Prising Stratagem

1. What is Pricing ?
• A method, companies use to price their
product or service.
• Organically, companies base their price on,
⁺ Production Cost
⁺ Labour cost
⁺ Advertisement expense
⁺ Profit.

2. Pricing Strategies
• Predatory Pricing
• Price Skimming
• Product life cycle
• Competitive Pricing
• Temporary Discount Pricing

3. PREDATORY PRICING AS AN ABUSE
OF DOMINANT POSITION
• Predatory Pricing refers to, the situation where a
dominant firm reduces its price to below cost level
for a period of time during which it will be able to
eliminate or contain a competitive force.
• once the predatory firm deems it safe enough; it
will raise its price to a level above the competitive
price level in order to recoup the losses made
during the reduction period.
• It is the dominant company in such a market which
is likely to have both the inclination and the
resources to finance such strategy and such pricing
can be equally ‘unfair’ to competitors.

4. Now the question that arises is why would a company
practice predatory pricing?
• The answer is simply to create a monopoly market and be the price maker.
Another reason for firms to do predatory pricing may be because it is a better
alternative to mergers.
• To understand the full implication of the concept of predatory pricing, let us first
understand the two terms dominant and abusive.
• A dominant company refers to a company holding a chunk of the share of the
relevant market. Dominant position is a position of strength, enjoyed by an
enterprise, in the relevant market,
• As far as the term abuse is concerned, it is very obvious that in every market there
will be a small number of dominant players and some smaller players. The small
players, individually, do not have the power to affect the market conditions as
such. But the dominant players, simply by virtue of the holding in the market, can
influence the market to a considerable extent. Now, when a dominant player uses
its power to influence the market to benefit itself in some way other than through
fair competition, it is known as an abuse of the dominance. That is, when a
company takes unfair advantage of its dominant position to hinder competition, it
is an abuse.
• Section 4(1) of the Indian Competition Act states that no enterprise shall abuse its
dominant position.

5. FACTORS DETERMINING
PREDATORY PRICING
• DOMINANCE
Since large capital reserves are needed to sustain the losses during
the below cost selling period, hence only a dominant firm would be
able to practice predatory pricing. The dominance of a company
can be analysed with regard to the relevant product and geographic
market by examining the potential demand and substitutability of
the products or services
• BARRIERS TO ENTRY AND RE-ENTRY
Successful predatory pricing requires certain level of entry barriers
to the market. Otherwise other potential rivals would immediately
re-enter the market once the predator raises its prices and by
adding their output to that of the predator drive the prices back to
competitive level.

6. continued
• EXCESS CAPACITY
Excess capacity is a pre-requisite for predatory pricing. The predator must be able to
absorb all the new demand created by its price cuts, and in the case of predation
against existing rivals, the predator must be able to absorb the rival’s sales. If it cannot
do both these, demand will exceed predator’s output and prices will have to rise,
which will take the pressure off the rivals and allow them to survive.
• NON-PRICE PREDATION
Non price predation includes excessive product differentiation, predatory
advertisement and investment, predatory product innovation. The main aim of these
non price predatory pricing is to raise the costs of the rival firms. If cost increase can
be imposed on the rivals, the predatory firm can profit immediately, even if the rivals
remain in business, this is because its margin will increase proportionately with rising
price levels. Another scenario is even if the prices remain constant, the predatory firm
gains market share as rival restricts output.
• OTHER FACTORS
Low price elasticity of demand facilitates recoupment as demand will decline
relatively less when the firm raises the market price. If a predator Journal article by
Greg Le Blanc; Rand Journal of Competition Law, Signalling Strength: Limit Pricing and
Predatory Pricing, Vol. 23, 1992. enjoys greater brand royalty, the less costly a
predatory pricing shall be for the firm. The more efficient the incumbent is to its rivals,
the less expensive it will be to conduct a predatory pricing campaign. Aaron S. Edlin,
“Predatory Pricing” Research Handbook on Economics of Antitrust, Ed. Einer Elhauge,
Edward Elgar, 2010.

7. IDENTIFICATION OF PREDATORY
PRICING
• Price-Cost Tests (PCT):
These tests examine whether the company or firm is incurring some losses for
legitimate reasons or just for Predatory Pricing. These tests look into the
detailed accounts of the firms and compare their costs and their prices to
reach the conclusion. The Price-Cost Tests may be of various types; the most
important among them being the Areeda-Turner test that if the sell price is
below the Short Run Average Variable Cost or the marginal cost, it is a case of
predatory pricing.
• The Two-Tier Test:
The Two-Tier Test of Joskow and Klevorick consists of two-tiers as the name
suggests. The first is the structural test to examine the type of the relevant
market. For example, if the market is a very competitive one with fairly low
entry barriers, then chances of a successful predatory pricing is almost nil.
The second tier is a behavioural test which examines the behaviour of one
particular enterprise in relation with the market to ascertain if there is an
abuse of dominance or not.

8. continued
• Test for Predatory Intention:
In India, below cost testing is also accompanied by proving intent, below-cost pricing “with a view to
reduce competition or eliminate the competitors” shall amount as abuse of dominance. In the price
abuse cases, exclusionary intent is very important as is given by the AKZO rule in the EC Competition
Law.
• Case C-62/86, AKZO Chemie BV v. Commission (1991)ECR I-3359
• Above Cost Pricing Test:
The Above-Cost Pricing Test is not a complete test but it says that even though the prices are not below
cost for that enterprise, it may still be Predatory Pricing. However, it brings an idea different from most
other prevalent tests, by its very premise. It applies to alleged predators that are selling at a price above
the costs, and not below but are still predating. To give an example, there may be a very dominant and
large enterprise which by virtue of its large scale of production has very low cost of production in
comparison to the cost incurred by other enterprises and hence may have a predatory effect in the long
run.
• Possibility of Recoupment:
The Possibility of Recoupment Test as the name implies, says that there should be a possibility for the
enterprise to recover its losses of the initial phase of the plan at some point of time. In Brooke Group
Ltd. V. Brown and Williamson Tobacco Corp, the Courts held that to hold an enterprise guilty of
predatory pricing, it must be shown that there is reasonable possibility of recoupment.

9. COST MEASURES ADOPTED IN INDIAN
COMPETITION LAW
• The Indian competition law has adopted Average Variable Cost as the
appropriate measure of cost, which is by and large the measure of cost
adopted in all jurisdictions. There is a presumption in most cases that
where the enterprise sets its sale price below its Average Variable Cost, it
has engaged in a predatory pricing practice. However, prices falling
between the ATC and AVC are also subject to inquiry, but in such case
specific intent would have to be shown. Prices set above the ATC are
unlikely to be challenged. The CCI also has proposed certain regulations
with respect to determining cost in cases of multi-product enterprises,
Joint products and By-products, transfer pricing, and captive consumption.
Once a predatory price allegation is established, the enterprise would be
said to have abused its dominant position. Where after inquiry, the CCI
finds that an enterprise in a dominant position is in contravention of the
provisions of Section 4, it may pass any of the orders specified under
Section 27 of the Act and may further under Section 28 of the Act direct
the division of an enterprise enjoying a dominant position to ensure that
such an enterprise does not abuse its dominant position.

10. INDIA: Test for Predatory Intention:
• In India, below cost testing is also accompanied by proving intent, below-cost pricing “with a view
to reduce competition or eliminate the competitors” shall amount as abuse of dominance. In the
price abuse cases, exclusionary intent is very important as is given by the AKZO rule in the EC
Competition Law.
• India has adopted AVC as the standard to measure price predation. The Commission also has the
discretion of adopting any other cost standard (such as avoidable cost, long run incremental cost, or
market value), if it considers doing so fit.
• In the MCX case in India, MCX alleged that NSE was practicing predatory pricing in the form of
waiver of transcription fee, admission free and data feed fee. The DG found NSE indeed was
abusing its dominance. NSE countered on two grounds- that there was no concrete evidence to
show the intent to do such an act that such low pricing was a promotional policy for the nascent
market and hence not predatory. NSE also claimed that they were offering the zero pricing policy as
its costs were zero.
• The CCI found NSE to be abusing its dominant position because that particular segment of the
market was no longer in the nascent stage; rather it was in its infant stage. Also the DG’s findings
regarding the costs showed that it was not zero.
• However, it is interesting to note that the CCI did not consider the pricing to be ‘predatory’ in the
strict sense of the term. Instead it was considered to be ‘Unfair’ and possible only by virtue of its
deep pockets and could not be sustained by its competitors.
• The Commission further commented that “if even zero pricing by dominant player cannot be
interpreted as unfair, while its competitor is slowly bleeding to death, then this Commission would
never be able to prevent any form of unfair pricing including predatory pricing in future”.

11. Important cases
• AKZO v. Commission [1991]
• Brooke Group Ltd. v. Brown & Williamson
Tobacco Corp.
• Tetra Pak International SA v. Commission
• Deutsch Post AG [2001]
• Matsushita v. Zenith Radio Corp.

12. CONCLUSION
• predatory pricing is a very complex mix of situations, intentions and
accounts. It is impossible to adhere to any one or more of the
practices tests as a conclusive test to prove predatory pricing. In
fact all the tests employed are merely indicative.
• It is true that parts of the existing theory is practical but the entire
theory of predatory pricing including the predation, bankruptcy of
all other firms, obtaining complete monopoly over relevant market,
no re-entry of any of the previous firms or entry of new firms in the
recoupment phase and finally recoupment of all losses is nothing
less than a fantasy, But having said so, it cannot be denied saying
that certain elements of predatory pricing are seen in the market
and have its harmful impacts. So even though the theory is applied
in parts, in its entirety, it is nothing more than a falsity.