Price Manipulation and Predatory Pricing: The Confluence of Competition Act and E-Commerce Rules
[Krati is a student at Rajiv Gandhi National University of Law. The following post was awarded the fourth-best entry in the IRCCL Blog Writing Competition 2020.]
As per a recent white paper prepared by Alvarez & Marsal India and the CII Institute of Logistics, the e-commerce market of the country is poised to top $100 billion by 2024 from an approximate $30 billion in 2019. Given the meteoric rise in internet and smartphone penetration, digital payments, advance technologies and further propulsion by the pandemic tailwinds, the online retail market heralds a promising future. In light of the anticipated growth, it has become even more crucial to regulate e-commerce in order to safeguard consumer interests in the digital world.
It is not the case that e-commerce had been completely unregulated before. Earlier, e-commerce in India was governed by the Information Technology Act 2000 (Act) and Information Technology (Intermediary Guidelines) Rules 2011. However, the e-commerce platforms like Amazon, Flipkart etc. could claim intermediary immunity as per Section 79 of the Act and pass the buck to the sellers. These provisions considered the e-commerce entities as mere aggregators and did not address the dynamic seller-consumer relationship. In recognition of this long-standing demand the Ministry of Consumer Affairs, Food and Public Distribution notified the Consumer Protection (E- Commerce) Rules 2020 (Rules) on 23 July 2020 that precisely outline the obligations of sellers and e-market platforms in an effort to adopt a more consumer-centric approach. In this post, the author seeks to analyse the shortcomings of price manipulation rule and its inefficacy in addressing the issue of predatory pricing before suggesting some pertinent solutions for resolving the said conundrum.
What do the Rules say?
As per Rule 4(11)(a) (Rule), the e-commerce entities are barred from manipulating price in so far as it leads to 'unreasonable profits' by means of charging an 'unjustified price' from the consumers with regards to the 'prevailing market conditions'. Though the intention of the provision is clearly to safeguard the interests of the consumers at the hands of unscrupulous sellers, the rules are in fact silent on what constitutes unreasonable profits or unjustified prices. Such a loophole in the law can indubitably be exploited by both crony vendors and litigious consumers.
Online vs. Offline Distribution Channels
In the absence of an appropriate definition of 'price manipulation', it is pertinent to deliberate upon the issue of “surge pricing” or “dynamic pricing” which is a flexible pricing mechanism based on current demand patterns. In an offline market, the free market mechanism is responsible for uniform price that dominates the market; however, such a mechanism may function differently in an online mode depending on other factors like consumer reach, consumer satisfaction, shopping experience, etc. As a result, the constants for determining the price differ accordingly.
The issues that arise here are:
(a) Whether there is any distinction in the price mechanism of online and offline markets?
(b) Whether the offline price mechanism can be used to compare and determine an appropriate price for the same product in an online market?
(c) What should, then be the barometer for determining the 'prevailing market conditions' as mentioned in the Rule?
Interestingly, the Competition Commission of India (CCI/Commission) has taken conflicting stands in the following decisions:
In Ashish Ahuja v. Snapdeal.com (2014), the CCI noted that there are significant differences between online and offline markets in terms of shopping experience and convenience offered by them, and consumers are likely to weigh their options accordingly. The Commission accordingly concluded that these markets are two different modes of distribution of the same product but not two different markets per se.
There appears to be a significant shift in CCI’s approach towards online and offline distribution channels in its recent judgements.
In All India Online Vendors Association v. Flipkart India (P) Ltd. (2018), the Commission recognised the blurriness of the distinction line between online and offline sellers while recognising the palpable convenience offered by online platforms. Lately, in certain cases pertaining to online travelling platforms, the Commission has called for a case-by-case approach.
In Ctrip.com/MakeMyTrip Limited (2019), the Commission categorically stated that the online channel appears to be a distinct mode of distribution, especially because of its increased popularity, wider reach and consumer experience which cannot be in any way replaced by other traditional brick-and-mortar stores. Hence, the line of distinction between the two markets was left open for interpretation on case-by-case basis.
In light of the above discussion, an example of a travel agencies market needs to be considered. There might be several players providing booking services to the customers, some with both online and offline presence, some with a more dominant position. Thus, the conditions/constants determining price mechanism in both the markets may be quite varied. The online mode offers convenience to sellers as they do not have to incur costs in establishing a physical store, manpower required for regular consumer interaction is significantly reduced, and so are maintenance costs. Similarly, the consumers can easily book the tickets from the comfort of their homes without having to stand in long queues, the commuting charges are also reduced. Thus, from the consumer’s perspective, the experience offered by the offline platform is significantly different from the one in an offline mode and can under no circumstances be compared with it. As a result, the price charged by different online platforms can be varying depending on these factors. Under the new rule, any consumer who feels that a seller is indulging in price manipulation can easily approach the relevant forum against him. Though these practices, may be data-driven, an absence of clarity in the law may lead to a flood of litigation, further adding to the pendency and burden of the courts.
Deep Discounts/Predatory Pricing- A Price Manipulation?
The rule on price manipulation aims to rein in the menace of deep discounts/predatory pricing by e-commerce platforms hitherto covered under the Competition Act 2002. It can be understood as a factitious reduction in prices by a dominant, resourceful player of the industry to an extent that is sufficient to drive away the smaller players, ultimately devastating the consumers due to sudden spurt in prices.
Several national trader bodies like Confederation of All India Traders (CAIT) and All India Vendors Association (AIVA) have time and again approached CCI alleging predatory pricing strategies by e-commerce platforms under Section 4 of the Competition Act 2002. As per the provisions of this section, an entity can be held liable for predatory pricing only if it can be proved that it had the advantage of exploiting its 'dominant position' in a 'relevant market' (Ashish Ahuja v. Snapdeal.com). A constrictive reading of the law makes it conspicuous that e-commerce entities comprising only 5% of the aggregate market (hence, not in a dominant position) cannot be held liable under this legal provision. Also, it needs to be proved that the price charged by the entity was below a particular threshold to be considered predatory and the sole intention of such an entity was to exploit the consumer for long term profits by raising the prices later after successfully wiping out competition (M/s Transparent Energy Systems Private Limited v. TECPRO Systems Limited). The application of the relevant threshold in such litigations was the sole discretion of the anti-trust body (as declared in MCX Stock Exchange Ltd v. National Stock Exchange of India Limited, the first case on predatory pricing in India) until later when it was changed to ‘average variable cost (AVC), as a proxy for marginal cost’ also called the Areeda-Turner Test.
Dominant position and AVC threshold: Issues involved
The definition of dominant position as per Section 4(2) of the Competition Act 2002 is a position of strength held by an enterprise in a 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.
A peculiar trend is observed in the context of e-commerce giants in India. These entities, with substantial financial cushions to sustain them in the long run, are able to penetrate the market through deep discounting strategies and lure a significant tech-savvy coterie of consumers at the cost of smaller brick-and-mortar stores. However, since the 'dominant position' clause requires evidence of position of strength, online entities often successfully contend their smaller market share as a proof for lack of dominant position. Also, the evolving condition of “collective dominance” that e-commerce platforms enjoy against traditional stores remains unaddressed by the new rules.
The AVC approach too is fraught with lacunae especially because the burden to prove that the price charged by the alleged entity was below the average variable cost lies exclusively on the petitioner. One of the ways used by the entities to circumvent AVC threshold is by misaligning operating costs through cross-subsidising route. Another recent trend observed in the current e-commerce industry is the long time period involved in the entity’s attempts for recoupment of the loss caused by predatory strategies which makes it difficult to prove predacious intent and further, makes predation prediction fragile.
Genuine price reduction vs. price manipulation
The vaguely worded provisions of the Rule lead to another conundrum of distinguishing genuine price reduction from price manipulation and thus leaves honest sellers at the mercy of litigious customers and the slackness of justice delivery system. The online space nurtures several emerging entrepreneurs who wish to expand their ventures by offering low-cost advantages to consumers in the initial stages. This one-size-fits-for-all approach that views all online marketers as potential predators might discourage new entities from entering the online space and deprive the consumer from the benefits of competitive pricing advantage.
The European Court of Justice (CJEU) Approach to Predatory Pricing
With the lack of exactitude regarding the definition of critical terms like “unreasonable profits” and “unjustified price”, the new e-commerce rules have failed to provide a robust mechanism for addressing the long-standing issue of predatory pricing by tech-titans while opening the door to frivolous litigations against genuine sellers. Possible solutions for the same can be found in notable decisions of the European Court.
The European Court of Justice in the Wanadoo case remarked that "demonstrating that it is possible to recoup losses is not a necessary precondition for a finding of predatory pricing", thus recognising the possibility of predation at even below AVC price. This is particularly significant in cases where the entity is a big market player with significantly deep pockets to cover loss for a long duration. Three important points can be understood upon perusal of CJEU’s ruling in this case.
Prices below AVC are to be considered prima facie abusive, while prices above AVC are to be considered so only if it is shown that prices are fixed in pursuance of a competition elimination strategy.
The conduct of a dominant company, even though similar to the acceptable conduct of non-dominant company, needs of be viewed differently in the light of special duties of dominant company. Thus, the defence of “meeting competition” stands nullified in a suit of predation.
The possibility of recoupment of losses may be an important factor in determining predatory conduct, but the crucial point is the plausibility of elimination of competition, in which case the recoupment may be irrelevant.
A successful overhaul of the AVC approach in line of the CJEU’s directions in the Wanadoo case can be of valuable assistance in plugging the loopholes in the existing law on predatory pricing as envisaged by Rule 4(11)(i).
Conclusion and Possible Solutions
The rule of price manipulation as laid down in the Rules is progressive in intent but fraught with practical absurdities. By defining dominant position strictly in terms of market share and independent operability, making recoupment of losses as a pre-requisite to analyse predacious conduct and leaving critical terms like “unjustified price”, “unreasonable profits” and “prevailing market conditions” undefined, the government efforts at reining in tech giants for predatory pricing seem to have gone down like a lead balloon. With the evolving market dynamics, there is an urgent need to overhaul the existing laws ere they fall too short of technological advancements in the society. Some plausible solutions could be summarised as follows:
Recognising online and offline modes as separate entities: This would help in distinguishing the “prevailing the market conditions” and assist in determining a justified price for both the modes.
Exempting new entrants with limited capital resources in the initial stages of business: This would protect genuine sellers with the intention of finding their feet in an online market from frivolous allegations of price manipulation.
Clarifications regarding the definitions of critical terms: In order to meet the objective of the rule, it is critical that government clears the air around the meaning of critical terms like “unjustified price”, “unreasonable profits” and “prevailing market conditions”.
Modifying dominant position definition to suit the dynamism of e-market: The evolving e-market matrix necessitates the need to recognise collective dominance of online platforms vis-à-vis offline stores.
Recognising the CJEU’s directions for determining unjustified price apropos of predatory pricing: An appropriate barometer for ascertaining unjustified price could be the European Court’s directions in the Wanadoo case. The plausibility of competition elimination needs to be given central focus in place of intent for recoupment of loss.
The glaring loopholes in the said provision call for a thorough analysis and deliberation in light of the proposed solutions.