Trai's order on predatory pricing may not withstand judicial scrutiny

The Telecom Regulatory Authority of India’s (Trai) recent Telecom Tariff Order (TTO) on predatory pricing (PP) and competition has stirred up a hornet’s nest. Here’s why.
 
In essence, the order stipulates: PP is the act of selling a service below average variable cost (AVC); a telecom service provider (TSP) has significant market power (SMP) if it crosses a threshold of 30 per cent of market share (subscribers or revenue); only a service provider with SMP can be guilty of PP; and, a TSP found using PP will be fined Rs 5 million per plan per licence area.
 
By definition, a non-SMP player (read Jio) can never even be accused of PP. If such a player sells services at below AVC, no charge of PP can succeed. And competitors with SMP cannot match prices, as they will have to sell below AVC and will thus be charged with breaching PP rules and fined. So, no price competition is possible. The sheer absurdity is stunning.
 
In economic theory, an essential ingredient of PP is that the player must have financial strength, that is, the ability to bear losses for longer-term gain. Reality check: The telecom industry is in dire financial straits, companies have gone and are going belly up, there is a huge debt overhang. Which SMP TSP (read Idea or Airtel) has the financial muscle to engage in PP? And if any player does have such muscle, it is the new entrant; but, ah well, it cannot ever be guilty of PP. It is utterly Kafkaesque. What was Trai thinking?
 
The regulators — Competition Commission of India (CCI) and Trai — need to ask whether pricing below marginal cost (MC) is fair or unfair, irrespective of which provider is doing so. The termination charge is the least MC because that cost has to be paid. But Trai ignored this and ruled that no price floor was necessary. So, an entrant can sell below MC and that is deemed “fair”.
 
Price discrimination and market segmentation are commonplace in services markets such as hotels, air travel. Also true for goods markets. And it is perfectly legal (provided the discrimination is not barred by law, for example, on the basis of gender/race/caste). Trai justified the comprehensive review of the TTO because of the changed circumstances and in consumer interest. But there was no change to the ceiling on the number of tariff plans (25); the validity of a tariff plan to protect consumers; existing transparency measures. The only significant change was restrictions on market segmentation and barring price discrimination (differential pricing).
 

Illustration: Binay Sinha

A discount is treated as a new tariff. And all segmented offers, even if designed for retaining customers, shall be new tariffs. While an entrant has the freedom to offer near zero tariffs, a rival competitor must disclose all action being taken to just retain customers. Worse yet, since all segmented offers (and discounts) are new tariffs, their number will surely breach the cap on the number of tariff plans. Remember Catch 22. The space for conducting business, why even for just competing, has been severely constrained.
 
Finally, in many markets where there is legal price discrimination, the CCI does not require a market player to disclose all such prices. If the CCI manages to ensure competitive markets without such a requirement, is there really any justification for such rules?
 
The ICRIER clearly told Trai that it would be impossible to identify all forms of price discrimination and distinguish between permissible and non-permissible. It sensibly advised Trai that the best way was to draw up a negative list of non-permissible forms and leave it at that. Trai did not heed this advice.
 
The CCI has a clear definition of PP. When TSPs (read Airtel and Idea) went to CCI charging Jio with PP, the Commission ruled against the TSPs, namely, no PP by Jio. It is a well understood and settled principle that, ex ante, a domain regulator (Trai) can issue orders/regulations, but, ex post, the responsibility for ensuring that competition prevails is the sole responsibility of the CCI. If PP is clearly codified and CCI is the acknowledged authority for ensuring competition, where was the need for Trai’s order? Now, the TTO goes well beyond PP to severely circumscribe price competition by incumbents. That is why it is viewed with suspicion: In the guise of promoting competition, it will end up actually reducing competition.
 
On promotional offers, Trai’s order in essence says: no restriction to less than 90 days, no restriction on the number of such offers, no limit on the time lag between such offers, and no restriction on periodicity. It is hard to believe that this is not in favour of the entrant. Also, since end 2016, the incumbent TSPs had protested the “endless” number of promotional offers all at zero or near zero tariffs. The regulator chose to maintain a studious silence. Now, the new TTO provides ex post facto justification for Trai’s inaction. Worse, it tilts competition in favour of the entrant.
 
The chapeau to the Trai Act states that the regulator has to balance the interests of consumers and the “orderly development” of the industry. In the name of consumers’ interest, Trai has “permitted” revenues and EBIDTA to contract. An industry in dire straits has been brought to the brink. Surely, this is not a balanced approach. The problem is compounded because the order is also not balanced amongst industry players. In the call-drop case, Justices Kurian Joseph and Rohinton Nariman had emphatically pointed to the necessity of “balancing of interests of consumers and service providers”. It appears the sage counsel has fallen on deaf ears. It is unlikely that the TTO will withstand judicial scrutiny.
 
A widely held perception of regulatory capture is bad. Worse are murmurs of a nod-and-wink from the powers that be. Certainly not a good augury after recent events in the diamond industry. The government would do well to advise Trai to adhere to the maxim, “Live and let live” (jiyo aur jeene do).
The author is former chairman, TRAI