[By Lavanya Jha and Shreya Jha]
The authors are students of WBNUJS, Kolkata and Amity Law School, Delhi respectively.
Introduction
The growth in anti-competitive concerns due to the rapidly evolving business landscape in India, has led to amendments being proposed in the Competition Act, 2002 (“Act”) by the Ministry of Corporate Affairs. One of such proposed amendments includes the expansion of the scope of cartels. Earlier, under the Act, only market players on a horizontal level were included in the definition of cartels. The (Draft) Competition (Amendment) Bill, 2020 (“Bill”) now seeks to include those enterprises which facilitate the operation of cartels, thereby extending the scope of cartels to hub-and-spoke agreements.
This article focuses on an analysis of hub and spoke agreements and its inclusion in the Bill.
What is a Hub-and-Spoke agreement?
Hub and Spoke refers to a type of collusion wherein ‘spokes’ are the colluding competitors and, ‘hub’ refers to the facilitator of this collusion by the spokes. This horizontal agreement amongst the spokes is referred to as the rim – as it connects the spokes.
An example of collusion can be seen in the case of United States v. Masonite decided by the U.S. Supreme Court. A patent-holder for hardboard entered into an agency agreement with nine competitors to sell the Masonite hardboards. In the agency agreement, each agent knew that the others were entering into an identical agreement with Masonite, thus inferring the existence of a horizontal agreement amongst the agents.
Types of Hub-and-Spoke arrangement
Hub-and-Spoke arrangements are primarily of two types:
- Downstream Hub-and-Spoke Cartel– This form of cartel can be illustrated with the help of US case Interstate Circuit, Inc. v. United States. In this downstream hub-and-spoke arrangement – Interstate Circuit, the exhibitor of motion picture movies and theatres acted as a ‘hub’ and entered into anti-competitive agreements with various movie distributors (spokes) by making them agree to raise prices of second-run theatre, where the prices were generally low. Thus, collusion was achieved between the downstream firm Interstate (Hub) and the movie distributors as spokes.
- Upstream Hub-and-Spoke Cartel– This form of a cartel can be illustrated with the help of Toys’ case. In 2003, three firms Hasbro, Argos, and Littlewood were fined by the then UK Competition Law Enforcer, Office of Fair Trading for entering into an anti-competitive agreement. Hasbro, a toy manufacturer had acted as a ‘hub’ and entered into anti-competitive agreements with catalogue retailers Argos and Littlewood by independently identifying the common products in their catalogue and persuading them to charge a recommended retail price. Thus, the manufacturer acting as a hub and retailers acting as spokes represents an upstream hub-and-spoke cartel.
The Hub-and-Spoke arrangement in the digital landscape
The digital economy is often characterized as an algorithm-driven economy. Algorithms play various roles in furthering an anti-competitive arrangement. In most cases, they strengthen an already existing cartel.
It was in the Eturas case where the Hub and Spoke arrangement was first recognized in the online world. According to the facts of this case, an administrator of a Lithuanian online travel booking system sent an electronic notice to its travel agents, declaring a new technical restriction that put a cap on discount rates. The Court of Justice of the European Union (“CJEU”) observed that the travel agents who knew of the message presumed to have participated in the cartel, unless they publicly distanced themselves from the message. In this case, the knowledge was presumed to exist among the travel agents. Thus, the Court inferred the existence of a horizontal agreement among the travel agents.
In recent times, taxi aggregators like Uber have often been quoted as examples of a hub-and-spoke conspiracy because of their business model which does not allow individual taxi operators to charge their own prices, and instead is decided by Uber itself. These prices are based on calculations made by its own algorithms. According to Mark Anderson and Max Huffman the fact that the drivers chose to enter into an agreement in order to determine sale price with Uber knowing that similar pricing arrangement exists with other drivers qualify as a horizontal cartel. However, the Competition Commission of India (“CCI”) held a different view in the case of Samir Agarwal v. ANI Technologies Pvt. Ltd. It was held that the unilateral decision of individual drivers to adopt algorithmic pricing determined by Uber did not raise an anti-competitive concern. This decision is premised on the observation that in cab aggregators, the pricing is based on various personalized information of the riders like time of the day, traffic situation, special conditions, etc. It was further clarified that for a hub-and-spoke cartel to exist it would require an agreement between all drivers to set prices through the platform, or an agreement.
Understanding tacit collusion in the Hub-and-Spoke Model
In an online marketplace an increasing number of pricing algorithms are being employed by the market players. There is greater market transparency as well as the availability of consumer data in the online forum. Greater availability of data subsequently leads to algorithmic collusion.
Algorithmic collusion is of two types – algorithmic express collusion and algorithmic tacit collusion. In express collusion, there is “direct and express” communication about an agreement as demonstrated in the Poster Cartel case.
However, in the evolving digital landscape, the issue of tacit collusion is gaining increasing importance. In tacit collusions, a substantive part of the collusive agreement is achieved without express collusion. The large-scale use of similar algorithms by the competitors or the use of available data may lead to a hub-and-spoke conspiracy. In other words, a single provider for algorithmic pricing- hub might lead to tacit collusion among spokes i.e. the competitors.
For instance, in 2018, an investigation was led by the CCI pertaining to a hike in the Chandigarh-Delhi flight fares due to “Jat agitation”. The CCI had suspected inflation in price due to collusion among the pricing algorithms of various airlines. Such collusion is made possible after the algorithms gather data related to ticket prices, availability of seats, timing of flights, etc.
Such practices have been considered as anti-competitive not only by the CCI, but by competition regulators across various jurisdictions. For example, the UK Competition and Markets Authority have observed that such an algorithmic hub-and-spoke structure is of greatest antitrust concern as “it simply requires firms to adopt the same algorithmic pricing model.”
Issues in enforcement
In a Hub-and-Spoke agreement, the ‘hub’ communicates with the ‘spokes’ and there is generally no direct exchange among the ‘spokes’. Thus, the question which arises is how to establish a link between two vertical information exchanges. This is because under the Competition Act, 2002, the horizontal agreements are considered anti-competitive per se, however, in the case of vertical agreements, the rule of reason is adopted to determine whether the agreement is anti-competitive.
With the inclusion of hub and spoke agreements, the CCI must determine a particular standard to deal with a combination of vertical and horizontal agreements.
In the US, an ‘inference standard’ is adopted which presumes an agreement among the spokes in hub-and-spoke cases. It takes into consideration, circumstantial evidence to support the absence of direct exchange among the spokes. An example of this is the Interstate case which has been discussed above. In this case the ‘spokes’ had received identical letters from the ‘hub’ which was considered sufficient circumstantial evidence to establish collusion among them.
On the other hand, in the UK a system of ‘concerted practice’ has to be established in which there is an exchange of information or disclosure of information from one of the market players and receipt of such information by the other player.
Conclusion
The inclusion of hub-and-spoke agreement within the Indian antitrust framework is a welcome move. However, various challenges exist in terms of its enforcement due to the digital economy and interaction among data-rich firms with the help of algorithms, subsequently leading to tacit collusion. Furthermore, a standard must be established in order to deal with hub and spoke agreement as it is a combination of horizontal and vertical agreements.