“Predatory pricing leaves people without their hard-earned piece of bread!”

“Predatory pricing leaves people without their hard-earned piece of bread!” – Levan Kalandadze

ბიზნესი & ეკონომიკა - 13:37, 12 May, 2017

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According to Western media, the U.S. is starting a war against predatory pricing, and Georgia is slowly following suit with anti-undercutting campaigns. In any case, the precedent of local entrepreneurs accusing multinationals of predatory pricing and market monopolization attempts has already been set. As analysts and experts claim, the long-term effect of undercutting results in local industries getting extinguished, which automatically makes the population poorer. Accordingly, undercutting is not just an economical, but also a social phenomenon. “In the modern world and the conditions for unfettered competition it provides, the number one challenge is attaining the dominant position in the market. Those who succeed will profit in the long-term perspective. In short, the main purpose of all this undercutting is maximizing profits,” says economic expert Levan Kalandadze.

- Mr. Kalandadze, are low blows allowed in this struggle for dominance?

- No. In order to prevent players from crossing certain boundaries, the states set certain rules of the game. There are many ways to attain market supremacy out there, and undercutting is one of them – selling or offering products at below-market price in order to steal the competitors’ clientele. This begs a simple question: Why would anyone sell products at a price below their prime cost? Well, if the company in question possesses a strong financial backbone and can weather a protracted period of losses, it becomes profitable for it to lose in the short-term perspective while forcing out competitors and thus dominating the market; once this is achieved, there is no one left to stop the company from raising prices again. Thus, short-term financial loss is compensated by long-term profit. Naturally, such behavior represents a violation of certain market rules.

While the state does not interfere with pricing, a company selling products at below-market prices represents a limitation of other participants of the market, and this is why many governments around the world keep an eye on predatory pricing.

- As far as I know, some states also have anti-undercutting legislation for that very reason, don’t they?

- Of course.

- We can’t say the same about ourselves, although such legislation is already in development, in accord with the European Union’s recommendations.

- Indeed. We are currently in the transition phase – some nominal regulations exist in this regard, although they are more down the anti-monopoly legislation’s lane. However, this legislation is generally about market access and limitation, while anti-undercutting laws are deeper and further-reaching.

- Some people say that existence of anti-monopoly laws makes anti-undercutting ones reduntant. Do you share this opinion?

- I do not, because these two complement rather than copy each other – anti-undercutting policy represents continuation and deepening of anti-monopoly policy. By the way, two years ago the Competition Agency accused oil importers of having a cartel agreement. While what they were engaged does not fit the precise definition of predatory piricing, but it has some of its elements – enough to prevent appearance of new players on the market or force them into the cartel agreement as well.

- Does undercutting involve manipulating prices as well?

- Yes; undercutting occurs when one or more players offer a service or a product at below-market price, forcing everyone else out by rendering them unable to compete. Afterwards, raising prices again becomes significantly easier.

- Western media frequently reports on government officials assisting or facilitating multinationals that engage in undercutting. So, does undercutting involve corrupt deals as well?

- Yes, pretty much always.

- So, given the large probability of undercutting existing in Georgia, does that mean that some government official is covering for it?

- Perhaps, but I also wouldn’t rule out lack of governmental control over undercutting for the simple reason of lack of appropriate legislation. Let’s bring up a few examples of how it works in developed countries.

- I’m all ears.

- If the government does not turn a blind eye and the legislation works, no company will be able to inflict financial damage upon its competitors. In general, corruption exists where the government allows it.

- As far as I know, governmental will for corruption is hardly uncommon in third world countries.

- Exactly. Predatory pricing is possible in countries where laws against it are not fully implemented. Georgia, however, is already on the path of passing this reform, having developed a minimal standard for market players’ protection, but undercutting schemes always try to keep up. Therefore, legislative control over the situation is vital.

What happened recently was not undercutting, but a cartel agreement. Today, however, we have an anti-cartel authority and an appropriate legislative base, to boot. Therefore, if the government wills it, this issue will become manageable and eventually disappear. Yet at the moment, we have bigger fish to fry – actual predatory pricing cases have been uncovered. A country might not have legislation to manage that, but there are other methods to combat predatory pricing, such as lotting. The EU, the US have been doing it for years by allocating lots to goods imported from China and other Oriental countries that were priced at below-market value.

- What does that mean, exactly?

- All right, here’s an example: it is far cheaper to produce electric wiring in China than in the U.S., but just like the EU, America employs a protectionist policy to safeguard its market – namely, by implementing quotas on imported goods. So, they limit the annual amount of foreign goods brought in to, say, 10 000 tons, preventing imports that exceed this margin. The importer can, of course, sell these ten thousand tons at below-market price, but he will never be able to overtake the market this way. This is just another approach to anti-undercutting policy; however, it would not be as easy to implement this in Georgia.

- How so?

- Because we have declared an open economic border policy, rendering us unable to create a barrier using tariffs, customs taxes and lotting. In its own way, it’s the right thing to do.

- Why?

- Let me explain: We want to attract direct foreign investment, which is the foundation of producing locally. Basically, this is a luxury that most countries at the same level as Georgia usually cannot afford. Which is why we should fight predatory pricing in a different way.

- I see... It is noteworthy that no so long ago, Donald Trump pretty much declared open war on predatory pricing, while our government doesn’t say anything even for the sake of appearances. Besides, cheaper goods are good for the consumer; why would an average Joe care about stopping undercutting if it benefits him?

- A very apt question. As I explained before, undercutting might be profitable for us in a short-term perspective, due to certain goods getting cheaper, but this drop in prices has a very definite purpose, and this purpose is not the consumer’s comfort, but snuffing out the competition. Success will allow the dominant company a carte blanche for raising prices, meaning that any losses sustained during undercutting will be compensated for manifold – at the consumers’ expense. Other companies will be out of business by then and emergence of alternative companies will take a very long time.

- So, undercutting is not good for the country’s economy?

- Exactly so. In general, competition is the root of development; the communications market is a shining example of this.

- Explain.

- If we take a look at the last ten years, we’ll see that the communications market in Georgia is becoming more and more competitive while prices on mobile communication services are steadily decreasing; however, I can’t really say that their quality is also degrading. This means that prices are dropping not at the expense of quality but due to healthy competition in an environment with relatively the same rules for everyone, which forces companies into pursuing customer-oriented policies. Long story short, undercutting kills competition.

- And this results in disappearance of workplaces, right?

- Of course. If there are 10 companies participating in a market and 9 of them get “killed”, all the jobs they used to create will be lost. From the point of view of pure income tax, the amount of contributions to the state budget might not shrink as the 10^th company will fill the vacuum left by its former competitors, but the budget will still lose income tax. In addition, many people will become unemployed. Predatory pricing is not just an economic phenomenon, it’s a social one.

- Do only foreign companies engage in predatory pricing or the local ones do as well?

- Everyone engages in it if such an opportunity presents itself.

- And governmental corruption represents one of those opportunities?

- Naturally. If the government wills to pursue an anti-undercutting policy, thus preventing predatory pricing from inflicting damage upon the country’s economy and social life, then it will either enforce appropriate laws or, in case of absence of the latter, create them.

- Does the worldwide practice of countering predatory pricing only envision fines for the culprits?

- No, it also enforces correction of the existing faulty situation; otherwise, the culprit will be fined for a much larger sum.

- So, predatory pricing is a crime?