CCI’s Aftermarket Dilemma: Legacy of Shamsher Kataria and Future of Electronics Market

[By Vanshaj Dhiman and Palak Jagetia]

The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow.

Relevant market delineation has become the most prominent determinant to ascertain the market power of enterprises and to analyze their ability to abuse their market power or to cause an appreciable adverse effect on competition (AAEC) in the market. Market practices like making warranty obligations contingent to use of its own aftermarket, lack of open market access to genuine spare parts, accessories, and associated technical know-how for the after-sales services of the product, higher aftermarket prices, etc, lead to consumer harm and foreclosure in the aftermarket and thus causing AAEC.

Aftermarket is a type of derivative market consisting of spare parts, repair services, and consumable goods.[i]An in-depth analysis of Indian, European, and American case laws suggests that the following parameters need to be considered while determining whether an intertwined market of the primary product and its aftermarket shall be delineated into two separate relevant markets –

a) Whether the consumer undertakes whole-life cost analysis at the time of purchasing the primary product;

b) Is it possible for a consumer to switch to aftermarket of another manufacturer; and

c)What is the cost of switching to another primary product relative to the cost of the spare parts?

As far as the automobile sector is concerned, all the mature jurisdictions including India depict the need for delineation of a separate aftermarket rather than a single system’s market consisting of primary market and aftermarket. However, when it comes to the market for electronic appliances, the Competition Commission of India (CCI) seems to deviate from the separate aftermarket rule. The CCI did so as it believed that the availability and accessibility of information about the aftermarket products were sufficient enough to delineate a unified system’s market.

This is evident from the cases of Trend Electronics v. Hewlett Packard and S.K. Mittal v. HP Inc., where the CCI denied recognizing the existence of a separate relevant aftermarket and held that Hewlett Packard (HP) was not dominant in the ‘market for laptops including its spares and after-sale services in India’.

In this blog, the authors shall discuss the possibility and feasibility of the existence of a separate aftermarket in cases of laptops as well as mobile phones.

Whole Life-Cycle Cost Analysis

The concept refers to the consumer’s ability to compute the life-cycle cost of a product at the time of purchasing it and the customer’s anticipation of the future costs of ownership of the primary product by taking into account the probable expenditure on after-market products.  Engaging in this analysis is based on various factors, inter alia, availability, and accessibility of information in the public domain, and presence of required sophisticated analysis skills in the consumers.

As far as printers and photocopiers are concerned, a unified system’s market encompassing of primary and aftermarket should be delineated. The consumables (toner cartridges) are indispensable for the proper functioning of printers or photocopiers and will be needed again and again depending upon the life-cycle of the primary product. Therefore, it can reasonably be presumed that a consumer will undertake the whole-life cost analysis at the time of purchasing the primary product. Now, this position needs to be distinguished while dealing with other aftermarket cases where instead of consumable products, spare parts and repair services are involved.

Lack of sophisticated analysis skills, prevalent consumer myopia, and illiteracy make the Indian consumers more sensitive to upfront cost than running cost. Moreover, even if consumer undertakes life Cost Analysis at the time of purchase, then too does it really prevent them from getting locked-in?  The answer is “No”, as all the prominent manufacturers engage in similar anti-competitive practices leaving consumers with no alternative but to buy from one of them. Thus, even the prior knowledge about the lifetime cost of a product cannot be construed as the sole reason to delineate a unified system’s market.

Non-Substitutability and Locked-in Effect

An aftermarket may be broader than merely the secondary products of one brand of primary product where the secondary products of different brands of primary product or independent secondary product bands are readily substitutable. However, if the secondary products for different brands are not compatible or substitutable, and a consumer requires certain parts and accessories for his/her smartphone or laptop, in a sense, the consumer is ‘locked-in’ to use brand-specific parts. The CCI, in Shamsher Kataria v. Honda Siel, noted that since the spare parts of one automobile brand are not substitutable with spare parts of other brands, the consumers are ‘locked in’ and forced to purchase the brand-specific spare parts.

If the manufacturers do not allow consumers to use the spare parts and repair services of other manufactures including independent service providers and even then, consumers choose to use the parts of other manufactures, those consumers will have to face a penalty in terms of revocation of the warranty obligations. Thus, such practices are not only anti-competitive in nature but also force the consumer to use the unlawfully tied aftermarket products even if they are provided at a higher cost.

The Magnitude of Switching Cost

Generally, the magnitude of switching cost is considered as the determinant factor while deciding the existence of a separate relevant market. That means, if it is possible to switch to another primary product to avoid higher costs in the aftermarket, there may be a unified system’s market encompassing the primary and secondary products. That said, just to avoid the increase in the cost of aftermarket, a consumer who already owns a primary product will not undertake the switching costs, which are as high as the cost of a new phone or laptop. Furthermore, even the second-hand product market could not decrease the switching costs to reasonable levels as the residual value of these products is very low owing to fast-changing technology and a high rate of obsoletion in the electronics market.

Analysis – Antitrust Concerns at Play

It is a settled position that in case the consumer finds itself ‘locked-in’ and finds it difficult to leave the platform, ecosystem-specific aftermarket may be defined. The European Commission, in cases relating to computer services, namely, IBM and Digital Undertaking, had found that the companies may have abused their dominant position on their aftermarkets, however, these cases were never reached the conclusion and were resolved by offering commitments.

Now, some may argue that the strong competition amongst the manufacturers will protect consumers in the secondary market from excessive pricing. However, it is to be noted that some scholars have doubted on the veracity of this proposition and found that aftermarkets can be separate relevant markets for competition law purposes, even if equipment markets are competitive. It is possible that all the competitors have themselves engaged in similar anti-competitive practices like excessive pricing in their aftermarket and will collectively lead to the exclusion of independent service providers from the aftermarket.

Moreover, the CCI has failed to answer the question of whether a manufacturer price-discriminate by overcharging unsophisticated consumers and assure competitive prices for new and sophisticated customers. In Trend Electronics, the aggrieved party bought the laptops in bulk quantity and it can be presumed that the sophisticated customers will reasonably ascertain the total life cost that he is likely to incur during the life cycle of the laptop. However, to what extent, this would be true for an unsophisticated consumer who makes retail purchases and does not have the means to conduct life costing owing to information asymmetry and lack of transparency in the market.

Since parts, tools, and the know-how to fix a particular device are not readily available in the open market, the manufacturer can easily charge supra-competitive prices at its whims and fancies. Consequently, this has made it a distant dream for a consumer to get his/her device repaired at a competitive price.

Concluding Remarks

The dominance in the primary market is not an essential element to successfully charge supra-competitive prices in the aftermarket for its own spare parts. Today, almost all the manufacturers’ have tied their aftermarket products and repair services with the sale of primary products which serve hardly any purpose beyond the suppression of competition in the aftermarket.

Unfortunately, the Indian Competition Act does not recognize the concept of collective dominance. Therefore, the only antitrust tool that the CCI could employ is to delineate a separate relevant aftermarket for each equipment manufacture. In that market, if the difference between costs actually incurred and the price actually charged is found to be excessive and unfair, the CCI should also impose penalties for violating section 4(2) of the Act.

While the ‘right to repair’ movement is gaining currency all around the world, India is yet to recognize it as a consumer right in its statute book. Therefore, in the interest of consumers, the CCI will have to come forth to promote competition in the aftermarket and to protect the consumers from the exploitation that occurred in the aftermarket of primary products.

Endnote:

[i] Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law – An Analysis of Antitrust Principles and Their Application (4th ed. 2016).

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