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The Classic Causality Dilemma In Probing Allegations Of Predatory Pricing As An Abuse Of Dominance

It was in the year 2017 that one of India's leading telecom players, Bharti Airtel Limited, alleged contravention of certain provisions of the Competition Act, 2002, by the then new entrant into the market, Reliance Jio Infocomm Limited (RJIL) and its parent entity Reliance Industries Limited (RIL). If we were to rewind back to the year 2016-17, it was the time when the telecom market in the country was resonating with the sound of JIO. Reliance Jio had made its debut into the segment in the second half of 2016, and its attractive and well-marketed voice calling and internet service offers had become the talk of the town.

Soon, people started queuing up in huge numbers to get their hands on a Jio SIM in order to benefit from what was then branded and sold as 'free internet'. Even after Jio's initial, freebie-heavy offers came to a stop, the telco continued to offer services at throwaway prices, forcing the incumbent companies to slash their prices in order to compete with it.

What Jio did was this- offer free services, slash prices and gain market share, and penetrate the market really quick to capture the customers through its appealing pricing tactics. The incumbent Bharti Airtel then approached the country's antitrust regulator, the Competition Commission of India (CCI), accusing Reliance Jio of indulging in predatory pricing.

The crux of Airtel's allegations, pertaining to violation of Sections 3 and 4 of the Act, was as follows:
  1. Abuse of dominance through predatory pricing [Section 4 (2)(a)(ii)]
  2. Anticompetitive agreement between RIL and RJIL (Section 3)

The Commission dismissed the above allegations of anti-competitive practices by Reliance Jio, emphasizing that it did not hold a dominant position in the relevant market where it was a fresh entrant. This is where the heart of the problem lies- determining an entity's dominant position to ascertain abuse.

Under the Competition Act, 2002, abuse of dominance by an enterprise is prohibited under Section 4. Of the several ways and methods by which an enterprise can abuse its dominant position, use of predatory pricing methods is what Airtel had accused Reliance Jio of indulging in. Additionally, it alleged that RIL, the parent entity, was in contravention of Section 4(2)(e) of the Act as it has allegedly used its financial strength in other markets to enter into the telecom market through RJIL.

The Commission, in its order in the instant case, noted "that financial strength is relevant but not the sole factor to determine dominant position of an enterprise. Considering comparable investments and financial strengths of competitors, the success of OP-2 (RJIL) in managing large scale investments does not suggest dominant position being enjoyed by OP-2.

The Commission does not find it appropriate to hold OP-2 dominant in a scenario where its customers constitute less than 7 per cent of the total subscriber base at pan-India level, various functions of telecom service providers are regulated and entrenched players have been in existence for more than a decade with sound business presence, comparable financial position, technical capabilities and reputation.

Even if one were to consider 4G LTE services as the relevant product market, OP-2 is not likely to hold dominant position in such market on account of the presence of the Informant, Vodafone, Idea, etc., who derive commercial and technical advantages due to their sustained and sound business presence in other telecom services. It needs to be appreciated that OP2 is a new entrant, who has commenced its business recently i.e., from 5th September, 2016. In the absence of any dominant position being enjoyed by OP-2 in the relevant market, the question of examining the alleged abuse does not arise."

Here lies the crux of the argument against the allegations of the second charge, i.e., abuse of dominance by Jio in violation of Section 4(2)(a)(ii). The Commission added "that providing free services cannot by itself raise competition concerns unless the same is offered by a dominant enterprise and shown to be tainted with an anti-competitive objective of excluding competition/ competitors, which does not seem to be the case in the instant matter as the relevant market is characterised by the presence of entrenched players with sustained business presence and financial strength. In a competitive market scenario, where there are already big players operating in the market, it would not be anticompetitive for an entrant to incentivise customers towards its own services by giving attractive offers and schemes.

Such short-term business strategy of an entrant to penetrate the market and establish its identity cannot be considered to be anti-competitive in nature and as such cannot be a subject matter of investigation under the Act."

The Chicken or Egg dilemma: Ascertaining predatory pricing
Section 4 of the Competition Act, 2002, describes direct or indirect imposition of unfair or discriminatory price by an enterprise in purchase or sale of goods or service, including predatory pricing, as an abuse of dominance by it. The Act defines predatory prices as "the sale of goods or provision of services, at 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."

However, a precondition to a charge of predatory pricing is a dominant position held by the enterprise in question. Again, under the Act, dominant position means "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 or consumers or the relevant market in its favour."

To break it down, while predatory pricing is a way in which an entity is said to engage in the anticompetitive practice of abuse of dominance, a dominant position has to be held by an entity for it to be probed for abuse of dominance. This is where the classic causality dilemma comes into the picture. Say an entity A is a fresh face in a market, where it sells its services way below the cost of production, forcing competitors to either compete by sustaining losses or bow out.

The entity A does so on account of its deep pockets, or the pockets of its parent firm, which invests substantially in it thereby enabling to disrupt, penetrate and capture the market. What entity A is doing clearly fits into the definition of predatory pricing under the Act.

However, since entity A is a new entrant, it cannot be said to have held a dominant position, thus nullifying any allegations of predatory pricing on its part. Going by this restricted interpretation of the provision, a lot of activities by businesses that may have an anticompetitive effect on the respective markets would go unpunished, solely on the technicality that they are new players.

From e-commerce companies to tech bigwigs, the increasingly popular cab aggregator platforms to online businesses, many such entities have made a similar, disruptive entry into various markets using pricing and discounting tactics that fall within the grey area of predatory pricing by new entrants. [i]

A similar approach was taken by the CCI in the case of Bharti Airtel v Reliance Jio, where it held that because RJIL was a new entrant in the Indian telecom market, it did not hold a dominant position. This case shed light on how predatory pricing is treated only as an after-effect of an entity's dominant position instead of also looking at predatory pricing tactics as an indicator of dominance. [ii]

Determination of Section 4 violation: Abuse of dominance
When the CCI looks into a charge of Section 4 violation, i.e., abuse of dominance by an enterprise, it checks of certain elements to arrive at a conclusion. Starting from delineating the relevant market in which the said enterprise operates, it looks at whether or not a dominant position is held by the enterprise under investigation. If the answer to this question is in the affirmative, that is when it moves on to the next and final step of probing an abuse of the dominant position. [iii]

A dominant position held by the entity is not per se bad or illegal, but such entities are held to a higher standard of responsibility in terms of how they operate in the market. The idea is to ensure that the objective of this act, that is to maintain and ensure competition in the market, is upheld. Also, such dominant players are required to adhere to the standards and refrain from any practices that would come within the ambit of abuse of dominance.

The reason why the Act applies only to abuse by the dominant firms is because of the presumption that a small firm will lose its customers to its competitors if it charges excessive prices, while customers might have nowhere to turn to if a dominant firm charges an excessive price.

Moving on to the determination of whether or not an entity holds a dominant position in the market, there are several factors listed under Section 19(4) of the Act. Although the market share or power of an enterprise is what usually figures into most discussions around dominant position, it is not the sole determining factor.

There are several other factors that the CCI is required to take into account, like the size and resources of the enterprise, countervailing buying power, size and importance of competitors, entry barriers (like financial risk, regulatory barriers, high capital cost of entry, high cost of substitutable goods or service for consumers, etc.), market structure and size of market and vertical integration of the enterprises or sale or service network of such enterprises, among other things.

Need for re-examination of the regulatory mechanism
In the case of Meru Travel Solutions Pvt Ltd v Uber India Pvt Ltd [iv], the Director General in his report noted that while market shares of the enterprises are a good first indication of dominance, there are other factors at play too. The DG then looked at factors like financial resources and the availability of funds at the company's disposal to assess its position in the market. As mentioned earlier, one of the factors in determining an entity's dominant position is the vertical integration of such enterprises.

Going back to the case of Bharti Airtel v Reliance Jio, the non-dominant position of Jio in the telecom scenario was used to disregard any accusations of abuse of dominance through predatory pricing. However, the fact that the sustained and substantial investments into Jio by the parent RIL was an indicator of its ability to distort competition in the market. It was able to bear and withstand losses over a certain period owing to the support lent to it in the form of investments or the deep pockets of RIL.

While large investments are to be viewed as a positive sign of a healthy business environment, however, the same should not have overpowering anticompetitive effects on competition in the markets. This is where the antitrust regulator restricted itself to a very narrow interpretation of the provision, without reading it in the larger context of the core object of the Act.

Similarly, in the case of Meru v Uber and that of Fast Track Call Cabs v ANI Technologies (Ola Cabs case) [v] before that, the newly-entered cab aggregator platforms were let off the hook by the Commission on the ground that they did not hold a dominant position in their respective relevant markets.

The deep-discounting methods that were predatory in nature and worked to eliminate competition in the market were not deemed to be an abuse of dominance since they were seen to exert competitive constraints on one another. For instance, Meru had pointed out that in the Ola Cabs case, Uber's presence in the market was seen as constraint on Ola becoming dominant, while the reverse was said to be true in Meru v Uber.

This, the appellant Meru Cabs had said was contradictory in itself. However, the Commission responded saying that the delineated relevant markets in the two cases was different and also such competitive constraints are not always unidirectional in nature.

The above argument can again be applied from the lens of economic power of the enterprise including commercial advantages over competitors as a factor for ascertaining dominant position. This was also not taken into account by CCI in the telco predatory pricing case.

The regulator's approach has been the same in quite a few cases, where it rejected any investigations into entities accused of predatory pricing on the sole grounds that they were new entrants that were not dominant in the relevant markets. This was done regardless of the fact that their pricing tactics were having an effect on the competition in the market, despite them being non-dominant entities.

End-Notes:
  1. https://www.icle.in/resource/the-predatory-pricing-case-against-reliance-jio-did-cci-miss-an-opportunity-to-rejuvenate-indian-telecom-sector/
  2. https://www.ccl.nluo.ac.in/post/predatory-pricing-or-price-penetration-the-dilemma-in-bharti-airtel-v-reliance-jio
  3. https://www.epw.in/journal/2016/39/web-exclusives/reliance-jio-predatory-pricing-or-predatory-behaviour.html
  4. 2021 SCC OnLine CCI 43
  5. Fast Track Call Cab Pvt. Ltd. v. ANI Technologies Pvt. Ltd., 2017 SCC OnLine CCI 36

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