An ABC.Com Exclusive: Exclusive Distribution Ageements By E-Commerce Portals And Their Impact On Competetion In India

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Any quest to purchase a new mobile phone inevitably leads one to the online e-commerce portals offering the exclusive products with wide range of choices. All the new entrants into the Indian market seem to prefer to market their products, exclusively through the e-commerce entities.

E-commerce in India has seen tremendous growth in the past decade. The number of internet users has increased from 50 million in 2007 to an extravagant total of 300 million in 2014. Consequently, and as a direct result of this, the Indian internet market has also grown at a tremendous pace. According to Morgan Stanley, the size of the present Indian internet market is expected to rise from US$11 billion in 2013 to US$137 billion by 2020. In 2014 alone, about 80 million smart phones were sold through online retail portals.

There has also been an humongous increase in the exclusive launches made by the top brands via such online portals. To name a few: Motorola and Xiaomi through Flipkart, OnePlus through Amazon, etc. These exclusive agreements certainly affect the competition in India and it has become necessary to ascertain whether such impacts on the market constitute as “appreciable adverse impact” prohibited under the aegis of the Competition Act, 2002.

The Competition Commission of India faced such dilemma in the case of Mohit Manglani v. Flipkart India Pvt. Ltd. and Ors. A complaint was filed by the Confederation of All India Traders, along with some of the independent offline retailers against Flipkart, Snapdeal, Jabong, Amazon India and Myntra. It was contended in this matter that the exclusive distribution agreements between these online portals and the abovemention specific brands constituted anti-competitive practices as mentioned under Sections 3 (Anti-Competitive Agreements) and 4 (Abuse of Dominant Position) of the Act.

The E-commerce portals raised a preliminary issue by challenging the very existence of such agreements, however the Commission came to the conclusion that the Agreements did in fact, exist.

At the outset, it is submitted that despite being billion dollar entities and ostensibly dominant, such e-commence portals have accounted for less than 1% of the total retail services in India. Further, none of the Companies are individually dominant and still continue to compete against each other. The essential question of these entities being dominant, was correctly rejected by the Commission.

Another significant question of the agreements being anti-competitive in nature, was also held in the negative, as the Commission found no prima facie grounds to warrant an investigation by the Director-General. The Exclusive Distribution Agreements in question were adjudged according to the rule of reason by the parameters laid down in Section 19(3) of the Competition Act. The Commission held that there were many benefits of the online distribution channel, which play against the possible existence of an appreciable adverse affect.

It is hereby opined that the Commission erred in stating that no prima facie case was made out. Under Section 19 (3), a delicate balance was sought to be created between the restriction of new entrants into the market and benefits accruing to the customer. The essence of the test was rightly explained in the Raghavan Committee Report in 2000:

“…The key issue is the extent to which these arrangements foreclose the market to manufacturers (inter-brand rivalry) or retailers (intra-brand rivalry) and the extent to which these raise rival’s costs and/or dampen existing competition. The costs of such arrangements need to be weighed against the benefits.

The Exclusive Distribution Agreements have an adverse impact on both inter-brand competition as well as intra-brand competition. Intra-brand competition is wiped out, for being a natural consequence of such agreements. Retailers no longer compete against each other trying to offer the lowest prices possible. This is a negative impact of the cause of the growth of e-commerce in India. The stakeholders of e-commerce have made a place for themselves in the market due to the lower prices offered by them to the customers. With the wiping out of intra-brand competition, the portals are free to charge a fixed price for the products. Sometimes they provide spurious offers to the customers so as to ensure that there is no other retailer for the customer to approach in hope of a better deal and the ultimate goal being the accumulation of profits.

Further, the inter-brand competition also gets affected in this process. Due to the exclusive dealing privileges given to the online portals, they are able to create an ostensible scarcity of the product. They release the product in limited numbers, creating hype amongst the consumers, further enabling them to sell the goods at fixed prices without having made to give any incentive and this fake scarcity which is created, promotes the goods. A recent example of this can be the launch of the Xiaomi Redmi 1S, which was sold in limited batches, opening for sale only for a few seconds at a time.

This truly does limit the capacity of the new entrants in the market. They are denied the ability to sell all the brands available and are ipso facto limited to sell their products outside the scope of the Agreements. This subsequently hinders their ability to compete with online portals and further, it drives them out of the market.

But at the same time there are certain benefits, which are accrued by the consumers. According to the Order of the Commission, the benefits that are accrued by the consumers is their supreme ability slash opportunity to compare the products on multiple screens and purchase only those goods that they prefer, from the comfort of their homes. It is also submitted that these benefits accrue from the inherent nature of online retail stores and not as a result of the impugned Agreements. As a matter of fact, no benefits accrue out of these exclusive distribution agreements.

Further to order an investigation by the Director General, only a prima facie case has to be made out. A proper trial by hearing both the parties is not required. The grounds made out by the Informant, which if proved, might lead to the existence of an appreciable adverse affect.

Therefore, on a concludint note, the author analyzes that the Competition Commission of India erred in holding that no prima facie case exists to warrant an investigation. The Commission failed to utilize the opportunity to properly investigate on the impact of such exclusive distribution agreements on competition in the Indian market. It is anticipated that the matter would be pursued before the Competition Appellate tribunal (COMPAT) and after due consideration to all the material facts, a logical conclusion should be drawn in this present case.

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