CCI’s E-Commerce Investigation: A New Era in Indian E-Commerce Landscape

[By Prasad Hegde]

The author is a fourth year student of Gujarat National Law University.

Background

On 13 January 2020, the Competition Commission of India (“CCI”) passed directions to carry out investigations into alleged violation of Section 3 and 4 of the Competition Act, 2002 (“the Act”) by ‘Flipkart Internet Pvt. Ltd.’ and ‘Amazon Seller Services Pvt. Ltd.’ (“Opposite Parties” or “OPs”). The information was filed by Delhi Vyapar Mahasangh (“Informant”). The Informant used the OPs’ platform to list their products for sale on online marketplace. The Informant alleged that there were several instances of anti-competitive acts by the OPs or between the OPs and their preferred sellers/private labels. The Informant alleged the following acts of the OP to be violative of the Act:

  • OPs provide “deep discounts” to its preferred sellers which adversely impact other sellers as they lack resources to compete on price with such preferred sellers;
  • OPs gather “data on consumer preferences” and use them to their advantage;
  • OPs provide “preferential listing” to certain sellers thereby creating a bias. Due to this the products of the preferred sellers dominate the first few pages of the search results;
  • OPs have “exclusive tie-ups” with producers, which are violative of Section 3 of the Act.

The Informant alleged that by virtue of these anti-competitive acts, they were denied a chance of optimally using the online market space. Such acts forced the non-preferred sellers to operate through the brick and mortar set up which involved high fixed cost and lacked pan-India reach. The Informant provided evidence in the form of communications to further the same.

However, in an unusual move, the aforementioned order by CCI has been temporarily stalled by the Karnataka High Court. It is rather surprising to see a CCI Investigation being stayed even before it has been completed. However, since it is a temporary stay, the HC might also uphold the CCI order which found a prima facie case against the OPs. Therefore, the CCI has a clear-cut task to prove that the practices of the OP warrant an investigation due to their anti-competitive impacts.

Deep Discounting

Such practices of deep discounting can be analysed under Section 4 of the Act i.e., predatory pricing. In order to establish violation of Section 4, the concerned enterprise must be dominant in the relevant market. The CCI has previously held that none of the e-commerce players enjoy a dominant position. However, the Indian Supreme Court (“SC”) recently upheld a COMPAT order which allowed for investigations into the predatory pricing practices of Uber. The SC in its order opined that an enterprise having a “position of strength” can be brought under the ambit of Section 4 of the Act. An enterprise holds a position of strength when it (i) operates independently of market forces and (ii) affects the competitors in its favour. Therefore, applying this rationale, both the OPs enjoy a “position of strength” because if the OPs incur any loss due to the discount they offer, it will attract more customers and will negatively impact its competitors. Further, they collectively hold a market share of 89% as declared in the first quarter of 2019 which confers a position of strength on them. Hence, their actions can be analysed under the ambit of predatory pricing.

Discounts can also be analysed under the rule of reason framework as per Section 3(4) of the Act. Section 3(4) of the Act will kick in if the intention behind the disparity in discounts offered is to induce exclusivity, which consequently amounts to an appreciable adverse effect on competition.

It is to be noted that though discounting creates benefits to consumers in the form of lower prices albeit in the short run. Nor, is discounting a reflection of efficiency gains or cost savings. It further creates distortionary effects on the supply side of the market. Discount is an incentive in the demand side of the market but consumer welfare does not only frown upon such discounts. To elaborate, discounts offered to preferred sellers today, will drive away other sellers in the online market tomorrow. This phenomenon will allow e-commerce players to increase prices, thereby creating no consumer benefits in the long run. Lastly, Regulation 5.2.15.2.4(ix) of the 2019 FDI Regulations also prescribes that “market-place entity cannot directly or indirectly influence the sale price of goods or services”.

Use of Data

The Informant has also alleged that OPs gathered consumer data and used it to their benefit. It is interesting to note that on 17 July, 2019, the EU had commenced investigation into Amazon’s use of sensitive data from independent retailers who sell on its marketplace. Amazon is alleged to come up with their own offering, using the data it collects from the retailers.

In India, such use of data could be analysed under Section 4 of the Competition Act, since both the OPs are in a positions of strength. India could take inspiration from EU’s investigation and the subsequent penalization of Google. The EU found that Google favoured its own shopping services over those of third parties in its search rankings due to misuse of data. The EC found that Google had committed an anti-competitive act that allowed Google to benefit from investments made by other firms.[i]

However, the fact that CCI has to look into is whether, Amazon by collecting data from the retailers using its marketplace, has launched similar products to compete against them. The most effective way (as evidenced by EU) to get to know about this, could be by asking retailers using the Amazon Marketplace. Further, it is to be seen, if principles of Section 3 and 4 of the Act suffice to address this issue. Lastly, the EU has the General Data Protection Regulations (“GDPR”) to protect personal and non-personal data, however, India lacks any data privacy law currently. Therefore, this investigation and the subsequent court battles might bring back the debate regarding the need for a robust data protection law.

Preferential Listing

The Informant further alleged that products of a few sellers dominate the first few search results on the OPs’ platforms. These entities are alleged to get an added advantage despite their user ratings being the same as that of other non-preferred entities. Such lack of transparency can lead to possible distortion of competition and may not reflect consumer choices in its true sense.

Preferential listing can be analysed under the ‘Rule of Reason’ approach because such listing debars an equal opportunity of visibility to other sellers on the OPs’ platforms. When looked from the point of Section 19(3) of the Act, preferential listing has the ability to drive existing competitors out of the market and foreclose the market for new entrants. Further, it also acts as a huge barrier for existing retailers to make their products visible on the platform, thereby preventing competition on merits. Such agreements of preferential listing come under the ambit of “agreement of sale” which leads to appreciable adverse effects on competition (“AAEC”). Further, Article 102(2)(c) of the Treaty on the Functioning of the European Union (“TFEU”), whose provision and interpretation is similar to that of Section 4 of the Act, prohibits dominant enterprises which are in positions of strength from offering preferential treatment to other trading parties.[ii]

Exclusive Tie-ups

The Informant alleged that the OPs had exclusive tie-ups with certain sellers of goods (e.g. mobile phones). Exclusive tie-ups agreements are of two kinds – (a) agreements under which a product is launched exclusively on a single e-commerce platform and (b) agreements where only one brand in a certain product category is listed by the platform. These sellers and often even preferred sellers only adopt a single platform and do not multi-home. Initially these products are exclusively available on the OPs platform but are offered to other retailers/brick and mortar retailers/other e-commerce platforms later.

However, the 2019 FDI Regulations have somewhat managed to control exclusive tie-ups. Regulation 5.2.15.2.4(iv) of the FDI Regulations provide that that no e-commerce platform shall purchase more than 25% of a particular product from one vendor. If they violate this norm then they shall get converted from market place model to an inventory-based model. Therefore, the FDI Regulations have helped in controlling exclusive tie-ups.

Exclusive tie-ups are not per-se anti-competitive unless used as an exclusionary tactic to foreclose competition or create entry barriers. An OP by entering into such exclusive agreements may prevent the market from being competitive. A competitive market offers lower prices and higher choices which may be lost because of such agreements. Further, such agreements make it difficult for rival brands to list their products before consumers. However, on the flip side of the coin, exclusive agreements might provide for higher efficiency and improve market competition. Therefore, the tie-ups’ being in the nature of an exclusive sale agreement has to be seen, if it leads to foreclosure of competition and drives away existing retailers from the market. If it does, then the agreement will be violative of Section 3(4) read with Section 3(1) of the Act.

Although the FDI regulations have helped in reducing tie-ups, it is to be seen how the CCI deals with such anti-competitive practices. The reason being, in In Re: Mohit Manglani and M/s Flipkart India, the CCI had held that exclusive sale agreements between e-commerce platforms and sellers/distributors do not cause AAEC. Further, in 2014 CCI had dismissed charges against Flipkart and others concerning an allegation of exclusive sale agreement of the book, Half Girlfriend. Therefore, in light of these previous decisions of the CCI, it would be interesting to note how the CCI deals with allegations of exclusive tie-ups against the e-commerce giants.

Conclusion

We can safely say that the imbalance in bargaining power and information asymmetry has been daunting retailers. The CCI while deciding this case has a tedious job to ensure certain priorities i.e., transparency in markets, reduction in information asymmetry, competition should take place on the merits and lastly ensure viable business relations. Platforms can also do their bit in ensuring that the aforementioned priorities are fulfilled by:

  • Having a clear policy on discounts, including the basis of discounts funded by platforms.
  • Having clear written guidelines on collection, use and sharing of data.
  • Having set parameters on which products are listed on the platform. Further, having transparency in user rating and customer reviews.
  • Pulling out brands from the platform in which the platform has a stake, in order to avoid conflict.
  • Platforms should avoid tie-ups. Even if tie-ups are resorted to, then they must not lead to market foreclosure.

Therefore, we can conclude that the e-commerce sector in India can go miles ahead, not merely by the decision of the CCI, but with the active cooperation of all platforms.

End Notes

[i]Hoppner/Davies The EU Competition Investigation of Internet Search. Why Google’s Market Tested Proposals for Re-Labelling and Opt-Out Solutions Do Not Suffice, Comp. Law Review Int. 2013, p. 107, 110.

[ii] Richard Whish and David Bailey, Competition Law (7th Edition), Page 760.

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