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-Darsan Guruvayurappan†
Introduction
In late 2019, the Supreme Court of India upheld a 2016 Competition Appellate Tribunal (“COMPAT”) order that directed an investigation into the pricing practices of Uber and Ola upon information given by Meru, based on a prima facie finding of predatory pricing by these companies. As is usual with most Supreme Court decisions, this judgement is light on theoretical and jurisprudential analysis and the Court completely sidesteps the more interesting arguments that Meru and the parties had raised before the CCI and the COMPAT. The Supreme Court held the existence of per-ride losses would be sufficient to prima facie support a predatory pricing charge, as required for directing an investigation under Section 26 of the Competition Act, 2002. This article argues that the Court has confused the requirements under Section 26 read with Section 4, and that the burden of proof in cases alleging abuse of dominant position through predatory pricing should be higher than what has presently been adopted.
Pricing to kill
Upon first blush, the very idea of predatory pricing seems ridiculous—how can lower prices ever hurt consumer welfare? Upon further consideration, of course, it becomes intuitively obvious that unfairly lower prices might harm consumer interests in the long run due to a throttling of competition. If one were to stop at this level of analysis, as the Supreme Court did, it might seem tempting to view every pricing-strategy of more well-heeled market actors as being predatory and anti-competitive. However, economic theory has long recognized that lower prices can be termed as predatory only in certain circumstances, such as when there exists high-costs of entry, complex regulatory barriers, etc. Another consideration is that firms driven to insolvency through predatory pricing might simply be revived or its assets will be re-deployed as soon as the prices return to normal. Otherwise, game theory dictates that fresh competitors will arrive at the scene the moment the dominant firm raises prices, thereby nullifying the effects of the predatory pricing. In the words of the SCOTUS, it is crucial that the monopolist must have a “dangerous probability of recouping its investment in below cost prices”. This makes predatory pricing seem like a second-order counter-intuitive economic theory in that predatory pricing cannot possibly be a rational pricing strategy, except when there exist certain narrow market conditions.
Under such circumstances, Courts should adopt a stricter standard of scrutiny based on an understanding of anti-competitive practices that is grounded in economic theory. One might, of course, argue that the presumption should be in favour of the CCI to begin preliminary investigations, particularly since mere investigations do not create liabilities or rights. However, this does not take into account the opportunity costs of the CCI diverting its limited resources, nor the significant compliance costs that an investigation would create for companies. In this case, the Supreme Court was prima facie convinced of predatory pricing on the part of Uber solely based on the fact that they were incurring a loss of Rs. 204 per ride during the relevant period. The Court did not even properly consider the second-order requirements such as the market size, the number of existing competitors, barriers to entry in the market, etc. before arriving at its determination. This is in contrast to the CCI’s original order in 2018 refusing to direct an investigation because, inter alia, the relevant market was sufficiently competitive and that there was no dominant player. Until recently, the mobile taxi-aggregation sector still operated under near free-market conditions. The mere fact that there are still several players in the different relevant markets in the taxi-aggregator sector shows that Meru’s fear of competition being wiped out was unfounded. The barriers to entry are not prohibitive and regulatory requirements are not burdensome. This is in contrast to other sectors such as telecom, commodities trading, and airlines, where it is excessively difficult for new entrants to set up shop.
The Supreme Court’s reasoning is that the very existence of per-unit loss prima facie attracts Explanation a(ii) of Section 4 which states that the ability to affect competitors, consumers, or the relevant market in its favour would indicate a dominant position. The entire idea of predatory pricing, therefore, needs to be rebuilt based on a sounder theoretical framework. Useful reference may be made in this regard to the dissenting note in a 2015 CCI order in similar case against Ola where factors such as market history, competitive constraints, and other factors were taken into account to conclude that a case of dominance was not established and that supposedly predatory pricing could not itself be circularly used to prove dominance. If per-unit loss is the only metric of determining the existence of predatory-pricing, then that would open the floodgates for most fledgling startups to be investigated under the Competition Act; incentive structures and consumer-onboarding programs would be effectively banned. The only thing currently standing in the way of blanket investigations is the requirement of establishing dominance.
Establishing Dominance
The precondition to invoking Section 4 against a market player is that they must be occupy a dominant position in the relevant market. That determination, however, is not quite simple and Section 19 provides a non-exhaustive list of factors such as the market share, size, economic power, integration, etc. that are to be carefully considered. Though the Supreme Court only stated in passing that dominance can be established by the very existence of below-cost pricing, the CCI order examines many of the second-order and third-order implications of a predatory pricing claim in great detail.
For instance, one of the more interesting arguments advanced by Meru was that Uber and Ola should be grouped together for the purpose of determining dominance since they had common shareholders. Though the order does not explicitly mention it, the argument seems to be based on a 2017 paper by Azar, Schmalz and Tecu which showed that common-shareholding in the airline sector resulted in higher prices in select routes. The argument is essentially that since all the competitors have common shareholders, the firms’ incentive to compete on prices is diminished; Uber and Ola, by virtue of their common foreign (alien) shareholders—Softbank, Tiger LLC, Sequoia Capital and Didi Chuxing—should be classified as a group for determining dominance. Though the CCI rejected the argument in the present context, they have kept the door open for future dominance claims based on common shareholding. However, in a 2021 paper, Azar and Vives have argued that inter-industry common shareholding, as exampled by large passive investors like Blackrock and Vanguard, lead to a decrease in product prices, contrary to the earlier findings in relation to intra-industry common-shareholding. Perhaps the argument can also be extended to large venture capital firms like Tiger and Sequoia which invest in a wide variety of industries and firms. Of course, the level of inter-connectedness between the companies in a venture capital portfolio and the S&P 500 is vastly different. Nonetheless, the key takeaway is that unlike the Supreme Court, the CCI has spent considerable time analysing the derivative requirements and factors that comprise a predatory pricing claim.
Standard of Proof
Section 26 of the Competition Act requires a “prima facie case” to be established before an investigation can be started. The Competition Act does not prohibit the act of holding a dominant position but only prohibits an abuse of the position. Dominance, therefore, is a necessary but not sufficient condition to attract S.4. Only if dominance has been properly established can the enquiry even proceed to the stage of determining the existence of a prima facie case as to whether the actor abused it. More importantly, since only the abuse of dominance is prohibited, the prima facie standard should only be applied with respect to the allegation of abuse, and not with respect to the determination of the dominance itself, which should be weighed on a higher standard. The Supreme Court, however, seems to have conflated these two steps together and has considered both the existence of the dominant position, and its abuse viz. predatory pricing, using the same yardstick of proof, leading to the absurd, unreasoned position that below-cost pricing per se implies dominance.
While Uber will certainly be able to meet the costs of complying with the investigation, such orders might lead to a chilling effect for other disruptive companies. Furthermore, lowering the standard of investigation will also lead to higher social costs in the form of opportunity costs incurred by the CCI, which might not have the resources to pursue all complaints. It is imperative, therefore, that the prima facie standard adopted before directing an investigation under Section 26 be interpreted more strictly, with careful reference to the ingredients of the prohibited act alleged. Judges should perhaps also rely a little more on academic theory and less on their common sense in interpreting economic legislations, particularly since results in economic theory are often counter-intuitive. The prima facie standard applicable to the abuse of dominance, therefore, should be based on a more nuanced understanding of predatory pricing economic theory that takes into account the second-order characteristics of the industries involved.
† Darsan Guruvayurappan is a 4th year student at the National Law School of India University Bangalore. He would like to thank Prof. Rahul Singh for his encouragement and feedback on the article.