When it comes to boosting sales or growing a business in general, pricing is the first factor one should consider, because it can really impact the growth of the business. Lower your price a bit, and boom, your sales go up. But here's the catch- if you lower your prices so much that your competitors can’t survive, it is termed as predatory pricing.
Predatory pricing is a strategy used by businesses in which they set the prices of their goods or services so low that it drives out the competition. It is an intervention that places a higher weightage on competitors’ losses rather than monitoring consumers’ gains.
Predatory pricing is used to banish competition by setting the prices of products and services so low that others are forced to exit the competition as they can't compete with the price standards set. And when the objective of driving out competition is achieved, the prices are jacked up again in order to make up for the losses incurred.
The price set by predators is usually less than the actual cost of producing the item and is solely aimed at hurting its competitors.
Through predatory pricing, a company sets its prices low, sells its goods and services at dirt-cheap prices, prices that fall even below the cost of actually manufacturing them and voluntarily suffer losses. Now the businesses that can afford to suffer such big losses in the short run, are the ones with deep pockets and thus have an unfair advantage over small players who cannot afford to do the same, thus kicking them out of the competition.
Short term vs long term
Predatory pricing, in the short term, appears lucrative to customers. Getting products at outrageously cheap prices and high competition in the market, as the rival also initially tries to play a battle of prices and consumers benefit from throwaway prices and high competition
However, in the long run, only the companies that are powerful and have deep pockets survive and the rest suffer losses- loss of customers and sales, resulting in heavy monetary losses, making them exit the market.
This usually creates a monopoly. Now that the competition is out, the predatory company raises prices sharply, a lot more than what one would've paid earlier if there was healthy competition. Along with high prices, the quality of the product falls as there is no competition in the market and the company has no fear of losing its customers to others. Along to the competition, the incentive to make high-quality products is gone. The company is not even motivated to innovate new technologies because of the same reason.
As a result, customers are forced to buy goods and services from a particular buyer, which is low in quality and high in price. The company's profit is multiplied.
The Competition Act of 2002, under Section 4, outlaws predatory pricing, treating it as an abuse of dominant position.
The act declares predatory pricing as a means of abuse of dominance and dominance is a precondition to establishing a predatory pricing claim.
Competition in India is regulated by The Monopolies and Restrictive Trade Practice Act,1969 (MRTP Act).
MRTP Act declared predatory pricing to be a restrictive trade practice under section 2(o) and section 33(j).
Essentials of predatory pricing
Selling at prices below the cost price voluntarily won't make any sense if businesses are not sure of recoupment of the losses suffered.
Businesses that take the bold step by selling out products and services at dirt-cheap prices are the ones who are sure they can make up for the losses made during the period and can even multiply their profits and sales.
2. Deep pockets
A predatory company is usually one which possesses large financial reserves and a big market share. These companies have a market edge over others as they generally deal in various categories and have multi-market operations, this helps them successfully attain profits from other sectors while they give away a certain category of goods at predatory prices.
3. Entry barriers
New entrants in an open market act as a check on predatory pricing and other such anti-competitive practices.
But companies are blocked from entering a market because of cheap prices and established monopolies.
4. Excess capacity
A predatory pricing policy is solely aimed at shooting up its sales of goods and services by absorbing the sales of its rival companies. When the prices go down, the demand goes up. And to fulfil the excess demand, production needs to be increased and that requires excess capacity. Without excess capacity within a company, there is no reason to set a cheap price.
But why is predatory pricing illegal in India?
Predatory pricing is an anti-competitive practice that affects the market structure. It creates barriers for new entrants and creates hurdles for already existing payers in the area and they can’t compete.
If predatory pricing is legalized, big players would take up the market and MSMEs and start-ups would not be encouraged. There would be a monopolistic market and consumers will have to face jacked-up prices and no alternatives to actually choose from. Competition Commission of India under Section 18 of the Competition Act has a duty to “to eliminate practices having an adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India ''.
Predatory pricing case in India:
One of the recent times we've enjoyed services at a throwaway price is when Reliance entered the telecom sector in India.
Mobile data and plans free of cost or at a minimal cost were provided by Jio and it successfully acquired customers of other telecom service providers. Customers shifted from 1.5GB a month, to 1.5 GB a day!
Telecom operator Bharti Airtel presented a case against Reliance Jio Infocom Limited (“RJio”) with the Competition Commission of India. Bharti Airtel accused RJio of predatory pricing as it gave away its service free of cost under one offer or another, which is thereby in contravention of Section 4(2)(a)(ii) of the Competition Act, 2002. It also alleged that the company used its financial strength in other markets to enter the telecom market through RJio, thereby contravening Section 4(2)(e) of the Act.
TRAI (Telecom Regulatory Authority of India) observed that the dominant position in the market at that point was held by Airtel with 23.5% of the customer base, whereas Jio had a decent share of just 6.4%, so it could not be held that Jio was a dominating player in the market. Its services were just promotional rather than being predatory.
It further held that the market was characterised by the presence of various other players which is contrary to a market with a predatory company.
Lowering prices or giving discounts can be a good way to attract customers and increase sales, but not going too far is the key. Competition is healthy as it prevents the market from turning into a monopoly, helps your competitors survive, gives your customers an actual choice and promotes innovation.
This article is written by Siya Ahuja of Gargi College, Delhi University.