Why did TRAI issue order on predatory pricing?

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New Delhi | Published: March 8, 2018 4:12 AM

department of telecommunication, trai, telecom sectorIt is quite likely that Trai’s current order on predatory pricing will not have any significant impact on the evolution of India’s telecom market.

The clamour for a ‘level playing field’ (LPF) has been heard in the telecom sector ever since the monopoly of the department of telecommunications (DoT) was broken in 1994 to accommodate private participation in the Indian market. With the entry of the private sector into an erstwhile monopoly, the demand for a LPF became the most obvious manifestation of competition having arrived. Thus, new entrants Airtel, Hutch (now Vodafone), and later Idea, among others, demanded cost-based interconnection with DoTs network when the latter enjoyed disproportionate market power because of its legacy presence in the market. DoT threatened to price the new entrants out of the market and, generally, nip competition in the bud through prohibitive and impossibly high interconnection charges. The regulator, Trai, intervened in favour of new entrants who even demanded, with some justification, that the regulator institute a regime of asymmetric regulation in their favour. For example, a retail price floor applicable to DoT and its successor BSNL would facilitate competition, they argued, because of the significant market power (SMP) the public-sector operator commanded. Naturally, such a floor would not be applicable to the new entrants. The demand was premised in the interest of promoting and cementing competition in a market characterised by massively unequal market shares, as is typical when a monopoly is first broken.

Asymmetric regulation has been a favoured instrument of regulators across the world to reign in the exploitative conduct of incumbents and, most often, has been used in the initial years of telecom liberalisation. The argument being that incumbents could destroy the fledgling competition even before it takes root and begins to confer the well-recognised welfare benefits on both consumers and, arguably, producers as well. Thus, regulators try to level the playing field between operators by imposing more onerous conditions on service providers with disproportionate market power. Modern regulators and competition authorities also nuance the relationship between market share and market power, acknowledging that one could exist without the other.

When competition has been fortified in the market, the need for ex ante regulation diminishes or even disappears, claiming competition among players would keep each one honest. Instead, the preferred instruments of disciplining the market rely on ex post remedies that seek to impose hefty fines and penalties on operators that harm the market through exclusionary behaviour.

Predatory pricing belongs to a category of exclusionary conduct strategies. The Chicago school takes a rather dim view of it, arguing that predatory pricing is rarely tried and even less rarely successful. The Chicago view had an enormous impact on the development of the legal doctrine towards predatory pricing in the US and elsewhere. The basic tenet is that the conditions to establish predatory behaviour are hard to prove in practice. The fact that a dominant player keeps prices below average variable cost, while admissible in court, is quite inconsistent with economic theory. And, then a more difficult task is to prove intent on part of the predator. The aggressive below-cost pricing must be so low as to induce the exit of the rival and once the rival has exited—or has been acquired—the predator can recoup losses by exercising monopoly power. This assumes existence of deep pockets, i.e., the capacity to withstand losses today in the hope of future gain. Proving predation in any circumstance, thus, needs a fair amount of subjectivity.

The one time that a floor price was sought to be introduced in India to preclude predatory impulses from the incumbent was in the case of limited mobility services in 2001. After an extensive consultation process, Trai issued an order that prescribed a floor tariff. It never really became functional since events that followed transformed limited mobility to full mobility, thereby conferring the said regulation to the annals of history. Whether the said order bequeathed any competitive benefit to the sector during the time it was applicable was never analysed, but it is unlikely to have. But even so, that order was instituted at a time when competition was still emerging in India. It is quite rare for predatory conduct to be proscribed by ex-ante regulation in a market that is as fiercely competitive as it is now after several years of telecom liberalisation. It is one thing to gauge competition from passive numbers that make up market share (see table), and quite another to get a feel of it from the outcomes in the market, such as prices, innovations and new offerings. On this front, the Indian market has been second to none. Besides, each of the long-term serious operators in India has invested huge amounts in excess of a few lakh crores. The ‘hit and run’ type of entry that occurred in the market to grab spectrum in 2010 is history, and those opportunistic players have been weeded out of the market.

It is quite likely that Trai’s current order on predatory pricing will not have any significant impact on the evolution of India’s telecom market. All players that will exist in the market under its frame are ‘big’, serious and with access to the best technology and to the best, yes, lawyers. The latter will be necessary to debate in court whether a particular price manoeuvre by an operator is in response to competition or a unilateral effort to destroy it. What the order does, however, is lay to rest the debate whether predatory conduct can emanate from a player with less than 30% share in the relevant market. According to Trai, it cannot. According to the competition watchdog, the competition commission of India (CCI), Trai has strayed into foreign territory.

While the big boys slug it out in the market and in the courts, substantial collateral damage is being caused to the players who first inspired coinage of the term LPF in the Indian context—BSNL and MTNL. One of the mandates of regulation has as much to do with the protection of competitors as it has with the protection of competition. If competition in the market is to succeed, it requires strong operator presence. The collective might of the private entrants and their better response to market demands has meant an ever-increasing market share at the expense of the public sector and its consequent wilting. Much of it is due to its own internal processes, and in some small part due to the benign neglect of the regulatory apparatus to its needs.

One could argue that the rhetoric of LPF has come full circle and ought to shift in favour of the public sector now, not to protect but to inspire it to become more competitive. But how, is a weighty question that will require many heads to come together to devise a strategy. Maybe a focus on core infrastructure will boost valuation. May we then be heretic to suggest a divestment strategy to a new qualified bidder who does not have high stakes in any operator currently. That could provide a fillip to healthy competition in the medium to long term. If the institutional machinery does not wake up to the public-sector challenge, we are afraid it could later become a case of the Shakespearean lament: “I wasted time, and now doth time waste me.”

Co-authored with Kaushambi Bagchi, consultant, and Richa Sekhani, research assistant, ICRIER

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