The recent Flipkart ‘Big Billion Sale’, dubbed as India’s largest discount sale ever generated immense hype. Following the initial publicity, there were several internal complaints by disgruntled customers accusing the company of mismanaging the sale. Similarly, the sale also managed to irk Flipkart’s competitors who alleged predatory behaviour from the company. In this post, we shall analyse whether Flipkart’s pricing policy was predatory or not, and the future policy implications for the E-Commerce industry.
Predatory Pricing in India
The Competition Act, 2002 categorises ‘predatory pricing’ under ‘abuse of dominance’ in Section 4 of the Act. Predatory pricing has been described as the sale of goods and services at a price below the cost of production of the goods in order to reduce or eliminate competition. Simply put, predatory pricing is a marketing strategy that companies use in order to drive their competitors out of business by initially reducing their prices. Thereafter, once the competition is successfully expelled, they increase the prices, thereby forcing consumers to buy from the dominant seller who is the price maker in the market. While theoretically this may sound simple, the practicality of such market behaviour requires sizeable resources.
The test of predatory behaviour by a seller has to fulfil certain prerequisites:
Dominant Position:
The foremost requirement of determining whether a seller has indulged in predatory pricing is by ascertaining its dominant position in the relevant market. The Act describes ‘dominant position’ as a position enjoyed by a seller in a relevant market wherein it is able to act independently of the competitive forces of that market or where the seller’s actions can affect competitors or consumers for its own benefit.
Abuse of the Dominant Position:
It is not enough that the seller is in a dominant position. In order to prove that the seller is indulging in predatory pricing it needs to be shown that the seller is abusing its dominant position. This generally includes creation of entry barriers preventing other firms from entering the market. Without entry barriers the incumbent firm would not be able to sustain competition if the expelled sellers decide to re-enter the market. In this case, abuse of dominance is not directly related to pricing of the product and its interaction with the end consumers, it has more to do with the position of the dominant seller vis-à-vis the other sellers in the market. Another way of abusing dominant position is by absorbing all the new demand created by the price cuts and in turn absorbing the entire sales of the rival’s firm. Which can be done by selling the products below the cost price which will have a deterrent effect on the new probable entrants in the market as they might not even end up covering there ‘variable cost’ (the cost price).
Relevant Market
The dominance and predatory pricing have to take place in the ‘relevant market’. The relevant market can either be identified on the basis of product or geography.
Analysing Flipkart’s position
It is difficult to say that Flipkart’s sale could come under the ambit of predatory pricing. Firstly, in this case, it is difficult to distinguish the relevant market. Flipkart mostly sells all genres of products, including home appliances, books, apparel, electronics etc. This rules out distinguishing the market on the basis of product. On the other hand, even though one can argue that the geographic market can be narrowed down to the whole of India, or the metropolitan towns in India, however with the data available, it would be hard to consider Flipkart as a dominant player in the market. As not more than 2% of the consumers ends up buying a product online. The retail shops in a country like India are still the most relied and preferred outlet for consumers. Other all-product online portals like Amazon and Snapdeal have emerged over the past few years challenging the previous market share of Flipkart.
Further, the prerequisite of abuse of dominance i.e. creation of entry barriers and deterrent tactics, discussed above are missing. The market strategy of giving heavy discounts is not necessarily predatory in nature as it comes under the fair competitive practise of attracting customers via discount sales. Although how far can you discount the product in order to attract maximum customers is something which should be regulated by CCI, but still if we go through the current position of law it won’t be illegal/anti-competitive per se.
More importantly, Flipkart could not absorb all the demand created by the consumers. The stocks of most of the products demanded by the consumers were over within minutes of the sale. Similarly, there were instances where prices were inflated which were later shown as discounted. However, despite the so-called discount other online shopping portals had the same product at a cheaper price. Despite the obvious attempts to increase consumer base, it failed to exploit its position.
Regulating E-Commerce?
In this debate of whether the “Big Billion sale’ was an anti-competitive move of Flipkart, there’s also an extended talk regarding Flipkart’s sale is the E-Commerce retail outlets vs. the traditional brick and mortar retailers. Subsequent to the sale there were speculative reports that the Enforcement Directorate (‘ED’) was probing the sale after receiving some complaints, but this found to be fallacious. However, recently, a senior official of the Competition Commission of India (‘CCI’) stated (The Hindu, Nov. 5, 2014) that they received a complaint against all E-Commerce portals, including Flipkart. The CCI has still not decided whether to go forward with the probe.
The E-Commerce retail market is increasingly being funded by Foreign Direct Investment (FDI). Flipkart raised $1bliion in July this year. Days after this announcement, Amazon also announced a $2 billion investment in India. Later, Japanese firm Softbank announced that it would invest $627 million in Snapdeal. In essence, these investments help E-commerce portals gain an upper hand over brick and mortar or store front retailers. For such investments, there is a complete lack of governmental oversight apart from the conventional RBI and SEBI guidelines. There is no concrete regulatory policy for such investments in the E-Commerce segment which is threatening the brick and mortar retailers. The competition law jurisprudence in India may not be enough to tackle such investments, as just because a section of suppliers in the market (online and offline) are financially more powerful than others does not necessarily mean it is anti-competitive in nature. Hence in such cases even if there acts are dominant in nature, would still not amount to anti-competitive act and therefore it will not come under the jurisdiction of Competition Law in India.
There are obvious inadequacies in the current regulatory regime surrounding E-Commerce retail business. Nonetheless, there are reports that mention that government would soon come out with a concrete E-Commerce policy and we hope it will help regulate the sector to provide long term benefits to both consumers and retailers.
This post has been co-authored by Shashank Singh and Samarth Sharma, students at the West Bengal National University of Juridical Sciences.
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