President Joko Widodo recently stated that the modern market system makes efforts to anticipate predatory pricing, especially in e-commerce, more critical than ever. He said that predatory pricing in e-commerce has killed local micro, small and medium-sized enterprises (MSME) as they were unable to compete with bigger companies; most of which are foreign companies.

As a follow up to the president’s instruction, the Ministry of Trade will issue a regulation to prevent and stop predatory pricing in e-commerce. One of the points in the regulation is about discounts and promotional deals, in which the ministry will formulate the requirements for e-commerce to give discounts and promotional deals for foreign products.

Originally, special treatments, such as discounts and promotional deals, by e-commerce were aimed at attracting users. However, the government revealed that foreign sellers in Indonesian e-commerce use artificial intelligence (AI) to copy the idea, design and production system of Indonesian MSMEs, then create similar products and sell them at a far lower price. Local MSMEs, which have only limited resources and capacity, are unable to compete in this environment and eventually fall. 

Predatory pricing is not actually a new issue in the rise of digital marketplace, but just recently started to surface because the pandemic makes people rely more on digital methods.

What is predatory pricing?

Predatory pricing is an act of setting prices at below cost or as low as possible in order to eliminate the competition. The winners are usually those with larger capital because they have the capability and resources to endure the initial losses in order to gain bigger profits in the end.

Imagine a traditional market where there are many sellers with identical products. One seller has more capital than the others, so he can sell his products below cost. Other sellers with less capital need immediate profit so that they can still sell the next day, so setting a same price with that one seller is not an option for them. Customers will automatically go to the seller with the lower price, and those with less capital will be forced to exit the competition. This practice in turn forms a monopoly.

This is the fate of Indonesian MSMEs if the government does not take any measure. They will no longer be able to compete in e-commerce because they do not have the same level of resources as foreign businesses. Eventually, the market will be dominated by foreign players with unfair advantage they get from this practice.