A closer check on predatory pricing

The Competition Commission of India recently proposed the CCI Determination of Cost of Production (DCOP) Regulations, 2025 to replace the 2009 regulations. A key change brought by the proposed regulation is the inclusion of Average Total Cost (ATC) as a measure of ‘cost’ when it comes to analysing cases related to predatory pricing. Furthermore, the regulation seeks to omit ‘market value’ as a measure of ‘cost’ while analysing similar cases of predation.

Indian competition law broadly operates on four strands – anti-competitive agreements, abuse of dominance, merger control, and competition advocacy. While the anti-competitive agreements are scrutinised in two parts, i.e. horizontal agreements (‘cartels’) and vertical agreements, abuse of dominance is subdivided into unfair and discriminatory terms and conditions for the purchase of goods and unfair and discriminatory prices. Predatory pricing falls under ‘unfair pricing’ which is also sometimes referred to as ‘exclusionary pricing’.

Predatory pricing would entail a firm deviating from natural market conduct and focusing on short-term low prices to eliminate competitors. The worst danger with any allegation of predatory pricing is that the market becomes susceptible to becoming a monopoly, thereby resulting in higher prices and limited choices for consumers. This is one of the primary reasons why this practice is banned across the globe.

As per the Indian law, there are three boundary conditions for any predatory pricing case to sustain: (a) the company should be dominant in some market; (b) it should have engaged in pricing-below-cost conduct; (c) there should be a view (‘intention’) on the part of the company to reduce or eliminate competition in the market. While the first condition remains mostly uncontentious, the bone lies in the second and third parts. As far as the second condition is concerned, the question is around what this ‘cost’ means. To begin, whether this cost would refer to ‘fixed cost’, ‘variable cost’, or ‘total cost’ to a business? Fixed costs are independent of production which the business has to take by the very existence such as office space, electricity connection, and information management system. Variable costs are production-dependent – they include raw material, dispatch costs, and after-sale-services. Total cost is the summation of fixed costs and variable costs. The third condition pertains to the non-existence of competition which can prove violation.

The ATC metric

The erstwhile regulations recognise the first part of the problem and attempt to address it by providing the CCI with discretion to consider the relevant form of cost when looking into the allegations. The CCI has to give a reason why it has adopted a certain matrix on a case-to-case basis unless the cost being used is Average Variable Cost (AVC). The Indian competition authority has been able to bring one successful case in the 16 years of its history under the existing regulations – the MCX vs. NSE case where the cost considered was the Long Run Average Incremental Cost (LRAIC). The reason given by the CCI was that stock exchange services are marked with network externalities and therefore, any analysis around predatory pricing should involve an element of fixed costs.

The proposed regulations take this discretion to choose the cost matrix granted to the CCI a step ahead. Apart from having all the existing measures, the Commission has added ATC as a factor with ‘market value’ acting as an exception. ATC is an industry standard for measuring a firm’s cost efficiency and there is no reason for the CCI to exclude it while conducting the pricing-below-cost test. This allows the CCI to conduct a more holistic analysis in predatory pricing cases which come with a certain level of complexity, and accordingly revert a finding.

The proposed change in the legal framework on predatory pricing is a welcome move. The CCI is a sector-agnostic body empowered to promote competition in all areas of the economy. Combine it with the fact that the annual budget of the CCI is decreasing on a Y-o-Y basis and the same explains, if not justifies, the lack of jurisprudence on this important area of law. It is high time that
CCI be granted a wide regulatory net so that it can capture anti-competitive practices in traditional industries such as oil and gas and new-age industries such as AI. The need of the hour is to put the proposed legal text into force so that the Commission can dispense its functions. Any concern around overreach or excess would just be a dog-whistle to be avoided by the government at all costs.

(Sumit is a founding director at the Centre for Competition Law and Economics; Nikita is an assistant professor at Nirma University)

Disclaimer: The views expressed above are the authors' own. They do not necessarily reflect the views of DH.