FDI Policy amendment to tackle Predatory Pricing in e-Commerce

e-commerce

WHAT IS PREDATORY PRICING?

A general definition of predation is ‘any business strategy that is profitable only because of the long-run benefits of eliminating one or more competitors.’  

Under the Indian jurisprudence, Predatory pricing is described as ‘unfair or discriminatory’ pricing, and is forbidden by law under Section 4 of the Competition Act, 2002 (hereinafter referred to as “the Act”), which refers to the “Abuse of a Dominant Position”. A dominant position in the market is ‘a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to (i) operate independently of competitive forces prevailing in the relevant market; or (ii) affect its competitors in the relevant market in its favour.’ Under the Act, a predatory price is defined as ‘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’. 

Therefore, essentially predatory pricing is a concept wherein large companies reduce their prices to consumers on products and services below the average cost to the companies, temporarily, with the view to ensure that smaller companies are driven out of the market as consumers choose the cheaper option. Once the competitor is out of business, the predator has a monopoly and can determine the price of its products and services in the market in the absence of competition. The predator then increases the price higher than the average cost in order to recoup the losses suffered by it during the period of predation.  

In order to prove that a pricing strategy is predatory, it is paramount to prove that the price was fixed below the average cost with an intention to eliminate competition. Thus, it is imperative to determine the threshold at which a price becomes predatory, and the allied circumstances. There is no hard and fast rule as to when a price is predatory. Courts, world over, have used a combination of scholarly works, judicial precedents and facts to determine prices as being predatory or not.

INTERPRETATION OF LAW AGAINST PREDATORY PRICING IN INDIA

In India, the notification issued by the Competition Commission of India (hereinafter referred to as the “CCI”) in 2009, clarifies that the default cost benchmark for determining whether the dominant undertaking is pricing below cost is the average variable cost (hereinafter referred to as “AVC”), even though the Commission may deviate from the default cost benchmark of AVC and use cost concepts such as avoidable cost, long run average incremental cost, cost prevailing at market value, depending upon the nature of industry, market and technology. The case of MCX Stock Exchange Ltd v. National Stock Exchange of India Ltd, wherein predatory pricing was contended for the first time in India in 2009, denoted the discretion of the CCI in applying different costs methods. The report of the Director General (hereinafter referred to as “DG”) in this case, was based on judicial scrutiny in various other international jurisdictions such as the United States and the European Union, with regard to the befitting cost to be taken into consideration in order to determine ‘predatory pricing’. It was observed that the average variable cost is not necessarily a consistent method. The report suggested that the ATC test, which is a test where a firm’s average total cost is calculated by dividing both its variable costs and its fixed costs by the total of its output, is likely to be a more long term and economical test to determine predatory pricing.  

Without recoupment of the losses, predatory pricing becomes a pointless phenomenon. In the case of MCX vs NSE, the Commission laid down that in order to achieve the recoupment requirement with respect to a claim of predatory pricing claim, the claimant must meet a two prong test: first of all, demonstration that the scheme could actually drive the competitor out of the market; secondly, there must be evidence that the surviving monopolist could then raise prices to consumers long enough to recoup his costs without drawing new entrants to the market. 

LEGAL OR INTERPRETATIVE DRAWBACKS

To sum up, as per Section 4 of the Act, an entity can be considered to partake in predatory pricing, only when it has the advantage of a “dominant position” in the “relevant market”.  A limited understanding of the same would imply that it will not be possible for a new entrant to be scrutinized for predatory pricing, although it may have abundant financial resources to withstand lower tariffs, as a result of which, other players in the market could be compelled to exit, just on the basis of the fact that it is does not occupy a “dominant position”.  

This restricted interpretation of Section 4 of the Act has led to various decisions of the CCI acquitting various entities that were allegedly engaging in unfair and anti competitive activities.  For instance, the CCI had adjudicated on similar disputes against Uber and Ola, as also, against e-commerce platforms such as Amazon and Flipkart wherein they had suddenly started offering massive discounts to consumers. Nonetheless, none of them were held liable on the ground that they did not occupy a “dominant position” in their respective markets.  

CORRECTIVE POLICY MEASURES

Recently, the Department for Promotion of Industry and Internal Trade, hereinafter referred to as “DPIIT”) proposed a new development with a new e-commerce policy, which amends some of the Foreign Direct Investment (hereinafter referred to as “FDI”) rules via a press note, which is a huge hindrance for big players in the e-commerce sector such as Amazon and Flipkart.  

What elicited such change was the increase in the number of complaints being made to the CCI and the All India Vendors Association (hereinafter referred to as “AIVA”) from small traders against Amazon and Flipkart that they have been biased towards their own subsidiaries on their platform as a result of which, the revenues of small scale traders were being affected.  

The press note which reviews the policy of FDI in the e-commerce sector states that  “E-Commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain level playing field. Services should be provided by e-commerce marketplace entity or other entities in which e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform at arm's length and in a fair and non-discriminatory manner. Such services include but not be limited to fulfilment, logistics, warehousing, advertisement/ marketing, payments, financing etc. Cash back provided by group companies of marketplace entity to buyers shall be fair and non-discriminatory. For the purposes of this clause, provisions of services to any vendor on such terms which are not made available to other vendors in similar circumstances will be deemed unfair and discriminatory.” 

It is important to note that the press note was released in order to take note of some of the pertinent concerns raised by the traders' association such as such as the Confederation of All India Traders (hereinafter referred to as “CAIT”) after the merger between Walmart and Flipkart was accepted by the CCI, wherein the shares of Flipkart, which is the largest e-commerce company of India, were acquired by Walmart, the largest private employer in the USA. 

India’s FDI e-commerce policy after its revision by DPIIT’s press note clearly distinguishes between FDI in the e-commerce marketplace and FDI in the sale of inventory through e-commerce, i.e., it allows for FDI in the platforms for e-commerce itself, but not in the inventory that is available for sale through the platform. Under this model, the e-commerce platform is only a facilitator between the buyer and the seller. The policy prohibits FDI in e-commerce models wherein the platform is not just a facilitator but is also a seller either directly or through subsidiaries.  The revised policy partly allays concerns relating non-intervention from the CCI. Under the new policy, Amazon and Flipkart will find it harder to build inventory with the aid of data built on sales by third party vendors on their platforms and thereafter to sell that inventory at a discriminatory discount to the detriment of those third party vendors.

The issue of marketplaces manipulating sale prices came into the wider spectrum after the Income Tax Appellate Tribunal in Flipkart India (P) Ltd. v. CIT acknowledged that Flipkart is indulging in predatory pricing and that it has its nexus with certain specific retailers for increasing its profit. 

Thus, the new policy brought in by the DPIIT has been a welcome change. The policy is a laudable attempt to curtail the problem of predatory pricing and preferential treatment in the e-commerce sector, vide the press note, by preventing marketplaces from providing undue favourable benefits to certain vendors and by ensuring that related companies can be provided only fair and non-discriminatory cashbacks. This restriction has come as great relief to millions of small traders who can benefit from a new platform for sales rather than feel challenged by e-commerce