Answer By law4u team
Predatory pricing is a strategy where a business sets prices artificially low (often below cost) to drive competitors out of the market, with the aim of gaining a dominant position or eliminating competition. This tactic can lead to monopolistic behavior, which harms consumers in the long run by reducing choice, quality, and increasing prices once competitors are driven out.
In many countries, including India, anti-competitive behavior like predatory pricing is regulated by competition laws designed to protect consumers and ensure a fair market. Online marketplaces, which often host numerous sellers, can also be caught in legal issues if they engage in or allow predatory pricing practices by themselves or through sellers on their platform.
The question is, can marketplaces face legal action for engaging in or enabling predatory pricing? Let’s examine the legal aspects of this issue.
What is Predatory Pricing?
Predatory pricing involves setting prices artificially low, often below the cost of production, in order to eliminate competitors. Once the competition is driven out, the business can then increase prices, reaping the benefits of monopoly power. This practice is considered anti-competitive because it distorts the market and harms both competitors and consumers in the long run.
For example:
- A marketplace offers a popular product at a price lower than the cost to the seller, making it difficult for competitors to match.
- Sellers using the marketplace could be pressured or incentivized to drop prices to unsustainable levels, driving competitors out of the market.
- Once the competition is gone, the marketplace may increase prices, resulting in higher prices for consumers and limited choice.
Legal Framework:
Competition Act, 2002 (India):
The Competition Act, 2002 is the primary legislation governing anti-competitive practices in India. It aims to prevent monopolistic behavior, unfair trade practices, and practices that restrict competition.
- Under the Competition Act, predatory pricing can be considered a prohibited practice under the following sections:
Section 3(3):
- Prohibits anti-competitive agreements, including those that affect the market by driving out competition.
Section 4:
- Prohibits abuse of dominant market position, which includes predatory pricing as a form of abusing market power to eliminate competition.
Monopoly and Dominance:
A marketplace with a significant market share could be considered a dominant player in the market. If such a marketplace engages in predatory pricing, it could be found to be abusing its dominant position, which is prohibited under Section 4 of the Competition Act.
The Competition Commission of India (CCI) would assess whether the pricing strategy is intended to eliminate competition and whether it results in consumer harm.
Consumer Protection Act, 2019:
The Consumer Protection Act, 2019 in India also includes provisions related to unfair trade practices, including deceptive pricing. Although primarily focused on protecting consumers, it also offers a legal framework for investigating and resolving issues arising from unfair business practices.
Marketplace Liability for Predatory Pricing:
Direct Liability for Predatory Pricing:
If a marketplace itself engages in predatory pricing, it could face legal action under the Competition Act. For instance, if the platform sets unreasonably low prices for products, with the intent to drive competitors out of the market, the marketplace could be investigated by the Competition Commission of India (CCI) and subject to penalties.
Example: Suppose an online marketplace offers a popular smartphone at a price below cost to attract more customers, with the intention of pushing smaller sellers out of the market. Once competitors are eliminated, the marketplace could raise prices, taking advantage of its dominant position. This would be a case of predatory pricing.
The CCI could investigate and impose fines or other penalties for violating competition law.
Liability for Seller Conduct:
Even if the marketplace itself is not directly engaging in predatory pricing, it could be held liable if it facilitates or encourages such pricing by sellers on the platform. Online marketplaces have a responsibility to monitor pricing practices by sellers and ensure that they comply with the law, particularly in a way that does not distort the market or harm competition.
Example: A marketplace allows a seller to list a product at a price far below market rates (often below cost), which drives competitors out of the market. Even though the marketplace did not set the price itself, it could be held accountable for facilitating the practice.
Under the Competition Act, if the marketplace encourages or enables anti-competitive behavior, it could face action for being an enabler of predatory pricing.
Regulatory Scrutiny:
Regulatory authorities like the CCI can conduct investigations if they suspect that predatory pricing is occurring within an online marketplace. Investigations typically involve gathering evidence of pricing patterns, examining the intent behind the pricing strategies, and assessing whether consumer harm has occurred due to the elimination of competitors.
Penalties and Fines:
If a marketplace is found guilty of predatory pricing, it could face significant penalties. Under Section 27 of the Competition Act, 2002, the CCI can impose a penalty of up to 10% of the average turnover of the company for the last three financial years for violating competition laws.
In cases of severe anti-competitive practices, the marketplace could also be ordered to cease the unfair pricing strategies and rectify its pricing behavior.
Legal Consequences and Penalties for Predatory Pricing:
Fines and Penalties:
As mentioned, the Competition Commission of India (CCI) can impose fines on the marketplace for engaging in or enabling predatory pricing practices. These fines can be as high as 10% of the company’s annual turnover.
Injunctions and Cease-and-Desist Orders:
The CCI can also issue injunctions or cease-and-desist orders to prevent the marketplace from continuing with predatory pricing or anti-competitive practices. This means that the marketplace may be forced to alter its pricing strategy or face further legal action.
Compensation to Affected Parties:
Affected competitors or consumers could potentially seek compensation if they can prove that they were harmed by predatory pricing tactics. Consumers may face higher prices as a result of the elimination of competition, and competitors may seek compensation for lost business.
Example:
An online marketplace known for selling electronics decides to sell high-demand products like smartphones and laptops at prices significantly lower than the cost in order to gain a larger market share and eliminate smaller sellers. This aggressive pricing leads to the exit of competitors who cannot afford to sell at those low prices.
After several months, the marketplace raises the prices back to normal levels, exploiting the lack of competition.
Competitors file a complaint with the Competition Commission of India (CCI), arguing that the marketplace engaged in predatory pricing to create a monopoly.
Outcome:
The CCI investigates and imposes a fine on the marketplace for violating competition laws, and the marketplace is ordered to stop the pricing practices and compensate affected parties.
Conclusion:
Yes, online marketplaces can be held legally responsible for engaging in or facilitating predatory pricing that harms competition. Such practices are considered anti-competitive under the Competition Act, 2002, and can lead to significant penalties and legal consequences. Marketplaces must ensure that they do not engage in or enable pricing practices that distort the market and harm competition, and they have a responsibility to monitor sellers to prevent such behavior.
