The continued global crisis, together with evolution of new technologies and energy sources, appears to have forced the competition watchdog to take a look afresh at predatory pricing, a tool in the hands of a market player to kill competition.
It wouldn’t be seen any more as a predatory act by a competitor when, bogged down by dwindling order flows due to economic recession and flummoxed by technology changes that lead to idle capacity, a firm quotes rates below what is considered justified by existing cost benchmarks, the Competition Commission of India said in a ruling.
“A party will bid at a price which is equal to the minimum of its average variable cost to exploit scale economies. It will be not prudent for abiding firm to keep its capacity idle and bid at a price higher than its minimum average variable cost. Hence, the aspect of predatory pricing has to be looked at from an appropriate cost benchmark,” said the ruling, signed by CCI chairman Ashok Chawla.
The case pertained to a tender worth Rs2,400 crore floated by Oil and Natural Gas Corp (ONGC) in December. HLS Asia Ltd, one of the bidders in the tender had made an allegation of under-pricing against Schlumberger Asia Services Ltd, an arm of the world’s largest oilfield service company.
The regulator considered the new realities of the market place and absolved Schlumberger of charges of predatory pricing.
Schlumberger submitted that prices for standard oilfield services have been falling since 2008 due to factors like recession in the global market post October 2008 and the discovery of shale gas in USA and “development of technology to extract shale gas economically, which has considerably reduced dependence of US on conventional fuel and has brought pressure for reduction of price in normal exploration of offshore and onshore oil and gasses”.
It claimed that prices of services has fallen by as much as 36%, and that even the firm that has alleged predatory pricing has itself quoted lower than what was quoted in the previous tender.
What’s predatory pricing?
“The predator, already a dominant firm, sets its prices so low for a sufficient period of time that its competitors leave the market and others are deterred from entering. Assuming that the predator and its victims are equally efficient firms, this implies that the predator as well as its victims has incurred losses and that these losses are significant,” says the Organisation for Economic Cooperation and Development. But that’s a rather traditional and straightforward way of putting it. The new definition, in a new normal, must also consider the market realities, going by the comments of CCI.