India: When Is Discounting ‘Predatory'?

Last Updated: 8 August 2016
Article by Avimukt Dar and Sonu Varghese

The Department of Industrial Policy and Promotion ("DIPP") recently released Press Note No. 3 (2016 series) dated March 29, 2016 ("Press Note") which brought fresh regulatory focus on foreign direct investment ("FDI") into e- commerce entities. The changes brought about by the Press Note have been incorporated into regulation 5.2.15.2 (E-commerce activities) of the consolidated FDI policy ("FDI Policy"), which was made effective from June 7, 2016.

One of the key changes brought in by the Press Note and the FDI Policy is the broad injunction restraining e-commerce marketplace entities from "directly or indirectly" influencing the sale price of goods or services and requiring them to maintain a "level playing field".

This condition is hailed as a welcome move by traditional offline retail groups in India which have been reeling under the popularity of online marketplaces and the sales discounts offered by such entities. Interestingly, though there have been allegations raised that online marketplaces exercise predatory pricing mechanisms in offering the discounts, the Competition Commission of India ("CCI") has not yet taken a stand or passed any orders adverse to the e-commerce industry. It, therefore, appears that the offline traders refocused their energies on public interest litigation which ultimately led to a change in the FDI Policy in their favour.

The premise of this article is to briefly discuss the competition law concepts borrowed by the Press Note, rather than to discuss the Press Note or FDI in e-commerce in depth, as that has been done at length by other authors.

Concept of predatory pricing and price fixing

Under the Indian competition law

The Competition Act, 2002 ("Act") defines 'predatory price'1 as the sale of goods or provision of services, at a price which is below the cost of production of the goods or services, with a view to reduce competition or eliminate competitors. Predatory pricing is regarded as an abuse of dominant position by an enterprise or a group, but does not include any condition or price which may be adopted to meet competition. Therefore, to establish predatory pricing, it has to be ascertained if the particular entity has a dominant position in the relevant market and what is its intent. An enterprise shall be considered to be in a dominant position when it enjoys a position of strength in the relevant market, to operate independently of competitive forces prevailing in the relevant market or to affect its competitors or consumers or the relevant market in its favour.

The restriction imposed by the FDI Policy on online market places from influencing the prices of goods and services appears to have been effected to curb predatory pricing tactics which are allegedly employed by the online marketplaces. The DIPP officials have maintained that vendors are free to give discounts and marketplaces cannot be accused of financing them if there is no predatory pricing2. Though this is not an official statement or clarification from the DIPP, it goes on to suggest that to initiate action against any online marketplace players who offers discounts to customers, it has to be first established that the e-tailer practiced some element of predatory pricing and that the vendors' products were being sold below cost price. Although determining a predatory pricing prior to initiating an action against an online marketplace is not laid down in the FDI Policy, the abovementioned position of DIPP officials supports this assumption. Unfortunately, this is where the similarity between competition law and the FDI condition ends. The relevant market share and intent of the player i.e. whether responding to competition or trying to force out competition does not appear to have been factored either in the Press Note or in any media statements made by the DIPP.

Under the EU and US competition laws

A substantively similar issue was faced by European and United States competition authorities in relation to 'most favored nation' ("MFN") clauses or 'most favored customer' clauses widely incorporated into agreements amongst verticals. MFN clauses are essentially agreements / clauses between parties, like the supplier and the customer, whereby the supplier promises the customer that it will grant to the customer equally favorable terms as granted to any other customer.3

An interesting discussion of the potentially anti-competitive nature of MFN clauses is found in the judgment of the United States Court of Appeals for the Second Circuit in relation to Apple Inc.4. The backdrop of the case was Amazon's launch of 'e-books' at very cheap rates which were a runaway hit with the customers. Amazon had adopted a 'wholesale model' with the book publishers, wherein the publishers would sell the rights to sell e-books to Amazon at a fixed price leaving it free to sell them to the customers at a price of its choosing. This enabled the low pricing of Amazon's e-books.

In 2009, Apple announced the release of 'iPad' and a virtual marketplace in the iPads for e-books known as the 'iBookstore'. Apple resorted to an 'agency model' with several major publishers where the publishers of the e-books would appoint retailers such as Apple as their agents, and the agent retailers would sell the e-books to the customers at a price determined by the publishers. This was formalized in the form of 'eBook agency distribution agreements' executed between Apple and 5 (five) major publishing companies. The agreements contained an MFN clause which provided that if any reseller other than Apple, offered an e-book at a lower price than what was being offered in the iBookstore, then the publisher would be required to designate a new, lower price for such e-book in the iBookstore to match the lower price offered by the other reseller. The court pointed out that Apple understood that the proposed contracts with these MFN clauses would be attractive to the publishers only if they collectively shifted their relationships with Amazon to an agency model. This shifting was necessary to retain a control over the prices of the e-books which were being sold by Amazon and to ensure that Amazon was not selling the e-books at a lower rate than what was being offered in the iBookstore. The agency model ultimately resulted in higher consumer facing e-book prices as the publishers had the control over fixing the prices. The court found Apple in violation of the Sherman Antitrust Act by its actions of inter alia embedding the agency model in their contracts (with price caps and MFN clauses) with the publishers. Apple was further guilty of orchestrating a conspiracy among the five major publishing companies to increase the publishers' pricing powers in order to deprive Amazon of its monopoly, thus resulting in a rise in the retail prices of e-books. The Supreme Court of the USA declined to hear Apple Inc.'s challenge of the appeal order.

CCI vs DIPP

It is often difficult to distinguish between aggressive pricing to meet competition and deliberate reduction of price to eliminate competitors. Further, to allege that a single online marketplace enjoys a dominant position in the relevant market may not be factually accurate and may be even extremely difficult to prove, with several marketplaces and retail stores competing with each other. As observed in an order passed by the CCI5, though online and offline markets differ in terms of discounts and shopping experiences, if the price in the online market increases significantly, then the consumer is likely to shift towards offline market and vice versa. Therefore, these two markets are different channels of distribution of the same product and are not two different relevant markets. The offers which are offered by the online marketplaces are mostly limited by time and adopted to make an impact on the customers and promote themselves. It would be difficult for the CCI to step in and establish predatory prices being imposed by the online marketplaces under these circumstances.

Unfortunately due to the well thought out statutory limits of the CCI's jurisdiction, it was left to the DIPP to jump in and hit the ball out of the park. The blanket restrictions imposed by the FDI Policy on market place entities, while loosely borrowing from competition law concepts have taken a 'one size fits all' approach to such entities without consideration to any of the criterion set out in the Act to establish predatory pricing. The DIPP should now carefully examine the impact of such onerous obligations placed on e-commerce entities, where no consideration has gone into their size or the nature of the products / services they are offering and analyze if it does more harm than good to the economy as a whole.

It is indeed preferable that marketplace operators be permitted some control over the e-sellers who list their products on the trading platform, to keep a check on the quality of the products offered and to ensure customer satisfaction. Further, one does wonder if there could have been more efficient ways to level the playing field for brick and mortar stores than burdening the ecommerce entities with restrictions and thereby stifling competition. There seems to be a plethora of discounts being offered by offline retail chains offering monthly sales and offers of cash back, coupons and vouchers that can be redeemed6. The restrictions imposed by DIPP solely on FDI backed online marketplaces in this context seem disingenuous and to some extent ambiguous. An extreme interpretation on the restrictions can lead one to believe that any activity done by an entity on its platform may be brought under the ambiguous definition of 'indirectly influencing prices'. Further, an ecommerce firm cannot curate sellers' discounted products under the firm's banner as it may prove detrimental to the business model of such entities and force some of their business practices underground7. Competition in a market ensures that the common man has access to the broadest range of goods and services at the most competitive prices8. We will now need to wait and watch if customer is really the king or whether levelling the playing field leads to upsetting the shopping cart.

Footnotes

1 Explanation (b) to section 4 of the Act

2 http://m.thehindubusinessline.com/economy/will-act-against-ecomm-players-who-flout-fdi-rules-says-dipp/article8581447.ece , last accessed on July 27, 2016

3 Gurkaynak, G., Guner, A., Diniz, S. et al., Most favored nation clauses in commercial contracts: Legal and economic analysis and proposal for a guideline, 42 Eur J Law Econ (2016), http://link.springer.com/article/10.1007/s10657-015-9515-y , last accessed on July 27, 2016

4 United States v. Apple. Inc., No. 13 – 3741 (2d Cir. 2015), decided on June 30, 2015

5 In Re: Mr. Ashish Ahuja v. Snapdeal and others, Case No. 17 of 2014, CCI9, decided on May 1, 2014

6 http://www.livemint.com/Industry/bGv1k7OlLxmJUgClysF1lL/No-dearth-of-discounts-online-and-offline.html , last accessed on July 27, 2016

7 http://retail.economictimes.indiatimes.com/news/e-commerce/e-tailing/amazon-in-discussions-with-government-onecommerce- rules-seeks-clause-allowing-promotions/52198890 , last accessed on July 27, 2016

8 Competition Commission of India official website, http://cci.gov.in/index.php?option=com_content&task=view&id=12 , last accessed on July 27, 2016

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