Discounts Deeper Than Mariana Trench: Predatory Pricing by Indian E-Commerce Giants

Posted On - 16 January, 2020 • By - Pawan Khatri

Online shopping festivals such as “The Great Indian
Sale” and “Big Billion Day” offer products at huge discounts and have always
been a center of controversy wherein serious allegations of anti-trust and FDI
policy violations are made against top E-commerce giants by the association of
retail traders called The Confederation of All India Traders (“CAIT”)
and various other parties.

CAIT has repeatedly made allegations against Flipkart
and Amazon for following unethical and unfair trade practices wherein their
deep pockets enable them to suffer losses and offer products at unfair or
predatory prices as a measure to wipe out competition from the market. While
the consumers do not realise anything wrong with huge discounts in the short
run, the long-term impact of predatory pricing can be catastrophic as such
e-commerce giants can exploit prices after wiping out the competition and
capturing the market.

While the merit of allegations of antitrust violations
is to be assessed by Competition Commission of India (“CCI”), we can take a look at what constitutes predatory pricing
and whether preliminary analysis of the facts establishes a possibility of
these e-commerce giants actually indulging in unfair trade practices by deep
discounting and predatory pricing as a measure to wipe out the competition.

What is
Predatory Pricing?

Predatory Pricing has been defined as a short term
strategy adopted by market giants with deep pockets to sustain losses and
reduce the prices of their products below the average variable cost as a
measure of wiping out competition from the market.[1]

The Competition Act, 2002 “the Act” defines and
prohibits the abuse of dominant position in Section 4 of the Act. Section 4(2)
further states that offering products or services at an unfair or
discriminatory price either directly or indirectly constitutes abuse of
dominant position. Further, Section 4(2) (a) (ii) mentions ‘Predatory Pricing’
as a form of unfair or discriminatory pricing and ultimately as abuse of
dominant position.

The reason why Predatory Pricing is illegal under the
Act is simply because of the harmful impact it has on the competition in the
market. The practice of Predatory Pricing creates hurdles for new entrants
willing to enter the market and also adversely affects consumers in the long
run when prices go up due to the lack of competition.

However, Predatory Pricing has been repeatedly termed as an inefficient method of capturing the market despite being illegal. Nevertheless, there have been instances where the practice has helped dominant players make good profit by exploiting the price higher after capturing the market.

Deep Discounts on Sale by E-Commerce Giants constitute Predatory Pricing?

giants have been directed to disclose the names of the top five sellers on
their respective platforms, an elaborate list of price of goods of vendors
suggested as site’s preferred sellers and the kind of support which is provided
to the sellers. They have also been asked to fill in individual questionnaires
wherein they have to reveal and disclose their capital structure, elaborate
note of business process and model as well as the inventory management system. The
crux of claims by e-commerce giants in response of the allegations was that
they have little or no influence on the pricing mechanism as the sellers were
provided with live dashboards enabling them to see prices being offered for
specific products by fellow sellers and the sellers themselves decide on the
discount they’re willing to give and modify the prices offered for the products
accordingly. They further stated that the sellers unlock the possibility of
good profits in short term despite the low margin of profit on each sale as the
collective or combined profit during the sale season is substantially high as
compared to the normal days due to high sales. Another defence took up by the
giants was that the losses incurred by them are not due to predatory
discounting but due to investments in building the business and technology.

The stance taken by CCI & Competition Appellate
Tribunal (“COMPAT”), includes the following
test of recoupment and intention to ascertain if the facts and the factors
constitute predatory pricing. In the case of H.L.S. Asia Limited, New Delhi v.
Schlumberger Asia Services Ltd. Gurgaon and Oil & Natural Gas Corp.
Limited, New Delhi[2],
CCI held that if the aggrieved party is seeking a remedy for alleged
predatory pricing, the most important factor is the determination of the
average variable cost. Further, the said determined average variable cost
should be higher than the current offered price of that product.

In the order of M/s. Transparent Energy Systems Pvt. Ltd. v.
TECPRO Systems Ltd.[3],

CCI held that three conditions have to be satisfied to ascertain whether the
practice of a dominant firm constitutes predatory pricing-

  • The
    price being offered for the goods or service should be lower than the average
    cost of production of the product or acquisition of service.
  • Such
    kind of manipulation in the price of the product was done with the intention of
    wiping out competitors from the market.
  • A
    substantial plan exists with a motive of recovering or recoup the losses
    incurred due to dropping the prices by jacking the prices high again after
    eliminating the competitors from the market.

This is not the first time that such allegations have
been made against online retailers. CCI has examined similar cases in the past
and rejected them due to various shortcomings in the essence of alleged
practice to have any appreciable adverse effect on the competition in the
relevant market.

The position of an online marketplace is to be treated
as part of the same relevant market as brick and mortar stores; this was made
very clear by the CCI in SanDisk case[4] as
they’re separate channels of one relevant market and not  distinct relevant markets.

Since Predatory Pricing is a form of abuse of dominant
position as per Section 4 of the Act, it is a pre-requisite to establish that
the alleged party is a dominant player in the market which is decided by the
market share in the relevant market. And time and again, CCI has held that
online marketplaces cannot be considered as dominant players on the basis of
their current market share.

Even if they were to be considered as a dominant
player in the market, the essentials of Predatory Pricing are hard to be
fulfilled as discounts on online market places during such sale do not necessarily
constitute Predatory Pricing. The aggrieved party shall have to establish that
such discounts were financed by online retailers and not the vendors/sellers
themselves. Further, they will also have to establish that the final offered
price was lower than the average variable cost of such products.

Arguendo, the above two components are established.
The party shall still be required to establish that a plan exists with a motive
of recovering or recoup the losses incurred by jacking the prices high again
after eliminating the competitors from the market.


Therefore, it is very hard to substantiate allegations of Predatory Pricing against e-commerce giants from a legal standpoint. As on preliminary analysis of the facts, it can be seen that the essence of the practice fails to establish any appreciable adverse effect on the competition in the relevant market. And, even with deeper analysis, it shall be farfetched to consider e-commerce retailers as dominant market players with their current market share as e-commerce is not considered as a distinct relevant market. However, a probe has been initiated by CCI against Flipkart and Amazon due to allegations of vertical arrangements such as preferential listing, exclusive tie-ups, private labels and preferential sellers. Such allegations based on ongoing practices on these platforms are likely to be charged as a violation of Section 3(4) read with Section 3(1) and Section 4(2) read with Section 4(1) of the Act.

  • [1] Hovenkamp, H.,Federal Antitrust Policy-The Law of Competition and its Practice,3rd ed., 2005, Thompson West.
  • [2] Case No. 80/2012, 2013.
  • [3] Case No. 09/2013, 2013.
  • [4] Ashish Ahuja v. through Mr. Kunal Bahl, CEO & Ors., Case No. 17/2014

Contributed By – Pawan Khatri

King Stubb & Kasiva,
Advocates & Attorneys

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