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Killing Competition? The Fast Track vs. Ola Case Study

Published on Wed, Jul 22,2015 | 17:46, Updated at Wed, Jul 22 at 17:46Source : 

By: Asha Joseph, Dy. Head, Arbitration & Mediation, Surana & Surana International Attorneys

In a recent case between Fast Track vs. Ola, the Competition Commission of India (CCI) prima - facie opined that the radio taxi service Ola cabs had abused its dominant position within the meaning of Sec 4 of the Competition Act, 2002 (the Act).  Accordingly, the CCI has directed the Director General (DG) to cause an investigation and to submit his report within 60 days.  

Fast Track contended that, Ola occupies a dominant position in the market of radio taxi services in the city of Bengaluru and they have abused their dominant position by engaging in predatory pricing. According to Fast Track, Ola spends more money on discounts and incentives (apart from the variable costs it may be incurring) on customers and drivers as opposed to revenue earned by them. According to Fast Track, Ola spends around Rs. 574 per trip while earning an average revenue of Rs. 344 leading to a direct loss of Rs. 230 per trip.

Abuse of dominant position through predatory pricing is prohibited under Sec 4 of the Act. Dominant position is defined as the position of strength enjoyed by an enterprise that enables it to operate independently of competitive forces in the relevant market or affect its competitors or consumers or the relevant market in its favour.  Whether or not an enterprise enjoys a dominant position is determined by an assessment of factors provided under Sec 19 (4) of the Act such as market share, resources, economic power, vertical integration, competitors and dependence of consumers, technical advantage, etc. Being dominant is not illegal but its abuse is prohibited.

'Predatory price' is defined under Sec 4 of the Act as the sale of goods or provision of services at a price below the cost, with a view to reduce competition or eliminate the competitors.  Though Sec 4(2)(a)(ii) of the Act provides that an enterprise shall be abusing its dominant position if it imposes predatory pricing, an explanation to Sec 4(2)(a)(ii), however makes it clear that predatory price adopted to meet competition will not amount to abuse of dominant position. Thus, mere provision of goods / services at a price below cost will not in itself amount to predatory pricing within the meaning of the Act.

To establish a case of predatory pricing is a very complicated task and it involves various findings by the CCI, such as:
1. Relevant market;
2. Whether the enterprise is dominant in the relevant market;
3. Whether the enterprise has provided goods / services below cost;  
4. Whether such pricing was intended to meet competition or to reduce competition or eliminate competitors.  

Each of the above factors and its proper identification by the CCI at the initial stage plays a very crucial role in deciding the interim and final outcome of the matter. Identification of appropriate relevant market establishes the parameters within which the competition policy will be applied in a given case. Therefore, the CCI has to act extremely cautious while deciding on the relevant market.

For example, in the instant case, relying on the materials placed on record, the CCI has held the relevant market as 'Radio Taxi services in the city of Bengaluru' and accordingly arrived at the prima - facie opinion that Ola is dominant in the relevant market.  Had the CCI gone on the basis that the relevant market is 'taxi market within the whole of India' the findings would have been totally different.  Let's examine whether the law permit the CCI to do so?

According to the Act, a 'relevant market' is decided giving due regard to both 'relevant geographic market' and 'relevant product market'.  Relevant product market is defined under Sec 2(t) of the Act as comprising all products which are interchangeable or substitutable by the consumer. Sec 19 (6) of the Act provides a comprehensive list of factors to be borne in mind while determining both relevant geographic market and relevant product market.  

Hence, if we apply the above law to the present facts, it is very well arguable that the radio taxi services and non - radio taxi services do not form separate 'relevant product market' but are merely different channels of transportation, which are substitutable.  It is admitted that the radio taxi services has some added features like phone booking facility, tracking facility, etc. But analyzing substitutability of radio taxi service with non radio taxi service from a demand perspective, the said special features may not make much difference.  This analysis will go in line with the CCI's findings in the matter of Mohit Manglani v. Flipkart India Private Limited and Others, Case No. 80 of 2014, wherein, while considering the allegations of 'unfair trade practices' by some major online retail companies, the CCI has held that online and offline retail markets do not constitute separate relevant market as they are merely different channels of distribution which are substitutable.  

Similarly, 'relevant geographic market' is defined under Sec 2(s) of the Act as the area wherein market conditions are distinctly homogenous and distinguishable from the conditions in other areas.  Applying the above test, the CCI could have considered the taxi market in India as a whole, as the relevant geographic market, rather than limiting the relevant market to the city of Bengaluru. As far as taxi market in India is concerned, market conditions in all major cities are almost the same. No particular city can claim having market conditions, which are distinctly homogenous and distinguishable from conditions in other cities.  

Given that the finding of the CCI as to relevant market is open to challenge, it is yet not conclusive that Ola is a dominant. If Ola is held not dominant at the time of initiation of predatory pricing, then there is no question of abuse of dominant position through predatory pricing by Ola.

Similarly, when it comes to abuse of dominance by predatory pricing, CCI has to decide whether Ola rendered its services below the cost and if so, whether such low cost was to meet competition or with an intent to reduce competition or eliminate competitors.  Determination of cost of Ola is a tricky one as it involves both economics and competition law considerations. The Competition Commission of India (Determination of Cost of Production Regulations, 2009) ("the Cost Regulations, 2009") recommends Average Variable Costs (AVC) to be used as the measure of cost. AVC means total variable cost divided by total output during the referred period. The Cost Regulations, 2009, also allows CCI, subject to reasons recorded in writing, to apply other relevant cost concepts such as avoidable cost, long run average incremental cost, market value etc depending upon on the nature of industry, market and technology used. Thus, we need to wait and see how the CCI will eventually arrive at the cost in the instant case and what test will be applied.

When it comes to Ola's intention as to competitor exclusion, practically, it is difficult to differentiate the price reduction caused due to predatory pricing and price reduction caused due to pro - competitive pricing. Since the Act is silent on how the CCI should ascertain the "intention" behind the price reduction it will be interesting to see how the CCI will ascertain the "intention" in the instant case. Though in National Stock Exchange of India Ltd. case, CCI had a chance to look into the "intention" element, CCI has decided the matter without looking in to the intention aspect.

Given that the immediate impact of predatory pricing is, reduced cost of goods or services and accordingly consumer benefit, the CCI while deciding this matter will have to act in an extremely judicious manner. It is highly recommended for the CCI to have high standards of proof for predatory pricing. Otherwise, instead of preserving competition and fair price CCI will be killing competition and fair price.  

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