When Platforms Themselves Compete: Preferential Listing and Unfair Contracts

[By Akash Gulati & Sanidhya Bajpai]

The authors are students at RMLNLU, Lucknow.

 

Introduction

India is the fastest-growing e-commerce market in the world. Online platforms like Amazon, Flipkart, Zomato, etc., offer a marketplace where the divergence of buyers, sellers, and advertisers partake in commerce. The presence of an online marketplace makes trade and commerce efficient and transparent. The testimonies of the stakeholders involved reveal that the online platforms, through preferential listing and unfair contract terms prima facie, constrain the marketplace and consequently bring competition concerns to the forefront. This piece delves into the key competition issues which have a proclivity to comprise the platform neutrality of the e-commerce platforms.

Platform Neutrality

Platform neutrality simply means a neutral treatment of complements by the platform free of unreasonable bias and discrimination. In the context of e-commerce, it means that any platform connecting the seller to the market cannot unreasonably put sellers at a disadvantage, either in isolation or in conjunction, by preferencing their own products over the other sellers. Platforms being in control of all listing parameters find themselves in such powerful positions where they can push around the discoverability of products that systematically alter sales. Further, platforms can also bestow perks upon certain sellers, some of which they directly or indirectly own, which make them seem more authentic when compared to peers. This piece is in the context of the market-leading platforms.

Online marketplaces rely on algorithms to provide a sorted list of products from sellers in response to a user query/demand. This seems to be a task that enables efficiency, but when coupled with the vertical integration of goods sold by the marketplace itself, a leeway is cracked open. Thereon the platform is not only a service provider to the sellers, but also a competitor.

Skewed Listing

The algorithms which sort the sellers do not seem to produce neutral results. A common complaint of sellers on platforms such as Amazon and Flipkart is that their preferred sellers are usually displayed on the first few pages of search results (see CCI’s report as well). Consequently, the non-preferred sellers are pushed away from the reach of the customers onto the later pages. It is seen that even the lesser-priced products from general sellers are pushed back in order to increase the visibility of the same products from preferred sellers.

Vertical Integration Foreclosing Competition

The preferred sellers include the directly or indirectly owned entities of the platform itself and the other sellers who sign up for the preferred seller program. This vertical agreement between the sellers and the platform allowing sellers to pay a fee to gain visibility and outperform peers can tend to foreclose competition. Especially in cases where the competitors who are as efficient as the preferred sellers, both in terms of pricing and quality, lose out on sales simply because of lesser visibility.

Such vertical arrangements seem to be in violation of Section 3(1) read with 3(4). These agreements tend to foreclose competition and drive current competitors out of the market which might result in an appreciable adverse effect on competition (“AAEC”). The lack of transparency on the modus operandi of these platforms makes it an iffy affair to determine the extent of such AAEC.

Role of Private Labels

A private label product is a third-party manufactured product that the retailer sells under its own brand name. In the e-commerce sector, giants such as Amazon and Flipkart sell private label products in vertical integration to their service as an intermediary. Such giants have access to the plethora of user data and preferences which the competitors lack.

Therefore, the platforms have the means to delineate the most profitable market segments and enter with the most personalized products. This strategic entry into new relevant markets can be termed as the efficiency of the platform. However, when this gets coupled with the undue advantage of preferential listing of private label products (vis-a-vis similar products of identical ratings) and the deep discounting offered on these products, the platform might be venturing into violation of the Sections 4(2)(a)(ii), 4(2)(b)(ii) and 4(2)(c).

Unfair Terms of The Contract

The leading online shopping and other e-commerce platforms such as Amazon and Flipkart have a superior position to other sellers by virtue of them owning the platform and occupying large market shares. This bestows them with superior bargaining power and makes other sellers susceptible to the unfair terms of the contract coupled with unilateral changes. The same was also observed in the CCI’s report on the e-commerce market study in India. The French courts fined Amazon on the grounds that it imposed ‘unfair’ terms on its suppliers. The courts found that Amazon, through its higher bargaining power, has obtained contracts that allow it to change the terms and policies at any time without prior notice. The sellers in the commission’s report have alleged that e-commerce platforms have imposed similar onerous obligations in India. The seller/vendor testimonies prima facie show that the e-commerce platforms have indulged in agreements that are likely to have exclusionary effects on the competition and are unfair/exploitative to the sellers and consequently are in contravention to Section 3(4) of the Act. The platform’s higher bargaining power allows it to impose exploitative/unfair terms on the sellers, and how these terms distress the sellers and distort the competition will be discussed further.

Exclusivity agreement

The e-commerce platforms engage in exclusive supply agreements that make a certain product exclusively available on only one platform. This hampers the customer’s ability to choose from a wide range of products and impairs the seller from selling the products on different platforms. The exclusive agreements, as reported in the commission’s report, are of two types; a) agreements that make a product exclusively available on one platform, and b) agreements that make a platform list only one brand in a specific product category. These types of agreements could lead to situations where a certain brand’s product is listed on a platform exclusively, and its competitor is delisted, which would be detrimental to the competition. The commission, while imposing penalties in the MMT-Go case, also directed them to modify their agreements and behaviour, and the directions included the removal of exclusivity conditions in agreements between MMT-Go and hotels.

Price parity

The platforms use the price parity clause to ensure that the lowest price of the specific good or service is at that platform. The platforms impose these conditions on the sellers to ensure the lowest price on their platform. The Commission in the MMT-Go case found that they impose a price parity clause on the hotels/hotel chains, which restricts the hotels from offering lower prices at any other platform. The commission, in this decision, delineated a nuanced difference between the ‘wide’ and ‘narrow’ price parity clauses and considered the latter to be justifiable in certain circumstances. Moreover, the commission, while rejecting MMT-Go’s plea that price parity is an industry practice, emphasized that the impact of price parity clauses by a dominant entity on the market is appreciably more significant than by a regular firm.

Deep discounts

The commission’s report on the e-commerce industry shows that one of the main grievances of sellers across e-commerce platforms is the deep discounting schemes that are undertaken by the platforms in order to increase their consumer traffic. It was alleged by the sellers in the food delivery and online hotel booking industries that deep discounts were offered by the platform unilaterally without any consultation. The platforms have maintained that the sellers indulge in deep discounting only if they want and out of their free will. However, the sellers on these platforms stated that rejection of the deep discounting schemes leads to their reduced visibility on the platform and restricted consumer traffic towards them through lower search rankings.

The reduced platform neutrality has led to e-commerce platforms imposing such anticompetitive and unfair/exploitative terms upon the sellers, who are caught between the choice of either accepting such terms, or facing the brunt of rejection in the way of reduced visibility and lower search rankings. The superior bargaining position of the platforms gives them the power to make offers sellers can’t refuse.

Conclusion

It is pertinent for a competitive and healthy market that market power is not abused to exclude effective competitors by denying them fair access to the market itself. Especially, when the market is facilitated through a platform and the platform itself partakes in the competition. For antitrust-compliant behaviour, such platforms need a systemic, transparent, and fair mechanism to allow competition in the market. Fair and alike treatment of all sellers is the bare essential that needs to be imbibed in the conduct of these platforms. Moreover, wide price parity agreements are to be done away with as well in most cases. Anything contrary, such as the problems listed above, would hamper consumer choice, the rights of the market players, and resultantly the overall competition in the market.

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

Contact Us

Kerwa Dam Road., 
National Law Institute University, Bhopal
Madhya Pradesh, India. 462044​.

write to us at – cbcl@nliu.ac.in