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The traditional predatory pricing theory is simple to understand. The predator is one who lowers its prices for a sufficiently long period of time such that its competitors leave. The predator can be an existing player or a new entrant with sufficient capital. This practice also deters others from entering the market. Assuming that both the predator and the prey are equally efficient firms, this implies that both the predator and the prey have suffered losses and that these losses are substantial. For the predation to be rational, there must be some expectation that, like any investment, these current losses (or foregone profits) will be offset by future gains. Moreover, this indicates that the company has a reasonable chance of gaining exploitable market power as a result of the predatory episode.
Jio’s initial pricing policy exemplifies a predatory pricing strategy in which it successfully reduced market players and established a competitive advantage to become India’s largest mobile network operator.
According to the Competition Act of 2002, any company that abuses its dominant position by engaging in unfair market practices is strictly forbidden from doing so. This includes using predatory pricing to eliminate competition and gain market share. There is currently no evidence to support these discounting strategies, such as predatory pricing, because the “companies have not been entirely successful in eliminating major competition from the market.”
Several reports have surfaced of e-commerce companies such as Amazon, Udaan, and MakeMyTrip engaging in unfair trade practices such as deep discounting, preferential selling, and predatory pricing to maximize their market share and establish a monopoly in the market. The traditional retailers and distributors of the country have suffered the direct impact of such activities. E-commerce companies have engaged in these activities to the extent that their prices have been reduced to below production costs, resulting in overall losses of more than Rs. 5000 crores. However, most of these losses are then absorbed by the venture capitalists who back the e-commerce companies.
This issue is not limited to the FMCG industry only. Newspapers, telecommunications, and the hospitality industries have all encountered it. These predatory pricing strategies have the advantage of increasing market share and, in some cases, establishing a monopoly, in the long run. The allure of high profits can entice potential entrants, resulting in increased competitiveness.
Furthermore, several distributors have reported that the manufacturers have a different pricing policy for online and offline distribution. The price disparity has recently risen to the point where some distributors have boycotted HUL and stopped supplying its products in protest. The All-India Consumer Products Distributors Federation (AICPDF) has approached the Prime Minister’s Office and the Commerce and Industry Minister about unfair margins offered by manufacturers.
To address this, the Competition Commission of India (CCI) has launched an investigation into e-commerce practices, and the Ministry of Commerce’s Department for Promotion of Industry and Internal Trade (DPIIT) intends to propose a policy outlining rules and guidelines for the e-commerce industry. The Confederation of All India Traders (CAIT) also issued a warning that failure to follow fair trade practices will result in the closure of traders’ businesses.
Factors contributing to the implementation of Predatory Pricing:
- The market conditions and market structure help in determining the level of competition in the market which acts as one of the prime factors contributing to the strategies formulated by the companies
- Barriers to entry and exit decide whether the company using predatory pricing strategy would be able to increase its share and assert dominance in the market. Fixed Asset Turnover is a ratio that is used to determine the barriers to entry.
- Favourable expansion capacity and high efficiency are crucial for the firm due to the rising demand from consumers owing to reduced prices
Impact on Economy and Businesses:
- Predatory pricing and deep discounting strategies cause MSMEs to reduce their operations, resulting in huge losses and, in some cases, business closure.
- Manufacturers’ differential pricing policies for brick-and-mortar retailers and offline distributors can contribute to the widening of income and wealth gaps in the country.
- This can also cause a decline in domestic trade and a wave of unemployment.
- After succeeding in maximizing their share in the market, these companies tend to aim for profit maximization by drastically increasing the price levels resulting in the exploitation of consumers
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