By Tanvi Agarwal

The author is a student of National University of Juridical Sciences, Kolkata.

 

Abstract

I. INTRODUCTION

The Competition Commission of India (‘the CCI’) is a governmental body with the aim of reducing the adverse effects on competition. It regulates various trade practices across the country. Recently, the National Restaurant Association of India (‘the NRAI’) has alleged that both Zomato and Swiggy undertake unfair trade practices which have anti-competitive effects. They have raised eight points of contention before the CCI which include allegations like presence of one-sided clauses in the agreement, masking of consumer data and charging exorbitant amounts of commission. Of these three issues which include maintaining platform neutrality, exclusivity and presence of price parity clauses in the agreement have been sent before the Director General (‘the DG’) for further investigation. The purpose of this paper is to understand the reasoning behind the Commission’s assessment to refer these three matters for investigation and to analyse any possible fallacies in the same.

II. PREFERENTIAL TREATMENT

It has been argued by the NRAI that Zomato and Swiggy provide preferential treatment to restaurant providers in whom they have an equity or revenue interest. It is exerted through the former’s control over various factors like ranking and deliveries which tend to influence competition. The Commission acknowledging the lack of platform neutrality has referred this matter to the DG.

The Commission’s assessment can be questioned on the ground that certain e-commerce platforms including Zomato and Swiggy tend to have the idea of preferential treatment inherently present in their company models. This special treatment is not purposely provided by the platform but is a result of the software and algorithm run by these companies. The system running on a set of rules and guidelines determines the seller’s visibility and performance based on criteria like price, product quality and response to customer feedback. Hence, the beneficial treatment depends on the seller’s own performance. Their visibility in the market is directly proportional to their investment, marketing strategies and creativity.

Further, a report published by the CCI in 2020 titled ‘Market Study on E-commerce in India’ states that the preferential treatment provided by the platforms must be examined in the light of the nature and power of the market. It has been argued by the NRAI that the e-commerce platforms and the restaurant providers form a vertical arrangement in the marketplace where it is common for the users to approach these e-commerce platforms due to the search and comparison features provided by them. So, the restaurant providers are incentivised to get listed on these platforms to gather visibility and become increasingly dependent on them providing these platforms a higher bargaining power and a subsequent dominant authority in the market.

However, an enterprise can be classified as dominant only when it is able to function independently of market forces. Whereas Zomato and Swiggy exist as duopolies in the market where the significant presence of either one of them reduces the ability of the other to operate independently of market forces. Therefore, the Commission must consider the market power and structure of the platforms before assessing their ability to provide preferential treatment.

III. PRICE PARITY

It has been argued by the NRAI that the agreement between Zomato/Swiggy and the restaurant providers contain price parity terms whereby the restaurant providers are not only required to provide the best prices on these platforms but also ensure that they do not offer lower or better prices on their personal platform or to other food aggregator platforms. The Commission has referred this matter for investigation under §3(4) and §3(1) of the Competition Act, 2002 (‘the Act’) as it believes that the presence of these parity terms would have an appreciable adverse effect on competition (‘AAEC’) on the market.

A. WIDE AND NARROW PARITY TERMS

Parity clauses tend to control the price range displayed by the sellers on e-commerce platforms as well as their own platforms. They are broadly categorised as ‘wide’ or ‘narrow’ parity clauses depending upon their scope and subsequent effects. While a ‘wide’ parity clause restricts the seller from offering better terms on both competing platforms and the seller’s own platform a ‘narrow’ clause is restrictive only up to the limit of the seller’s personal platform.

A market study launched by the CCI in 2019 highlights the theory of harm associated with such clauses. It emphasises on the potential reduction of competition in the market as a ‘wide’ price parity clause while ensuring similar prices on all platforms discourages competition on the lines of commission. As the best terms are guaranteed to the platform it also entitles them to arbitrarily increase the commission rates they levy on the seller in turn leading to higher prices for the end-users. Moreover, parity clauses may act as a barrier for low-cost entry of platforms in the downstream market. A major means of entry for the platforms is adopting a low-cost model and luring the upstream suppliers through lower commission rates and better terms of policy. However, the suppliers are forbidden from offering lower listing prices as the same would be in violation of the parity clause.

While the Commission has classified the parity clause between the parties as a ‘wide’ parity clause it is essential to analyse the Commission’s assessment in the backdrop of §3(4) of the Act. The standard of assessment of §3(4) of the Act aligns with the method of “rule of reason” where the AAEC is determined after balancing the positive and negative effects of an agreement. It is argued that even wide parity clauses have the potential of generating pro-competitive effects as it protects e-commerce platforms from the practice of sellers ‘free riding’ on investments. Free riding occurs when customers merely use e-commerce platforms to enhance their user experience and knowledge and ultimately tend to order from the downstream platforms which offer lower prices. These clauses also promote risk sharing behaviour between the downstream and upstream platforms. The Commission has also assessed AAEC on the belief that the agreement would not accrue any benefits to the customers. However, the Commission must take into account the general accessibility and popularity of both Zomato and Swiggy which aim to provide a hassle-free experience to its customers. For instance, Swiggy has received several complaints from its customers who find discrepancies in the prices stated on their platform and the seller’s personal platform. In such a scenario, having a price parity clause would be beneficial for the customers as it would be a less time consuming and baffling experience. Hence, the Commission must decide on a case-by-case basis as the effects of a parity clause tend to vary in scope, nature and application. Here, the positive effects tend to balance out the negative ones which necessitates reconsideration on part of the Commission regarding the ability of the price parity clause to cause AAEC.

In case of Zomato, the NRAI has argued that Zomato changed its parity clause from ‘wide’ to ‘narrow’ after the filing of the Information. Narrow parity clauses have been widely recognised as being less intrusive as it tends to increase competition between platforms by encouraging them to provide lower commissions and demand enhancing features. Furthermore, the change to a ‘narrow’ parity clause has been recognised in several jurisdictions to ensure a successful balancing formula to accommodate the interests of both the upstream and downstream platforms. For instance, the need to limit the scope of Booking.com’s parity clause in the form of a ‘narrow’ parity clause was held legitimate by the French, Italian and Swedish agencies. The Swedish competition authority noted that it would reduce the probability of hotels free-riding on the investments made by Booking.com. Therefore, it is suggested that the Commission must consider the benefits obtained from a change in parity clause and the validity of the same before setting up the matter for investigation before the DG.

B. GLOBAL PERSPECTIVE

Parity clauses also referred to as Most Favoured Nation clauses have been interpreted in various ways in different jurisdictions. Historically, the U.S courts have favoured parity clauses as they regard them to be pro-competitive. They have been identified as an opportunity for buyers to bargain for low prices as they would be treated as favourably as other customers. Further, it has been held that a policy in the form of a clause which would promote competition on merits would not be regarded as exclusionary under the law.

In the European Union (‘the EU’) a price parity clause is assessed with respect to Article 101(1) Treaty on the Functioning of the European Union (‘the TFEU’) to determine whether it constitutes restraint of trade. Here, an anti-competitive agreement may also be deemed valid under the vertical block exemption regulation 330/2010 if the market share of the platform does not exceed the threshold of 30%. Nonetheless, in both the U.S and the EU the growing hinderance in the entry of new competitors into the market and the subsequent anti-competitive effects have brought the parity clauses under scrutiny.

IV. NEED FOR COLLECTIVE DOMINANCE TEST

The Commission’s assessment heavily relies on §3(4) of the Act which generates hurdles while absolutely holding Zomato and Swiggy accountable for their policies. In such a scenario, §4 of the Act comes to the rescue where it safeguards the sellers from harsh contractual terms and unilateral revision of the contract by assessing whether a platform is abusing its dominant position or not. However, there is lack of findings and clarity regarding dominance of e-commerce platforms by the CCI. The difficulty to determine the dominance level of Snapdeal.com arose in Ashish Ahuja v. Snapdeal.com (‘Snapdeal.com’) due to the presence of several competitors in the market. Further, the CCI has faced difficulty in identifying any particular online retailers as dominant in the given market delineations. The conundrum intensifies as the interpretation of §4 of the Act implies that only a single enterprise can hold a dominant position in the market. §4 has been deemed irrelevant on grounds that none of the financial institutions could ‘individually’ hold a dominating position. This can be identified as a potential lacuna in the law because platforms with strong control over the market may escape liability as they may not meet the threshold of being dominant due to the presence of other competitors. In the present case, even though both Zomato and Swiggy command positions of strong market power their existence in the form of duopolies negates them from being classified as dominant.

Moreover, the idea of joint or collective dominance is not recognised in India. Previously, the CCI has refused to undertake investigation of two prominent companies Amazon and Flipkart dismissing the allegations under §4 of the Act. It highlights how big business players can escape accountability and freely continue with their unfair trade practices. This necessitates the need to recognise the idea of collective dominance in India. Through this principle even when a platform is not individually dominant in the market but can collectively influence the market power with the other competitors it will be regarded as anti-competitive.

V. CONCLUSION

The CCI has put forth three matters for investigation before the DG. The argument of Zomato and Swiggy providing preferential treatment to some providers can be challenged on the ground that it requires a proper pre-assessment of the market power and dynamics of these platforms. Whereas the relevance and potential benefits associated with price parity clauses stipulates reconsideration on part of the Commission before sending the matter for investigation. Hence, the heavy reliance by the Commission on §3(4) of the Act may provide a leeway to the platforms to continue with their trade practices and go unpunished.

In such a scenario, adopting the idea of collective dominance under §4 of the Act would protect the interests of the both the players and consumers and provide a level playing field in the market while helping the Indian competition law adapt with the changing dynamics of the e-commerce world.