Mr Vinod Dhall, Acting Chairman, CCI, told Business Line that “three conditions must be met for predatory pricing to be applicable – a dominant market position, selling below average variable cost (excluding all fixed cost), and with a motive to kill competition.”

An innovative product, such as Nano from the Tata stable for instance, would not come under the ambit of ‘predatory pricing’ as it would not necessarily result in killing competition. This is largely in keeping with the demands of industry, which had said that regulations framed by CCI should ensure that new entrants in the product market were not prejudiced by restrictions on predatory pricing.

The Competition Act envisages that if an entity is found directly or indirectly indulging in predatory pricing of goods and services, it would tantamount to “abuse of dominant position”.

In many countries predatory pricing is considered anti-competitive and is illegal under antitrust laws. However, it is usually difficult to prove that a drop in prices is due to predatory pricing rather than normal competition, and predatory pricing claims are difficult to prove due to high legal hurdles designed to protect legitimate price competition.

According to CCI’s draft regulation on determination of cost of production, the formula for calculating predatory pricing would include elements such as the raw material cost, electricity, any consumable items like oil, and manpower (if it is not a fixed expense).

Unexpected costs incurred, as a result of natural calamities or fire or accident or such other losses, during the period under enquiry will be excluded in determining the average variable cost, the draft rules have proposed. Fixed expenses would include building and plant and machinery among others.

According to the draft rules, in the case of a multi-product enterprise, the variable cost of a product could be determined in three ways. The first is by apportioning the variable cost of the enterprise in the ratio of value of output of that particular product to the value of total output. It can also be determined by apportioning the cost of the variable factors on the basis of their utilisation or by an appropriate procedure determined by the Commission.

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