Predatory pricing is when the prices of goods or services are fixed at a very low rate with a prime intent to wipe away competitors from competing in the market. Predatory pricing is one of the many tactics followed by well established firms/businesses and is a clear abuse of their dominant position. Predatory pricing is a deliberate strategy, usually by a dominant firm, of driving competitors out of the market by setting very low prices or selling below the firm’s incremental costs of producing the output (often equated for practical purposes with average variable costs). Once the predator has successfully driven out existing competitors and deterred entry of new firms, it can raise prices and earn higher profits.[1]
Although it might not seem to immediately affect consumers in the initial stages, it is likely to have adverse effects. It could give more power to monopolies, leaving consumers with no choice. It is considered illegal as it makes markets vulnerable to monopoly and countries around the world have regulations in order to forbid such practices. It has to be noted that there is a difference between predatory pricing, the former being applicable to domestic trade and the latter comes in the context of International Trade.
Table of Contents
The theory of predatory pricing
A firm in the dominant position, is considered to be the predator in the theory of predatory pricing. To go by the meaning, the predator aims at exploiting it’s rivals through several means, including the predatory pricing strategy. Predatory pricing would be a neutral move as the tactics of reducing prices could be easily construed as a part of fair competition, but at the same time, it has its own drawbacks. It need not always be a clever move as it would be difficult to cope with the loss that has occured while eliminating competitors from the market. The legal sanctions for predatory pricing are generally in the form of fines and are administrative in nature.
Assessing predatory pricing
There are several theories upon assessing predatory pricing and the evolution of the same is worth mentioning. Predatory pricing could be assessed by the extent to which it could act as a barrier to entry of new businesses in the market.
No rule
The no rule theory considers predatory pricing as a rarely occurring issue and states that it need not be a special concern. The theory also emphasises on the inextricable similarities between predatory pricing and competitive pricing. The main point of view underlying the theory is that the firm that attempts to predate punishes itself by inflicting losses and the struggle of recouping shall further persuade the firm in withdrawing the predatory activities. The No-Rule approach was devised by Bork, McGee and Easterbrook who were of the opinion that predation, an antitrust offence would be long forgotten and is not the central issue.[2]
Short-run cost-based rules
Inspired by the welfare implications of marginal cost pricing, the short-run cost-based rules were mapped out by Areeda and Turner in 1975 [3] and had to go through several further alterations in the later years. It can be conferred from the theory that the authors are in consonance with the stand taken earlier in the no-rule approach that predation is a rare occasion. This rule considers the pricing that is in par with or above the Average Variable costs (AVC) to be lawful and prices below the same to be anti-competitive pricing. It focused on short-term costs strategies rather than long-term as it seemed speculative to go for the latter[4]. The major criticism faced by this rule was that it relied upon the costs and ignored the intention of the price setters which led to the rule being not adapted in a plentiful scenario.
Long-run cost-based rules
The long-run cost-based rules were framed by Posner who argued that long-run marginal costs are a better tool for testing predation as opposed to that of the Areeda-Turner rule. This rule also makes it necessary that the intention of the predator to exclude competition must prevail and also adds on that prerequisites and defence must exist. As a requisite the rule requires the plaintiff to prove that the market was predestinated for predation. As an indicator he refers to an instance where the predator operates in several markets, the victims operate only in fewer markets as compared to the predator, the markets are concentrated, entry is slow, fringe firms are few, buyers are numerous and the product is homogeneous. He also permits the predator to defend according to the fluctuations in demand and supply.[5]
Output expansion rules
The output expansion rules were propounded by Williamson that was to govern permissible pricing and output of firms in general and in response to new entrants.[6] He had rightly emphasized that dominant firms raise prices in order to maximize profits while restricting output until there are new entrants. Along with the limitation that price shall not drop below the Average Variable Cost (AVC), the rule also intents to prohibit output expansion for a period of 12-18 months post new entry that shall give enough time for the new entrants to adapt to the market and draw customers While explaining the rule, he gives justification that this rule allows dominant firms to increase output and reduce price prior to new entry, in order to be prepared at the time where entry occurs.[7] This makes the output to remain constant, but at a lower average cost.[8] This rule was criticized by McGee and Areeda and Turner, the former stating that limit pricing could be feasible to exclude new entrants and the latter arguing that the gains from profit maximizing in the present should be more attractive than speculative future gains from deterring entry.
https://legalreadings.com/relationship-between-international-law-and-municipal-law/
Rules governing price rises
This rule was an attempt by William Baumol [9] to control long-term predation who finds it best to avoid complete reliance on cost-based tests. The rule requires the price drop to continue even after successful predation, which seems more usable as it avoids perplexed cost figure calculations.
Although there is scope for the predator to increase price after the closing out of competing firms, it has to be done with reasonable justification[10]. This rule was criticised upon its workability as it requires timely review to check whether the price reduction remains the same. Another criticism was that cautious firms that cut prices due to unavoidable circumstances could also be put in threat of not being able to raise prices again.
Non-price predation
Non-price predation could be stated as the opposite of predatory pricing as it is a form of strategic behaviour that involves raising rivals’ costs. It is potentially less costly and hence more profitable than predatory pricing. Typical methods include using government or legal processes to disadvantage a competitor. A firm may be able to force competitors to incur significant litigation or administrative costs, bearing however very little cost to itself. It is yet another practice that amounts to abuse of dominant position[11]. Non-price predation could occur in several forms like misuse of governmental procedures, innovative advertising, etc,.
This leads to an increase of price level in the market which is not so advantageous to competitors and customers as well. It ultimately makes consumers go for the least costly products, thus ignoring the competitors who have higher prices for their products. At the end, this also may result in monopolies ruling the market and not providing customers with options to choose. Non-price predation could occur in several forms like misuse of governmental procedures, innovative advertising, exclusionary provisions, etc.[12]
Regulations in different countries
United States
The Antitrust laws of the United States impose stern rules and regulations for antitrust claims regarding predatory pricing theory and any such practice shall give rise to antitrust claims of monopolization or attempts to monopolize.
The United States Legislation strives to eradicate monopolistic behaviour and preserve healthy competition at the same time. Most of the different types of predation including price predation is illegal and duly prohibited.[13]
European Union
European Union law related to predatory pricing is dealt extensively with under the EU Competition law and the Treaty on the Functioning of the European Union(TFEU). Article 102 of the Treaty prohibits abuse of dominant position that could affect trade between the member states. The law imposes fine or orders the dominant firms to adopt fair practices and cease their abusive conduct.[14]
Australia
Predatory pricing was considered illegal as per the Trade Practices Act, 1974. Later it was replaced with the Competition and Consumer Act, 2010. Section 46 of the Act deals with misuse of market power.[15] Sections 46 (1AAA) and 46 (AA) of the Act makes it clear that any corporation that has a substantial share of a market must not supply or offer goods or services for a continuous period of time at a cost lower than the relevant cost, even if it could never be able to recoup the loss incurred in doing so.
India
The Competition Act, 2002 defines predatory pricing 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.” The Act prohibits any sort of abuse of dominant position which also includes predatory pricing.[16]
Canada
Abuse of dominant position is prohibited in Canada law under the Competition Act, 1985. Section 79 punishes persons indulging in anti-competitive practices that result in reducing competition in the market. The tribunal is vested with not only the power to prohibit persons from engaging in such practices, but also to direct such persons to take actions that are necessary to restore competition in the market.[17]
Germany
The German law relevant particularly in this context is the Act against Restraints of Competition, 2017. It prohibits abuse of dominant position under sections 19 and 20.[18] Compliance with the Act is enforced by the German Federation Cartel Office. The Act specifically prohibits firms that hold a dominant or superior market power from offering goods or commercial services if it is not occasionally below cost price.
Japan
The Antimonopoly Act of Japan is the law entirely devoted to prohibit monopolization in all forms that could occur. The Act on Prohibition of Private Monopolization and Maintenance of Fair Trade, 1947 defines ‘unreasonable restraint on trade’ and the term “unfair trade practices” under Article 2 of the Act which includes price predation. The Act prohibits continuous supply of goods or services at a price far below the cost incurred to supply them, that tends to cause difficulties to the business activities of other enterprises.[19]
Conclusion
Consumer satisfaction being the key to success, fair trade and competition is one of the key means to achieve the tripartite features. Predatory pricing, a pricing strategy is an anti-competitive practice that is unlawful and prohibited around the world striking at the root of fairness. The legislations in various countries have formulated severe rules to forbid such predatory practices to foster fair trade practices and competitive pricing strategies. Predatory pricing that can stir up a price war which would not only be disadvantageous to new entrants and competing firms. It affects the consumers who are forced to perhaps opt for the only or few options left in the eventuality of there being no competitors available. The consequence of this establishes a monopoly and vests excessive power with the monopolist who can further exploit and rule the consumer along with the market completely. As identified and explained above, different perspectives exist with respect to the framework of law that shall be in place to regulate such unfair trade practices. It can be noted that most of the countries categorise the offence under competition/antitrust laws which are often administrative in nature and levy fines, punishments and implementing corrective actions. The ill effects that could arise from such practices have made price predation an illegal act and it is thus never allowed and encouraged across the globe.
REFERNCES
[1] The Organization for Economic Co-operation and Development, “Glossary of Statistical Terms”, Predatory Pricing, available at:
https://stats.oecd.org/glossary/detail.asp?ID=3280#:~:text=Definition%3A%20Predatory%20pricing%20is%20a%20deliberate%20strategy%2C%20usually,equated%20for%20practical%20purposes%20with%20average%20variable%20costs%29 (last visited on December 31, 2020).
[2] Easterbrook, Predatory Strategies and Counterstrategies, 336-37, University of Chicago Law Review, Vol. 48, 1981.
[3] Philip Areeda and Donald F. Turner, Predatory Pricing and Related Practices Under Section 2 of the Sherman Act, Harvard Law Review, Vol. 88, 697, 1975.
[4] Areeda and Turner, Antitrust Law, 148, 1978.
[5] Richard Posner, Antitrust Law: An Economic Perspective, 189-190, University of Chicago Press, 1976.
[6] Oliver E. Williamson, Predatory Pricing: A Strategic and Welfare Analysis, 284, The Yale Law Journal, Vol. 87, 1977.
[7] Id. at 299-301.
[8] Id. at 309-10.
[9] William J. Baumol, Quasi -Permanence of Price Reductions: A Policy for Prevention of Predatory Pricing,1, The Yale Law Journal, Vol. 89, 1979.
[10] Id. at 6-7.
[11]The Organization for Economic Co-operation and Development, “Glossary of Statistical Terms”, Non-price Predation, available at: https://stats.oecd.org/glossary/detail.asp?ID=3269 (last visited on December 31, 2020).
[12] Robert Bork, The Antitrust Paradox: A Policy at War with Itself, 155-160, 347-348, Basic Books, Inc., New York, 1978.
[13] The Federal Trade Commission, “Guide to Antitrust laws”, available at: https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws (last visited on December 31, 2020).
[14] European Commission, “Abuse of dominant position”, available at: https://ec.europa.eu/competition/antitrust/art82/ (last visited on December 31, 2020).
[15] Competition and Consumer Act, 2020, Australia, available at: https://www.legislation.gov.au/Details/C2011C00003 .
[16] The Competition Act, 2002, s.4.
[17] The Competition Act, Canada, available at: https://laws.justice.gc.ca/eng/acts/C-34/section-79-20090312.html .
[18] Act against Restraints of Competition, 2017, Germany, available at:
http://www.gesetze-im-internet.de/englisch_gwb/englisch_gwb.html .
[19]Act on Prohibition of Private Monopolization and Maintenance of Fair Trade, 1947, Japan, available at:
https://www.jftc.go.jp/en/legislation_gls/amended_ama09/index.html .
BY AMRITHA BALAJI| SCHOOL OF LAW, SASTRA DEEMED TO BE UNIVERSITY