Nisha Kaur Uberoi, Akshay Nanda and Tanveer Verma, Trilegal
This is an extract from the second edition of the E-Commerce Competition Enforcement Guide - published by Global Competition Review. The whole publication is available here.
The Competition Act 2002 (the Act) is currently undergoing review after However, even with its many benefits, the digital economy is giving rise to the possibility of new anticompetitive behaviours, which, owing to the complex nature of the underlying technology involved, may not only be difficult to comprehend but may not even fit into the traditional competition law framework.
In the past few years, the competition regulator in India – the Competition Commission of India (CCI) – has dealt with several cases in the digital market involving e-commerce marketplace platforms, online cab aggregators, big data and online search, etc. The CCI has had the opportunity to grapple with various issues that are fundamental to the digital economy, such as substitutability between online and offline markets, two-sided markets, network externalities, market power owing to network effects, parallel conduct by online platforms, and the nature of antitrust relationships between the online platforms and their users.
Apart from dealing with complaints regarding anticompetitive and abusive conduct by enterprises in the digital market, the CCI has also taken proactive steps to increase its knowledge regarding the digital economy and to have a better understanding regarding how the digital markets work. These proactive initiatives will enable the competition regulator to take a balanced approach between ‘consumer welfare’ on one hand and ‘incentive to innovate’ on the other. This balance, along with the timing of intervention, is critical for the competition regulator to ensure that the digital markets remain competitive and innovation driven for the times to come.
In June 2019, the CCI initiated a market study in the e-commerce industry in India. The study was initiated in view of the rapid growth of e-commerce and the rising importance of online trade in India. The purpose of the study is to allow the CCI to develop a better understanding of the functioning of e-commerce in the country and its implications for markets and competition. The CCI aims to build its capacity in appreciating competitive dynamics in e-commerce markets to assess the novel issues and challenges that digital markets bring forth for competition regulation. The objectives of the study include studying market trends with a particular focus on emerging distribution methods and strategies in response to e-commerce; understanding business practices and contractual provisions in e-commerce, their underlying rationale and implications for competition; identifying impediments to competition relating to e-commerce; and ascertaining enforcement and advocacy priorities for the CCI in e-commerce.
The digital technology markets have come to be recognised as an industry involving rapid innovation and creative disruption. These markets are generally characterised by strong network effects. Direct network effects arise where a user’s benefit from a product or service increases with the number of other users on that network. Because of network effects, which have a major impact on these digital markets, these markets generally tend to have fewer players competing for the entire market rather than just for a share of the market.
Network effects in the digital market
Network effects play a major role in the new digital economy, especially in two-sided markets. In the case of a two-sided market, impact on one side of the market has an effect on the other side of market as well. These effects (network effects) can be seen in several markets; for example, in the market of online cab aggregation services, online marketplace platforms and online search. In the case of online cab aggregator platforms, more commuters that book cabs on a particular platform make that platform more valuable for drivers of the cabs and encourages new drivers to join that particular network. However, more drivers that join or operate on a particular platform make that platform valuable for commuters on the other side of the market, as more drivers means more availability of cabs, reduction in the fare as well as waiting time through increased competition. The size of the network as such plays a critical role in determining the success of the platform. Further, new players that enter the market have to create a network to effectively compete with the incumbent network. Therefore, it is important to ensure that the incumbent operators do not prevent, restrict or distort competition through means other than competition on merits. The competition regulator must ensure that new players are given a fair opportunity to effectively compete in the market as well as ensuring that innovation or the incentive to innovate of the incumbent players is not restricted or limited in any manner. Therefore, it becomes important for the competition regulator to have an in-depth understanding regarding the operation of the digital market, so that it is able to identify the anticompetitive conduct from the competitive conduct. A thorough understanding of the market becomes absolutely necessary to ensure that competition regulators do not prohibit or penalise competitive conduct, which may reduce innovation or the incentive to innovate to the detriment of the interests of the consumers.
The CCI has been tasked with the responsibility to eliminate practices having an adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants. The CCI has, in the past decade, dealt with several cases in respect of the digital economy. Owing to the disruption caused by online players, several small players in the offline market that suffered because of the digital disruption filed several complaints before the CCI alleging anticompetitive and abusive conduct by the online players. The allegations made ranged from predatory pricing, exclusivity arrangements, manipulation of algorithms and discrimination, etc. Key issues assessed by the CCI in the digital space are set out below.
Smart mobile operating systems
The CCI has recently directed an investigation against Google based on allegations of abuse of dominant position in the market for licensable smart mobile device operating systems in India. It has been alleged that Google has engaged in different kinds of anticompetitive and abusive practices in the market in which it is dominant as well as in separate markets, with the aim of cementing its dominant position in online general web search services and online video hosting platforms (through YouTube). In this regard, the complainant alleged that Google has essentially abused its dominant position by the following conduct: it mandates smartphone and tablet manufacturers to exclusively pre-install Google’s own applications or services, which hinders the development and market access of rival mobile applications or services; it ties or bundles certain Google applications and services (such as Google Chrome, YouTube and Google Search) distributed on Android devices in India with other Google applications, services and application programming interfaces of Google; and it prevents smartphone and tablet manufacturers in India from developing and marketing modified and potentially competing versions of Android (Android forks) on other devices. The allegations made against Google are similar to the issues dealt with by the European Commission last year, which ended with a penalty of €4.34 billion being levied on Google. This is the second time that Google has been investigated by the CCI. The CCI had previously penalised it for abusive practices in the market of online web search services.
Online web search and online search advertising
The CCI in the Google case (Matrimony.com Ltd and another v. Google LLC and others) recognised the role of big data in the digital economy and observed that the rise of new business models based on the collection and processing of big data is currently shaping the world. The CCI further noted the vital role that innovation plays in channelling and growing the marketing and business solutions of an enterprise. The CCI recognised that the internet search market is a dynamic, fast-changing and innovative market characterised by vigorous competition among various internet search engine providers.
The CCI took nearly seven years to complete its investigation against Google and considered a number of issues pertaining to technology and procedure. While the CCI held Google to be in violation of antitrust laws in India, it did largely deviate from the adverse findings in the Director General’s (DG) report. In a very positive move, the CCI rejected the reliance placed by the DG’s report on the voluntary draft commitments given by Google across various jurisdictions, taking the view that it might prejudice or vitiate an unbiased, independent decision-making process.
The CCI held that Google enjoys dominant position in online general web search and web search advertising services markets in India and that Google has abused its dominant position on the following three counts:
- Ranking of ‘universal results’ prior to 2010 by Google was not strictly determined by relevance. Rather, the rankings were pre-determined to trigger at the first, fourth or 10th position on the search engine results page. This practice was unfair to the users and was in contravention of the provisions of Section 4(2)(a)(i) of the Act.
- Prominent display and placement of its ‘commercial flight unit’ with a link to Google’s specialised search options and services (Flight) amounted to an unfair imposition upon users of search services, as it deprived them of additional choices and thereby this conduct was in contravention of the provisions of Section 4(2)(a)(i) of the Act.
- The prohibitions imposed under the negotiated search intermediation agreements upon the publishers were unfair as they restricted the choice of these partners and prevented them from using the search services provided by competing search engines. Imposing unfair conditions on these publishers by Google amounted to a violation of the provisions of Section 4(2)(a)(i) of the Act. The CCI noted that Google was doing so because it has dominance in the market for online general web search, to strengthen its position in the market for online syndicate search services. This amounted to a violation of the provisions of Section 4(2)(e) of the Act as well. Further, as competitors were denied access to the online search syndication services market, contravention of Section 4(2)(c) of the Act was also made out.
This was also the first order where the CCI recognised the growing debate on big data issues. This decision was also important for competition law jurisprudence, since the CCI recognised the vital role that innovation plays in channelling and growing the marketing and business solutions of an enterprise. The findings against Google are primarily historic and fairly minor.
In an extremely welcome step, the CCI recognised that any intervention in the technology markets must be carefully crafted so that it does not stifle innovation or deny consumers the benefits that innovation can offer. The CCI demonstrated its maturity by not intervening in the product design of Google. It observed that product design is an integral and important dimension of competition and that undue intervention in the designs of Google’s search engine result page might affect legitimate product improvements, resulting in consumer harm.
Online retail and marketplace platforms
Several complaints had been filed against major online e-commerce platforms, including Amazon and Flipkart, alleging anticompetitive and abusive conduct by these enterprises. In all these cases, the CCI dismissed the complaints and refused to direct any investigation against the major online marketplace platforms. The CCI in these cases delineated the relevant market to include both online and offline retail. The CCI was of the view that services provided through the online marketplace and offline marketplace (i.e., through bricks-and-mortar shops) is considered substitutable by the end consumers and as such the market share of the online players was negligible for the purpose of competition laws. The CCI particularly noted that online and offline retail are only two different channels of distribution and not two different relevant markets.
The CCI has recently, to some extent, diverted from its previous view regarding the delineation of the relevant market to include both online and offline retail. In the matter of All India Vendors Association v. Flipkart Pvt Ltd and Another, the CCI took the view that online marketplace platforms (platforms to connect buyers and sellers) that do not have an inventory of their own are a distinct category when compared with online retail stores running on an inventory model. The CCI held as follows:
In [an] online retail store, a particular seller, who may or may not own a bricks-and-mortar retail store, owns his portal to sell products thorough [an] online website. Whereas in an online marketplace platform such as Amazon or Flipkart, the owner of the online portal offers a platform for buyers and sellers to transact.
The CCI has taken a different approach from its previous decisions and created a distinction between an online retail store and an online marketplace platform. Though, it is debatable whether they constitute separate relevant markets considering that the economic or the functional need of the consumers fulfilled by both the online portals is the same.
In another matter involving allegations of abuse of dominant position by an online cab aggregator, it was argued by the cab aggregator that it was primarily a ‘technology software service provider’ that is primarily engaged in providing an internet and mobile technology platform for taxi hiring by commuters and is thus different from radio taxi companies operating under an asset-owned model. However, the CCI delineated the relevant product market as the market for radio taxis. The CCI took the view that the online cab aggregator is providing the same functional product that the players operating under the asset-owned model are providing. It noted that for the end consumer, who is booking a taxi ride through the online platform, the identity of the driver who owns the taxi is inconsequential. It further noted that the consumers perceive the online cab aggregator as a provider of a radio taxi service, whose service is substitutable with the services provided by other radio taxi service operators, irrespective of the business model followed by them. Thus, substitutability in the radio taxi industry is between the operators and not between the drivers. Based on this view of the CCI, if the online retail store and the online marketplace platform fulfil the same economic need of the consumer, both should be included as part of the same relevant market.
An information (complaint) was also filed by All India Online Vendors Association against Flipkart (its online marketplace platform as well as its wholesale trading enterprise) alleging abuse of dominant position on the part of Flipkart, which is one of the leading online marketplace platforms in India. It was alleged that Flipkart’s wholesale trading company sold goods to companies like WS Retail Services Private Limited, which was previously owned by the founders of Flipkart until 2012, at a discounted price and thereafter these were sold on the platform operated by Flipkart. It was alleged that these practices amounted to preferential treatment to certain sellers and that this discrimination amounted to abuse of dominant position. It was also alleged that Flipkart had abused its dominant position by selling goods at discounted prices and below cost price, resulting in denial of market access to the individual sellers, and that Flipkart was using its dominance in the relevant market by leveraging its position to enter into another market by way of extending discounts and manufacturing products under private labels.
The CCI gave the opportunity to Flipkart and the complainant to address the CCI and provided the same opportunity to Amazon, although it was not a party to the complaint. The CCI held that, looking at the present market construct and structure of online marketplace platforms in India, it did not appear that any one player in the market was commanding any dominant position at this stage. Considering that Flipkart was not in a dominant position (because of the presence of competitors like Amazon), the CCI dismissed the complaint filed. The CCI further noted that the marketplace-based e-commerce model was still a relatively nascent and evolving model of retail distribution in India and the CCI was cognisant of the technology-driven nature of this model. Recognising the growth potential as well as the efficiencies and consumer benefits that these markets can provide, the CCI took the view that any intervention in these markets needs to be carefully crafted lest it stifle innovation.
Instant communication apps
It has been observed that in matters involving digital markets, there is a tendency of the CCI to delineate the relevant market in a narrow manner. In the case of Vinod Kumar Gupta v. WhatsApp Inc, while delineating the relevant market as the market for ‘instant messaging services using consumer communication apps through smartphones’, based on price, characteristics and end use, the CCI drew a distinction between ‘instant communication apps’ and ‘traditional electronic communication services’ (such as text messaging and voice calls).
The CCI observed as follows:
Instant communication apps cannot be compared with the traditional electronic communication services such as text messaging, voice calls etc. . . . because unlike traditional modes of communication, instant messaging using communication apps are internet based and provide additional functionalities to the users. . . . Further, instant communication apps can be used through smartphones only whereas traditional electronic communication services can be used through any mobile phone. There are also differences in the pricing conditions in both the abovesaid modes of communication. “WhatsApp” is a free to download communication application which does not charge any fee from its users for providing the services and just uses internet connection on the device to send instant messages, connect voice calls etc. Further, text messaging through traditional modes can be done between people who do not use the mobile service of the same service provider, whereas instant messaging services typically require you and your contacts to be on the same communication application platform.
- all consumer communication apps were offered for free or at a nominal price;
- all consumer communication apps were easily downloadable on smartphones and could coexist on the same handset (multi-homing) without taking much capacity;
- once consumer communication apps were installed on a device, users could pass from one app to competitor apps in no time;
- consumer communication apps were normally characterised by simple user interfaces so that costs of switching to a new app were minimal for consumers; and
- information about new apps was easily accessible given the ever-increasing number of reviews of consumer communication apps on app stores such as Google Play.
The findings of the CCI in the WhatsApp matter will likely play a pivotal role in the recent investigation directed against Google for its practices in the licensing of Android. If consumers can easily download applications competing with Google’s suite of applications, tying of the Google applications as a condition to seek a licence for Android is unlikely to restrict competition.
Online cab aggregator platforms
The CCI has dealt with several matters involving online cab aggregator platforms. Allegations made against online cab aggregator platforms included predatory pricing, exclusivity arrangements and hub-and-spoke cartel.
Several complaints that were filed against Ola and Uber alleging predatory pricing were dismissed by the CCI on the ground that none of the major players in this market were in a dominant position. The CCI also took into account the nascency of the market and held that:
- the competitive process in the relevant market was unfolding;
- the market was growing rapidly;
- effective entry of a competitor had taken place thereby leading to gradual decline in the market share of the alleged dominant player;
- entry barriers were not insurmountable;
- there existed countervailing market forces that constrained the behaviour of the alleged dominant player; and
- the nature of competition is dynamic in such innovation-driven markets.
Also, it was important to understand that in these markets promotional offers in the initial stages do not constitute predatory pricing. Such promotional pricing and offers were an important and effective strategy to increase the size of the network and bring more users on the platform.
In the case of Mr Samir Agrawal v. ANI Technologies Pvt Ltd (Ola) and Uber, an allegation was made that the pricing algorithm used by the platforms such as Ola and Uber, both of which are network cab aggregators, artificially manipulated supply and demand, thereby guaranteeing higher fares to cab drivers who would otherwise compete against one another on price and would not be able to command such high prices by themselves without the support of the network aggregators. It was further alleged that the cooperation between the cab drivers orchestrated by the network aggregators resulted in ‘concerted action’, which led to the fixation of prices thereby violating the competition laws. The CCI rejected the allegation upon a prima facie consideration and held that for a cartel to operate as a hub-and-spoke, the existence of collusion needed to be proven in the first place. In the present case, while the drivers may have individually acceded to the algorithmically determined prices by the network operators, this alone cannot be said to be amounting to collusion between the drivers. In the case of ride-sourcing and ride-sharing services, a hub-and-spoke cartel would require either an agreement between all drivers to set prices through the platform or an agreement between the network aggregator and the drivers that the network aggregator would coordinate the prices between them.
In another case, Meru Travel Solutions Pvt Ltd v. ANI Technologies Pvt Ltd and others, it was alleged that Ola and Uber had colluded, inter alia, because of common investors. The CCI opined that the presence of common investors was insufficient to establish collusion and what was required to be established was the existence of some form of ‘control’. The CCI further held that since Ola and Uber had established that the investments by the common investors were circumscribed by several other fiduciary responsibilities, it was highly improbable for them to exercise any control in both Ola and Uber at the same time. Though the CCI dismissed the complaint and did not direct an investigation, it did accept that common investments and investors may lead to softening of competition and it was possible that the anticompetitive effects of common ownership may arise more as an error of omission, rather than error of commission. It further noted that it will monitor whether safeguards have been put in place to ensure that competition was not compromised by the common investments. Further, the CCI noted that it would not hesitate to take action, on its own motion or otherwise, if concern arising out of horizontal shareholdings prima facie seem to exist at any point of time in the future where the parties are found to be competing less vigorously consequent to any interference by the common investors in the management decisions.
Algorithm-based surge pricing by airlines
The CCI is also looking at algorithms used by airlines to determine fares, as part of a detailed probe into alleged fixing of air ticket prices. The investigation has been directed on the basis of allegations of similar pricing as well as simultaneous increase in ticket prices by the airlines. The CCI is trying to analyse the pricing pattern followed by airlines and to assess whether there is an element of collusion in the fixing of airline prices through the use of algorithms. Airlines have often stated that pricing of airlines tickets is an outcome of demand-based dynamic pricing by the software used by them. The investigations were directed after it was observed that there was a spike in air ticket prices during festivals and natural calamities. The case may raise an important issue regarding whether the airlines would be deemed guilty of a price-fixing cartel if it is found that the algorithms employed by various airlines to determine prices coordinated with each other without the knowledge of the airlines to determine the prices.
Merger decisions relating to e-commerce
Internet firms have revolutionised the way in which business is conducted, across the globe and in India. Innovative technologies have benefited the economy and all stakeholders through a reduction in the dependency on cash (e-wallets) and by facilitating ease of access to services (online bookings).
Mergers and acquisitions (M&A) in the digital economy require antitrust authorities to scrutinise transactions on a holistic understanding of the market. Further, disruptive technologies that challenge the traditional markets must be analysed carefully while keeping in mind their pro-competitive effects and benefits to consumers.
The CCI has played a key role in enabling businesses in the digital economy to thrive and grow while ensuring that innovation of the internet economy is not hindered. If the key objective of a merger is to acquire access to new data – which would result in a higher concentration of data post-combination – this could potentially result in market foreclosure and the creation of entry barriers, and would become a competition law concern. However, the regulator must evaluate the merger in terms of sufficiency of choices for consumers, innovation and improved quality products and services, while maintaining a fine balance to not impede M&A activity.
The CCI has assessed several transactions relating to e-commerce marketplaces such as investments in Snapdeal and Bigbasket, and the consolidation of Flipkart and eBay India. The CCI observed that the e-commerce marketplaces offer better services to consumers in terms of discounts, more product offerings and doorstep delivery. This availability of choice to the consumer and the presence of multiple players has significantly contributed to the regulator concluding that investment and consolidation in the e-commerce market are not detrimental to competition.
Data can have pro-competitive and anticompetitive effects. When data becomes a source of market power, it can lead to a situation of a data advantage to the established players to the detriment of smaller or newer entrants. Conversely, data can address information asymmetry by increasing transparency. The reverse of this is that transparent markets are more prone to cartelisation. Given that it is data and not market shares or turnover that will be the key in future mergers of this ilk, competition regulators are increasingly amending their merger control regimes to adapt to the unique situation of the digital market.
Interestingly, mergers between internet giants like WhatsApp and Facebook have escaped the CCI’s merger control scrutiny because of notification being premised on asset and turnover thresholds. Most digital companies may not meet the turnover thresholds; therefore, consolidation of data should be scrutinised for cases involving digital economy. It may be time for the CCI to consider several alternatives (transaction value, users, data, etc.) to review merger thresholds for the digital economy to avoid a Facebook/WhatsApp-like situation. It will be interesting to see whether the CCI follows the lead of its German counterpart, the Federal Cartel Office.
The CCI, like other competition regulators, continues to focus on the issues of competition in digital markets. Given that India has acquired a reputation as a start-up hub and that several Indian unicorns in the digital space have emerged, the CCI must tread a fine balance ensuring that consumers have choice, the markets remain competitive and innovation continues, while adhering to the fundamental tenets of competition law. Based on the orders passed by the CCI, it is likely that it will take a measured approach in intervening in the digital economy.
The way forward for the CCI, like other competition regulators, is to develop myriad tools and processes, including hiring data scientists to work with them, and to move away from traditional barometers of market share to parameters that include entry barriers, access to big data, lock-in effects, multi-homing versus single-homing and network effects.
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