Predatory pricing by e-commerce companies: Government’s knee-jerk reaction may aggravate MSMEs’ concern

November 20, 2019 7:43 PM

Ease of Doing Business for MSMEs: For a robust competitive landscape, it is essential that each market participant is able to operate and effectively compete – this is what competition law seeks to achieve.

CAIT, ecommerce sites, prodcuts on e commerce sites, Piyush Goyal, Minimum Operating Price, cod on ecommerce productsVarious lobby bodies have written to government stakeholders with respect to issues around discounts offered by e-commerce players.
  • By Kanika Chaudhary Nayar

Ease of Doing Business for MSMEs: At a key gathering of BRICS ministers and officials in Brazil last week, Commerce and Industry minister Piyush Goyal had flagged risks associated with the ‘predatory pricing’ strategies allegedly being adopted by companies in India. This brings us to the question of what is predatory pricing under Indian antitrust law, when does predation raise concerns and how should India tackle it. Another question that readers may raise is whether they have come across examples of possible predatory pricing in their day to day lives and is predatory pricing all that bad.

What’s Predatory Pricing

The traditional theory of predatory pricing is straightforward. A company indulging in predatory pricing, which is already a dominant enterprise, sets its prices so low for a sufficient period of time that its competitors leave the market and others are deterred from entering. For predation to be rational, there must be some expectation that these present losses (or foregone profits), like any investment, will be made up by future gains. 

This, in turn, implies that the company has some reasonable expectation of gaining exploitable market power following the period of predatory practices and that profits of this later period will be sufficiently great to warrant incurring present losses or foregoing present profits. The theory also implies that some method exists for the company indulging in predatory pricing to outlast its competitors, whether through greater cash reserves, better financing or cross-subsidization from other markets or other products.

In our day to day lives, we come across multiple business strategies adopted by companies that some experts may suggest amounts to predatory pricing. The top two leading English dailies in the national as well as in various regional markets sell their newspapers to readers in the price range of Rs 5-7 on a daily basis. It is estimated that the cost of production of a 40-page newspaper is in the price range of Rs 18-25 and most of the costs are cross-subsidized by advertisement income. While standalone this may look like a classic case of predatory pricing, one will, however, need to assess this behaviour on factors like: do newspaper companies expect to gain exploitable market power; will it lead to driving out of competitors or does this enhance consumer welfare without adversely affecting the competition in the market. 

Role of Market Conditions

The clear indication is that below-cost pricing has clearly benefited consumers for decades, it has not resulted in driving efficient competitors out of the market and in fact, over time, the newspaper industry has faced and continues to face significant competition from players active in the decimation of news/articles/information through online platforms. Thus market conditions play a key role in determining whether price predation is a feasible tactic for a company to employ. Evidence has already started suggesting that a number of e-commerce companies are either shutting down / reducing operations or are significantly reducing their capital burn in an attempt to stay afloat. This probably suggests that markets in the medium-to-long term will correct themselves.

Various lobby bodies like the National Restaurants Association of India, the Federation of Hotel & Restaurant Associations of India, Confederation of All India Traders etc. have written to government stakeholders with respect to issues around discounts offered by e-commerce players some of which may possibly be valid concerns. The CCI has initiated a study into the practices of the e-commerce sector. It is a good starting point. The government of India may consider setting up a high-level committee to comprehensively look at concerns in this sector especially those of small and medium enterprises. 

Impact on MSMEs

For a robust competitive landscape, it is essential that each market participant is able to operate and effectively compete – this is what competition law seeks to achieve. However, if the Government of India does plan on setting up a high-level committee, it will be critical to ensure that such a body has wide participation including from academia and other antitrust authorities so that a long term holistic solution, which is acceptable to all stakeholders, is found to the outstanding issues.

However, any knee-jerk reaction by any department of the government or a regulator may not yield desired results for the industry. One should remember that Press Note 2 issued by the Department of Investment Promotion and Policy on 28 December 2018 had far-reaching consequences not just for e-commerce players but even for the small and medium enterprises. For example, those SMEs which had equity participation from marketplaces or whose inventory was controlled by these marketplaces could not sell their inventory on e-commerce platforms thus resulting in significant harm to exactly those set of entities that this press note sought to protect.

It may be remembered that despite the controversy surrounding predatory pricing, there is a broad consensus among OECD members that the goal of competition law enforcement ought to be the protection of competition, not of competitors. It is said that competition laws are not intended, and should not be used to require businesses to price their products at prescribed prices (which penalize the consumer) so that less efficient competitors can stay in business. The Competition Act, 2002 is not a subsidy for inefficiency. Prime Minister Modi has another tough task ahead of him – marrying expectations of brick-and-mortar stores, industry bodies like NRAI, FHRAI, CAIT and political organizations like Swadeshi Jagran Manch, with his larger goal of improving the ease of doing business in India and make India a better investment destination.

(Kanika Chaudhary Nayar is the Partner at L&L Partners. Views expressed are the author’s own.)

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