Mkt’s 001 to get licence to maim

NEW DELHI: Predatory pricing — selling a product cheaper than the cost of production — is set to get explicit legal sanctity in the new law on competition.

The practice will not be regarded as an abuse of a company’s dominance in the market if it is to meet the pressures of a competitive market. It would be an offence only if it is adopted with the intention to kill the competitor and to recoup the losses later on.

This is one of the signal departures of the Competition Act, still to be notified in its entirety, from the Monopolies & Restrictive Trade Practices Act in force at present. The MRTP Act leaves little room for a market leader to price its produce below the cost of production.

Predatory pricing as a strategy works on the assumption that once the smaller competitor is finished off though unsustainable pricing, the dominant player can hike prices to recoup earlier losses and make a killing on top. In the real world, this is difficult to work if entry of fresh rivals is easy.

In a market for traded goods or services, low levels of protection are sufficient to ensure the second stage of the predatory pricing strategy — of hiking prices — is extremely difficult to sustain. In such a situation, aggressive pricing by market leaders only serves to benefit the consumer. The ministry feels the law on competition should not end up robbing the consumer of the benefit.

The corporate affairs ministry has shot down the recommendations of some parliamentarians and the Planning Commission, who said the sharp undercutting by a dominant player in the market should be treated as abuse of its leadership position.

The ministry has made up its mind that a market leader should not be deprived of the chance to compete aggressively in the market like any other player. The Planning Commission wanted an amendment to the competition law so that a price reduction by the market leader would come under the regulator’s lens.

This provision in the existing law, however, has not been notified and the demand was to modify this before it is enforced. The ministry feels such a move would deprive the consumers of the benefits of competition.

Deciding whether a case of predatory pricing is meant to meet competition or to eliminate the rival is tough, and the regulator would take a view on a case-to case-basis. For example, Tata Motors’ proposed car for Rs 1 lakh may not be a case of predatory pricing to get the marketshare of Maruti 800 if one considers the fact that Tata has no marketshare in the Maruti 800’s segment.

However, if we consider it as a dominant player in the entire auto industry, the decision could be different. “The first step is to determine the relevant market and whether the player has a dominant position there. Obviously, the pricing strategies of new entrants would not come under the provision.

Competition authorities worldwide are cautious in deciding on predatory pricing cases,” competition commission member and acting chairman Vinod Dhall said.