Jurisdiction - India
Reports and Analysis
India – Excessive Pricing, An Abuse Of Dominance.

18 May, 2013

 

The Competition Act was enacted to protect the interests of consumers as well as promote and sustain competition in markets. Greater competition leads to increased innovation and lower prices, thereby enhancing consumer welfare. In the absence of effective competition, consumers may be forced to pay high prices. This is especially true of monopolies or oligopolies, where it is difficult to discern whether prices charged by firms indeed reflect the interaction between demand and supply. 

 

The pricing behavior of firms in such markets often attracts scrutiny from antitrust regulators. Cases of excessive pricing unleash a slew of difficult questions. At the outset, competition authorities must identify cases of excessive pricing by first agreeing on parameters that determine whether a stated price is excessive. When they do, regulators are mindful that high prices could be driven by risky investments and innovations, factors that ordinarily indicate dynamism in the marketplace, leaving them hesitant to intervene. This is especially true of industries with high sunk costs and significant expenditure on research and development. The next equally complex step is determining the extent and manner of intervention, particularly whether to regulate prices. This article analyzes some of these tensions and examines how the competition authority may intervene in cases of excessive pricing.

 

Excessive prices may be scrutinized by CCI as an abuse of dominance. Section 4 of the Act expressly lists the imposition of ‘unfair’ prices as potentially abusive conduct. The Act, however, does not define what constitutes ‘unfair’ prices. In a recent roundtable on competition law organized by the Organization of Economic Co-operation and Development (‘OECD’), the Indian delegation took the view that ‘excessive’ prices are a subset of ‘unfair’ prices (Written submissions on behalf of India to OECD Policy Roundtables on Excessive Pricing, February 7, 2012). CCI, however, is yet to examine what constitutes an ‘unfair’ price and when ‘excessive’ pricing becomes punishable but “dominant” companies are at a risk of having their pricing strategies subjected to CCI scrutiny.

 

The only discussion on this issue was brought out in CCI’s decision in Kapoor Glass Limited v. Schott Glass Limited (CCI Case no. 22/2010, March 29, 2012), when it held rather cryptically that a price a customer is willing to pay depends upon the value he ascribes to a product, and nothing can be said to be excessive as long as there are buyers for the product.

 

Our tussle with the concept is also evident from India’s submissions to the OECD. These freely admit the difficulty in identifying the accurate methodology to assess unfair price when (a) measures such as excessive profits may be undermined by differing accounting principles and asset bases that comprise largely human capital, and (b) using competitors’ prices as a tool for assessment could fall short if buyers are willing to pay higher prices because they consider that product superior to others (Kapoor Glass).

The problems of excessive pricing are compounded in jurisdictions that consider ‘joint’ or ‘collective’ dominance a concept that is proposed to be introduced in India via the Competition (Amendment) Bill, 2012. In such cases, there is a greater possibility of an increase in prices.

 

However, joint dominance requires regulators to first determine whether the price before the increase was competitive before assessing whether the increased price is excessive. Excessive pricing through joint dominance also makes it harder for regulators to identify appropriate measures that remedy the situation.

 

There is also much debate on the necessary market conditions that merit intervention for fear of undermining incentives to invest and innovate, thereby ultimately compounding consumer harm. India’s submissions to the OECD conference agree upon two market conditions which together could warrant intervention. The first is the presence of high and non-transitory entry barriers that limit the market’s “self-correcting ability”. Ordinarily, high profits would encourage new entry into a market, but the presence of such barriers could allow a dominant enterprise to run amok. The second necessary condition is that the market power of the dominant firm should have originated from exclusive/special rights, in order to strike a balance between promoting innovation by rewarding firms’ risky investments and maximizing “short-run economic welfare by acting against anti-competitive practices”.

 

Assuming a case for excessive pricing has been made out in a market  characterized by the factors set out above, competition authorities must then formulate an appropriate solution. Direct price regulation is generally the least favoured remedy and in Manjit Singh Sachdeva v. Director General, DGCA (CCI Case no. 68/2012, March 6, 2013), CCI refused to enact the role of a price regulator and fix airline fares on the grounds that only market forces should decide the maximum retail price of a good or service. 

 

This is especially true of industries overseen by independent sectoral regulators such as electricity, telecommunication, and gas.

 

Jurisdictions with older and more developed competition law regimes also grapple with the concept of excessive pricing. The European Court of Justice (‘ECJ’) in United Brands v. Commission ([1978] ECR 207) defined excessive price as “a price that has no reasonable relation to the economic value of the product”. This was the first relatively comprehensive, and to date, widely accepted definition of excessive pricing. However, it meant determining the cost of production; not an
easy task when undertakings often apportion indirect costs and general  expenditure in a discretionary manner. The complexity of the undertaking’s structural set-up and numerous territorial areas of operation did not serve to simplify ECJ’s analysis.

 

The United Kingdom’s (‘UK’) Office of Fair Trading, in its assessment, compares the allegedly excessive price against a range of factors including (a) identical products in other markets, (b) underlying costs, and (c) comparison with prices in another time period. None of these are easy parameters to determine, let alone, run comparisons against (See Generally: Napp Pharmaceutical Holdings Limited v. Director General of Fair Trading, CAT Judgment January 14, 2002). Despite this, the UK is one of the few jurisdictions that is relatively aggressive in its pursuit of matters of excessive pricing and more willing to play price regulator at the remedies’ stage. For instance, in Genzyme Limited v. Office of Fair Trading (Case No: 1016/1/1/03, September 29, 2005), the Competition Appeal Tribunal fixed a minimum discount rate for the sale of the drug Cerezyme.

 

Competition authorities investigating cases of excessive pricing need to strike a balance between incentivizing investors and preventing consumer harm (Written submissions on behalf of India to OECD Policy Roundtables on Excessive Pricing, February 7, 2012). Certain jurisdictions such as the USA, steer clear of this entire debate by refusing to consider excessive pricing an offence. Instead, high prices may provide evidence of other violations under the (American) Sherman Act.The Indian submissions to the OECD agree on the unsuitability of the ‘one size fits all’ approach and even consider the need for more sector-specific measures. Ideally, high entry barriers and lowered price competition should be tackled at the source, and a starting point could be active engagement in competition advocacy between CCI and industry.

 

AZB

 

For further information, please contact:

 

Kamya Rajagopal​, AZB & Partners
kamya.rajagopal@azbpartners.com
 
Karan Vir KhoslaAZB & Partners
karan.khosla@azbpartners.com

 

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