4 February, 2016
Source http://www.123rf.com/profile_leenadamle
Discounts and loyalty programs adopted to attract customers is a widely used practice among businesses across almost all goods and services sectors. However, in a recent case in India, M/s Fast Track Call Cab Private Limited v. M/s ANI Technologies Pvt. Ltd. (Ola), demonstrated how a company’s discounting practices may cross the line and go from being considered a legitimate marketing tactic to a predatory business practice in violation of the India’s Competition Act, 2002. We had a chance to speak with Zia Mody, Partner at AZB & Partners, a leading Indian law firm, about this case and what it means for businesses moving forward.
Conventus Law – Ola, India’s largest app-based taxi service, has been accused by a competitor of using “predatory pricing to establish its monopoly” in the market, and now faces an investigation by the Competition Commission of India (CCI).
The allegation is that Ola has been incentivizing its drivers unrealistically by offering discounts and giving loyalty rebates to its customers with a view to drive its competitors out of the market with its discriminatory pricing.
Leveraging discounts to increase sales seems rather benign. Where is the line drawn between conduct which tends to stifle or eliminate competition and conduct that generates success for a business earned through legitimate means?
AZB & Partners – Not all discount or loyalty schemes raise competition concerns. Rather, most discount and loyalty programs are beneficial to consumers and as you say, considered benign by competition regulators.
In limited situations, when discount and loyalty programs offered by dominant enterprises result in creation of barriers to entry or expansion, or drive existing competitions out of the market, they may be viewed as anti-competitive.
For example, if the quantum of discount offered by a dominant enterprise is so significant that the sale price goes below the average variable cost, and the discount is offered with the intention to drive competitors out of the market, the CCI could consider it as predatory and hence anti-competitive.
Likewise, when a dominant enterprise structures a discount or loyalty program in such a manner that customers would be induced to deal with it alone, the CCI could view it as anti-competitive, because its end effect is exclusion of other competitors from the market.
Apart from discount/loyalty programs that have exclusionary effect, the [Indian] Competition Act, 2002 (CA02) also seeks to prohibit “discriminatory” pricing/sale conditions, which could include discount schemes that discriminate between two similarly situated customers.
CL – If offering special discounts and loyalty programs to incentivize and attract customers can lead to discriminatory pricing practices, how may a business who regularly offers these promotions ensure that it does not step over the line into the realm of predatory practices?
AZB & Partners – The CA02 envisages, two key conditions for any discount/loyalty program to be viewed as anti-competitive- (a) it must be offered by a dominant enterprise; and (b) it must either have exclusionary effects (resulting in exit of competitors from the market) or be discriminatory (dissimilar treatment to similarly situated persons/enterprises or similar treatment to dissimilarly situated persons/enterprises).
A new entrant in the market that seeks to promote its products/services by offering discounts is less likely to be viewed as dominant, and hence its discount/loyalty programs are less likely to result in an exit of its competitors from the market, thereby becoming anticompetitive.
But as the new entrant grows in strength and reaches the ability to act independent of its competitors or consumers (a very difficult task in most industries), the discount/loyalty schemes that were otherwise permissible may become impermissible.
For dominant enterprises, the rules of the game are different. They need to take each step with caution and assess each discount/loyalty program to see if it could lead to an exit of competitors from the market or a creation of barriers to entry, or discrimination between two similarly situated enterprises.
Lawyers may help identify risk areas, but the important thing is to develop a culture of competition compliance and increase awareness amongst the employees about competition rules.
CL – Predatory pricing is covered under Section 4 of the Competition Act, 2002. What factors or tests are used to determine whether a pricing practice is predatory?
AZB & Partners – The assessment of whether the prices are predatory must start with an assessment of whether the enterprise offering the goods/services at relatively low prices is in a dominant position.
High market shares are often taken as proxy for dominant position, but the key is to assess whether the enterprise has the ability to act independent of its competitors or customers.
Most businesses know when they hit this sweet, but treacherous spot. The next step involves the mathematical assessment of whether the sale price is below average variable cost (or any other benchmark that the CCI may consider appropriate).
Finally, the CA02 also requires that the sale of goods/services below the average variable cost must be with the view to reduce competition or eliminate competitors.
The third factor brings in the element of intention, which is usually very difficult to prove. Poorly worded internal communications and memos may give the impression that a company has devised its discount schemes to eliminate competition.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
