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A recent ruling by the Delhi High Court has endorsed the uninhibited discounts offered by Uber and Ola. This comes on the back of its previous order asking cab companies to stick to government-determined rates. Neither of these orders augurs well for healthy competition and the establishment of a free market in India.
While price-fixing by government is a universally-recognised bane, far less is known about issues pertaining to the latest order endorsing discounts. Driven by never-ending venture capital (VC) money, Ola and Uber in the taxi market, and Flipkart, Amazon etc. in the e-commerce market, are engaging what's called ‘predatory pricing’ — charging consumers far below costs — to unfairly drive out competitors and capture the market, only to eventually raise prices and recoup losses. The attention of the media and regulators needs to shift urgently from surge pricing — so far, an innocuous issue — to the inexplicably low prices charged by these companies during the majority of transactions, so that long-term welfare is not sacrificed at the altar of instant gratification.
If competition has been eliminated, consumers would have to accept higher prices. Already, surge-pricing multiplier is being replaced by fixed fare.
The truth behind CCI’s decisions
India’s competition regulator, Competition Commission of India (CCI), has already investigated several complaints of predatory pricing against taxi and e-commerce companies. In all but one case, they’ve been exonerated. The only exception is where Ola has been prima facie found guilty, and investigation continues.
Closer scrutiny of the judgements shows that India’s competition law (Competition Act, 2002), which governs CCI’s decisions, is itself deeply flawed. It’s a typical case of the regulator being behind the curve. Because of loopholes in the law, these companies have been acquitted on technical grounds. In a glaring omission, the clause proscribing predatory pricing has been mentioned under Section 4, titled ‘Abuse of dominant position’. This means that anyone indulging in it can only be found guilty when the player is already dominant in the concerned market. One of CCI’s judgements is telling — “Since OP Group (Uber) doesn’t seem to be dominant, there is no need to go into the examination of OP Group’s conduct in such relevant market.”
Karnataka, Mangaluru: 06/03/2015: Ola cab service launch of their service in Mangaluru on Friday. Photo: Special Arrangemnet
Note that the issue of predatory pricing has not even been touched upon because Uber isn’t dominant yet. It seems the regulator is content to wait till these players occupy a dominant market share through cheating, after which it might be too late. Worse, CCI’s decisions show that the sole determinant of dominance is market share. In most countries, as in India, outdated competition laws ignore critical factors such as the deep pockets that help companies acquire market dominance by undercutting bigger competitors through eye-popping losses . Both market share and deep pockets must be factored in while determining market dominance, so that beginners can have some leeway, but not to the extent of cheating.
Defying logic, CCI has held that app-based taxis and auto-rickshaws are different markets, which means the latter have no protection against predatory pricing. This omission can’t even be blamed on the law, which duly states that products/services that are “perceived to be substitutable by consumer by reason of their basic characteristics, intended end-use, price etc.” form part of the same market. The only thing that differentiates auto-rickshaws from taxis is their cheaper cost, although not when those are run by Ola and Uber. It’s natural to choose air-conditioned cabs over autos, when the former’s fares are cheaper. The autos, and related jobs, will come under more fire as smartphones and cab companies proliferate.
In the exceptional case where Ola is still being investigated, it was found to have a dominant market share in the concerned geography, Chennai. While CCI declined to rule against Ola, there was a strongly dissenting opinion given by one member. It said, “the behaviour of the Opposite Party (Ola)… is a clear pointer to predatory intent since no other rational explanation can be attached to its behaviour.”
Current and future competition
CCI’s judgements have lauded stiff competition between players in these markets. But, the question is, for how long will competition last in such a scenario? In the taxi market, ever-plunging costs give this competition the appearance of a race to the bottom. Below a certain price threshold, traditional competitors will disappear, and VC-driven companies will undercut each other till the sustenance of their drivers becomes impossible. That would mean either unbearable driving hours leading to safety issues (for example, Chinatown bus-wars ), or, in case transparency isn’t enforced, frequent surge-pricing. Even if Uber stays scrupulous, what stops drivers from colluding to manipulate surge pricing? If competition has been eliminated, consumers would have to accept higher prices. Already, surge-pricing multiplier is being replaced by fixed fare.
If price-fixing by governments can stifle innovation, so can the price-fixing done by private players.
CCI has acquitted e-commerce giants on similar grounds of non-dominant market share and stiff competition. They were accused of colluding to limit supply of certain books. Amazon has been accused of similar malpractice in the United States. Its bafflingly low costs have helped it acquire a dominant share in the U.S. e-book market. Hence, most authors/publishers are forced to publish on its platform. In return, Amazon pays them a pittance, killing free speech . If price-fixing by governments can stifle innovation, so can the price-fixing done by private players.
In 2012, Apple was found guilty by a U.S. court of colluding with publishers to counter Amazon. The judgement read, “... more corporate bullying is not an appropriate antidote to corporate bullying,” thus taking a swipe at Amazon as well. Do we want a similar scenario to play out in India?
Schumpeter is dead
Critics argue that Schumpeterian creative destruction would displace any entrenched player(s). Orkut’s displacement by Facebook is cited as a glowing example. This example is disingenuous. Orkut was displaced by Facebook because both of these are free services. Had Facebook charged users in proportion to its superiority, the same would hardly have happened. In the case of paid services in e-commerce and taxi markets, if the new companies are allowed to cheat to acquire dominant market share, they can lower prices anytime to eliminate fresh competition — the scenario that Section 4 of the Indian competition law is designed to guard against. However, the Canadian Competition Bureau warns against certain companies’ “reputation for predation” which discourages future entry, irrespective of safeguards.
India needs a progressive competition law
Indian law and competition regulators seem to have taken the age-old wisdom of ‘living in the present’ rather too seriously. Economic literature is awash with possibilities of smaller players indulging in anti-competitive practices to capture markets unfairly, and jurisdictions such as Korea have provisions to deal with the same. India too needs a sagacious law clamping down on predatory pricing, to usher in a truly free market.
