Is dumping of foreign capital to offer discounts ‘anti-competitive’?

February 2017 | EXPERT BRIEFING | GLOBAL TRADE

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E-commerce marketplaces have been a game changer when it comes to retail trading in India. E-commerce market players have been trying to acquire a customer base for the purpose of enhancing their gross merchandise value. For some years these online players have been able to lure customers by providing deep discounts, which has caused customers to increasingly rely on such e-commerce offers and sales.

Offers and discounts provided by e-commerce players, as well as predatory pricing, have, for a long time, been entangled with one another. Physical retailers or ‘brick and mortar’ stores have been pressing the issue against online players, claiming that online retailers have been engaged in unfair practices intended to adversely affect competition in India for a long time.

The physical retail community has always been concerned about the infusion of foreign capital in e-commerce marketplaces in India, and has been accusing e-commerce players of dumping foreign capital in order to offer disruptive prices with the intention of diminishing healthy competition in the market. However, now even domestic e-commerce players have started raising some eyebrows over the easy accessibility of foreign capital to the foreign e-commerce marketplaces operating in India and the hefty discounts and offers provided by such marketplaces to their customers.

The Department of Industrial Policy and Promotion (DIPP), in its 29 March 2016 ‘press note 3’, while allowing 100 percent FDI under the automatic route in marketplaces, also imposed certain conditions on e-commerce operators, including a restriction from directly or indirectly influencing the sale price of goods or services. This move, taken by the DIPP to curb any form of influence that e-commerce giants might have over the sale price of goods or services, was designed to provide a level playing field and equal opportunities to bricks and mortars stores.

However, the Competition Commission of India (CCI) has remained silent on the issue, despite the fact that the issue of predatory pricing falls within the ambit of the CCI.

Do discounts amount to predatory pricing?

Under Section 4(b) of the Competition Act, 2002, predatory pricing is defined to mean “the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors”. However, in order to establish predatory pricing, it is essential to determine whether an entity enjoys a dominant position in the market, and whether at the same time, such an entity is abusing that position.

There has always been a substantial difference between the sale prices of goods offered by offline retailers and e-commerce players. Going by the assertions put forth by brick and mortar stores, such a marked difference in prices is due to online marketplaces, which are flooded with foreign capital, funding the discounts with the intention of eliminating competition from the market.

In the case of the All Delhi Computer Trader Association, several complaints were filed against various online retail platforms for selling products at extremely low prices that brick and mortar retail outlets could not compete with. However, the CCI held that the e-commerce players had no dominance in the market as the entire e-commerce industry forms only a miniscule part of the entire retail market in India. Thus, it was held that the conduct of such online retail platforms was not anti-competitive, as per Section 4 of the Competition Act.

Position under US antitrust law

In 2009, Apple Inc. announced the release of the ‘iBookstore’, which sold e-copies of books that were priced accordingly by the respective publishers. Amazon, on the other hand, priced these copies at a comparatively lower cost, according to the customer base. Pursuant to the same, Apple executed agreements with major publishing companies to ensure that its prices were further lowered to compete with those of other resellers in order to maintain dominance.

However, the US Supreme Court found Apple to be in violation of the US antitrust law and levied a penalty of $450m, taking into consideration the dominant position enjoyed by Apple in the US and the intention of creating a monopoly.

Officials at the DIPP have also maintained that ‘press note 3’ does not restrict e-commerce vendors from offering discounts and no action can be taken against them unless it is established that such e-commerce players have resorted to predatory pricing.

Limitation of the CCI’s jurisdiction

The CCI’s jurisdiction is limited by the criteria for determining the existence of predatory pricing, stipulated under the Competition Act, as per which, predatory pricing can only be established if an entity enjoys a dominant position in the relevant market. Thus, if an e-commerce entity with a minimum market share in the relevant market provides products or services at a price lower than the cost price of such products or services, such an entity cannot be held guilty of predatory pricing since it does not hold a dominant position in the relevant market. In a complaint filed by Meru Travel Solutions Pvt. Ltd. against Uber group with the CCI, in relation to a reduction of the fares and discounts provided by Uber, the CCI held that e-commerce players such as Uber cannot be prohibited from providing discounts to consumers since they are not dominant players in their relevant market.

However, the DIPP has imposed a blanket condition on e-commerce marketplaces without setting out any criteria for determining predatory pricing, such as market share, dominant position and intent.

Thus, on one hand, any e-commerce marketplace flouting the condition prescribed by the DIPP by directly or indirectly influencing the sale price of the goods or services shall be liable to be probed by the DIPP, however, under Section 4 of the Competition Act, no e-commerce player can be held liable for exercising predatory pricing since they hold a miniscule market presence in the relevant market, which also includes brick and mortar stores.

Conclusion

An extreme argument is that under ‘press note 3’, any efforts by the online marketplace to match the competition can fall under the purview of ‘indirectly or directly influencing prices’, violating their fundamental right to freedom of trade.

Under the Competition Act, an e-commerce entity cannot be held liable for adversely impacting competition in the market until it becomes a dominant player. Does this allow such e-commerce entities to continue resorting to anti-competitive measures to maintain sustainability in the market?

The DIPP has placed general restrictions on marketplace entities without taking into consideration the objective criterion provided by the Competition Act to prevent predatory pricing. Pursuant to the same, the press note has created a dilemma as to whether the provisions of the Competition Act would prevail over the condition set out under the press note considering the fact that the CCI enjoys sole jurisdiction over antitrust issues. It would be quite interesting to see if the CCI clears up this dilemma.

Further, taking into account the present scenario, a question arises as to whether there is a requirement for an anti-dumping law or regulation to provide checks and balances in relation to dumping or utilisation of foreign capital by e-commerce players? India is still progressing toward opening up the market for overseas investors. Will a step toward setting up of a regime to check or impose conditions on utilisation of overseas capital be progressive or digressive?

Rajesh Begur is managing partner and Vinit Patwari is an associate at ARA LAW. Mr Begur can be contacted on +91 22 6619 9800 or by email: rajesh@aralaw.com. Mr Patwari can be contacted on +91 22 6619 9814 or by email: vinit.patwari@aralaw.com.

Rajesh Begur and Vinit Patwari

ARA LAW