The term exclusivity holds a significant value in the marketing channel ranging from the distributers to the suppliers and the consumers as well. It simply means conferring rights to a person or an entity that its competitors do not have. Exclusivity can be in granting specific rights and privileges or it can also impose a restriction. Either way, these rights, and restrictions are given to a particular establishment only which gives them a certain edge in the market. More often than not while we are shopping online, we come across a few products which have certain discounts and sales whereas the other products of the same category are sold based only on their retail price.
Such products which have discounts have entered into an exclusive dealing with the online platform thereby increasing their promotions and sales. The two observations which can be made here are that there is an agreement between the supplier and the distributor (online platform) where the supplier has barred the distributor from providing such discounts to its competitor. And the second one being, the availability of such products exclusively on that particular platform or distributor. There are always two sides to an action. While some of the agreements have a symbiotic relation, like the dealings between McDonald’s and Coca Cola, other exclusive dealings might result in altering the market scenarios.
Before analyzing agreements entered by Amazon and Flipkart and how their exclusivity impacts the market, it is essential to know a few provisions of the Indian legal system which mention the exclusive agreements. The Competition Act, 2002 which replaced the Monopolies and Trade Restrictive Practices Act, 1969, gives the scope and definition of an exclusive agreement. Section 3(4)(c) of the act, defines exclusive supply agreements as agreements restricting the purchaser from purchasing/dealing with goods other than those of the seller. And also explains an exclusive distribution agreement as an agreement that limits, restricts, or withholds the output or supply of any goods or allocates any area or market for the disposal or sale of goods.
Furthermore, when an enterprise enters into an exclusive agreement and it results in that enterprise having an unfair advantage in the market by creating a monopoly, then it is said to be in a dominant position, and exploiting this dominant position leads to the abuse of the significant market power. This is governed by Section 4 (1) of the Competition Act.
The laws stated above can be interpreted in this way, Section 3(4) is said to be anti-competitive if it causes an appreciable adverse effect on competition (AAEC) in the market due to such agreements. And if they fall under the ambit of abuse of dominant power as per Section 4 in violation of Section 4(2)(a)(ii) and Section 4(2)(c) read with Section 4(1) of the Act. In such cases when an exclusive agreement indeed causes an AAEC then the CCI has to showcase the adverse effect in the market arising out of the respective exclusive agreement as per Section 19(3) of the Competition Act.
Case study and Analysis
Acting as the puppets of capitalism, there is a point in all of our lives where we have waited for big billion days or great Indian festivals to purchase things online, just to avail of the discounts and cashback offered on the platform. One thing which can be witnessed in these sales is that the discounts are for certain products only. Sometimes few products are launched only on the online platforms and not in the retail stores. These are prima facie examples of an exclusive agreement. But what is often overlooked is how launching a product only on one online platform or having deep discounts and preference listing affects the retail market which is operating offline.
To tackle these complications and shed more light on the aspect of exclusive agreements, the Competition Commission of India on January 13th ordered an investigation for the Amazon Sellers Pvt Ltd. And Flipkart Internet Services Pvt Ltd. For allegedly contravening the provisions of the competition act.
It is an irrefutable fact that Amazon and Flipkart hold power in the market when it comes to online sales of smartphones in the Indian market. In the past too, there have been many shreds of evidence of exclusive dealings of smartphones in these giant online platforms. In the year 2014 when Motorola was still a struggling brand yet managed to completely sell out their Moto G model in a matter of minutes after entering into an ‘exclusive’ deal with Flipkart.
This drastically transformed the e-commerce sector in India. Considering the issues and grey areas that came along with the growth and improvement of the E-commerce sector, the Competition Commission of India conducted a study on the market trends and patterns on 8th January 2020.
On 13th January 2020, the CCI also ordered a probe into these E-commerce platforms, based on the Allegations raised by the MSME’s which are dealing with smartphones and related accessories.
- The Exclusive Dealings of Amazon and Flipkart are contravening Section 3(4) along with Section 3 (1) of the Competition Act.
- Establishing joint dominance in the market as per Section 4 (2) along with abuse of dominance according to Section 4 (1) of the Act.
- E-commerce sites engage in exclusively launching mobile phones, targeting preferred sellers, deep discounting, and promotion of private labels.
The CCI evaluated that the allegation under the Section 3 (1) and (4) can be investigated as there is prima facie opinion that the actions and dealing of Amazon and Flipkart are against the said provisions but the allegations under the Section 4 of the Act cannot be investigated as there is no existence of joint dominance of Amazon and Flipkart. Also, it has to be recalled that in the year 2018, the CCI dismissed the accusations against Flipkart by holding that it is not in the dominant position of the market, in the same order the CCI also considered Amazon as a relevant player in the market and held that neither Amazon nor Flipkart is under the contravention of Section 4.
Furthermore, after this investigation was ordered in February, Amazon and Flipkart managed to obtain a stay from the High Court of Karnataka on the investigation probe. Yet, there was another significant change in the decision, wherein on 11th June 2021 the Karnataka High court dismissed the Writ petition of Amazon and Flipkart which was against the antitrust probes. And it was held that the investigation shall be conducted.
Amazon and Flipkart indeed do engage in an Exclusive seller/ distribution Agreement. These kinds of agreements per se are not anti-competitive, except for when they foreclose the market competition or hinder the entrants of a new competitor in the market. The question which arises here is whether the practices of Amazon and Flipkart affect market scenarios in horizontal competition or vertical competition and how does it create an impact in the market chain. The below section analysis each component of competition in brief.
- Vertical Agreements: agreements at different levels of the market chain that is, the agreement between the producer and distributor is considered as vertical agreements. One of the allegations raised in the allegation by MSME was about the practice of owning a set of preferred sellers. Such a set of sellers who are given priority and have a nexus with the E-commerce sites are called ‘Alpha Sellers’. These Alpha Sellers are said to have more than 60% of the overall sales occurring in the E-commerce sites. Furthermore, as per the research conducted by MCA and Tofler, it was found out that the top-selling category in the online market was smartphones which held a value of 34%.
Vertical exclusive dealings which put forward the preference seller agreement create a lacuna in the market for offline/ brick and mortar retailers. As the alpha sellers release their product only on the E-commerce sites first and later in the offline stores. These stores often face losses due to such activities as there is a trend shift in the market due to the late release of these products. Additionally, the action of deep discounting also affects the market competition as it also falls under the scope of vertical agreements. There is no proper mechanism and transparency in the system to determine the basis of the discounting prices.
The most pertaining problem faced due to deep discounting is that the extent of the discount is so high that no other firm or industry can accommodate to profitably match these prices from other modes apart from the E-commerce sites. Thereby creating an anti-competitive scenario in the market.
- Horizontal Agreements: Restrictive agreements between the same stage of an enterprise, as per the competition act, an agreement between two enterprises is said to cause AAEC and is void. However, in this particular case, it can be safely said that horizontal agreements were not evident between the two E-commerce sites. Agreements to restrict the sale or the agreement to establish joint dominance were found to be not existing in the market. Both the sites hold power in the market, but they do not establish any joint dominance or restrict new entrants and do they indulge in collusive bidding or bid-rigging.
This case study and analysis aims to answer the question of whether or not the e-commerce site indulges in exclusive agreements which create an impact in the market, for which the answer is affirmative. Since the time these issues have been put forward, the E-commerce sites have been denying the allegations of indulging in vertical agreements which affect the market scenario. Although there is no concrete evidence of such actions, the recent development to start the antitrust probe into these sites may shed some light on these grey area practices. Other improvements which can be made to regulate the exclusive agreement practice are by bringing out transparency in the agreements made, establishing regulating bodies to look after the agreements.
However, deciding the anti-competitiveness of an agreement varies from case to case, having few norms and conditions will make the process easier. Furthermore, developing technology is an important growth factor for an economy, this process should not be hindered, hence, it is of paramount importance to make sure that offline retailers, e-commerce sites should develop as per the norms of the market without harming each other.
Author(s) Name: Ananya K (Presidency University, Bangalore)