Predatory pricing gets redefined PDF Print E-mail
Monday, 20 January 2020 04:59
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CCI will need a credible explanation for why it felt RJio’s pricing was not predatory while Amazon/Flipkart’s was

Frowning upon ‘deep discounting’ is fine, but what is the ideal discount level? Will it apply to each item, are store labels to be allowed ...CCI & govt have opened a can of worms


It is early days, but the Competition Commission of India (CCI) ordering an investigation into etailers like Flipkart and Amazon suggests it is rethinking how anti-competitive behaviour is to be decided. While ‘deep discounting’ (or predatory pricing) is the main issue, others include vertical agreements with preferred sellers, giving them preferential listing, and exclusive tie-ups for selling mobile phones, for instance.

The findings—assuming CCI finds the etailers guilty—are critical since many of these issues apply to other businesses, including offline retail. One allegation is of Flipkart classifying some sellers as ‘assured sellers’ so they show up higher in search results, and then, even partially funding their deep discounts—the etailers deny the charge; Amazon uses the term ‘fufilled’ for such sellers. Apart from the fact that, in the case of Flipkart, ‘assured sellers’ means those who store their goods in its warehouses, if such arrangements are unacceptable, will offline retailers be compelled to store the goods of every seller?

Exclusive tie-ups are also frowned upon, but if CCI rules against a Xiaomi selling a phone exclusively on Amazon, will it decide on the marketing strategy for all firms? After all, this is not as much about Amazon as it is about Xiaomi’s choice of marketing platform. And, if showing some sellers first in a search—this is the charge Google faces in many countries—is unacceptable, why is it okay for an offline retailer like Reliance Retail to offer better shelf space to some brands, or to use their ‘standees’ in its aisle?

The use of related-sellers—the owners of Flipkart/Amazon have a stake in some of the firms selling on their platforms—is another issue CCI finds objectionable. While online marketplaces claim to be abiding by government rules on this, does this mean a Future Retail cannot stock goods made by any firm in which it has a stake since that is the stipulation for online retailers? And, how does that work for private labels, which, by definition, are store brands created to give customers value for money; whether this is done through a third party or a group company is surely a decision that the retailer takes?

Much of the furore centres around predatory pricing, a combination of below-cost pricing (average variable cost, not marginal cost) with the aim of eliminating competition, and, once the competition is finished, firms raising tariffs (this is what is happening in telecom while CCI remains a mute spectator, but more on this later). Market share is critical here; a Maruti Suzuki pricing cars at 25% below cost, just by way of example, will crush the market, while newcomer Kia doing the same won’t have the same impact.

Since, despite the massive discounts they are said to be offering, etailers have just a 2-3% market share, CCI investigating their pricing means it is junking the traditional market-share principle. But, if CCI is now examining a firm’s ability to do damage thanks to its deep pockets, it needs to explain why, when older telcos like Airtel/Vodafone/Idea were complaining about RJio’s predatory pricing some years ago, it did nothing. Indeed, even if RJio had a negligible share of the voice-call market at that point, it was the dominant player in the data market a very long time ago.

It gets worse. After RJio’s pricing wrought havoc in the telecom market, the government appears to have dictated a strategy to the three remaining telcos which involved them raising prices together. It may not matter right now since it is clear telecom pricing is still below-cost, but surely acting in concert—with the government an active participant—should have got the CCI to take note?

Being a creation of the government CCI, possibly, doesn’t think its mandate involves scrutinising official action. Why else would it keep quiet when, over the years, the government gave Air India `33,000 crore; by preventing Air India from shutting down, this altered the competitive landscape. Had Air India shut operations, fares would have risen, and airlines like Jet Airways may never have shut down. Nor did CCI raise an eyebrow when, for decades, the government subsidised sales of petrol and diesel by PSUs like IOC, HPCL, and BPCL; since this subsidy was not available to either Reliance or Essar, the policy led to them shutting down their retail outlets or slowing down their expansion.

Using the deep-pocket approach to predatory pricing—the Supreme Court asked CCI to do that in the Uber-Meru case—makes sense in many cases, but the approach has to be nuanced and take into account the extent of the potential damage. In this case, etailers are not even giving huge discounts on most of their products anymore—the latest iPhone, for instance, costs roughly the same online and offline.

More important, the CCI action raises important questions that both it and the government must address. If ‘deep discounting’ is bad, how does one calculate the ‘appropriate’ level of discounting? And, is this discount factor—35%, say—to be applied for each product or at the level of the firm, and does it apply at any point in time or is it over a year; since most offline retailers offer 60-70% off on various articles in their clearance sales, or offer significant discounts on ‘loss-leaders’ throughout the year to draw in customers, is this kosher? And, how do you calculate the discount, or the MRP, for products like sarees that are not sold by manufacturers at one price across the country?

And, what is the base price against which the discount is to be calculated since different firms have different cost structures? RJio argued that its superior technology allowed it to dramatically drop prices whereas the older telcos argued that the relevant factor was, in fact, the money invested; since RJio had invested over Rs 2 lakh crore to set up its network, they argued, it could not make money at the prices it was charging. If predation is to be judged by the losses run up, well, most businesses incur losses in the first few years.

The government, too, needs to do some serious soul-searching over what it really wants. Amazon and Flipkart have invested over $15 bn in creating warehouses and cold chain logistics—apart from large data centres—and, as a result, have 4-5 lakh sellers who, till now, didn’t have access to pan-India markets. If the government wants Amazon/Flipkart to be just a bare-bones marketplace like its GeM—a portal primarily to get price quotes and place orders—it can’t hope to provide market access to millions of small sellers, including farmers;people buy from these etailers because they offer quality control, assure payments,on-time delivery, refunds, etc. Instead of berating Amazon and Walmart, the government should spell out how it will give market access to millions of SMEs and farmers.


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