While the whole world is at a loss with the outbreak of the novel coronavirus, some companies are garnering profit even at these testing times. While the citizens are struggling with unemployment and shortages of essential products, the companies are capitalizing on this situation by unreasonably raising prices and imposing discriminatory standards. While the citizens are fighting against Covid-19, there seems to be another evil that citizens are needed to be shielded from- that of price-gouging.
Who would have thought there would be a day when face masks are a fashion trend, and sanitizers are available in flavoured scents? These two products have accompanied us throughout the lockdown, and they are here to stay. So, while the demand for these essential products outpaces the supply of it, the apparent result of this imbalance is the volatility in its prices, the consequence of which is to be borne by both businesses and consumers. This article is an attempt at understanding and unpacking these consequences, from the viewpoint of both the stakeholders, who stand on the opposing ends of the spectrum.
LOOKING THROUGH THE CONSUMER’S WINDOW
AUTHORITIES THAT CAME TO THE RESCUE OF CONSUMERS:
Due to the nature of the virus being such, there was a sharp increase in the demand for sanitizers and face masks all over the world. Seeing an opportunity to profit at the cost of the general public, companies arbitrarily increased the prices by manifold, so much so that the N-95 mask which was initially being sold for Rs.150/- each was now suddenly being offered at Rs. 500/- each. Similar to the covers, even prices of hand sanitizers shot up through the roof – a 30 ml bottle which would generally cost between Rs.35-50/- was now being sold at Rs.999/-.These numbers indicate that while the number of positive cases in India was growing at a fast pace, what was increasing at an even quicker rate was the selfishness of these companies.
That’s when the Ministry of Consumer Affair, Food and Public Distribution, in the exercise of its powers under the Essential Commodities Act 1955, issued a notification ordering “masks & hand sanitizers” to be included in the Schedule as an essential commodity to enable the Government to regulate the production, quality, distribution, logistics of it. They also set the retail price of surgical masks to be a maximum of Rs.10 per piece and Rs.100 for 200ml sanitizer bottle. The situation was so grave that the Supreme Court of India also entertained a PIL ordering the Government to ensure fair and equitable distribution of surgical/ N95 masks and sanitizers which are available at reasonable prices.
Online operators like Amazon have also begun restricting the types of sellers that can sell health and sanitation products on their marketplace. They have not only banned sellers who hiked up the prices but have also removed products that made false claims. This is a drastic step taken by the e-commerce platform to fight against deceptive marketing practices since they were previously called-out on keeping exorbitantly overpriced listings of these items on their website, which lead to misleading consumers.
COMPETITION LAW AND COVID:
In India, competition policy has been implemented via the Competition Act, 2002 which along with its amendment, establishes a Competition Commission of India (CCI) to prevent anti-competitive practices, promote and sustain competition, protect the interests of the consumers and ensure freedom of trade in the markets in India. However, three significant areas are regulated through which anti-competitive practices are curbed:
- prohibiting anti-competitive agreements,
- prevent abuse of dominant position and
- By regulating combinations, i.e. mergers and acquisitions in such a manner that it does not have any adverse impact on competition in India, at the same time promoting freedom of trade while protecting the interests of consumers at large.
As of March 31st 2020, the CCI suspended all filings related to anti-competitive agreements and abuse of dominant position until future notice, however, in the meantime they did issue an advisory to serve as a deterrent to erring businesses indulging in a rampant exorbitant increase in prices of certain essential commodities. They further informed the enterprises of the provisions of Section 3(3) and 19(3) of the Act which enables the Commission to conduct competition assessment and impose sanctions on business found guilty of violating the provisions of the Act.
LOOKING THROUGH THE COMPANY’S WINDOW
HISTORY OF HURRICANES:
While the COVID-19 price-gouging investigations and litigations are yet to unfold fully, we have records of past emergencies to gain insight of economic disruptions that take place due to natural disasters. In 2005, when hurricane Katrina and Rita hit significant portions of the Gulf Coast Region, the immediate aftermath of this disaster was the spike in the price of gasoline due to price-gouging.
Congress had directed the Federal Trade Commission(FTC) to investigate whether these developments resulted from market manipulation in the sale of gasoline under Section 632 of the FTC’s appropriations legislation for the fiscal year 2006. It was discovered that the hurricane reduced crude oil production and refining capacity, and large sellers were accused of taking advantage of this market trend. However, the U.S. Court of Appeals made an interesting point regarding the thin line that exists between proper pricing and price-fixing. While the latter is illegal, one may resort to the former method in anticipation of declining retail prices or increasing future costs. The companies in India are arguing on similar lines by stating that the reason the prices sky-rocketed, was due to the volatile nature of the market, with constant fluctuations in the demand and supply curves, which forced them to increase the rates to meet the increasing cost.
PRICE-GOUGING INTERSECTS WITH ANTI-TRUST:
During the Covid-19 Pandemic, several have raised voices against competitor collaborations leading to anti-competitive conduct. However, the critical difference that exists between the two practices is the’ types of situations in which they arise’: In antitrust, an increase in price results from the intentional behaviour of the defendants to undermine the competitive process. In contrast, a price-gouging claim is often brought in a situation where the defendants have not caused the change in economic incentives; instead, they are responding to a change in incentives created by an exogenous factor like a hurricane or an epidemic.
While the two practices may seem to overlap, but it’s essential to understand the intention and implication of each of them individually. Suppose one scrutinizes what is happening in the current regime, with prices of masks and sanitizers reaching excessive levels. In that case, it might be concluded that these practices are indeed price-gouging. However, the Companies argue that price changes are not a result of their malicious intentions but a product of a pandemic that was beyond their control.
COORDINATION BETWEEN COMPETITORS:
Coordination between competitors occurs when there is an exchange of business-sensitive information to maintain adequate supplies in the market or to improve the efficiency of the distribution process by segregating the market into smaller divisions, and it is mainly witnessed in the essential supply market.
The United Kingdom has allowed temporary relaxation of competition law for supermarkets to enable the retailers to collaborate (i.e., by sharing data with on stock levels, pooling staff, cooperating to keep shops open, sharing distribution depots and delivery vans, etc.) to enable an adequate response to market needs. Following this decision, the European Competition Network, also issued a joint statement, ensuring cooperation between companies as a necessity to avoid a shortage of supply.
It is important to note that any form of cooperation or collaboration amongst competitors continues to be an anti-competitive agreement under the Competition Act, 2002 unless the Central Government exempts explicitly such partnerships on the grounds of public interest (Section 54(a) of the Competition Act).
However, despite legitimate reasons existing for competitors to collaborate on the grounds of a public health emergency, the CCI has made no attempts in trying to relax these policies. Companies think that maybe the CCI, like other antitrust regulators, should initiate emergency measures with temporary relaxations for smoother distribution, to meet rising demands during periods of panic buying.
UNITED STATES OF AMERICA:
In the USA, Enforcement agencies are looking to demonstrate their vigilance to the public by taking measures to counter significant price hikes. President Trump announced the signing of an Executive Order to “prohibit the hoarding of vital medical equipment and supplies” and to “prevent price gouging” under the Defense Production Act.
Before the pandemic, companies had complete discretion to price their products depending on the market forces and were rarely scrutinized by agencies. However, given that almost every state has declared an emergency, states are now exercising their power to constrain companies from increasing prices of certain products.
The problem with this enforcement scheme is the lack of a consistent definition of “price gouging.” There is no uniform threshold for what constitutes an unreasonable or unfair price, and there are wide-ranging dimensions to it. While some states set a maximum point beyond which prices can’t be fixed, there are other options like a Look-back period, where the price that existed “immediately” before the emergency declaration, will be benchmarked. Some states choose to limit the scope of products and only restrict it to “essential goods”, while there are others who might opt-in to include all consumer products during the period of the emergency. As per California law, for 30 days following the proclamation of a state of emergency, it is unlawful to sell any consumer goods or emergency supplies at a price higher than 10% before what it was.
United Kingdom launched a COVID task-force and released a form for consumers to report unfair business practices during the outbreak. They have also indicated that they will apply both Competition Law and Consumer Protection Rules for tighter mechanisms for the businesses.
Under EU competition law, agencies can sanction dominant firms for using their market power to exploit consumers directly. In particular, Article 102 Treaty on the Functioning of the European Union provides that abuse may consist of “directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions”. Prohibitions on exploitative conduct in Europe apply only to dominant firms. However, to tackle potentially anti-competitive behaviour in times of crisis, agencies may try to stretch the definition of dominance in several ways, including by (i) defining narrow markets to enable them more easily to reach dominance findings; (ii) relying on the concept of collective dominance to find that several companies are dominant together. These factors indicate the exact scope of Competition Law that is applicable in the country along with the powers conferred on the Competition Authority to govern businesses.
ANALYSIS & RECOMMENDATIONS:
INCREASED ROLE OF CCI:
While the competition law regime is robust and exhaustive to a great extent, the outbreak of the pandemic has raised concerns of profound implications. In light of the behavioural tactics that companies may adopt to overcome the negative impact on their businesses, which could harm end consumers, the role of competition regulators has become even more critical. CCI should also take a more proactive part in not just monitoring the behaviours of businesses but also in preparing measures to deal with the immediate fallout of suspended business operations.
CCI, along with the Central Government, should create a task force that can account for the changing market trends and furnish protection to both consumers and companies. If a price increase is based on an increase in underlying costs/market conditions/government directives, then the specific factors should be documented and explained by the businesses. Such written documents will help in both State inquiries and consumer scrutiny. The task-force should also be given the duty of detection, investigation, and prosecution of price-gouging and other fraudulent activities related to medical and other essential resources.
COMPETITION LAW RELAXATIONS:
The outbreak of the Covid-19 pandemic has disrupted business globally. As companies around the world prepare to respond to the effects of this pandemic, they must become aware of the challenges and opportunities that competition law presents.
As a practical matter, it may be challenging to attribute costs and margins to specific sales in a dynamic market with so many supply chain disruptions and distortions caused by rapidly changing circumstances. Against this backdrop, when businesses are certainly pushed hard to find solutions to overcome the crisis caused by the pandemic, the instinct for them is to overcome a problem by uniting and cooperating with others. While companies need to stay conscious of their continuing obligation under the Competition Law, they should also come together in addressing logistical hurdles in ensuring the efficiency of the supply chain.
Whilst the Indian Government has not exempted the application of competition law so far, it remains to be seen whether the Government would take a cue from other jurisdictions and suspend the application of Competition Act for a temporary period (similar to the indication it has given in respect of the possibility of breaking the application insolvency and bankruptcy provisions) or if not complete suspension, at least provide relaxations as this would enable companies to collaborate with their competitors to meet the sudden hike in demand of essential commodities without having any apprehensions of breaching the Competition Act.
It is essential to clarify at this stage, that suspensory measures do not imply a suspension of the substantive provisions of the Competition Act. Anti-competitive practices such as cartels, bid-rigging, and abusive conduct of dominant companies continue to amount to violations of the Competition Act. Instead, such a suspension is to provide buffer periods and additional support to businesses that have incurred significant losses in revenue and to give them a chance of revival by allowing them to cooperate with competitors.
There is a lack of uniform and specialized laws that specifically deal with price-gouging and other such practices. Hence, there is a rising need to have clear-cut legal provisions either in the form of Central legislation or as an Official notification. Such laws not only prevent discriminatory practices but also offer safeguards and regulations for the businesses to flourish without constant intervention by the authorities. A legal framework like this can provide a list of products and services that are under scrutiny along with stipulating a price-range beyond which the prices can’t be fixed. These guidelines are also beneficial for the consumers to understand the legal protection afforded to them and helps them in reporting discrepancies to the task-force concerning prices of the stipulated products.
Unfair price practices are no more limited to just essential commodities like face masks and sanitizers. Still, they have also seeped within the ambit of vital services like expensive testing’s, bidding of hospital beds, and overpriced medical treatment.
In the backdrop of this dark reality, hope can only be found in unity.