Resale Price Maintenance – A Tale of E-India

By, Chirayu singh, 3rd year Gujarat National Law University, Gandhinagar (B.A. LL.B) & Shubhankar Sharan, 3rd year Gujarat National Law University, Gandhinagar (B.A. LL.B)

ABSTRACT

The Competition Act of 2002 (“Act”) provides for certain types of agreements, which may be deemed if result in Appreciable Adverse Effect. Precisely, Section 3 sub-section (4) of the Act identifies various anti-competitive agreements, of which this paper will deal primarily with Resale Price Maintenance (“RPM”). RPM has featured significantly in competition law jurisprudence, but its analysis in the realm of online markets or e-commerce remains deficient till date. Hence, the paper attempts at dissecting intersection of e-commerce with RPM. In doing so, various jurisdictions around the world, along with emphasis on developments of India become the centerpiece of the paper. Apart from it, this paper also aims to assess the economic viability of RPM besides highlighting challenges associated with this specific kind of agreement.

INTRODUCTION

In common parlance, Resale Price Maintenance refers to an established price below which the reseller cannot sell the goods. RPM agreements are common in India in a traditional market setup, however, are not evaluated juxtaposing the advent of e-commerce platforms in the country. As time passed, definitions of online and offline market have changed, now the country aims to get their products delivered at their door step in just one click from several platforms which brings the competition law in play to regulate the price mechanism in such a manner that discourage anti-competitive spirit of these different online platforms by eliminating problems such as free-riders on the other hand. However, it is true for India only. Other jurisdictions have fared better and analyzed the applicability of RPM agreements in the online markets.

RESALE PRICE MAINTENANCE IN E-COMMERCE: A TALE OF INDIA

Section 3 of the Competition Act, 2002¹ (“Competition Act”) largely outlines various anti- competitive agreements, considering them void if they cause Appreciable Adverse Effect on Competition (“AAEC”). In the same section, sub-section (4) prohibits entities working in different stages of a supply chain. Such agreements are termed as „Vertical Agreements‟. In light of the same, the sub-section invalidates such agreements if their consequence is AAEC. However, this segment would restrict discussion to Section 3(4)(e) of the Competition Act, The Competition Act, 2002, § 3, No. 12, Acts of Parliament, 2002 (India). which mentions the practice of Resale Price Maintenance (“RPM”). It refers to an agreement wherein the Seller designates a minimum resale price at which the purchaser must sell the goods at the same, unless a seller resells it at a lower price. In the Indian jurisprudence, unlike horizontal agreements, there is no presumption of AAEC. The Courts use the „Rule of Reason‟ in ascertaining AAEC. The same has to be proved by the Informant of the matter as per the factors mentioned in Section 19(3) of the Competition Act.² Till now, Companies have not been held liable for AAEC by RPM, until recently in the case of M/S FX Enterprise vs. Hyundai Motor India Limited³ where Hyundai was deemed liable for anticompetitive practices through RPM. Several scholarly writings exist pertaining to the application of RPM in the offline market; however, the same remain restricted when concerned with Online markets in the e-commerce era. The Competition Commission of India (“CCI”) has attempted as distinguishing or conjoining both the markets in a spate of judgments.

One of the arguments for non-application of RPM to online market points to the fact that the e-commerce platform does not engage in „resale‟, nor does it perform the functions of a purchaser. Rather, it is just an intermediary for convenience of the consumers. The CCI in Samir Agrawal v ANI Technologies Pvt Ltd⁴ (upheld by the Supreme Court in Samir Agrawal v CCI (Cab Aggregators)) held Ola and Uber were not guilty of anti-competitive RPM. Primarily, their services could not be resold; this case sheds importance on “resale” of goods for furthering anti-competitive RPM arguments. However, the CCI moved hand in hand with time, clarifying that the definition of “resale” has undergone changes with the development and pervasion of e-commerce and online markets.

Online And Offline Market

The CCI has attempted to distinguish between both the forms of market in its orders and judgements. Apart from that, the rapid progress of e-commerce has moved the CCI to conduct a Market Study on the same. Consequently, it initiated an investigation into exclusive arrangements of several major e-commerce platforms like Flipkart etc. In Rubtub Solutions (P) Ltd. v. MakeMyTrip India (P) Ltd.⁵ the CCI noted distinctions between the online and offline markets, as clauses like “Across Platforms Parity Agreements” (“APPA”), Retail “Most Favoured Nation” (“MFN”) signifies peculiarities of the former. However, the

same authority has also laid out that both the markets are not distinct but different channels of distribution to the same relevant market. Further, in Confederation of Real Estate Brokers Association of India v. Magicbricks.com‟s⁶ Order the CCI referred both online and offline services of brokers as not distinct but alternative channels of delivering the same service.

Despite elaboration on differences between the two platforms, the jurisprudence surrounding RPM in online markets is still in nascence. The only significant case in this regard has been Jasper Infotech (P) Ltd. v. Kaff Appliances (India) (P.) Ltd.⁷ (“Jasper”) where the CCI has dealt directly with the intersection of RPM with online market. Herein, Snapdeal owned by Jasper was sent a notice by Kaff Appliances (“Informant”) for sale of its goods on discounted prices. Simultaneously, it issued a cautionary notice on its website indicating that the products being sold on Snapdeal are counterfeit. Moreover, it sent a letter to Snapdeal averring it would not be meeting warranties of products sold on Snapdeal. As noted earlier, the concerned allegations would have to be proven by the Informant. Pursuant to the Complaint, the CCI in 2014 directed the Director General (“DG”) to investigate into the matter of anti-competitive RPM, since Kaff had 28% market share.

As per the DG Report, the Opposite Party (“OP”) did not have enough market share, hence, could not cause AAEC. In its “supplementary report” the DG referred e-commerce platforms as mere “marketplace” and not a purchaser of products.

The CCI affirmed the DGs observations vis-à-vis RPM, though, it diverged from the views on characterisation of e-commerce platforms. Despite stressed importance on “resale”, the CCI put forth that digital markets have re-structured the business relations, so significantly that the pre-requisite of “resale” can be dispelled. Online platforms perform varied functions ranging from storage facilities, grievance redressal opportunities to the consumers, etc. It is sufficient to indicate that Online Marketplace‟ forms a necessary link in the vertical supply chain, even though it does not buy from the supplier. Moreover, it considered online markets as parallel distribution markets equivalent to offline markets. Further, in light of the restrictive clauses mentioned above, the CCI found that anti-competitive agreements and clauses can be entered into with online markets, thus endangering the level playing field.

Hence, the CCI held that agreements between manufacturers and e-commerce platforms can be assessed under Section 3(4) r/w Section 3(1) of the Competition Act.⁸

The case of Jasper is the sole case dealing with RPM in online markets, recognising the applicability of the former. Though Counfreedise v. Timex Group India Ltd.⁹ Discussed about RPM and discrimination by informant against other e-commerce retailers, it didn‟t deal specifically with applicability of RPM in agreements with e-commerce platforms. Seeing the international precedents cited by the CCI in its judgement, it is indicative of the fact that the position in India is yet unsettled, and requires further research for setting up an appropriate framework.

ECONOMIC EFFECT

Economic effect of RPM (Resale price maintenance) can depend on different factors such as industry, market and the government.

Free Riders And Perfect Competition

Prefect competition is a situation where the markets and the industries have the freedom of entry and exit with the perfect knowledge of the trend and the prices are determined by the forces of demand and supply.

This represents an elastic demand curve because there is no discretion in the price eliminating the factor of price choice for the consumers.

Free rider is a situation in which the discounting retailers earns more profit by selling the goods at lower price than the full service retailer by enjoying on the investment of the full service retailer in advertising and promoting the product. In such a case perfect competition cannot be established because consumer demand for the cheaper option will rise and the demand for expensive option will fall.¹⁰

In the above scenario the Resale Price Maintenance acts as a pro competition factor, a particular price or a minimum price for resale is set by the manufacturer which every reseller has to follow eliminating Free Riders and establishing Perfect Competition in the market.

This can be further understood with the help of the curve

• Minimum price is given by the manufacturer; resale price is determined by market forces of demand and supply, eliminating the free Riders.
• P1 is the market equilibrium showing that the firms make the normal profit.

This scenario leads to multiple economic changes

1. Price Stability – Resale price Maintenance ensures price stability in the market promoting the competition to prevail, this not only solves the problem of free riders but also prevents the manufacturers from price erosion and can guarantees a certain amount of profit enabling them to invest further, keeping the graph perfectly elastic.

• Retailers Margin – RPM can ensure some amount of profits to retailers by setting a minimum price for resale, facilitating the entry of new firms in the market and leaving less space for free riders to offer hefty discounts. This can incentivize retailers to provide better customer service and invest in marketing efforts.

• Competition – in some scenarios the RPM can even discourage competition because the established market price market can make it difficult for the new competitors to enter and to compete as matching the price of an existing enterprise can lead to losses as the cost of establishment couldn‟t be covered. This leaves fewer choices to the consumers. For example what if Amazon and Flipkart start selling the products at exactly same price, will this practise be consumer friendly? Answer is no the price disparity is not that huge but still one platform offers some sort of discounts which

makes the whole scenario consumer friendly and the consumers can choose from different online platforms rationally.

To maintain a perfect competition in the market prices need to fluctuate which gives a bracket to the other firms to enter. This establishes a need for price competitive market, encouraging the innovation and increasing stability.

So is Resale Price Maintenance fit for a competitive online market in long run? The answer is No.

The supernormal Profits that can be seen as a gap between P1 and P2 is the supernormal profit which some firms make by offering a better prices than others in the market. These supernormal profits give a bracket to the new firms to enter into the market. But if the resale price is fixed then there will be no supernormal profits discouraging the entry of new firms declaring the policy of RPM unfit for long Run.

Double Marginalisation

This is an issue of monopoly in the vertical market or worse double monopoly. This arises when two firms in the same supply chain at different vertical level apply a mark-up to their prices. Now these prices are over marginal cost and prices above marginal cost yield dead weight loss and in this particular case this loss occurs twice shrinking the profit surplus which a situation worse than monopoly. This is a situation where there is no perfect competition.

Mark-up is the value added in the price which leads to the selling price so the difference between the cost and selling price is mark up. This is the profit of the firm but when 2 firms at different level of the same supply change mark up their price this result into loss because now wholesale price rises and the retail margin also raises, which means the profit which was expected has now reduced because of double mark up.

It is believed that RPM can solve the issue of Double Marginalisation as by giving a price ceiling and price floor the losses cannot increase after a particular limit and the mark up cannot be of enormous value if there is a limit which needs to be maintained. This way the mark ups can be reduced, discouraged establishing the bigger profit margins and more consumer friendly prices in the market.

INTERNATIONAL JURISDICTION

European Union

A significant amount of regulatory engagement is what distinguishes European Union‟s law in the area of vertical restraint. Consten And Grundig v. Commission,¹¹ states that Article 101 of TFEU prohibits both horizontal and vertical agreements restricting competition that negatively affect inner market trade. In this law RPM is seen as a hard core restraint which can directly or indirectly affect the competitive strength of the market. (See European Commission: Commission Notice – Guidelines on Vertical Restraints, SEC (2010) 411, 2.10, especially paragraph 223.) They particularly focuses on minimum RPM as the very spirit of this setup is believed to be anti-competitive even if it is done in a very small market. This is done to establish soft competition and avoid dynamism, this aims at price stability and to achieve the goal of sustainable development by ensuring consumer welfare as well. Although exemption can be granted under Article 101(3) if the restraint is not anticompetitive.

Four well-known consumer electronics businesses, including Asus, Denon & Marantz, Philips, and Pioneer, have each received fines from the European Commission (the “Commission”) totalling more than EUR 111 million. Due to the corporations’ participation in breaking EU competition laws by imposing “fixed or minimum resale prices maintenance (RPM)” on its online sellers, they were penalised with these fines. Laptops, kitchen appliances, and hi-fi equipment were the main targets of the forbidden practises.¹²

These businesses engaged in actions that limited competition by preventing online vendors from independently setting their retail pricing. According to the study conducted by the Commission, the effects of this resale price maintenance went beyond the normal supplier- retailer-consumer triangle. This is due to the fact that a sizable number of online merchants were negatively impacted by the price algorithm software used by the online retailers to compare their prices with those of their rivals.

As a result, the Commission decided that action needed to be taken, and the aforementioned consumer electronics businesses were penalised. The penalties, which total over 111 million euros, act as a deterrent against further offences and emphasise the value of fair competition on the European market.

United States

In US RPM was treated as an anti-competitive approach under the section 1 of the Sherman Act as Contracts, the situation can be seen similar to the EU law. Example of Dr. Miles Medical Co. v. John D. Park and Sons¹³ can be taken which is a case of American Supreme Court case and upheld that the RPM is unlawful but didn‟t distinguished between Vertical RPM and Horizontal RPM. Although this decision was overruled in 2007 this case was overruled by the US Supreme Court and it stated that vertical price agreement should be analysed economically to identify that on what degree it is appropriate for the situation being dealt with. This case first highlighted that how the problem of Free riding can be resolved by exercising the function of RPM and narrowed down four situations in which RPM can be anti-competitive, lowering price to retailers can result into price fixation in competing manufacturers resulting into abuse by powerful manufacturers and retailers. Firstly this decision was based on common-law rule but later on Supreme Court stated that the decision should differ from case to case as every time the result cannot be anti-competitive or pro- competitive. So it was finally concluded in three points i.e. as follows-

1. The scope of use of RPM is not an appropriate factor to determine whether its effect is going to be anti-competitive or pro-competitive as the wide spread use can result in narrowing down the competition or it can itself be a result of perception of people of RPM as an efficient market practise.
2. There is a difference between RPM by the retailer and by the manufacturer but both can use it to eliminate the problem of free riding or retail discounting and in such a concrete situation the competition effect of the RPM stays unchanged.
3. Market power is a condition of major concern if the exercising entity possesses market power then RPM by such an entity can have major anti-competitive effect but if the entity lacks market power the RPM by such a unit won‟t be a topic of concern.

CHALLENGES

• Less Discounting – Cost of living is a major concern for the Indian citizens and the mechanism of RPM tend to put a bar on lowering the price which makes the middle- income section of the society suffer a great loss because even after waiting for good period of time they are not able to get goods and products at a lower price because of this anti-competitive practice.
• Anti-competitive – in an online setup or e-commerce platform the retailers and suppliers aim at attracting the customers because of huge volume of sellers in the online market space. The basic economics which they want to follow is reducing the price to beat the competition but when RPM is exercised it discourage the ability of the retails to adjust the prices as per their choice and force them to stay on the same price level as other competitors.

RECOMMENDATIONS

• Suppliers in the spirit of controlling the price should not regulate it beyond a certain limit and should give some freedom to the retailers so that they can benefit in the online competitive setup and some of the benefits can trickle down to the consumers as well.
• Motive of RPM is consumer welfare, healthy competition and elimination of practises like free riding but its regulation should not lead to anti-competitiveness and should always be in the favour of the market.

CONCLUSION

Application of RPM on practices related to e-commerce platforms is still unsettled in India. The economic implications of RPM are suggestive of its positive outcomes in the market. Not to mention, on comparison with other developed Competition Law jurisdictions, India can take necessary lessons for pushing RPM practices in e-commerce industry. Considering the instrumental role of e-commerce industries in the current context, India must evolve its practices by referring to mature jurisdictions before the un-supervised players take undue benefits from lack of oversight.

¹ The Competition Act, 2002, § 3, No. 12, Acts of Parliament, 2002 (India).

² The Competition Act, 2002, § 19(3), No. 12, Acts of Parliament, 2002 (India).

³ Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Limited, 2017 SCC OnLine CCI 26.

⁴ Samir Agrawal v. CCI (Cab Aggregators Case), (2021) 3 SCC 136.

⁵       Rubtub Solutions v. MMT,      case       No.       01       of       2020,       Competition         Commission of India, https://www.cci.gov.in/sites/default/files/01-of-2020.pdf.

⁶ Confederation of Real Estate Brokers v. Magic Bricks, Case No. 23 of 2016 (CCI).

⁷ Jasper lnfotech Private Limited v. Kaff Appliances (India) Pvt. Ltd., 2014 SCC OnLine CCI 150

⁸ The Competition Act, 2002, § 3(1), No. 12, Acts of Parliament, 2002 (India).

⁹ Counfreedise v. Timex India Group Limited, 2019 SCC OnLine NCLT 26511.

¹⁰Jinling Bao, The Economic Effect of Resale Price Maintenance and the Regulation of Antitrust Law, Web of Proceedings,https://webofproceedings.org/proceedings_series/ECOM/ECOMHS%202019/ECOMHS19007.pdf.

¹¹ Consten And Grundig v. Commission, (1966) Case 56/64 and 58/64, [1966] ECR 299.

¹² Ertuğrul Can Canbolat, Baran Can Yildirim, EU Commission – Resale Price Maintenance In Online Sales Has A Broader Effect, Mondaq, (June 26, 2023, 6:13 PM), https://www.mondaq.com/turkey/antitrust-eu- competition-/723742/eu-commission–resale-price-maintenance-in-online-sales-has-a-broader-effect.

¹³ Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).