Predatory Pricing or Price Penetration? The Dilemma in Bharti Airtel v. Reliance Jio
Author: Ameya Garud
The author is a student at the National Law University Nagpur
In 2016, Reliance Industries Limited (RIL) acquired a telecom start-up called Infotel Broadband Services Private Limited (IBSL) and later renamed it as Reliance Jio Infocomm Limited (RJIL). RJIL, along with RIL was brought to the Competition Commission of India (CCI) by Bharti Airtel Limited (Airtel), alleging predatory pricing. Although the CCI let RJIL & RIL off the hook, questions arise on whether the CCI was well justified, or it failed to differentiate between ‘Predatory Pricing’ and ‘Penetrative Pricing’.
II. Is Alleged Predatory Pricing Substantial?
Airtel alleged predatory pricing. It was alleged that RIL leveraged its large commercial and economic backing to dominate the telecom market. By the help of the commercial advantages, RJIL deployed the largest amount of spectrum for 4G LTE services in India in 20 of the 22 areas of service. RJIL offered their voice/video calling and internet data service absolutely free from 5th September 2016 to 31st December 2016 as a part of the ‘Jio Welcome Offer’. It continued this offer till March 31 2017, in the name of the ‘New Year Offer’. As a result of this, RJIL gained a subscriber base of 72.3 million users as on December 31, 2016. The informants contended that although the Telecom Regulatory Authority of India (TRAI) had curtailed the ‘Welcome Offer’ to 3rd December, RJIL went forward to disobey those orders and extended it till March 31, 2017.[i]
III. Was CCI Right in Finding No Predation?
Airtel alleged violations of Section 4(2)(a)(ii) for predatory pricing & Section 4(2)(e) for entering a market using dominance in another market. The informant argued that RIL had allowed unfettered access of its large funds & resources to RJIL, so as to maintain a low price in the relevant market of 4G services in India to cause an Appreciable Adverse Effect on Competition (AAEC) in the market. It was stated that pursuant to Section 19(4)(b) & 19(4)(d), RJIL was also dominant in the 4G market. But, the CCI held that RJIL did not indulge in predatory pricing. It reasoned that RJIL was not a dominant player in the market on account of it having a 6.4% market share in the 4G market in 2016. The CCI reasoned that other players having a much larger market share had an equal economical or financial strength. Due to this, consumers were not dependant on anyone enterprise. Thus, as dominance was not established, the issue of abuse of dominance or predatory pricing was invalid. The CCI observed no hindrance in the competitive market. Thus, RIL & RJIL was freed of all allegations.[ii]
But this does not end here, there still persist many doubts and questions on the fairness of the CCI proceedings. Did the CCI fail to differentiate between penetrative & predatory pricing? Subsequent parts of the article will address this issue.
IV. Was CCI Unable to Differentiate Between Penetrative Pricing & Predation?
Penetrative pricing means when new entrants charge a very low fee to quickly increase market share and gain consumer attention. Even if this is not predatory, it is just done to establish a presence in the market.[iii] A ‘predatory intent’ is what differentiates the two. This term was used in the MCX v. NSE case[iv] and again in the Fast Track Call Cabs case.[v] In Bharti Airtel v. Reliance Industries Ltd, the CCI held that the free service offered by RJIL did not have a predatory intent to eliminate competitors. Opposing this the Informant vehemently argued that even if the intent could not be ascertained, the economic might of RIL would allow RJIL to maintain a predatory price for a long period till a wide market share was gripped.[vi] This indicates abuse of dominant power by setting an unfair purchase price, violating section 4(2)(a)(ii) of the Competition Act, 2002[vii] which prevents the imposition of unfair purchase prices on. Services at a zero cost, a wide presence all over India, a 72.3 million share in 4 months is strong economic evidence.[viii]
While investigating for predatory pricing issues, the CCI relies primarily on economic evidence[ix], yet it ignored the abovementioned evidence which indicated an ability to maintain low costs for long periods and potential of recouping the losses later by increasing costs gradually when a wide market share was gripped. Even if the CCI didn’t foresee the possibility of competitors being ruled out then, looking at the present scenario, the RJIL is a dominant player in the 4G market alone by virtue of a 35% market share and an incomparable economic might.[x] Many competitors have suffered irreversible monetary losses. Why does proving dominance act as a hurdle in proving predatory pricing? This is will be addressed in the proceeding section.
V. The Hurdle of Proving Dominance in the Relevant Market
Just because RJIL was a new entrant, according to the CCI, it did not enjoy a dominant position. It is a drawback that predatory pricing is considered only as an after-effect of dominance and that predation is not considered as an indicator of dominance.[xi] Other factors such as the ability to maintain low price, survive the heavy losses and to recoup those later may also signify dominance and thus prove predation.[xii] It is much clear from the facts that it was only after IBSL won the spectrum auction in the 2300MHz band, that RIL acquired IBSL and renamed it as RJIL. Coupling the financial power of RIL with the reach of RJIL in the 2300MHz band 4G spectrum, RJIL could maintain this zero price for as long as 7 months. Now, when all other players are loss-making operators, Jio started to increase the prices every month to recoup the losses gradually.[xiii] The fact of RJIL being the only profit-making telecom operator currently[xiv] coupled with the highest market share (35%)[xv] proves the potential recoupment of losses. Although the ability to recoup the losses was evident from the economic power of RIL, CCI overlooked this probability.
The CCI ignored Section 19(4)(d) of the Act[xvi] which states that an entity which has a relative commercial advantage or financial strength is in a dominant position. The CCI misinterpreted dominance in the market and predatory pricing. This wasn’t the first time. Even in the Meru Travel Solutions Pvt. Ltd. v. Uber India Systems Ltd,[xvii] the CCI let Uber off the hook owing to Uber being a new entrant. CCI didn’t find Uber in a dominant position. Hence the issue of predation did not arise. As a result, the COMPAT had to intervene and overturn the CCI’s order to instigate a probe against Uber.[xviii] The COMPAT reasoned that regardless of Uber’s dominance, the pricing scheme of Uber hindered the competition in the call cab relevant market in NCR. This substantiates that even without the dominance of an entity, predatory pricing can affect the competition.
The preamble of the Act states that preventing AAEC and maintaining a fair competition are the objectives of the Act. The hurdle of proving dominance must not stop the CCI in enforcing its objectives. Detecting the effect of predatory pricing is an area of greater concern than assessing the dominance of an entity. Thus, in Bharti Airtel v. Reliance Industries Limited, the CCI yet again failed to differentiate predatory pricing from penetrative pricing.
VI. Are ‘Promotion of Technology’ & ‘Benefit of Consumer Interest’ Valid Arguments?
In the Jio case, the CCI reasoned that in cases of predatory pricing, even if the competitors suffer losses right from the start, better technology would be accessible to consumers at cheap prices.[xix] Since one of CCI’s main objectives is to safeguard the consumers’ interests,[xx] investigating the effect on consumers is also an important element in predatory pricing. Sometimes, predatory pricing can help better technology reach more and more consumers. Hence, even if it may be against the interests of competitors, it is pro-consumers.[xxi] This pro-consumer pro-penetrative approach was the reason behind the Telecom Regulatory Authority of India (TRAI) permitting Jio to carry on with free services.[xxii] Even if the Telecom Dispute Settlement Appellate Tribunal (TDSAT) nullified the TRAI verdict, the pro-consumer approach remains an important principle.
However, this argument fails as the benefit of the consumers only persists for a short-term. In Brooke Group v. Williamson Tobacco case,[xxiii] it was held that while assessing abuse of dominance, the larger picture of the competitive market needs to be looked upon as well. The long-term consequential impact on consumers is also to be pondered.[xxiv] Firstly, when competitors are eliminated in the long-term, the predator gradually increases the prices with a view to recouping all the losses suffered previously.[xxv] This price-rise will later put consumers at a disadvantage. Secondly, when such cheap prices will force other competitors to exit the market, the consumers will have less or no options to choose from. This will result in denial of market access to competitors as well as consumers, violating section 4(2)(c) of the Act.[xxvi] An injury to consumer interests will contradict the legislator’s objective as stated in the preamble of the Act.
Under Indian competition law, the dominance of an enterprise must be proven before predatory pricing can be proved. Without the existence of a dominant position, predatory pricing is out of the question. This has proved to be a roadblock for the CCI in many cases abovementioned in this article, especially in the Bharti Airtel case. There have been cases which provoke questions regarding the difference between penetrative pricing and price predation. Unfortunately, there exists very minimal jurisprudence this area of competition law. The Indian anti-trust jurisprudence is developing.
[i] Bharti Airtel Ltd. v. Reliance Industries Ltd. & Anr., CCI Case No. 03/2017, ¶¶6.1-6.4, https://www.cci.gov.in/sites/default/files/3%20of%202017.pdf. [ii] Id. at ¶19.
[iii] What is Penetration Pricing?, (May 26 2020, 12:25), https://corporatefinanceinstitute.com/resources/knowledge/strategy/penetration-pricing. [iv] Multi Commodity Exchange of Ltd. v. National Stock Exchange of India, CCI Case No. 13/2009, ¶29, https://www.cci.gov.in/sites/default/files/MCXMainOrder240611_0.pdf. [v] Fast Track Call Cabs Pvt. Ltd. & Anr. v. ANI Technologies Ltd., CCI Case No. 06/2015, https://www.cci.gov.in/sites/default/files/6%20%26%2074%20of%202015.pdf. [vi] Supra note 1, at ¶21. [vii] The Competition Act, 2002, 12 Acts of Parliament, §4(2)(a)(ii), 2003. [viii] Supra note 1, at ¶6.3. [ix] M/s Transparent Energy Systems Pvt. Ltd. V. Tecpro Systems Ltd., CCI Case No. 09/2013, https://www.cci.gov.in/sites/default/files/092013_0.pdf. [x] Jio is now the largest telecom player in both revenue & market share, Livemint, (May 31 2020, 21:45), https://www.livemint.com/industry/telecom/jio-is-now-the-largest-telecom-player-in-both-revenue-customers-base-report-11580184164761.html. [xi] Dhruv Ranjan & Aakriti Thakur, Predatory Pricing: Not only abuse but also proof of dominance, SCC Online (2020) PL (Comp.L) February 79, (May 26 2020, 12:57). [xii] Brooke Group Ltd v. Brown and Williamson Tobacco Corporation, 509 US 209 (1993). [xiii] Sneha Saha, Jio Data prices will increase every month: Says Report, India Today, (Jun 6 2020, 21:55), https://www.indiatoday.in/technology/news/story/jio-data-prices-will-now-increase-almost-every-month-says-goldman-sachs-in-a-report-1070474-2017-10-25. [xiv] Reliance Jio posts ₹1,350 crore net profit in Dec quarter, Livemint, (May 31 2020, 22:37), https://www.livemint.com/companies/company-results/reliance-jio-q3-net-profit-surges-62-at-1-350-crore-arpu-rises-11579267987681.html. [xv] Supra note 10. [xvi] Supra note 7, at §19(4)(d), 2003. [xvii] Meru Travel Solutions Pvt. Ltd. v. Uber India Systems Pvt. Ltd., CCI Case No. 96/2015, https://www.cci.gov.in/sites/default/files/26%282%29_96%20of%202015.pdf. [xviii] Meru Travel Solutions Pvt. Ltd. v. Competition Commission of India &Anr., Appeal No. 31/2016 (COMPAT), ¶15, http://compatarchives.nclat.nic.in/Attachments/JudgementList/4198_Meru.pdf. The CCI failed to identify predatory pricing of Uber. The COMPAT thus had to rectify the error made by CCI. [xix] Supra note 1, at ¶16. [xx] Competition Commission of India v. Steel Authority of India Ltd. & Anr., (2010) 10 SCC 744. [xxi] Priyadarshee Mukhopadhyay, Penetrative Pricing: Understanding its Evolution and Rationale Under the Indian Competition Law Regime Through the Revolutionary Jio Case, Kluwer Competition Law Blog, (May 26 2020, 16:39). [xxii] TRAI moves SC against TDSAT order on predatory pricing, Business Today Newspaper, (May 26 2020, 16:52), https://www.businesstoday.in/sectors/telecom/trai-moves-sc-against-tdsat-order-on-predatory-pricing/story/306308.html. [xxiii] Brooke Group Ltd v. Brown and Williamson Tobacco Corporation, 509 US 209 (1993). [xxiv] Supra note 4, at ¶24.2. [xxv] OECD, Predatory Pricing, pg. 7, (May 28 2020, 18:16), http://www.oecd.org/competition/abuse/2375661.pdf. [xxvi] Supra note 7, at §4(2)(c).