Online cab aggregator Uber has found itself in troubled waters after the Supreme Court gave a green signal for a probe against the transportation giant for its alleged practises of predatory pricing to eliminate rivals.
While the news could spell trouble for the operations of Uber, it also puts focus on the practice of predatory pricing that has often been used as a strategy by firms to assert their monopoly in business.
The practice can be simply defined as a pricing strategy in which a particular product or service is sold at a very low price in order to attract new customers. It also adversely affect the business of competitors and discourage prospective rivals.
A particular firm with a heavy financial backup could itself willingly suffer considerable loses for a long period and sell their products to buyers at a surprisingly low rate. This, low prices will be seen as favourable to the buyer in the short term, prompting them to opt for the product by a particular firm.
The move will soon affect the rival firms in the sector as this could see their customer base dwindle significantly. Any attempts to lower prices on their part could lead to financial loss due to their weaker financial clout.
This ultimately leads to the elimination of competition and to the monopoly of one or a few firms in a particular sector.
But once the price war leads to the monopoly of a few, these firms could then take advantage of the monopolistic marketplace. The firms could then raise the prices at their will exploiting the limited bargaining power of the buyer.
Duo to these reasons, the practice is considered as an illegal activity across the globe. In India, predatory pricing has been declared illegal under the Competition Act, 2002. Under the act, any practice of selling goods or services at a price below its cost with a view to reduce competition or eliminate the competitors is treated as an abuse of dominant position, prohibited under Section 4 of the Competition Act, 2002.
However, it is not easy to prosecute any firm for predatory pricing as defendants often find it easy to argue that low prices are part of normal competition.
First Published: IST