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Predatory Pricing and Legitimate Competition: Distinction & Test- Kavya Budhiraja

Updated: Nov 29, 2020

“Sale at a price below cost is not per se predatory.” We all are well-versed with section 2 of the Competition Act, 2002, as per which “abuse of dominant position” is described as, under clause (a) of sub-section 2, imposition of unfair, either directly or indirectly, a) condition in trading of goods or services or b) price in purchase or sale of goods or services. The term “Dominant Position” means a position of strength enjoyed by an enterprise in the market which enables it to function independently of competitive force or affects its rivals or consumers in the market in its favour.

In view of the aforementioned, we can observe that dominant position is seen in reference to a negative impact upon the competitive forces. Having fulfilled the aforementioned conditions, a trader can be said to abuse his dominant position in the market. In the case UNITED BRANDS V. COMMISSION (1978) ECR 207, the European Court of Justice observed that imposition of unfair selling and purchasing prices by an undertaking in Dominant Position is certainly an abuse. As per Section 4(2)(b), the term “Predatory Price” refers to the sale of goods or services at a price which is below the cost of production of such goods or services, with a view to reduce competition or eliminate the competitors.

THIN LINE OF DISTINCTION BETWEEN “PREDATORY PRICING” AND “BELOW COST PRICING”:— Often times the two aforementioned terms are used interchangeably as both tend to deal with setting up of prices below the market price, because of which there is high confusion between the two.

As envisaged under section 4(2) of the act, the main purpose of predatory pricing is to eliminate competitors from the relevant market, so as to increase consumer base. Predatory pricing is a great tool to establish monopoly in a market. Competitors often step back, especially the newcomers, once prices by an already established enterprise are set so low that such newcomers are not even able to cope up with their manufacturing cost, what to speak of competing with such price and sustaining in the market.

For example, a China-based company commences an enterprise in India for a product bearing price 4 times lower than the market price. In furtherance of this, various new entrants in the industry dealing with the trading of the same product, could not match such price offered by the China-based company and as a result monopoly is established in the market. Here, it is evident that the very purpose of setting such a low price by the Chinese company was for reduction or complete elimination of rivals from the market, and hence such a practice can be termed as predatory pricing. Now, here the confusion arises. Both, predatory pricing and below cost pricing deal with setting up the price of the product below than the cost of manufacture. Setting up of prices below cost can, in case of ‘legitimate competition’, be definitely beneficial for consumers, as the purpose is not to eliminate the competitors rather to retain consumers by providing them the best quality in the most reasonable price, whereas in case of predatory pricing the main aim is to drive competitors out and thereby gaining dominant position in the relevant market. In the case IRISH SUGAR PLC. v. COMMISSION (1999) 5 CMLR 1300, it was held that an undertaking is legitimate when it sell its products or services below its average total cost to protect itself from competitors. The undertaking when in a dominant position would save itself, when it is attacked, to protect its own commercial interests. TEST TO DETERMINE PREDATORY PRICE:—

The test to check whether a price can be classified as predatory price was laid down in the case AKZO CHEMIE v. COMMISSION (1996) ECR 1-3359. Here, the European Court of Justice observed two methodologies to test whether a price falls within the ambit of predatory price or not. Firstly, setting up of prices below the Average Variable Cost (AVC) are to be considered abusive. Next, prices below Average Total Cost (ATC) but above Average Variable Cost (AVC) are to be seen in the light of the ‘intention’ of setting up such price, to say whether such a price has been set up to eliminate competitors from market. In such a scenario, the same could be considered abusive and therefore, predatory. Conclusion: The line of distinction between the two is really thin and has to be seen in the light of intention as envisaged under as AKZO Chemie case as discussed, the main ingredient is the intention to eliminate or drive competitors out of the relevant industry, thereby gaining dominant position, the basis of which the two can be classified upon.

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