[By Ritvik Maheshwari and Vatsla Shrivastava]
The authors are students at National Law University Odisha, Cuttack, and National Law Institute University, Bhopal, respectively.
Introduction
The advent of the Internet has proven to be a groundbreaker in the introduction of new ways of commerce and business. With the incessant inclination towards e-commerce, online platforms for search and comparison of products and services have become commonplace. Consequently, a special type of agreement called Across Platform Parity Agreements (hereinafter APPA), which ensures price parity across all platforms, has become extensively employed. These agreements raise some competition concerns, one of them being perpetuating the formation of a price-fixing cartel. This article explores how APPAs can be used as a means to form a price-fixing hub-and-spoke cartels.
Across Platform Parity Agreements and their Significance
APPAs are used to avoid a type of market failure called free-riding or free-riders effect. A buyer uses an online platform to locate a seller, but may finally conclude the transaction on an alternative venue. When this happens, the online platform does not get any commission for such transactions, which results in free-riding by the buyer. This is more likely to occur when some other platform offers the same product/service at a lower price.
These online platforms have to make investments in quality, such as improving algorithms and rankings, along with other investments such as advertising to attract the parties to the platform. If an online platform does not get a commission for transactions, it would not be able to cover these costs. Thus free-riding would break down the business model.
To overcome this problem of free-riding, online platform uses APPAs. These are contractual provisions that bar the seller from charging different prices for the same product/service on other platforms. An APPA is ‘narrow’ if it prevents the seller from offering a different price on other platforms; on the other hand, it will be ‘wide’ if the agreement bars the seller from offering different prices even at its own website.
If the price across all channels is the same, a buyer is more likely to conclude the transaction on the platform on which it located the seller. This ensures commission for the online platform. While APPAs do seem to be necessary to run online platforms, they are likely to hinder competition in the market by being used as a means to form a price-fixing cartel.
Section 2(c) of the Competition Act, 2002(hereinafter Act) states –
“cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services”.
This indicates that a cartel is an arrangement among economic actors at the same level of the supply chain rather than those on different levels. Section 3(3) of the Act covers cartel-like agreements and practices such as price-fixing, market control, market allocation, and bid-rigging. Section 3(3) covers only agreements and practices between the ones engaged in similar or identical trade. Hence, in the defense of narrow APPAs, it can be argued that they are not cartel agreements since they are vertical agreements entered between platform owners and sellers. However, the concern arises when APPAs lead to the formation of a special type of cartel, i.e. hub-and-spoke cartel, whose formation and operation is different from a traditional cartel.
Formation and operation of Hub-and-Spoke Cartel
This is a unique arrangement of economic actors that do not co-ordinate through direct links among the horizontal competitors, but coordinate through deviant exchanges via a vertically related supplier or retailer. It becomes strenuous for enforcement agencies to recognize when intrinsically legitimate transactions between suppliers and retailers transform into a prohibited arrangement, without any explicit evidence of collusion.
For instance, in the case of Argos Ltd & Anor v Office of Fair Trading, Hasbro was the leading toy manufacturer in the UK while Argos and Littlewoods were the top retailers, competing with each other. Argos and Littlewood were giving low margins on some products. In order to tackle this, Hasbro came up with a “pricing initiative”. According to this, retailers were supposed to charge a Recommended Retail Price (RRP) to increase the margins. Both of them were suspicious that the other one would undercut the RRP to acquire market shares. Here, Hasbro acted like a hub indulging in anti-competitive practice by holding discrete discussions with Argos and Littlewoods and communicating the pricing strategy with both of them. Moreover, Hasbro was continuously monitoring the retailer’s conduct directly or through the information accepted by the retailers. Henceforth, Hasbro acted as a hub, while Argos and Littlewoods were the spokes connected to this hub. These kinds of cartels are called Hub and Spoke Cartels and as we shall see in the following section, APPAs can induce the formation of such cartels.
Misuse of APPAs to form Price-Fixing Cartel
The formation of a price-fixing hub-and-spoke cartel via price parity agreement has been previously witnessed in the case of United States v. Apple, Inc. Apple was eager to enter the e-book market by launching its iPad and the iBookstore. Amazon was prevalent in the market with the Kindle reader and its online bookstore. Most of the publishers sold their books through Amazon and Amazon used to buy those books at the wholesale price from publishers. This allowed Amazon to set the price of the books considerably low.
To tackle Amazon’s primacy in the e-books market, Apple came up with an alternative for the publishers and offered the publishers an “agency model” wherein publishers would set the prices themselves for the books to be sold via the iBookstore. In this arrangement, Apple would receive a commission of 30% for each e-book sold. However, this arrangement was not enough to compete with Amazon. Consequently, Apple incorporated a parity clause in publishers’ contracts, according to which publishers were restrained from selling e-books on any other platform lower than the prices at iBookstore.
It appeared that the only way for the publishers to get out of this situation was to enter into the agency model agreement (as suggested by Apple) with Amazon as well. However, all the publishers were required to shift to the agency model at the same time to make the arrangement work. Apple facilitated the communication among the publishers and negotiated the agency contracts with Amazon. In this way, Apple acted as a hub whereas publishers played the role of spokes in forming a hub-and-spoke cartel. This carves out the way for the spokes to form a price-fixing cartel through price parity clauses with the hub.
In the above case, Apple and Amazon were not the sellers on their platform but the condition worsens in cases where the operator of the platform himself acts a seller, and in consequence, competes with other platform sellers on the retail level. This practice may engender horizontal competition concerns, as there would be an incentive for such a platform operator to apply hub-and-spoke apparatus in his dealings with the independent sellers on its platform, or to implement different anti-competitive horizontal practices.
Conclusion
APPAs may be used as a tool to form a hub-and-spoke cartel and antitrust agencies must be cautious when dealing with these agreements. Since the intention is an important requirement in cartel investigations, a case to case basis assessment must be employed to check if APPAs are being used to form to price-fixing cartels or not. Irrefutably, it is a herculean task to prove a hub-and-spoke cartel because of the discreet pieces of evidence of indirect nature present in the horizontal conspiracy. Due to this, competition agencies are forced to rely on circumstantial evidence and are required to examine multitudinous streams that link a supplier and a multiple of his retailers, or vice versa.
Any agency that decides to prosecute a hub-and-spoke cartel should be cautious before doing so. The said agencies cannot afford to dissuade legitimate business conduct between vertically related players since APPAs are an important instrument to deal with free-riding. Enforcement agencies must dedicate many hours on research into market structures, incentives, and behaviors, in order to distinguish between anti-competitive and legitimate vertical exchanges in the retailer and supplier relationship.