by Pranav Pathak
Synopsis
The push into the digital age also brings with its new challenges. The blog tends to deal with the new business practice i.e. “Price Parity Arrangement” and its implications in Competition Law. The arrangement evidently gives edge to platforms that impose such clauses in the market. Considering the customer sensitivity to price, the platform gradually edges out the competition. This gives way to the key competition problems. The arrangement is based on the RPM Model. However, price parity arrangement is Pandora’s box. It is a hot potato by virtue of twofold reasons; firstly, the arrangement causes a negative impact on the market; and, secondly, the arrangement has no ameliorating effects on the competition. The blog thoroughly discusses each of the reasons, and asks for clarity on parity.
I. Introduction
In recent years, digital platforms have risen to global prominence. There is a rapid growth of online trade in a large number of product categories. Ours is the country with the quickest rate of e-commerce market growth. However, the digital platforms have turned over a new leaf and began the new business practices and approaches. One of such new business practices is Price Parity Clauses. Essentially, price parity clauses forbid suppliers/retailers from offering lower rates or better terms on rival platforms or marketplaces or on their own websites. For example, in the recent case of FHRAI v. MMT India Pvt Ltd[1], MMT-Goibibo imposed price parity agreement by which hotel partners were forbidden to sell their rooms at lower prices on any other Online Travel Agency or on its own online portal.
This evidently gives edge to platforms that impose such clauses in the market. Considering the customer sensitivity to price, the platform gradually edges out the competition. This gives way to the key competition problems. The CCI (Competition Commission of India) identified the same in the market study.[2] The market study highlighted in detail how e-commerce companies impose parity conditions on seller/retailers who use their platforms. The “online travel agency market” and the “online food ordering and delivery market” are the markets where such parity clauses are pervasive.
II. Price Parity Clause, A resale price maintenance arrangement
The §3(4)(e) of the Competition Act defines “Resale Price Maintenance” as a “vertical agreement” which proscribes a price between the upstream market enterprise and downstream market enterprises and the latter cannot sell the product at a higher price than stipulated in the agreement. The provision is also applicable on the RPM agreements entered between enterprises operating in digital space. The CCI opined that the essential ingredients of RPM are fulfilled as the resale of the product is get effected through the platform, irrespective of the identity of the direct purchaser.[3] Considering the distinct features of high-tech digital markets, the commission negated from applying ‘stricto senso’ the principles of transit/movement of products in traditional market to digital markets. Rather,enterprises which avail services of other online platforms to sell their products can be considered as consumers of such platforms.[4] The commission opined the active role of such platforms to the end customer in availing the product or service involved, as a relevant factor.For Example, Snapdeal was considered a part of vertical chain while selling products of the distributors.[5]
Therefore, digital platforms operate at different stages or levels of the production chain, and play an active role in availing the product or service involved to the end consumers. As a consequence, it can be construed that the price parity arrangement imposed by digital platforms is based on an RPM model and falls within the ambit of §3(4)(e) of the Competition Act, 2002. It is evident from the report published by CCI on e-commerce[6] which acknowledges that parity agreements can be examined under the ambit of §3 of the Act.
A. Wide Price Parity Arrangement v. Narrow Price Parity Arrangement
There exist two forms of price parity arrangements, i.e, “wide” and “narrow”. If the arrangement limits the pricing across all other platforms, along with the provider’s own website, it is referred to as “wide”. On the other hand, the arrangement is deemed “narrow” if it prevents the provider from lowering costs on its own website while allowing prices on other platforms to be set as they choose. “Wide price parity” is the more restrictive form of parity arrangement. As a result, the line of distinction between “wide” and “narrow” parity clauses lies in the scope; specifically, scope of coverage in “wide parity clauses” is greater than that of the “narrow parity clauses.”[7] For example, the case of FHRAI v. MMT India Pvt Ltd & Ors. is the case of wide price parity arrangement, however it would have been “narrow” if MMT-Go would have allowed the hotel partners to sell their rooms on other platforms at desired price.
III. Price Parity Clause upon the anvil of Competition laws
There are some of the cribbing questions on price parity arrangement upon the anvil of Competition Law. The price parity arrangement causes AAEC in the market because firstly, the arrangement causes a negative impact on the market; and, secondly, the arrangement has no ameliorating effects on the competition.
A. The Agreement causes a Negative Impact on The Market
1. Creation of entry barriers
The arrangement between two parties will cause appreciable adverse effect on competition in the market if it leads to the foreclosure of market or causes entry barrier[8] to other competitor of the market.[9] Resale price maintenance (RPM) are treated as a hardcore restriction.[10] RPM agreements, according to the “European Commission”, prohibit new retailers from entering the market with low prices by preventing price competition between distributors. This will reduce dynamism and innovation in the relevant market.[11] Similarly, the parity clause leads to softened competition between platforms inducing deterrence to entry via low-cost strategy[12]. The price parity restrictions would de-incentivize enterprises to enter into the market in lieu of the ‘wide’ nature of the agreement, as the consumer won’t be able to avail services of other platforms at better terms and conditions.
2. Driving existing competitors
The arrangement between two parties will cause AAEC in the market if it leads to driving existing competitor out of market.[13] The compulsion created by price parity clause would lead the existing competitor to leave the market because considering the price sensitivity of the consumers, the footfall loss of end consumers on platforms of existing competitors is an obvious consequence, and would cause huge financial setback to the competitors and would force them to leave the market.
B. The arrangement has no ameliorating effects on the competition
1. There is an accrual harm to customers
§19(3)(d) of the Competition Act, 2002 envisages accrual of benefit to consumer as an ameliorating effect on the competition. However, price parity agreements may reduce the drive for platforms to compete on the “commissions” they charge to customers, may inflate commissions and the final prices paid by consumers. Price parity agreements seem to prevent dealers from buying identical or comparable products from other suppliers at a cheaper price. It might also restrict access to new affordable platforms. As a consequence of such behaviour, the end consumers may also be denied the option to purchase products at competitive prices.
2. There is no improvement in the production of goods or provision of services
§19(3)(e) of the Competition Act envisages improvement in the production of goods or provision of services as an ameliorating effect on the competition. However, the arrangement hampers the ability of other players to utilize the content for their platforms. Thus, the agreement is hampering the production of goods or provision of services.
3. The parity agreement is detrimental to the promotion of technical scientific and economic development
§19(3)(f) of the Competition Act envisages “promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services”, as an ameliorating effect on the competition. However, the price parity clause would dissuade to develop a technology or mechanism which curb prices, as such mechanism will not be able to implemented. The arrangement would decrease the incentive to work, as effective control of the prices is in the hands of the platform who has imposed price parity clause.
IV. Price Parity clause: International Jurisprudences
Price parity clauses are treated as anti-competitive in various antitrust jurisdictions. Parity agreement in the EU competition law, as interpreted by the German Federal Cartel Office is a violation of §1 of the German Act Against Restraints of Competition[14] and Article 101 (1) TFEU,[15] as being restrictive of competition.[16] Furthermore, the Swedish competition authority also accepts that parity agreements are per se anti-competitive in nature.[17] Additionally, France has also barred the parity agreements by way of legislation.[18] Accordingly, the price parity clauses are liable to be treated in the same manner as treated across various antitrust jurisdictions and considered as violative of §3 of the Act.
V. Conclusion: Need clarity on Parity
The push into the digital age also brings with its new challenges. The new business practice of price parity arrangement gives way to key competition concerns. The price parity arrangement is based on an RPM model and falls within the ambit of §3(4)(e) of the “Competition Act, 2002”. However, there are some cribbing questions on the price parity arrangement in the light of competition law. It evidently causes an adverse effect on competition in the market. The arrangement not only causes negative effects on the market but also possesses no ameliorating effects on the competition. As a consequence, the assessment of “price parity clauses” under the Competition Law is much needed act in the current scenario. The recent MMT-Go case has given clarity on the price parity clauses. However, legitimacy of price parity clauses has been one of the hotly contested ‘modern’ antitrust issues across many jurisdictions. In several recent incidents of abuse both inside and outside of Europe, these clauses have been determined to be anti-competitive. It is anticipated that the CCI will keep looking into parity clause instances as the e-commerce business develops further. The vertical rules will be required to undergo changes to make them fit for the digital era.
This article is authored by Pranav Pathak, (4th-year student Hidayatullah National Law University, Raipur.)
References
[1] Competition Commission of India, Federation of Hotel & Restaurant Associations of India (FHRAI) v. MakeMyTrip India Pvt. Ltd & Ors, Case No.14/2019.
[2] Competition Commission of India, Market Study on e-commerce in India: Key Findings and Observations (2020), available at http:/www.cci.gov.in/sites/default/files/whats_/Market-study-on-e-Commerce-in-India.pdf, (last visited on 20/03/2023).
[3] Competition Commission of India, In Re: Jasper Infotech Private Limited (Snapdeal) v KAFF Appliances (India) Pvt. Ltd., Case No. 61/2014.
[4] Id.
[5] Id.
[6] Competition Commission of India, Federation of Hotel & Restaurant Associations of India (FHRAI) v. MakeMyTrip India Pvt. Ltd & Ors, Case No.14/2019.
[7] Supra note 2.
[8] The Competition Act, 2002, §19(3)(a).
[9] Competition Commission of India, Mohit Manglani v.Flipkart India Private Limited and Ors, Case No. 80/2014.
[10] European Commission, ASUS, Case COMP/AT.40465 (2018).
[11] European Commission, Nathan-Bricolux, Case COMP.F.1/36.516 (2000).
[12] Directorate for Financial and Enterprise Affairs Competition Committee, Hearing on Across Platform Parity Agreements- Note by Sweden, DAF/COMP/WD (2015).
[13] The Competition Act, 2002, §19(3)(b).
[14] Act against Restraints of Competition, 2013.
[15] Consolidated Version of the Treaty on European Union, 2010, Art. 101(1).
[16] Bundeskartellamt (GCA), 4 Case No. B-9 66/2010 and B-9 121/2013.
[17] Swedish Competition Authority, Case No. 596 of 3013, Bookingdotcom Sverige AB and Booking.com B.V.
[18] Latham & Walkins, Antitrust and Competition Practice, 2015, available at https://www.lw.com/thoughtLeaders-thoughtleadership-French-Macron-anticonpetition-law, (last visited on 12/03/2023).
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