From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Predatory pricing issue
Consumer goods distributors in Maharashtra has been protesting against Colgate’s alleged unfair treatment of traditional distributors vis-à-vis B2B (Business-to-Business) technology companies such as Reliance’s JioMart, Udaan and others.
The disruption caused by B2B companies
- Nearly half-a-million of India’s distributors pick up goods from consumer companies such as Colgate and deliver them to 13 million small local stores located in 7,00,000 villages and towns across the country through a web of millions of traders and other intermediaries.
- Enter the new age technology B2B companies.
- They have developed technologies to connect directly to the kirana store through a mobile phone app, bypassing the intermediaries.
- They supply goods to the local store for lower prices than the charged by the distributor.
- Unable to match such prices and facing the peril of losing business, India’s distributors claim these are unfair practices and want manufacturers such as to stop supplying goods to the technology companies.
Issue of disruption caused by the pricing power and predatory pricing
- Creative destruction: New innovations disrupting an existing process and rendering incumbents futile is generally a healthy process of ‘creative destruction’, as the Austrian economist, Joseph Schumpeter, postulated.
- But this disruption in India is driven not entirely by technology innovation but also through pricing power.
- These technology companies bear the loss on the products they sell to the local store.
- Further, they offer extensive credit terms and working capital to the local stores.
- In other words, these technology companies rely not just on their mobile phone app innovation but also steep price discounting and cheaper financing to win customers.
- Evidently, these companies use the money to not only build new technologies but also to undercut competitors and steal market share.
- This practice, called predatory pricing, is illegal in most countries including India.
- These companies are supplied with funds from foreign venture capital firms, which in turn are largely funded by American pension funds and university endowments.
- The flip side is that India’s millions of distributors and intermediaries have no access to such finance.
- These small companies are cut off from the endless stream of free foreign money that gushes into new age ‘startups’ and established large corporates.
Problems created by predatory pricing
- While consumers may benefit from lower prices, the livelihoods of millions of distributors, traders and their families suffer.
- To be sure, this is not just an India problem but a global one.
- Social media companies such as Facebook give away their products for free and e-commerce companies such as Amazon sell at lower prices, benefiting consumers enormously, but also causing immense social strife and disharmony.
- But in India’s case, there is an added complexity of foreign capital flows.
- Access to this capital is only available to a tiny proportion of Indian businesses but threatens the livelihoods of millions of Indian families, as in the case of distributors, causing massive income and social disparities.
- This unequal access to capital creates leads to anti-competitive behaviour.
Consider the question “What is predatory pricing? What are the issues created by predatory pricing?”
To be clear, this is not a Luddite argument against e-commerce or technological innovations. The issue is about illegal predatory pricing and abuse of pricing power by startups and big corporates through preferential access to easy foreign money.