This article is written by Kamal Goyal, from NMIMS Kirit P. Mehta School of Law, Mumbai.
Table of Contents
Introduction
Across Platform Parity Agreements (APPAs) are a special type of agreements between a supplier and a retailer. The word platform presupposes that such agreement is mostly used in businesses involving online selling platforms. APPA restricts the supplier/service provider from offering their goods/services at better terms, prices and other favourable deals through their individual websites or other sales channels including other retailers in the market, in comparison to the terms and prices offered by the retailer on its platforms, which has entered into the APPA. APPA offers protection to the online retailer that the products sold on its platform will be lowest in the market. This has allowed the online retailer to retain business on its platform without losing the business to a competing retailer. Thus, the APPA reduces the price competition among the retailers.
There are two kinds of parity agreement i.e. narrow APPA and wide APPA. The APPA is ‘wide’ if it applies to the price offered on all the platforms including the platforms owned by the supplier. Whereas, the APPA is ‘narrow’ if it restricts the price only on the platforms and sales channels operated by the supplier while imposing no conditions with respect to other platforms.
Views of competition commission of India (CCI)
The CCI has recently released a market study on e-commerce which highlights the competition concerns raised by parity agreements.[i] The concerns raised by CCI are as follows:
- The APPA will reduce the price competition among online retailers. The online retailers may not have sufficient incentive to compete on commission rates.
- The new entrant in the online retail market may offer to charge lower commissions and offer the goods/service at a discounted rate to penetrate the market. However, the APPA will act as a barrier to the entry of such low-cost entrants.
- The APPA restricts the online retailers to reduce the prices on their platforms even if the cost incurred by them has been decreased.
- The APPA can help in tacit understanding between the online retailers by discouraging deviation from a consensus rate of commission, a situation conducive to cartelization in the market.
However, the CCI has also pointed out various efficiencies attributed to the imposition of APPA. The use of APPA can be justified on the grounds that they prevent free-riding practices. The term free-riding was pioneered by Lester Telser and has been elaborated and widely used since.[ii] It includes a situation where one distributor may free-ride on the promotion efforts of another distributor.[iii] Free-riding can also occur between suppliers, for instance where one invests in promotion at the buyer’s premises, in general at the retail level that may also attract customers for its competitors.
In an example, free riding can happen when one platform, say Platform ‘A’, makes investment in promoting a particular product of certain restaurateurs, however, the customer buys that product from Platform ‘B’ because of the low price being charged on Platform ‘B’. The Platform ‘A’ cannot charge a low price because it has made investments in promoting that product, however, it is the Platform ‘B’ that is taking all the benefits from that promotion. In an economic sense, Platform ‘B’ is free-riding on the promotion efforts made by Platform ‘A’. This type of problem discourages the enterprises to make new investments because of the fear of being undercut and preventing them from recouping their investments. The problem can be resolved by entering into an APPA. The APPA will ensure uniform pricing in the market, which further will prevent platforms to undercut their competitors.[iv]
The Commission is also of the view that the APPA can be examined on a case to case basis under section 3(4) of the Competition Act, 2002 (see here). Also, the APPA has to be examined in the rule of reason under the factors enumerated by section 19(3) of the Act (see here) which allows the commission to assess both harms and efficiencies generated by APPA. If the anticompetitive effects of APPA outweigh the procompetitive effects, the APPA can be held to contravene section 3(4).
Anticompetitive Effects of APPA
The APPA generates certain anticompetitive effects which are to be examined under section 19(3). In other words, the APPAs are anticompetitive under section 3(4) only if they affect the competition adversely. Although the appreciable adverse effect on competition (AAEC) is not defined under competition law, certain factors are taken into consideration while examining the AAEC of the agreement under section 19(3). These factors are enumerated as (a) creation of barriers to new entrants in the market, (b) driving existing competitors out of the market, (c) foreclosure of competition by hindering entry into the market, (d) accrual of benefits to consumers, (e) improvements in production or distribution of goods, (f) promotion of technical, scientific and economic development by means of production.
Section 19(3) of the Act stipulates that the Commission shall have due regard to any or all factors mentioned above while determining whether an agreement under section 3 has an appreciable adverse effect on competition. The term ‘due regard’ under section 19(3) only means that the Court is supposed to take into consideration the parameters under section 19(3) of the Act, however, the CCI has opined that it would be prudent to examine the action in the backdrop of all the factors mentioned in Section 19(3).[v]
APPA creates entry barriers for low-cost entry
Considering the first factor under section 19(3), firstly the APPA creates a barrier for new entrants in the retail market. The new entrants or new platforms, who are ready to offer the same services as existing online retailers, may get discouraged to lower their commission and eventually offer the product at lower retail price to win more customers. In the absence of APPA, the new entrant can lower its cost to have an entry into the market, however, in contrast where the online retailer who holds APPA, the new entrant will not be able to transfer the benefit of lowering the costs to the customers due to price uniformity and may not get customers from its competitors. Thus, the APPA will dis-incentivize the low-cost entry in the market.[vi]
Moreover, in a recent example where the United Kingdom Competition Commission has raised an issue of low-cost entry being prevented by MFN clauses imposed by Booking.com (an Online Travel Agent) on hotels. Due to these conditions, the Skoosh, another OTA, was unable to lower its commission and it claimed that this has harmed its ability to create a presence in the market.
APPA reduces competition in the market
Secondly, the parity agreements soften the competition between the platforms. With the APPA the online retailer who holds the APPA does not fear the possibility that a retail customer will find the same product cheaper at a different platform and this can lead to higher-end prices for consumers.[vii] The APPA prevents rewards for innovation and price reduction for the existing competitors in the market. Due to uniform pricing policy, there is little incentive for a platform to innovate its services or to reduce the retail prices as their innovation or cost reduction will not be reflected in the final retail prices. This would discourage the competitors to undercut their commission charged by online retailers holding the APPA as this will not earn them additional volume. Not only, the existing competitors may not gain more customers by reducing the prices, but also, the customers will become heavily dependent on few platforms even if the services provided by them may not be satisfactory due to uniform price at all the platforms.
APPA facilitates resale price maintenance
Thirdly, the APPA can facilitate Resale Price Maintenance (RPM) against section 3(4). RPM includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller.[viii] Thus, it is undisputed that the RPM policy is a technique for preventing price competition among retailers.
At the outset, the Competition Commission of India has held that ownership of a product is not a prerequisite for value addition.[ix] The online platforms may not buy the product before selling as they majorly work on the agency model rather than the traditional wholesale model, this does not preclude the platforms from the value chain. The products sold by online platforms can be considered as a resale of products under RPM.
From the meaning of RPM explained in the statute, it is cleared that the prices, at which a purchaser sells the product, are stipulated by the seller which can be a manufacturer. The online retailers, who are purchasers have imposed the APPA on the suppliers, whereby the prices of the products will be the same on all the platforms, however, it does not mean that the prices will be set by the online platforms. The suppliers can still fix the prices of their products. But, the suppliers stipulating prices for one platform, it would mean that price will be fixed for all the platforms. The other platforms and the suppliers agree on a price obligation even if that did arise due to APPA imposed by online platforms which makes the parity agreement no lesser than the RPM.
Further, during the OECD Discussion of the Hearing on Across-Platforms Parity Agreements held on 27-28 October 2015, Competition Law Professor Hviid identified two elements of RPM i.e. vertical and horizontal. Vertical element, where upstream player fixes the resale price and horizontal agreement, the implicit element of RPM, where each restaurateur sets uniform price across all the platforms. The horizontal element functions similar to an APPAs do.[x] He further mentioned that RPM and APPAs share the same explicit vertical element, but APPAs make explicit the horizontal price parity that is common but only implicit in RPM. He, therefore, recommended that APPAs be treated no less harshly than RPM.[xi]
Procompetitive effects of APPA
Section 19(3) of the Act stipulates that the Commission shall have due regard to any or all factors mentioned above while determining whether an agreement under section 3 has an appreciable adverse effect on competition. The term ‘due regard’ under section 19(3) only means that the Court is supposed to take into consideration the parameters under section 19(3) of the Act, however, the CCI has opined that it would be prudent to examine the action in the backdrop of all the factors mentioned in Section 19(3).[xii]
Thus, before deciding if the APPA agreement is anti-competitive, its procompetitive effects are weighed against the anticompetitive effects of the agreement. The parity agreements may provide a lucrative opportunity to invest in such a business where parity agreements are enforced. The new players get investment security under these circumstances. It is well known that parity agreements resolve the problem of free riding and provide an opportunity to new as well as existing players not lose business due to anticompetitive pricing techniques such as predatory pricing. Also, the parity agreement can generate excess profits for the players which can attract new players[xiii]. Thus, this as a whole protects the business of new players from anticompetitive activities of existing players, which does not discourage the new entrants or drives existing competitors but provides an opportunity to invest more in such a market and a non-price competitive space where the players can compete on branding and quality.
Most well-known among them is solving the problem of free-riding which is also posed by the CCI in its market study. The APPA will ensure uniform pricing in the market, which further will prevent platforms to undercut their competitors. This will also encourage the platforms to invest in new products and services provided to the consumers which in turn will establish one of the positive factors under §19(3) i.e. promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
Secondly, the parity agreement reduces price competition, meaning thereby the platforms will now compete on non-price competition. The platforms will work on to improve their quality of services, they will try to increase their profits by not increasing their commission but by optimizing their distribution process.[xiv]
The introduction of APPA will increase innovation in the distribution process and improve the quality of services because now the platforms have to increase their profits by engaging themselves in non-price competition. Also, the platforms will try to reach out to their services to new places to increase their sales, which will further increase the sales of the restaurateurs. This substantiates another factor of §19(3) i.e. accrual of benefits to the consumers.
Conclusion
It is clear that the parity agreements may have anticompetitive effects as well as procompetitive effects on the competition. It can be learned that the effect of APPA in specific cases can be complicated by key differences between these cases. In one case, the agreement’s efficiency outweighs its negative effect and vice-versa. Having learned the nascent literature on the parity agreements, there is a need for a robust and general theory backed by empirical evidence that can be explained to policymakers. Less information is available on the effects of the parity agreement in e-commerce due to the complex business model and price structure involved in the sector. However, one thing can be said for sure is that the APPA per se is not anti competitive. It should be examined on a case to case basis, its adverse effects are to be weighed against its efficiencies and credible defences.
References
[i] Market Study on E-Commerce in India, Key Findings and Observations, COMPETITION COMMISSION OF INDIA (See here).
[ii] Thomas K Cheng, A Consumer Behavioral Approach To Resale Price Maintenance, 12 VIRGINIA LAW AND BUSINESS REVIEW 1, 35 (2017). (See here)
[iii] European Commission, Commission Notice on Guidelines on Vertical Restraints, SEC (2010) 411, 7th March 2020. (See here)
[iv] Leegin Creative Leather Products, Inc. v. PSKS Inc., 551 U.S. 877 (2007) (See here)
[v] Automobiles Dealers Association v. Global Automobiles Limited & Anr. (See here)
[vi] Market Study on E-Commerce in India, Key Findings and Observations, COMPETITION COMMISSION OF INDIA (March 06, 2020, 18:16) (See here)
[vii] UK COMPETITION COMMISSION, Private Motor Insurance Market Investigation Provisional Findings Report, 17th December 2013. (See here)
[viii] Explanation to §3, Competition Act, 2002, No. 12, Acts of Parliament, 2003 (India) (See here)
[ix] Jasper Infotech Private Limited vs Kaff Appliances (India) Pvt. Ltd. (See here)
[x] Fletcher, A. and M. Hviid (2014), Retail Price MFNs: Are they RPM ’at its worst’? CENTRE FOR COMPETITION POLICY, UNIVERSITY OF EAST ANGLIA (March 6, 2020) (See here)
[xi] DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS COMPETITION COMMITTEE, OECD, Hearing On Across Platform Parity Agreements, DAF/COMP(2015)6, October, 2015. (See here)
[xii] Automobiles Dealers Association v. Global Automobiles Limited & Anr.
[xiii] DIRECTORATE FOR FINANCIAL AND ENTERPRISE AFFAIRS COMPETITION COMMITTEE, OECD, Summary of Discussion of the Hearing on Across-Platforms Parity Agreements, DAF/COMP/M(2015)2/ANN2/FINAL, October, 2015.
[xiv] European Commission, Commission Notice on Guidelines on Vertical Restraints, SEC (2010) 411.
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