By way of a July 19 2017 order, the Competition Commission of India (CCI) closed the case against ANI Technologies Pvt Ltd, operating under the trade name OLA Cabs, for the alleged abuse of its dominant position.(1)
Fast Track Call Cab Pvt Ltd and Meru Travel Solutions Pvt Ltd claimed that OLA had abused its dominant position in the relevant market by offering significant discounts to passengers and incentives to drivers which constituted predatory pricing under Section 4(2)(a)(ii) of the Competition Act.
The case was ordered for investigation by the CCI based on the prima facie view that OLA had abused the dominant position that it held in the market for radio taxi services in Bengaluru.
On investigation, the director general concluded that OLA held no such position in the market; therefore, no question of abuse could arise.
Market share The claimants appealed the director general's decision, on the grounds that, among other things, OLA had held a high market share in the relevant market throughout the period of investigation. They argued that a market share exceeding 50% of the entity creates the presumption of dominance.
However, the CCI held that market share is only one of the indicators of dominance provided under Section 19(4) of the Competition Act and therefore it cannot be considered in isolation. The CCI observed that high market shares – particularly in the case of new economy or hi-tech markets – may be temporary, especially in the early stages of a new technology. Moreover, it rejected the argument that dominance was linked to the company's ability to behave independently of competition on the grounds that Uber had entered the market and provided sufficient competitive constraint on OLA. The CCI held that Section 19(4) of the Competition Act pertains to the size and importance of competitors, rather than their market share.
With regard to effects on the network, the CCI held that in the absence of switching costs between different networks in the relevant market, the constraints exerted by the established networks on newer entrants are limited. In this case, the network effects did not seem to affect entry or expansion by the companies equipped with strategies capable of attracting drivers.
On the issue of the high barriers to entry posed by the network effects in OLA's platform-based business model, the CCI acknowledged the fact that in 'two-sided markets' (ie, where intermediaries connect two distinct ends of the supply chain by charging a fee or consideration for such connection), network effects may enable a large network to become dominant and insulate itself from potential competition on the basis that new entrants will struggle to challenge the entrenched incumbent.
However, the CCI found that both Uber and OLA were aggressively competing to attract participants (ie, drivers). It observed that despite OLA having the largest network, the network effect was insufficient to deter Uber's entry and rapid expansion in the market. Further, there were no significant costs preventing consumers from switching between the different radio taxi apps. According to the CCI, the absence of switching costs between different networks in the relevant market limits the constraints exerted by the established network on new entrants.
The CCI also noted that competition in the relevant market is still unfolding and rejected the argument that the market has tipped in OLA's favour. The CCI identified the platform-based model in the radio taxi market and observed that it is easier for platform-based companies – as opposed to asset or ownership-based companies – to enter the market given the reduced upfront costs of starting a business.
In response to the argument that predatory pricing is evidence of dominance, the CCI held that new entrants to the market regularly engage in practices such as below-cost pricing and loyalty discounts in order to gain a foothold in the market. Holding companies to be dominant based on this simple observation of conduct may have the undesirable effect of chilling competition.
The CCI also analysed the pricing strategies adopted by different players in the market and held that the strategy adopted by OLA was reactionary to Uber's aggressive pricing. In addition, the financial losses incurred by Uber were substantially higher than those incurred by OLA. This was indicative of the competitive constraint that Uber imposed on OLA in the relevant market.
Further, the CCI rejected the claim that OLA's low prices were not a result of cost efficiency, but rather were achieved through funding received from private equity companies. It found no evidence that access to such funding was inequitable or that the financing market was not competitive.
Finally, the CCI expressed its reluctance to intervene in a market which has yet to evolve fully. It noted that the competition regulator's premature interference in a nascent market situation may be counter-productive.
The order exemplifies the growing use of economic analysis in decision making in India. The CCI undertook a detailed analysis of the intricacies and synergies at play in the radio taxi market and the effect of disruptive technology, as well as network effects, on a two-sided marketplace. Further, it augers well for businesses that the CCI championed the idea of minimal intervention in a nascent market situation.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact MM Sharma at Vaish Associates by telephone (+91 11 4249 2525) or email (email@example.com). The Vaish Associates website can be accessed at www.vaishlaw.com.
(1) CCI decision, July 19 2017. For the full text please see the CCI website.