There has been a widespread alarm regarding exploitative pricing or price gouging in relation to protective or essential products such as face masks, gloves, sanitisers etc
The CCI should strongly consider putting its interim relief framework to good use by intervening in the short term
New Delhi: The Coronavirus (COVID-19) pandemic has caused supply-demand disruptions in many sectors. Accordingly, we have witnessed significant volatility in prices of certain goods or services, especially those which have temporarily been in high demand, including medical goods and services. There has been a widespread alarm regarding exploitative pricing or price gouging in relation to protective or essential products such as face masks, gloves, sanitisers, medicines and even hospital services.
How have competition authorities been controlling prices globally?
Globally, several competition authorities have issued strong warnings against profiteering by excessive pricing. For example, the UK Competition and Markets Authority (CMA), in addition to launching a COVID-19 task force which seeks to act on exploitative pricing, also sent warning followed by an open letter to the pharmaceutical and food and drink industries, advising them not to charge unjustifiably high prices lest it is constrained to take direct enforcement action.
Similarly, the European Competition Network of the national competition authorities of the EU issued a joint statement, stating that regulators would not hesitate to take action against companies taking advantage of the current situation. In the US, President Donald Trump announced signing an executive order under the Defense Production Act that among other areas, seeks to prevent price gouging, in addition to the announcement of possible enforcement by both Department of Justice and Federal Trade Commission. Back home, the CCI (Competition Commission of India) has published its own advisory which is primarily focussed on how it would evaluate business cooperation during these times, but importantly also cautions businesses “not to take advantage of COVID-19.”
The Indian mechanism for checking prices
In India, uniquely, the Legal Metrology Act, 2009, requires packaged commodities to bear a maximum retail price (MRP), charging above which is a punishable offence. This ensures that uninformed consumers are not exploited at the hands of retailers, but this, however, cannot remedy exploitative pricing. Other than enlisting products or services under the Essential Commodities Act, exploitative pricing can only be checked under the Consumer Protection Act and the Competition Act, to the extent that exploitation is by a dominant undertaking, thereby affecting competition in the larger market. In the context of the Competition Act, in normal market conditions, finding a “dominant position” would be the first roadblock for the CCI before it can initiate an inquiry into excessive pricing. However, in the current times, a dominant position could be relatively easier to establish.
The CCI could, for example, finds an undertaking temporarily dominant due to the complete dependence of consumers on the undertaking in a given neighbourhood due to movement restrictions in the lockdown. Alternatively, the CCI may argue that the ability to price the product/service unjustifiably high in itself proves that the undertaking’s ability to act independent of competitors and is, thus, an indicator of dominance.
CCI should intervene, but in a calibrated way
Like some of the other competition agencies globally, it could be an easy choice for the CCI to intervene now and gain a reputation as the champion of the exploited consumers. However, it would be best advised to have a calibrated and careful approach towards exploitative pricing. First, regulating or prescribing caps on pricing interferes with the natural tendency of the markets to respond to high prices by expanding supplies either through expanding capacity or by new entries in the market. Such corrections would be slower in markets with high entry barriers. Second, and somewhat related problem, is that if supply expansion is affected due to price regulation then the availability of the product is likely to be on a first-cum-first-serve basis or only to those who could afford it at the price level determined to be “reasonable.”
This situation can also lead to parallel or black markets involving inferior products/services. Thus, this would lead to undesirable outcomes. Third, there is no objective criteria for determining what price level qualifies as exploitative in a given case. Merely evaluating the price against the cost of production or a comparable product could undermine not only demand-driven higher prices but also the value of the product/service in the eyes of customers, which is higher in case of dependency in situations such as the present one. At the same time, intervention could be necessary especially in the short term, in certain cases involving products/services with high entry barriers and where there is clear evidence of excessive pricing being not a result of higher costs or other market developments. The CCI should strongly consider putting its interim relief framework to good use by intervening in the short term, while balancing intervention with the ability of the markets to self-correct themselves.
Pranjal Prateek is a competition lawyer with Khaitan & Co. Views expressed are personal.