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--------------- Print Magazine --------------
  May 2016
  April 2016


Pricing ‘Abuse’ by Dominant Enterprise

Section 4(2)(a) of the Competition Act, 2002 holds it to be an ‘exclusionary’ abuse by a ‘dominant enterprise’ if it practices unfair or discriminatory pricing, including predatory pricing, which can distort competition by making it harder for other enterprises to enter the market or for new entrants with shallow pockets to remain in it. Explanation (b) of section 4 of the Competition Act, 2002 describes ‘predatory price’ 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’. ‘Unfair price’ includes both ‘predatory price’ and price above ‘average variable cost’ but below ‘average total cost’.

The Competition Commission of India (CCI) has set out markers in paragraph 2(1)(c) of the Competition Commission of India (Determination of Cost of Production) Regulations, 2009 (Cost of Production Regulations):

(i) “total cost” means the actual cost of production including all input costs and overheads attributable to the product during the referred period;
(ii) “total variable cost” means the total cost referred to in (i) above, minus the fixed cost and share of fixed overheads, if any, during the referred period;
(iii) “total avoidable cost” means the cost that could have been avoided if the enterprise had not produced the quantity of extra output during the referred period;
(iv) “average avoidable cost” (AVC) is the total avoidable cost divided by the total output considered for estimating ‘total avoidable cost’;
(v) “long run average incremental cost” (LRAIC) is the increment to long run average cost on account of an additional unit of product, where long run cost includes both capital and operating costs.

The European Court, in AKZO Chemie BV v. Commission, [1991] ECR I-3359, observed that average avoidable cost (AAC) is the average of the costs that could have been avoided if the company had not produced the extra output which is the subject of allegation of abusive conduct. In most cases, AAC and the average variable cost (AVC) would be the same. Long-run average incremental cost (LRAIC) is the average of all the (variable and fixed) costs that a company incurs to produce a particular product. LRAIC and average total cost (ATC) are good proxies for each other. LRAIC is usually above AAC because, while AAC includes the fixed costs component if incurred during the period under examination, LRAIC includes product specific fixed costs made even before the period in which allegedly abusive conduct took place.
It was noted that –

(a) Failure to cover AAC indicates that the dominant undertaking is sacrificing profits in the short term and therefore an ‘as efficient’ competitor cannot serve the targeted customers without incurring a loss;
(b) Failure to cover LRAIC indicates that the dominant undertaking is not recovering all the (attributable) fixed costs of producing the good or service in question and that an ‘as efficient’ competitor could be foreclosed from the market.

It was the view of the court that ‘[a] dominant undertaking has no interest in applying such prices except that of eliminating competitors’. Each sale would generate a loss, and therefore the Court felt that the logical expectation was that after eliminating competition, the dominant enterprise would thereafter ‘raise its prices by taking advantage of its monopolistic position’.

Analysis of data relating to cost and sales prices becomes very important in determining ‘abusive behaviour’. If the analysis suggests that an ‘as efficient’ competitor can compete effectively with the pricing conduct of the dominant undertaking, then it can be inferred that the dominant undertaking’s pricing conduct is not likely to have an adverse impact on effective competition. If, on the contrary, the data were to suggest that the price charged by the dominant undertaking has the potential to foreclose ‘as efficient’ competitors, then the Commission may intervene.

This principle becomes clear by studying the Competition Commission of India (CCI) Order dated 23-6-2011 in CCI Case No. 13/2009, MCX Stock Exchange Ltd. v. National Stock Exchange Ltd and DotEx International Ltd. The CCI held that ‘the Indian Competition Act intrinsically distinguishes the narrower concept of predatory price that is intended to harm competition either through adversely affecting competitors or consumers or the relevant market, from the broader concept of unfair price’. It was noted in the aforesaid Order by the CCI that –

“… it is the specific conduct of “below the cost” pricing “with a view to reduce competition or eliminate competitors” that is the necessary ingredient that qualifies and distinguishes predatory price in terms of the Indian Act….”

In the Cost of Production Regulations, the ‘average variable cost’ is the total variable cost divided by total output. ‘Cost’ can be understood in terms of avoidable cost, variable cost, incremental cost, market value, etc. Predatory price would go below the average variable cost, and can only be sustained by an enterprise with deep pockets and long term ulterior plans of the dominant enterprise which plans to drive competition away.

Cases of pricing will therefore be examined in relation to possible effects on competition in the long run. It must be kept in mind that the CCI would not don the mantle of a price regulator.

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