Contracts - A Competition Issue or a Marketing Strategy

-Dr. Geeta Gouri†

Business runs on contracts. Periodic allegations of contracts as anti-competitive are raised with the Competition Commission of India (“CCI”) for being exclusive supply agreements under Section 3(4). As a class complaint by traders or manufacturers, the allegation pertains to contracts that create entry barriers. Each case filed with the CCI alleges a different cause for entry barriers. The most recent is by the Delhi Vyapar Sangh (‘‘DVS’’) (Case No. 40 of 2019). Their angst is with the high discount on product prices offered by Flipkart and Amazon on their portals. Flipkart and Amazon list only those manufacturers and sellers who are agreeable to high discounts on their prices. Discount policy is a condition stipulated prior to finalizing contracts with sellers. The complaint once again raises the issue of whether contracts between buyers and sellers can be a competition issue.

The CCI, in its prima facie Order, expressed concern over the exclusive partnership between smartphone manufacturers and e-commerce platforms, meriting investigation as a case of exclusive supply agreement. In their Order, CCI opined that the allegation needs to be investigated whether exclusive supply arrangements with deep-discounting and preferential listing are being used as an exclusionary tactic to foreclose competition “resulting in an appreciable adverse effect on competition contravening the provisions of Section 3(1) read with Section 3(4) of the Act”.

Trader bodies approach me at every lecture of mine. Obviously, my response to them has not been satisfactory. Their arguments, even in the present case (DVS), are slightly convoluted and need unravelling. A revisit to contracts and exclusive supply agreements from a competition lens is required while we await the decision of CCI.

Contracts in Case No. 40 of 2019

The underlying presumption of DVS in their complaint is that of dominant platforms. Flipkart and Amazon are able to attract customers by offering deep discounts in the sale of smartphones and accessories. Contracts are inked with manufacturers agreeable to these terms.

The case was filed under Section 4 and Section 3(4) of the Competition Act, 2002 (‘CA02’). Continuing the tradition of conflation, DVS has combined Section 4 (abuse of dominance) with Section 3(4) (exclusive supply agreement). The intent of conflation is to establish abuse, irrespective of the section.

Categorizing the abuse of Flipkart and Amazon under Section 3(4) as vertical restraints is not clear from the filings of DVS. Section 3(4) on account of efficiency factors is considered by competition authorities to benefit consumers. The classification of contracts as a vertical restraint is surprising. It amounts to an unstated acceptance of the benefit to consumers in contrast to their allegation on deep discounts. The ability of these high-tech companies on data collection to build consumer profiles that are then targeted through advertisements is a familiar anti-trust story. But if discounts benefit consumers applicability of this section of CA02 to contracts makes the case interesting.

CCI ruled out Section 4 and the case now rests on contracts as exclusive supply agreements. As per the Act Section 3(4):

shall be an agreement in contravention of Sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.

‘exclusive supply agreement’ includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person;

Contracts of Flipkart and Amazon raise two sets of questions:

The first set of issues is of choices available to sellers of phone sets— between selling offline or online—and of these choices to buyers of phone sets, namely the consumers. Are phone manufacturers restricted by contracts or are they voluntarily accepted as alternate selling channels? Are choices of phone sets available on e-commerce platform markets those of consumers?

A second set of issues relate to defining what is a fair contract. Fair to whom? The buyer (who is the consumer), the seller, or the firm that offers the platform or, to the aggregators that offer market space on their platform? It is interesting how allegations towards high tech firms tend to repeat themselves on decisions of earlier cases.

The alleged bias of platform markets towards its own sellers is alleged by DVS, but it is a slight variant of the argument that Bharat Matrimony and Consumer Unity & Trust Society (‘CUTS’) used in the Google case. Bharat Matrimony and CUTS alleged that Google is biased towards its own products. Salinger and I had argued then that “Protecting Competition Versus Protecting Competitors” is a warped approach to competition adopted by the CCI for platform markets. The Google decision prefaces the contention that Flipkart gives preference to its own sellers on the platform and Amazon with its preferred list of sellers of smartphones and related accessories. These are ranked high on their respective e-commerce platforms.

Competitors: Assessing the Antitrust

The DVS of small and medium traders of smartphones and accessories have alleged that they are at a disadvantage when it comes to listing on platform markets as the two major platform markets have their own preferences. Discounts are offered by Flipkart and Amazon if consumers purchase these smartphones on their platform. These allegations are perceived as vertical restraints on account of contracts between sellers and platform markets adversely affecting competition as under Section 3(4) read with Section 3(1).

Preference is given to select smartphone manufacturers in the form of private labels with phrases such as “Assured Sellers” and a prominent position on the platform. Their collaboration with Cloudtail India (a joint venture between Amazon and Catamaran Ventures) and Appario Retail (a wholly-owned subsidiary of a joint venture between Amazon and Mr. Ashok Patni) was pointed out in Case No 20 of 2018 against Flipkart is now extended to include Amazon in the present case. The argument then and now is that small vendors have become allies of big vendors like Cloudtail, WS Retail, etc., who are suppliers to the Flipkart and Amazon platforms. Business-to-Business (‘B2B’) is the modus adopted rather than selling directly to consumers through the online e-commerce marketplace sites. The Business-to-Consumer (‘B2C’) model is not permitted for international firms such as Flipkart and Amazon, nor are these companies permitted to have warehousing facilities.

Competition Concerns

Is exclusivity of supply contracts anti-competitive?

CA02 Section 3(4) states

“shall be an arrangement in contravention of sub-section (1) if such agreement causes or is likely cause an appreciable adverse effect on competition”.

The emphasis on ‘likely to cause’ leaves a wide margin to assess possible outcomes. Efficiency factors are taken into consideration and are high in the host of considerations listed in Section 19(3). Framed, however, in traditional brick-and-mortar product market analysis of anti-competitiveness, there are limitations to CA02 for assessing the economics of contracts between buyers and sellers on platform markets. However, this has not restricted the CCI from assessing contracts and competition. The present allegation of DVS is that exclusive supply agreements are anti-competitive on the platform market? Decisions of CCI on exclusive supply agreement proceed on ‘rule of reason’ approach. This approach implies that an enquiry into the anti-competitive effects of agreements must necessitate a reasoned analysis, taking into consideration the relevant product market, market power, and any evidence showing an appreciable adverse effect on competition (‘AAEC’).

Let us take a look at the phrase ‘likely to cause’ initially in general terms, without defining the nature of the market. In Case No.11 0f 2009 Jindal Steel and Power Ltd vs Steel Authority of India Ltd (‘SAIL’), the long-term supply contract for providing long rails to Indian Railways (‘IR’) set out the protocols for assessing supply agreements. The arguments in this case hinged on the safety dimension and the requirements of railways for the continuous supply of Research Designs & Standards Organisation (‘RDSO’) compliant rails and, in this particular case, on the exercise of buyer’s choice. Of significance to exclusive supply contracts, the CCI decision was based on the important consideration that tenders for long rails are open tenders issued on a regular basis to all manufacturers of steel rails. There are only 3 manufacturers of steel in the country, which are concentrated mainly on the manufacture of structural products. Long rails require high investment and for a limited domestic market of IR, producing rails is not an attractive investment. The government, for the manufacture of long rails to IR, had kept one steel plant of SAIL only to meet the requirement. Jindal Steel, on the other hand, largely manufactures structural and short rails. The international market is for short rails. In this scenario, Jindal was advised by CCI to export rails till it received RDSO clearance from IR. The contracts were not found to be anti-competitive. The decision of CCI was balanced as the protocol was followed before entering into an agreement. The tenders were open and regular with the requirements of IR listed.

In Case No. 80 of 2014 M/s Flipkart India Private Limited, M/s Jasper Infotech Private Limited, M/s Xerion Retail Private Limited, M/s Amazon Seller Services Private Limited, M/s Vector E-commerce Private Limited by All India Traders Association, the CCI ruled on ‘exclusive agreement’ and ‘restrictive/unfair business practice’ of these e-portals. A perusal of some of the agreements, taking into account factors listed in Section 19(3), did not indicate an AAEC, as pointed out by CCI in its prima facie Orders “the bare perusal of the agreement on the touchstone of the factors laid out above suggests that such agreements do not result into AAEC”. The CCI also pointed to the fact that the scope for creating entry barriers for new entrants is unlikely in the presence of competitive constraints. In the highly vibrant digital markets, be it books, cameras, or phone sets, the emergence of new portals indicate growing competition. Further, the CCI was not convinced that by exclusive agreements, any of the existing players in the retail market are getting adversely affected, rather with new e-portals entering into the market, competition seems to be growing. The case was dismissed at the prima facie stage.

In the present case of contracts and exclusive supply agreements, CCI has ordered an investigation into the selection process adopted by Flipkart and Amazon for picking sellers and manufacturers for their e-commerce platform markets. No further information is available in the prima facie Order for instituting an enquiry.

As a regular buyer online, I took a look at the Amazon portal. At the bottom of the portal, Amazon places advertisements for those who wish to sell on their platform. Details, as listed on their web site, are given below.

The openness of the process and the quest for new sellers suggests that Amazon’s prime concern is to meet consumer requirements. There have been newspaper reports of Amazon being interested in encouraging MSME producers. No information is available on deep discount policies or on conditions for listing.

If CCI is to proceed on CA02, the idiosyncrasies of platform markets would need to be addressed.

Platform Markets:

Are platform markets prone to encouraging exclusive supply arrangements?

Two-sided markets vie with buyers and sellers on one side and advertisers on the other side. In my forthcoming publication (Springer Nature), the economics of competition in different market formats has been analysed in depth. Platform markets are defined by network economies and size, which enable economies of scale and scope. The agenda of platform markets is to attract as many customers or consumers to surf the portal and generate the required economies. Indian consumers are bothered about the price of the product. Algorithms employed by these firms keep abreast of changing prices enabling price comparisons offline and online. Consumers, having discovered the convenience of shopping online which includes delivery at home and a policy of return, are unlikely to shift to brick-and-mortar shops. These shops, being forced to compete, have come up with some offline incentives such as home delivery shopping for daily conveniences. Competition is severe and even the presence of a few firms provides the required competitive constraints, as was observed by CCI in the earlier decisions on Flipkart and Amazon. The allegations that exclusive supply agreements of Flipkart and Amazon capture consumer preferences remain unproven. Preference for specific portals has never been substantiated with data. In the Google case, the ‘eye stray-stay’ hypothesis was strongly argued on the importance of ranking on the portal. It was never tested and was taken as a given.

If the consumer gains are low, the lower prices are not considered to be positive by the competition authorities. Rather, counterarguments are raised against the simple concept of competition and, often, without any consumer survey. To give an example, the argument favored most is that consumers are locked-in to a portal, thereby limiting their choice to the process facilitated by personalized algorithms used by big platforms. A quick check on airlines tickets on different days confirmed the scope for algorithmic collusion and of restricting consumer choice. Simple gaming on name and date resorted by most of us provided the requisite consumer choice.

Another favorite line of reasoning is that consumers offer data without any return from the portals. This access to data, which facilitates business, is not available to other smaller portals. One is never sure on how much data is useful, how much is white noise and how much data is required for selling innovative consumer products. Further, there is no analysis from the competition authorities whether consumers are harmed in terms of ‘lock-in’ or have a choice in comparing prices online/offline and among several portals.

Defining consumer and consumer harm is an open area of investigation and research in competition economics. The absence of defining consumer harm in CA02 was clearly perceptible and also pointed out by the Competition Law Review Committee. The ambivalent definition of consumers saw a ‘welfare-leaning approach’ towards competition, which was represented by more players than of benefits to consumers. This perspective of anti-competitiveness, honed in the economics of traditional products markets, falls short of understanding platform markets and is perhaps why the Delhi Vyapar Sangh perceive Flipkart and Amazon a threat, despite a less than 5% share of the digital market. The vibrant online market, in contrast to subdued offline (brick-and-mortar) markets, has anti-trust concerns voiced by the Delhi Vyapar Mahasangh in their allegation on contracts and exclusive supply agreements.

Is it a competition issue or a marketing strategy? This is one question that the CCI will have to confront.

† Dr. Geeta Gouri