In this article, Phoenix Legal representatives discuss the anti-trust aspects of online portals, noting how easily dominance can be achieved due to pros such as price comparison and doorstep delivery. Has the innovation of the online marketplace increased competition by generating more businesses or made it so that only the big boys can compete?
The Indian e-commerce market has seen an unprecedented growth in the past few years. The sector has grown by 34 percent since 2009, generating revenues which touched US$16.4 billion in 2014 and is expected to be in the range of US$22 billion in 2015.
E-retailing, more popularly known as e-tailing, which comprises online retail and online marketplaces, has become the fastest-growing segment having risen at a whopping rate over the last five years. Products including books, apparel, accessories and electronics are the largest selling products, and account for around 80 percent of product distribution. The increasing use of smartphones, tablets, internet broadband and 3G technology has led to development of a strong consumer base which is likely to increase further. Admist the growing market, the e-commerce sector has come under close scrutiny of the Competition Commission of India (CCI) as various complaints have been filed against online portals such as Amazon, Flipkart etc. with the CCI for being engaged in anti-competitive activities and thus doing business in violation of the provisions of the Competition Act, 2002 (Competition Act).
The CCI has recently passed positive orders in the favour of online portals Flipkart, Amazon, Snapdeal etc. (Online Portals) by not accepting the allegations that these Online Portals establish exclusive arrangements for gaining full control over the sale of selected products. In another on-going proceeding, upon a complaint being made by Snapdeal, the CCI ordered investigation into the practices regarding minimum resale price followed by a manufacturer, and addressed some important concerns for e-commerce companies. The CCI has analysed the aforementioned issues relating to operation of e-portals, while dealing with the proceedings in the cases mentioned above.
One of the major complaints that was filed against the Online Portals was the existence of exclusive agreements between sellers/distributors and the Online Portals. The complaint filed against Flipkart, Amazon and various other Online Portals, specifically stated that these e-commerce websites have exclusive distribution agreements with their distributors for certain products, due to which such products are only available on that specific Online Portal. It was alleged that the presence of such exclusive arrangements leads to the concerned products being available only on the specific portal, which allows the portal operator to decide terms of resale, sale price, terms of payments, delivery period, quality and service standards etc.The CCI was of the view, that exclusive distribution agreements or vertical agreements will not be interpreted as anti-competitive unless such an agreement/arrangement causes an appreciable adverse effect on competition under the terms of Section 3 (4) of the Competition Act. The aforementioned section cites types of agreements which, should they cause an appreciable adverse effect on competition, will be in interpreted as anti-competitive.
Therefore, existence of exclusive arrangements between distributors and Online Portals will not be treated as anti-competitive at the first instance, and the CCI will have to assess such agreements in accordance with the various factors specified under the provisions of the Competition Act1 such as creation of barriers for new entrants in the market, driving existing competitors out of the market, foreclosure of competition by hindering entry into market, accrual of benefits to consumers, improvements in production or distribution of goods or provisions of services and promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
The CCI also observed that the existence of exclusive agreements did not seem to affect the existing players in the retail markets and with new e-portals entering the market, the competition was only expanding. It recognised that the Online Portals provide the opportunity to consumers to compare prices, judge the pros and cons of a product before purchasing it and receive packages at their doorstep.
Market dominance and relevant market
The Online Portals defended themselves, stating that a particular product cannot be defined as a relevant product market in itself. A relevant product market is to be described on the basis of products considered to be substitutable or interchangeable. By way of example, the relevant market for books will be delineated on the basis of the nature of the sale i.e. on the basis of category/genre, language etc.
The CCI agreed with the contentions made by the representatives of the Online Portals and observed that every product cannot be taken as a relevant market in itself. It was also observed that no one Online Portal seems to be individually dominant as there are considerable number of Online Portals in the online retail market that offer similar facilities to consumers.
Usually the products offered on Online Portals and in the physical markets are the same and can be considered as two different channels of the same relevant market and not as independent relevant markets, making them substitutable for one another.
Resale price maintenance
With the products being sold by the Online Portals at heavy discounts, the manufacturers have started displaying notices on their websites distancing themselves from such products being sold under their brand name and refusing to honour the warranties of the products purchased from Online Portals. The manufacturers treat the Online Portals as not being part of the authorised distribution channel.Recently, Kaff Appliances Private Ltd (an appliances manufacturer) displayed such a caution notice on its website and also served a legal notice to Snapdeal wherein it stated that the products manufactured by Kaff are sold at its exclusive chain of authorised retail outlets and at the listed prices and any discounted schemes introduced and launched in the market by distributors will require prior sanction of Kaff and specifically required Snapdeal to comply with resale price maintenance practice, or what is more popularly now known as ‘Market Operating Price’ (MOP). Snapdeal served a notice on Kaff for violating the provisions of the Competition Act.
The CCI opined that the requirement to comply with MOP was in violation of Section 3(4)(e) read with section 3(1) of the Competition Act, which provides that agreement for resale price maintenance, which causes appreciable adverse effect on competition, will be treated as anti-competitive. The CCI also observed that the manufacturers cannot force the dealers/distributors to sell the products at the prices determined by the manufacturers.
Section 3(4) of the Competition Act provides that agreements among enterprises or persons at different stages or levels of production chain in different markets, in relation to production, supply, distribution, storage, sale or price of, or trade of goods or services, including agreements such as tie-in arrangements, exclusive supply agreement, exclusive distribution agreement, refusal to deal and resale price maintenance would be in contravention of Section 3(1) if such agreements cause or are likely to cause an appreciable effect on competition in India. Resale price maintenance has been classified as a restraint under Section 3(4) that does not automatically raise competition concerns unless the agreement causes or will likely cause an adverse appreciable effect.
It is interesting to note here that Section 19(3) of the Competition Act specifies the factors based on which CCI has to determine an existence of appreciable adverse effect. The factors include creation of barriers to new entrants, foreclosure of competition by hindering entry into the market, improvements in production or distribution of goods or provision of services, accrual of benefits to consumer and driving existing competitors out of the market. However, while determining the prima facie existence of adverse appreciable effect, the CCI identified that Kaff’s market share of 28 percent is enough to have an adverse appreciable effect and ignored the factors specified in Section 19(3) of the Competition Act.
E-commerce under scrutiny in Europe
Online Portals continue to face heat from anti-trust authorities in foreign jurisdictions as well. Recently, the European Commission launched an inquiry into the e-commerce sector in the European Union. The European Commission, which targets to identify the potential barriers created by the companies to cross-border online sale of products, is expected to give its final report in the first quarter of 2017.
As a part of the inquiry, more than 2000 e-commerce firms have been asked to submit the sensitive commercial information and the copies of contracts to the anti-trust authorities. The scrutiny of the information provided may result in formal anti-trust cases being initiated against Online Portals violating the European Union law by abusing their dominant market position. It would be interesting to see whether the European Commission will take a view similar to the CCI that the online distribution channels provide opportunities to the consumers to compare the prices as well as the pros and cons of the product, or on the contrary, restrict arrangements between the marketplaces and the distributors as being anti-competitive.Conclusion
The introduction of Online Portals in the retail marketplace has changed the functioning and dynamics of the distribution and sales in the country. The physical marketplace propagated the presence of various parties such as wholesalers, distributors, retailers and other middlemen in the chain connecting manufacturers and consumers. However, with the advent of an online marketplace, manufacturers of products are capable of fostering exclusive partnerships with e-commerce players, allowing them to sell their products directly to the end consumers thereby eliminating middlemen and offering consumers a hassle-free shopping experience.
In the emerging economies like India, the e-commerce sector is expected to grow exponentially. While e-commerce has its own risks, it cannot be denied that it has given consumers various diverse options to choose from.
From the recent orders passed by the CCI in cases involving Online Portals, it appears that the CCI has taken a conscious approach to understanding the nitty gritty of the upcoming e-commerce sector and rationally decided upon the issues and challenges faced by Online Portals. The sector and competition analysts are confident that the decisions of the CCI in respect of unconventional businesses such as Online Portals will iron out many issues and challenges that these corporate houses face in and out.