This article is written by Sachi Ashok Bhiwgade, B.A.LLB (Hons.) student of Hidayatullah National Law University, Raipur. This article discusses the key findings, Anti-trust issues and the observations made by the Competition Commission of India in its report ‘Market Study on e-commerce in India: Key Findings and Observations’.
The Competition Commission of India (CCI) has recently released a complete report on Market Study on e-commerce in India: Key Findings and Observations on 8th January 2020. The CCI launched this study in April 2019. This report mainly relies upon the surveys, stakeholder interaction, focused group discussion (FDG), one-on-one meetings, workshop deliberations and written submissions of the stakeholders covering 3 broad categories of e-commerce that include consumer goods, accommodation services and food services. This study gives an insight into the conceptual and analytical questions that are relevant to the enforcement of the Act. The report is only restricted to the findings relating to competition matters although issues relating to non-competition matters also tend to come up during the study. This report discusses issues that may directly or indirectly have a bearing on competition or hinder the full pro-competitive potential of e-commerce.
The objective of this study was to gain a better understanding of how e-commerce in India is functioning and the implications it has on the markets and competition.
The study focuses on:
- Trends and features of e-commerce;
- Competition issues; and
- The observations of the CCI.
Key Trends and features of the Market
Trends and Features are discussed in Chapter 2 of the study. They are:
- Revenue in the e-commerce sector expected to increase to USD 120 million in 2020 from USD 13 billion in 2017 that is growing at an annual rate of 51%.
- Mobile phone subscriber base increased from 904.51 million in March 2014 to 1173.75 million in September 2019.
- Increase in the number of internet users from 445.96 million in 2017 to 665.31 million in 2019.
- Other factors such as cash on delivery, fast delivery including one-day delivery, discounts and deals, access to a large range of products, revolutionized retail, service delivery has also enabled the growth of e-commerce.
- There has been an increase in investment in the e-commerce sector. Since 2009, funding of USD 13,338 million in 904 rounds has been received. Due to the increase in investment, new companies have entered the market. Presently around 4754 e-Commerce startups are active in India.
- In the goods category, A compound annual growth rate (CAGR) of 57% has been observed in the last 7 years. A growth of 18.6% is expected until 2022.
- The food-tech industry is expected to grow at more than 12% CAGR between 2016 to 2021.
- Online travel booking(OTAs) sales are likely to reach USD 39.09 billion by 2021.
Importance of digital commerce
The CCI report mentions that there has been a rapid growth of online trade in India and online trade is gaining significance across the various sectors of e-commerce.
- Goods category: As per the findings, the share of online distribution and its relative importance as a sales channel in regards to the offline channels significantly differ across products.
- Hotel Category: As per the study, the hotels in the budget and mid-market section prefer distribution through online travel agencies (OTA) as an important access route to customers.
- Foodservice category: 83% of the restaurants reported to have an online presence with the online sale on an average of 29 % of the restaurant’s revenue. Between 2016 to 2018, around 69% of these restaurants have gone online.
Increasing price commerce
Online commerce has improved price transparency and price competition. The report mentions that most of the retailers and hoteliers track the prices of the competitors and accordingly adjust their own prices. In fact, the retailers in the goods category were found to vary prices several times a day. While some reported revising the prices on a weekly basis and during promotional events and only a few restaurants were found to track the prices of the competitors. A majority of the consumers reported using price comparison tools for hotel booking to find the best deals.
Strategic response to e-commerce
Businesses in these sectors are gearing up to avail the opportunities of e-commerce. The retailers are considering ways to expand their online presence in order to engage with the online consumers. Some of them (the large brick and mortar retailer) have launched their own website. The report mentions that the manufacturers and distributors have inserted specific clauses in their contracts relating to online sales. A trend of cloud kitchen (online-delivery only) in the service sector has been observed. The OTAs have started programs where they lend their brand names to some selected hotels which go about as a sign of value to the customers.
Role of the online marketplace platform
The study mentions that the third-party marketplace platform sees an estimate of 64% of digital retail, through online platforms. The study also confirmed that due to the development of e-commerce, there has been an expansion of markets for the products of small-scale enterprises. The shift of businesses from offline to digital space is happening rapidly.
The report says that access to customers of the sellers or service providers on an online platform depends mostly upon the ranking of the website of the platform in response to related search queries.
The study includes payment system providers such as payment aggregators, UPI, providers of prepaid payment instruments that facilitate online transactions on e-commerce platforms.
Competition issues in the e-commerce sector
Chapter 3 of the study talks about anti-trust issues that directly and indirectly have an effect on the competition identified by the market study. These are platform neutrality and unfair platform to business contract terms, price parity clauses, exclusive contracts and deep discounts.
According to the report, platform neutrality concerns emerge when the online platform act as both marketplaces and as a competitor of that marketplace they have the incentive to leverage their control in favour of their preferred vendors or private label products to the disadvantage of other service providers as the platforms have mechanisms by which they use to act upon such incentive.
Platform to business contracts
The imposition of unfair contract terms and unilateral revision in contract terms by major platform leads to an environment which results in undermining the trust of these businesses. The business users are unable to have a substantial relationship with the platforms causing harm to their business interests. The findings mention that a platform does not make a standard contract for all business users but a customized one that addresses the individual needs of service providers that are not similarly placed. It further mentions that a customized contract does not mean that they were mutually negotiated. By this, the platforms were able to impose any terms and conditions as per their interest. The commission rates that were paid by the service providers to the platforms were arbitrarily increased without negotiation.
Platform price parity clauses
A price parity clause is imposed by the platform on the service provider which means that a service provider cannot offer his goods or services at a lower rate on other platforms. This enables the platforms to control the competition in the market and discourages entry.
The exclusive agreements between the service providers and the online platforms are of two types:
- First, where a certain product will be launched exclusively on a single online platform, and
- Second, where a platform will list only one brand in a certain product category.
Pressing concerns were raised by the service providers regarding deep discounting practices by the platforms leading to permanent value erosion of their products and their market position. The study identified that many platforms operating as pure marketplaces offer discounts above the prices that have been set by the service providers. The selling price at these marketplace platforms sometimes is even below the cost price. Because of this, they either have to match online discounts or otherwise, there would be a reduction in their search rankings.
Observations of the Commission based upon the findings
Chapter 4 presents the observations made by the CCI on the competition issue identified by the study. The CCI mentioned that most of the issues will have to be determined on a case-by-case basis in accordance with the relevant provisions of the Competition Act, 2002.
It was observed by the commission that there are limits on the amount of information that can be made explicit. It also acknowledged that by sharing certain information, there may be a risk of providing businesses an opportunity to game the system. But this does not restrict platforms from balancing between minimizing risks and addressing the issue of opacity while putting in place a framework that confirms transparency.
Platform to business contract terms
The study revealed that an imbalance of bargaining power and asymmetry of information between platform and business users prejudice the interests of the business users. It is also stated in the report that unilateral revision and unfair terms of the contract by major platforms has led to a tension between the platform-business relation.
A platform, in order to foster trust and to have a sustainable relationship with the business users, must devise ways to protect the interest of all the contracting parties by:
- Negotiating framework for basic contract terms;
- Discount policy;
- Penalty; and
- Conflict resolution.
The commission can on a case-by-case basis interfere in situations where there is an imposition of unfair conditions or price by a dominant enterprise in the relevant market under Section 4 of the Act. In case of contract terms having an exclusionary effect on the competition while also being unfair to the business users the commission can examine such contracts under Section 3(4) of the Act.
Platform price parity clauses
The commission observed that if there is no price parity restriction, then it may lead to service providers taking advantage of these features of a superior platform so that they can draw the attention of the customers to its product and sell it through its website or through another platform at a lower price. This will in turn lead the customers to search and compare products on qualitative superior platforms and make transactions from a website or platform where they are being offered a lower price. If this behaviour of the service providers and customers continues then the platform may factor the same and lose the incentive to invest in superior features.
Price parity clauses help in protecting investment incentives by preventing free-riding. The commission under Section 3(4) can examine parity clauses and if the parity clause imposed by the platform is found to be dominant in the relevant market, the commission under Section 4 can examine such conduct.
The commission observed that exclusive agreements are not per se anti-competitive and have to be analysed on a case to case basis. The commission stated that exclusive agreement will only be a concern when used as an exclusionary strategy in order to prevent competition. The commission can examine exclusive contracts under Section 3(4) and Section 4 of the Act.
It was observed that deep discounts for a short period of time are justifiable but such a discount beyond a certain period of time would need a fact-intensive exercise done on a case-by-case basis. The commission under Section 3(4) can evaluate agreements to assess whether the discount offered is used as a mechanism to induce exclusivity or whether it leads to an adverse effect on competition. The commission under Section 4(2) can examine the issue of discriminatory discounts in the case of a dominant platform in the relevant market.
Transparency measures indicated by the Commission
On the basis of the study findings, the CCI has indicated self-regulatory guidelines for the e-commerce marketplace platforms to ensure transparency, create an incentive for competition and promote information symmetry. These transparency measures are:
- To set out in the terms and conditions of platforms, a general description of the main search ranking parameters in a plain and intelligible language and keeping it up to date.
- To set out a description of the possibilities if the main parameters influence the ranking against any direct or indirect remuneration aid by business users and the effect of such remuneration on the ranking.
Collection, Use, and Sharing of Data
- To set out a clear and transparent policy on data collected on the platform.
- To set out the use of such data by the platform.
- Potential and actual sharing of such data with the third party or related entities.
User Review and Rating mechanism
- Transparency to be maintained in publishing and maintaining user reviews, rating with business users.
- Reviews should be published only for verified purchases.
- To devise mechanisms preventing fraudulent reviews and ratings.
Revision in terms of the contract
- To provide notification of any proposed changes/revision in the terms and conditions of a contract to the concerned business user.
- To bring out clear and transparent policies on discounts and to explain the basis on which the platform funds the discount rates.
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