All you wanted to know about predatory pricing

Aarati Krishnan | Updated on November 05, 2019

News reports that e-commerce majors such as Amazon and Flipkart have sold goods worth ₹19,000 crore in their festival discount sales seem to be causing some heart-burn in India’s traditional retail industry. The Confederation of All India Traders (CAIT), a trade body representing brick-and-mortar retailers, has been urging the Commerce and Finance Ministers to launch a probe into the deep discounting practices of e-commerce players for ‘predatory pricing’. But why would the discounts be anti-competition? The competition regulator will have final say on this.

What is it?

Ever come across a product or service where a large player offers you a throwaway price to reel you in, only to jack up prices later? That’s predatory pricing for you. Predatory pricing is a strategy whereby a Goliath in an industry with deep pockets prices its goods or services at rock-bottom levels, so that no rivals can compete with it. Once everyone else runs up huge losses and is forced out of the business, the Goliath makes hay by withdrawing the freebies and fleecing consumers.

In India, the Competition Act of 2002 lays down the ground-rules on what constitutes predatory pricing. ‘Predatory pricing’ figures in the section on abuse of dominant position by a market player. It expressly forbids any enterprise or group from ‘abusing its dominant position’ in the market, either by imposing unfair conditions or an unfair and discriminatory price — including predatory price — resulting in denial of market access.

Predatory price is specifically defined as sale or goods or services at a price below the cost of production, with a view to reduce or eliminate competition.

Why is it important?

If the CAIT really believes that e-commerce players are indulging in ‘predatory pricing’, it should be knocking on the doors of the Competition Commission of India with its complaints on e-commerce discounts, and not the Finance or Commerce Ministry. Should the complaint be taken up by the CCI, one can expect it to seek further numbers from the e-commerce players on the pricing and cost of goods sold on their platforms during festival sales, to gauge if there is indeed predatory pricing.

But even the CCI may not have easy time pinning down India’s e-tailers for predatory pricing. One, despite the big splash they make, e-commerce players in India are still bit players in the humongous retail industry, which consists of thousands of mom-and-pop stores, super markets, hyper markets et al.

In value terms, online sales still make up less than 5 per cent of the total retail sales in India. It may therefore be hard to accuse them of ‘abusing their dominant position’ though they have deep pockets.

Two, for a case of predatory pricing to stick, the CCI will have to establish that e-commerce platforms are actually selling products below their costs of production. This can be tricky, especially as sellers on these platforms aren’t complaining.

In fact, predatory pricing is a much-debated facet of anti-competition law globally, because these laws are essentially meant to protect consumer interests. Discounts, however predatory, do initially benefit consumers. They turn anti-consumer only when the firm offering them withdraws them and begins misusing its monopoly position to fleece customers.

Why should I care?

If you’re a shopaholic, you’ll need to keep watch on whether these allegations fizzle out or are taken up by the CCI.

That will decide whether you get to enjoy the next ‘Big Billion’ sale.

The bottomline

Are e-commerce discounts bad for you? You’ll have to wait and watch to decide.

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Published on November 05, 2019

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