E-Commerce Competition Enforcement Guide

India

07 December 2018

Trilegal

The advent of e-commerce has changed the way in which business is conducted. It has helped firms to establish market presence and enhance existing market position by providing a cheaper and more efficient distribution chain for their products and services. E-commerce has not only lowered entry barriers for small retailers, but has also provided consumers with more choice, lower prices, increased information symmetry and a personalised shopping experience. Innovation is the foundation of economic progress. With rapid strides in technological development, internet firms have revolutionised the way in which business is conducted, across the globe and in India. Innovative technologies have benefited the economy and all stakeholders by reducing the dependence on cash (e-wallets) and by facilitating ease of access to services (online bookings). Digital services have a unique feature known as network effects, which means that a product or service gains additional value as more people use it. This promotes concentration of markets, but at the same time there are multiple routes through which digital services can be delivered to the end users. However, rapid developments in dynamic technological markets have shortened the life cycle of innovations and consequently made market power ephemeral.[2] Nevertheless, in certain circumstances there exist potential positions of entrenched market power on account of network effects.[3]

True innovation and dynamic competition in the digital space is characterised by entry and exit to the market and changes in the respective ranks. This is to be expected in new, dynamic, fast-changing and innovative industries, especially as the providers of internet digital services are generally viewed as still being in their infancy. During any given period, some firms will emerge as leaders, while others may exit or lose market share.

Against this backdrop, the Competition Commission of India (CCI) is tasked, under the Competition Act, 2002 (the Act), with balancing innovation in nascent, evolving digital markets with protecting the process of competition. The challenge for the CCI is the same as that faced by other antitrust authorities – whether or not to intervene in digital markets and if so, whether to use traditional tools?

The key to effective regulation is an understanding of the changes in dynamic markets. We have come a long way: from cartels in smoke-filled rooms to disputes over the dominance of internet browsers and now to a world where prices are determined by algorithms. Digital markets are merely the next step of evolution and not a panacea.

CCI’s decisions relating to e-commerce

The CCI has had limited experience with cases concerning the e-commerce sector, in the context of both abuse of dominance as well as merger control. Although there are a number of pro-competitive benefits of e-commerce, it is also vulnerable to anticompetitive practices, owing to certain characteristics. Further, since e-commerce has emerged as a popular model for distribution in the digital economy, the segment is prone to vertical restraints. Vertical restrictions in the digital market are not restricted to their traditional forms but have rather moved to more sophisticated measures, for example, usage of software to adjust prices taking into account competitors prices, geo-blocking mechanisms, MFN clauses, price parity agreements and advertising restrictions, among others. A relevant question that needs to be asked in such cases is whether the online platform is only an intermediary providing the services of a platform or a distributor in the vertical chain. The essential analysis encompasses whether there exists market power, while recognising that market shares tend to be ephemeral, given the constantly evolving technology and the state of digital markets. In its assessment of e-commerce and digital sector cases, the CCI has adopted a calibrated, cautious approach, ensuring effective intervention while not restricting innovation, to enable a largely self-regulated online market. While innovation is an epitome of economic growth and development, such disruptive innovations may lead to significant market power amenable to abuse. Against this backdrop, we will proceed to explore the CCI’s decisions in the digital space.

Abuse of dominance

While the CCI’s jurisprudence regarding abuse of dominant position in the digital sector and online markets is still evolving, there have been a few instances where the conduct of internet-based businesses has been evaluated by the CCI on grounds such as predatory pricing,[4] exclusivity conditions and discriminatory practices.[5] The CCI has decided cases involving the e-commerce marketplace, the online taxi aggregation market, and the online search services and advertising market.

The CCI’s biggest contribution to e-commerce and digital markets has been in the area of abuse of dominance. Two of the seminal cases in this context are: Fast Track Call Cab Pvt Ltd v. ANI Technologies Pvt Ltd (the Ola case)[6] and Matrimony.com Ltd v. Google LLC.[7]

Online taxi aggregation services

The CCI in the Ola case while dealing with the issue of multi-sided platforms and alleged predatory pricing recognised the need for non-intervention in the nascent and evolving markets for radio taxi services, on the basis that any intervention at this stage would disturb market dynamics and provide a sub-optimal solution to a nascent market situation. The CCI took the progressive view that innovation is the key in nascent markets and that, despite market shares of over 60 per cent, network effects did not deter the entry and expansion of players in the market, particularly given that there were no switching costs between different radio taxi applications. Further, while Ola had the largest platform, this had not been either an entry barrier or a deterrent to the entry and expansion of Uber, which further reinforced the fact that the network effects of Ola were not strong.

Matrimony.com Ltd and another v. Google LLC and others

The CCI in the Google case recognised the role of big data in the digital economy and observed that the rise of new business models based on the collection and processing of big data is currently shaping the world. The CCI further noted the vital role that innovation plays in channelling and growing the marketing and business solutions of an enterprise. The CCI recognised that the internet search market is a dynamic, fast-changing and innovative market characterised by vigorous competition among various internet search engine providers. However, in the context of conducting competition assessments of the internet search market, it is critical that its two-sided nature be taken into account for the purpose of defining the relevant market.

In the case of Google (despite the theoretical arguments), the spate of investigations into its alleged anticompetitive business practices poses a high risk of competition authorities committing ‘Type I errors’ (false positives) – finding alleged violations of competition law that are likely based on misreading pro-competition business behaviour as being anticompetitive. Type I errors adversely affect legitimate competitive business strategy, raise costs and have a chilling effect on innovation. In contrast, a ‘Type II error’– the inadvertent failure by competition authorities to prevent anticompetitive business behaviour – may have less serious repercussions. This is because market forces provide some corrective power for false negatives. Even when one firm has a dominant position, there is still some level of competition to counteract monopolistic behaviour.

The CCI took nearly seven years to complete its investigation against Google and considered a number of questions pertaining to technology and procedure. While the CCI’s order held Google to be in violation of antitrust law in India, it has largely deviated from the adverse findings in the Director General’s (DG) report. In a very positive move, the CCI rejected the reliance placed by the DG’s report on the voluntary draft commitments given by Google across various jurisdictions, taking the view that it might prejudice or vitiate an unbiased, independent decision-making process.

Universal results

The CCI held that the ranking of ‘universal results’ (namely groups of search results for specific types of information such as news and images) were not, prior to 2010, strictly determined by relevance. Instead, some of the rankings (such as the first, fourth and tenth position) were predetermined. The CCI observed that after 2010 Google introduced fully-floating rankings. It is interesting to note that while the informants in 2012 alleged that Google had abused its dominant position, Google itself shifted to a fully floating regime on its own in the absence of any direction by an antitrust regulator. The approach of the minority in the CCI seems to be based on the fact that the changes brought by Google had addressed the anticompetitive concerns and there was thus no need for any regulatory intervention.

Commercial unit

The CCI found that Google had placed its commercial flight search function in a position of prominence on the search results page and that had acted as a barrier to other businesses trying to enter the market. However, one fails to understand what Google gained from diverting users to its own commercial flight unit page. Google could have only abused its dominant position to its own benefit had it been in the flight-booking business. Its commercial flight unit page only offered a price comparison service that was accessible directly from the search page of all available flight options to a given destination. In the CCI’s decision, Google’s prioritisation of its own page misled users into believing that they were encountering the most relevant results while being directed towards Google’s own service. It is not apparent as to how the ‘search flights’ link to Google’s flight unit page takes away the choice of users. The quality of evidence available suggests that there was no evidence on record to hold that competing travel sites were demoted to such positions that users were unable to find them. The CCI lost sight of the fact that Google is a technology and innovation-driven company and that it devises a better, more intuitive way to organise search results to improve the consumers’ overall experience. Such innovations should have been encouraged and not penalised so long as it did not adversely affect the interests of consumers or competitors. The modification directed by the CCI to add a disclaimer at the bottom of the commercial unit specifying that the results lead to Google flights also lacks teeth. The dissenting opinion in the CCI order correctly observed that the disclaimer will do little for consumers who are likely to be navigated towards Google’s own service instead of competing ones.

Search intermediation

The CCI considered Google’s practice of entering into agreements with publishers to provide search bars and ads on their websites (popularly known as ‘Adsense’). It held that Google was leveraging its position of strength in the market of ‘online general web search’ to impose restrictive conditions in ‘online syndicate search agreements’. The CCI order further went on to hold that by such practices Google’s competitors were denied access to the online search syndication market. However, the CCI deviated from the settled position of the law in holding that this practice of Google was in breach of antitrust laws in India. For a dominant entity to leverage its position in one market to enter a new market, the Act requires the delineation of two separate relevant markets: one where the entity is dominant and a second where the market is being leveraged. In this case the CCI did not define ‘online syndication search agreements’ as a separate relevant market, and consequently the ingredients of Section 4(2)(e) of the Act were not satisfied.

This is the first order where the CCI has recognised the growing debate on big data issues. The CCI referred to the role of big data in the digital economy and observed that the rise of new business models based on the collection and processing of big data is currently shaping the world. This decision is also important for competition law jurisprudence since the CCI recognised the vital role that innovation plays in channelling and growing the marketing and business solutions of an enterprise. In this regard the CCI’s decision is a welcome move, as it reflects its understanding of the thriving and competitive environment of the technology sector in India and the world. In that light, the findings against Google are minor and historic in nature. The decision marks an important milestone and demonstrates CCI’s maturity in assessing antitrust issues arising in the technology sector, which is subject to constant innovation. This will serve as an impetus in all future cases involving the technology sector – where the CCI is likely to adopt a pro-competitive approach based on a holistic understanding of the sector and factors specific to the industry.

Another key feature of the CCI order is that it recognised that the internet search market is highly dynamic, fast-changing and innovative. In an extremely welcome step, the CCI has recognised that any intervention in the technology markets has to be carefully crafted so that it does not stifle innovation and deny consumers the benefits that innovation can offer. The CCI demonstrated its maturity by not intervening in the product design of Google. It observed that product design is an integral and important dimension of competition but that undue intervention in the designs of Google’s search engine result page might affect legitimate product improvements, resulting in consumer harm.

However, unlike its stance in the Ola case, the CCI held that Google was dominant in the market for ‘general web search services’ and was held to have abused its dominance.

Issues of abuse of dominance in relation to big data issues

The CCI, in the case of Vinod Kumar Gupta v. WhatsApp Inc,[8] examined the potential abuse of dominance emanating from big data issues. They alleged that WhatsApp had abused its dominant position in the relevant market for ‘instant messaging services using consumer communication apps through smartphones’ by introducing a privacy policy which compelled its users to share their account details and other information with Facebook, its parent company. The CCI, while finding WhatsApp to be dominant in the relevant market, found no abuse because:

  • all consumer communication apps are offered for free or at a nominal price;
  • all consumer communication apps are easily downloadable on smartphones and can co­exist on the same handset (multi-homing) without taking much capacity;
  • once consumer communication apps are installed on a device, users can pass from one app to competitor apps in no time;
  • consumer communication apps are normally characterised by simple user interfaces so that costs of switching to a new app are minimal for consumers; and

• information about new apps is easily accessible given the ever increasing number of reviews of consumer communication apps on apps stores such as Google Play etc.

Thus, the CCI gave its decision in line with the views of other mature jurisdictions on the growing debate on the interface of big data and competition. Antitrust issues are likely to arise in such cases when entities foreclose competition making it difficult for competitors to expand their customer base. This happens in technology-driven markets with dynamic efficiency in which undertakings aggregate data from customers, providing them with a competitive advantage over competitors and entrenching market power.

Anticompetitive agreements

Any agreement on transactions in the digital or e-commerce space which hinders competition by causing an ‘appreciable adverse effect on competition’ (AAEC) is examined under Section 3 of the Act, which lays down the framework for regulating anticompetitive agreements, including vertical restraints.[9] To find a breach of Section 3, there must first be an agreement/arrangement. Second, such an arrangement or agreement must result in AAEC as per the factors given under Section 19(3).[10]

Although there have been preliminary cases relating to anticompetitive agreements in online markets, especially e-commerce, the CCI is yet to delve into a deep inquiry and analysis of the contravention of Section 3 in online markets. Nevertheless, there are some far-reaching implications to the issues and contentions put forth before the CCI, especially under Section 3(4), which prohibits vertical agreements having an anticompetitive effect.[11]

Collusion using algorithms

In the digital economy era, there is a growing discussion on anticompetitive agreements in online marketplaces. This discussion assumes greater significance in relation to different enterprises operating under the online marketplace model, competing for a larger customer base and a greater share of coveted advertisement revenues. This provides impetus to these enterprises to enter into vertical agreements with sellers to sell exclusively on their marketplaces and to enter into agreements with search engines driven by algorithms to push results from their marketplaces higher in the rankings of search results. Moreover, a pricing algorithm can set the price of an item for sale, and it can be written to rely on competitors’ prices, as well as demographic or other information about the customer, enhancing the profits of both undertakings by setting higher prices than either would have charged using only its own rules or algorithms.

The CCI is also looking at industries driven by digitalisation and algorithm-based systems to ascertain whether there were any anticompetitive agreements. In particular, the CCI is looking at algorithms being used by domestic airlines for ticket pricing to determine whether potential cartels existed in those markets. Being a nascent jurisdiction, the CCI has not yet made any decision setting out the jurisprudence in this area. It is, however, looking at decisions made by its counterparts in other mature jurisdictions, in moving forward in this area.

Online vertical restraints

In the opinion of various International Competition Network members and competition regulators, there are four types of vertical restraints observed in online markets:[12]

  • Resale price maintenance (RPM) – This is the same as the RPM under Section 3(4)(e) of the Act, namely where agreements to sell goods provide that the prices to be charged on resale by the purchaser have to be those stipulated by the seller.[13]
  • Resale price maintenance facilitating conduct (RPM facilitating conduct) – This includes Minimum Advertised Price Agreements (MAPs) and dual pricing restrictions. This refers to conduct which indirectly attempts to achieve an effect similar to that of RPM. In this regard, the UK Office of Fair Trading, now the Competition and Markets Authority, has the concept of Internet Minimum Advertised Price (IMAP) or MAP agreements, under which a retailer is prevented from advertising a supplier’s product below a minimum agreed resale price.[14]
  • Across platform parity agreements (APPAs or Retail Most-Favoured-Nation Clause (Retail MFN) – This poses a novel issue in relation to online markets. It is an agreement between a manufacturer and an online retailer under which the manufacturer cannot charge on that platform a higher price than that charged on other platforms for the same product. This has, thus far, not been seen in India.
  • Online sales bans or limitations – The most common restriction imposed on retailers by the manufacturer is to limit the scope of their online offerings when distribution is organised through a selective distribution network. This is done to build brand image for luxury, credence and experience goods.[15]

Although the CCI’s experience in relation to online vertical restraints is very limited, an analysis of the various sorts of allegations under Section 3(4) would be instrumental in providing a useful insight on the online vertical restraints observed around the world.

Online vertical restraints under Section 3(4)

In Ashish Ahuja v Snapdeal.com and others,[16] the CCI noted that brand image and goodwill are important concerns in a quality-driven market and that authorised distributorship is a prudent business policy since the sale of products from unknown, unverified or unauthorised sources should not be encouraged or allowed.[17]

Further, in Mohit Manglani v. Flipkart and others,[18] the CCI dealt with an information alleging the existence of exclusive vertical agreements under Section 3(4)[19] of the Act between manufacturers and the major online retail players for the sale of certain products, to the exclusion of other e-portals and physical channels. Although there was an exclusive agreement between e-portals and manufacturers, the CCI found no prima facie breach of Section 3. The CCI observed that:

It seems very unlikely that an exclusive arrangement between a manufacturer and an e-portal will create any entry barrier as most of the products which are illustrated in the information to be sold through exclusive e-partners (OPs) face competitive constraints.[20]

The CCI did not find that these exclusive agreements adversely affected competition in the retail market since new e-portals entered the market, which meant that competition was growing.[21] In conclusion, no AAEC was found by way of these exclusive distribution arrangements between manufacturers and e-portals.[22]

However, in M/s Jasper Infotech Private Limited (Snapdeal) v. M/s KAFF Appliances (India) Pvt Ltd,[23] the CCI did find a prima facie contravention of Section 3(4). It accepted the contention that the existence of an agreement can be inferred from conduct considered to be coercive when the level of coercion exerted to impose an apparent unilateral policy of the supplier, in combination with the number of distributors actually implementing the policy, would in practice point to tacit acquiescence by the other party or parties.[24]

This case is similar to that of CIBA Vision, in which the German Federal Cartel Office levied a fine on CIBA for imposing price restraints and limiting internet and wholesale sales of its products – contact lenses.[25] In that case, CIBA Vision monitored the traders’ sales prices online, and if the resale prices of individual traders were below the ‘non-binding’ recommended retail price (RRP), personnel of CIBA Vision would contact and induce them to increase their sales prices. The RRP system is very similar to KAFF’s MOP insofar as traders were made, albeit by different means, to raise their prices whenever they were lower than the prescribed level.

Merger control

Mergers and acquisitions (M&A) in the digital economy require antitrust authorities to scrutinise transactions with a holistic understanding of the market. Disruptive technologies that challenge traditional markets must be analysed carefully while keeping in mind their pro-competitive effects and benefits to consumers.

CCI’s merger decisions relating to e-commerce

The CCI has played a key role in enabling businesses in the digital economy to thrive and grow while ensuring that the innovation of the internet economy is not hindered. If the key objective of a merger is to acquire access to new data, which would result in a higher concentration of data post-combination, this could potentially result in market foreclosure and creation of entry barriers and would become a competition law concern. However, the regulator must evaluate the merger in terms of sufficiency of choices for consumers, innovation and improved products and services, while maintaining a fine balance in order not to impede M&A activity.

CCI has assessed several transactions relating to e-commerce marketplaces such as investments in Snapdeal and BigBasket, and the consolidation of Flipkart and eBay India. CCI observed that the e-commerce marketplaces offer better services to consumers in terms of discounts, more product offerings and doorstep delivery. This availability of choice to the consumer and the presence of multiple players has significantly contributed to the regulator concluding that investment and consolidation in the e-commerce market are not detrimental to competition.

Ongoing consolidation (Amazon’s proposed bid to acquire a majority stake in Flipkart) will lead to interesting regulatory outcomes and CCI is likely to continue to test mergers using traditional tools of analysis while applying these to the specific factual matrix of the digital economy.

Guidance from global experience

In 2005, Myspace was acquired by News Corp for US$580 million, followed by a US$900 million advertising deal with Google in 2007. However, after the entry of Facebook to the market, Myspace lost its relevance as customers shifted to Facebook, and it was ultimately sold for US$35 million in 2011. This demonstrates the transitory and dynamic nature of the market, where the new entrant has the ability to alter market dynamics. Globally, there has been increased interest in antitrust issues with respect to technology firms and the approach of other antitrust regulators is of significant relevance to the CCI in today’s inter-connected world. One such instance was Facebook’s acquisition of WhatsApp, which was considered and approved by the Federal Trade Commission and the European Commission (which reviewed the transaction as it met the jurisdictional thresholds of Cyprus, Spain and UK). However, despite the acquisition affecting a combined amount of 1.7 billion users, it escaped the scrutiny of competition regimes that use thresholds based on turnover (such as India), as digital companies tend not to have high turnover owing to the provision of free services. Data can have pro-competitive and anticompetitive effects. When data becomes a source of market power, it can lead to a situation of a data advantage to the established players to the detriment of smaller or newer entrants. Conversely, data can address information asymmetry by increasing transparency.

The flip-side of this is that transparent markets are more prone to cartelisation. Given that it is data and not market shares or turnover that will be the key in future mergers of this ilk, competition regulators are increasingly amending their merger control regimes to adapt to the unique situation of the digital economy.

It may be time for CCI to consider several alternatives (transaction value, users, data, etc.) to review merger thresholds for the digital economy to avoid a Facebook/WhatsApp-like situation.

Conclusion

The CCI, like other competition regulators, continues to focus on the issues of competition in digital markets. Given that India has acquired a reputation as a start-up hub and that several Indian unicorns in the digital space such as Ola and PayTM have emerged, the CCI must tread a fine balance ensuring that consumers have choice, innovation and competition. The Ola case is perhaps the best example of the CCI adopting a regulatory ‘Type II approach’, as opposed to committing a ‘Type I error’, ensuring that innovation and nascent markets were not stifled and recognising that market shares were not permanent in dynamic markets.


Notes

[1] Nisha Kaur Uberoi is a partner and the national head of the competition law practice at Trilegal.Shravani Shekhar is a senior associate in the Competition Law Practice at Trilegal.

[2] Organisation for Economic Co-operation and Development, ‘Implications of E-commerce for Competition Policy - Note by India’, Directorate for Financial and Enterprise Affairs – Competition Committee, DAF/COMP/WD(2018)52, 6 June 2018, available at: https://one.oecd.org/document/DAF/COMP/WD(2018)52/en/pdf (last accessed on 26 July 2018).

[3] ibid. at paragraph 9.

[4] Competition Act, 2002, s. 4(2)(a)(ii).

[5] Competition Act, 2002, s. 4(2)(a)(i).

[6] Case No. 06 and 74 of 2015.

[7] Case No. 07 & 30 of 2012.

[8] Case 99 of 2016.

[9] Competition Act, 2002, s. 3.

[10] Competition Act, 2002, s. 19(3).

[11] Competition Act, 2002, s. 3(4).

[12] Australian Competition and Consumer CCI, ‘Online Vertical Restraints Special Project Report’, 2015 International Competition Network Annual Meeting, 2015, available at: www.internationalcompetitionnetwork.org/uploads/library/doc1070.pdf. (last accessed on 25 August 2018).

[13] Competition Act, 2002, s. 3(4)(e).

[14] Australian Competition and Consumer CCI, Online Vertical Restraints Special Project Report, 2015 International Competition Network Annual Meeting, 2015, available at: www.internationalcompetitionnetwork.org/uploads/library/doc1070.pdf. (last accessed on 25 August 2018)

[15] Organisation for Economic Co-operation and Economic Development, Vertical Restraints for Online Sales 2013, 12 September 2013, available at: www.oecd.org/competition/VerticalRestraintsForOnlineSales2013.pdf (last accessed on 26 July 2018).

[16] Case No. 17 of 2014.

[17] ibid. at paragraph 19.

[18] Case No. 80 of 2014.

[19] Competition Act, 2002, s. 3(4).

[20] Case No. 80 of 2014, paragraph 16.

[21] ibid.

[22] ibid. at paragraph 17.

[23] Case No. 61 of 2014.

[24] ibid. at paragraph 13.

[25] German Federal Cartel Office press release, ‘Bundeskartellamt imposes fine on CIBA Vision’, 25 September 2009, available at: https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2009/25_09_2009_Ciba-Vision.html (last accessed on 25 August 2018).

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