Our Problem is Not Predatory Pricing, But the Predatory State

This is the 29th installment of The Rationalist, my column for the Times of India.

There is a delightful saying in Hindi that goes, ‘Ulta chor kotwal ko daante.’ The thief accuses the policeman. I am reminded of this every time someone in government uses the term ‘predatory pricing’, as if lowering prices for consumers is a terrible thing. Amazon has recently been accused of this, and the government has threatened to take action. That would be a big mistake.

Here’s the typical narrative that has been built around predatory pricing. A big company comes into a market and lowers prices. Sometimes it willingly incurs losses while doing so. This drives its competitors out of the market, as they can’t match those low prices. Local jobs are lost. Having thus secured a monopoly, the big company raises prices. Consumers suffer. Lost jobs remain lost.

This narrative is simple, and thus attractive. But it is wrong at several levels. Let me unpack some of them.

One, assume that a company does manage to drive all its competitors out, and is a monopoly. It then raises prices higher than what they were at the start. Immediately, competitors will rush in attracted by the high prices. The only situation in which this won’t happen is if the state imposes barriers to entry. That cronyism, that predation by the state, would then be the problem. In a free market, with no barriers to entry, you cannot stop competition from coming in.

Indeed, I can’t think of a single example of a company that has done predatory pricing, chased away competitors and then raised prices again in a free market. Yes, Jio cornered a big chunk of the telecom market by lowering prices – but prices remain below earlier levels, and their ‘predatory pricing’ has empowered millions of ordinary Indians. Similarly, Amazon has used low prices for customer acquisition since the 1990s. Where has it then used its market power to raise prices again?

Two, we often define monopolies too narrowly. For example, Facebook and Twitter may seem to be monopolies if we define their market as a certain kind of social media. (Personal updates and micro-blogging respectively.) But they are both competing with the millions of ways in which people can spend their time. Tomorrow, if Facebook and Twitter get carried away by their alleged monopoly status and start charging exorbitant fees, users will simply spend less time on those platforms. Everything else that you can do with your time is competition for them.

This is not relevant to Amazon, of course,which I maintain can never even be a retail monopoly in a free market. But there is so much alarmism about the alleged monopoly of tech companies that it is a point worth making.

Three, people talk about the local jobs lost when competitors shut down, but that is the Seen Effect. The Unseen Effect is that the money saved by consumers goes back into the economy and generates more jobs. We must remember that markets exist to satisfy the needs of ordinary people. We should be focussed only on consumers. Whoever gives value to consumers thrives. Whoever cannot compete gets out of the way, and their resources are deployed elsewhere. That is the process by which societies prosper.

When the government gets in the way of anything that benefits consumers, such as ‘predatory pricing’ or ‘dumping’ or international trade, think about what it is doing. It is redistributing wealth from ordinary people to rich interest groups. It is taking from the poor and giving to the rich.

This is why I object to the misleading term, ‘predatory pricing’. When Amazon gives you these incredible sales, it is doing you a favour, not preying on you. It should be called ‘philanthropic pricing’. If the government gets in the way of your getting low prices, then it is the government that is predatory, not the company.

Why is there so much rhetoric against ‘predatory pricing’ then? Politics. It is in the interest of those small retailers affected by Amazon to get together and lobby the government to help them. This comes at the cost of the common citizen. Small retailers form a large part of the base of multiple political parties in the country. They contribute election funds to those parties. Obviously, a quid pro quo is expected. It comes at our cost.

The campaign against ‘predatory pricing’ seems like a trivial thing to outrage about. But it is one among countless illustrations of the cancer at the heart of our democracy: the vicious circle of money and power in politics. Money chases power so that power can generate money. That happens at our expense. That is why we should beware of the predatory state.