[This post has been authored by Urmil Shah and Vishwa Mukhtyar, 3rd year students at Auro University, Surat.]
With the growth in economic activities in digital space, the e-commerce industry has gained traction in the last decade and revenue from the sector is expected to shoot USD 120 billion by 2020. Realizing the anti-competitive concerns arising out of the inventory model of e-commerce, whereby the platforms can hold inventory and sell directly to consumers, the DPIIT has disallowed FDI and permitted 100% FDI under automatic route for marketplace model. The Indian anti-trust regulator CCI, in January 2020, released a detailed report on understanding the modus operandi of e-commerce operations in India and the anti-trust ramifications in the market. The focus of the study was on e-commerce marketplace platforms in sector of goods food delivery and accommodation service. Certain competition issues are akin to this sector, which creates a novel groundwork for regulatory supervision for competition authorities includes:
Platform Governance Practices: Reportedly, most goods and food services aggregators, indulge in the anti-competitive conduct of private labelling, through which they provide preferential treatment certain vendors, thereby vertically integrating with them. Food service aggregators operate their cloud kitchen services which they brand frequently over other suppliers and flout the spirit of “marketplace” model to provide a free and fair market. It must be noted that CCI considers provision of “goods” and “services” by the marketplace platform as two different relevant markets and thus providing cloud services would amount to enter into another relevant market by leveraging the position in the market of online commerce of goods. Such preferential arrangements has the effect of denying the legitimate market to the non-preferred suppliers by restricting them freely compete in the market and the extension of essential facilities can help to curb the mischief carried out by these marketplace models.
Bundling & Exclusivity Business Contracts: A critical consideration for competition authorities can be the customized agreements entered into between marketplace platforms and vendors for listing products, subject to periodical unilateral revisions. Usually the terms are determined by the platform, leaving little scope for negotiation and can influence existing competition in the market based on the terms of engagement. Most food services aggregators enter into the contract whereby the vendors are compelled to utilize the delivery fleet of the platforms, despite having their own delivery mechanism, causing potential losses. Such tying arrangement can result in price discrimination at the helm of the platform on the basis of the commission rates and can effectively foreclose competition. The agreements also contain conditions warranting exclusive sale of certain goods and services which may not be per se anti-competitive but those having effect of foreclosure of rival marketplace platforms or not providing suppliers the opportunity of price discovery can be assessed by CCI under section 3(4) of the Indian Competition Act, 2002 (CA, 2002). However, CCI has regularly held that such exclusivity agreements do not have appreciable adverse effect on competition and are not hit by the effects test.
Deep Discounting Conundrum: Cut-throat price competition is a significant takeaway of the marketplace model whereby the competing vendors tend to provide discount schemes to attract consumer base, which at times results in selling below the production cost and eventually foreclosing competitors. This phenomenon results in conflating with the inventory model of e-commerce operations as the platform, which is supposed to merely facilitate transactions, decides the discount schemes applicable on different suppliers based on the terms of engagement and commission fees. The principle of offline/online substitutability as laid down in Ashish Ahuja Order makes it difficult to consider marketplaces as dominant enterprises due to a common relevant market of substitutable goods and thus harming interest of brick-and-mortar stores dealing in similar goods and services. However, the CCI in the AIOVA Order deferred from the earlier reasoning to consider marketplaces as significantly different relevant market, recognizing that any marketplace may not be individually dominant to abuse the competition.
Abuse of Collective Dominance: There may be certain instances where the independent marketplace may not be individually able to exercise dominance due to minimal market share; however, on acting together, their conduct can amount to be anti-competitive. Unlike Article 102 of the TFEU of EU Law, the CA, 2002 doesn’t recognize the concept of collective dominance[i] and an allegation has to be proceeded in accordance with vertical integration agreements.[ii] The lack of recognition has resulted in dismissal of 12 out of 16 cases at the stage of prima facie opinion by the CCI. For a successful claim, it must be determined that based on an economic assessment of the structure of the market, the firms conduct as collective entities is detriment to the interest of competitors.[iii] The Indian Supreme Court has long recognized that market share should not be the casting factor to determine dominance, yet the concept of joint dominance requires statutory recognition to curb the mischief. The peculiarity of e-commerce operations is that such an agreement which helps in ascertaining collective dominance may not be forthcoming and by virtue of their position of strength in the market, they may operate at a loss and foreclose competition.
Across Platform Parity Arrangements: A supplier on the marketplace platform enters into a number of agreements which can indirectly result in price determination.[iv] Across platform parity agreement (APPAs) is a complex web of arrangement whereby the vendors enter into a horizontal collusion inter se through the platform and vertical arrangement with the platform which has the effect of foreclosing the market by deterring the entry of rival platforms and passing on products at higher than competitive prices to the consumers.[v] Section 3(4) of the CA, 2002 is wide enough to cover such hub-and-spoke cartel arrangements; however, the CCI has expressly held that algorithmic determination of prices by the “hub” platform doesn’t amount to horizontal collusion.[vi] For such a conspiracy to exist, it is essential that every “spoke” provides the intermediary with information to ascertain the implicit understanding between the spokes; however, for identifying such a tacit mechanism, it is essential to have a robust e-commerce regulatory framework. The Draft Competition (Amendment) Bill, 2020 is a step forward in this arena as on the basis of recommendations of the Competition Law Review Committee, there is express inclusion of such arrangement under the presumptive rule test.[vii]
Defence of Single Economic Entity: There can be possibility that the private labels and the platform collectively are considered as part of the single economic entity. CCI has frequently held the counterparty to the agreement in an aggregator-setup acts as an independent third-party service provider rather part of the same group; however, the efficacy remains to be seen in case of allegation of collusion against the private label and the marketplace platform. For an abuse of dominant position to be established surrounding the conflicting jurisprudence online commerce as relevant market, the deterrence of anti-competitive agreements as frequently resorted to by the competition watchdog can be absolved due to the non-existence of counter-party to contract. Thus, mutual exclusivity between the remedies under Section 3 and 4 of the CA, 2002[viii] must be considered by the aggrieved party before initiating compliant against the marketplace platform.
Conclusion
Online commerce is marred by technological innovation and considering the nascent evolution and informational asymmetry in the sector, it is necessary that evidence and research-based policy approaches are undertaken by regulatory authorities. The market study by CCI is a step-forward in this direction; however, the findings of self-regulatory measures by e-commerce marketplace platforms highlights the lackadaisical approach to policymaking in India. Being a technology-drive market with a temporary market share of competitors, the sector faces competition from potential competitors. Thus, there is a need for a comprehensive legislation dealing with the entire gamut of e-commerce operations and the draft e-commerce policy is the way ahead to resolve the crisis. Data, which is considered as the new oil, gives unprecedented market power to these platforms through customer preferences, search rankings and prices of competing products. The competition authorities must therefore be careful not to tread into the uncharted territories which may fall within jurisdiction of potential e-commerce or data protection regulators and give rise to an anti-trust war.
[i] Delhi Vyapar Mahasangh v. Flipkart Internet Private Limited, 2019 CompLR 40 (CCI).
[ii] Section 3(4) of the Competition Act, 2002.
[iii] Joined cases C-395/96 P and C-396/96 P Compagnie Maritime Belge Transports SA, Compagnie Maritime Belge SA and Dafra-Lines A/S v. Commission [2000] ECR I-1365.
[iv] Maurice Stucke & Ariel Ezrachi, Two Artificial Neural Networks Meet in an Online Hub and Change the Future of Competition, Market Dynamics and Society, Ox. L. Stud. Research Paper No. 24/2017.
[v] Dhruv Rajain, Nandini Pahari & Satvik Mohanty, Vertical Restraints in the Indian E-Commerce Sector: The New-Age Competition Issues, PL (Comp. L) August 73 (2019)
[vi] Samir Agrawal v. ANI Technologies Pvt. Ltd., 2018 ComLR 37 (CCI).
[vii] Section 3(3) of the Competition Act, 2002
[viii] Kritika Narayan & Lubhanshi Rai, Millennial Complications: Collective Dominance & Horizontal Minority Shareholding, RGNUL Fin. & Mer. L. R. (2020) https://www.rfmlr.com/post/millennial-complications-collective-dominance-horizontal-minority-shareholding