India is the second most populated country globally and one of the largest markets for companies to trade. The country's retail trade is expected to boom at a very high rate. Currently, the value of retail trade is above $600 billion. It displays the massive opportunity in the country's retail trade.
With the advent of smartphones, people have shifted from traditional brick-and-mortar stores to online shopping websites. Many multinational companies like Amazon, Walmart, and Snapdeal are unleashing their massive energy and funds to capture the burgeoning online shopping market.
With the tremendous increase in the annual turnovers of these e-commerce companies, brick-and-mortar traders are facing severe losses in their businesses. The traders allege that the companies are abusing their dominance and are indulging in predatory pricing to capture the market share in the retail market. The Confederation of Traders (CAIT), the leading trader group, has been spearheading the protest against the e-commerce giants, while these giants maintain their stand that they are empowering many small traders through their platforms by removing the geographical barrier to trade.
Competition Act, 2002
With the liberalisation policy in 1991, the private sector began to expand, and the union government realised the drawbacks of the Monopoly Restrictive Trade Practices Act, 1969 and introduced a new law to regulate competition, the Competition Act, 2002. A bare perusal of the Act's preamble clarifies that the Act aims not to restrict the growth of the businesses but to promote the growth of businesses and have healthy competition in society. The Act gives power to the Competition Commission to investigate the complaints related to anti-competitive activities.
Legal Provisions: Abuse of Dominance
Under the Competition Act, 2002, the establishment of dominance by an enterprise is itself not prohibited. The Act prohibits the abuse of dominant position by an enterprise over its competitors, thereby promoting healthy competition in the country.
As per Section 4, an enterprise abuses its dominant position when even one of the following conditions get satisfied:
1. An enterprise imposes direct or indirect, unfair or discriminatory conditions in the purchase or sale of goods or services or on the price of goods or services.
2. Limits or restricts the production of goods or services or technical or scientific development of goods to the prejudice of consumers
3. Indulges in practices that result in denial of market access
4. Uses its dominant position in one relevant market to enter into or protect another relevant market.
To establish an abuse of dominance, it must first be established that the enterprise is at the dominant position in the relevant market.
As per section 2(r) of the Act, the relevant market means the market the Commission may determine concerning the relevant product market or the relevant geographic market or both the markets. There are two types of relevant markets, and the proof of dominance in any of them is sufficient to establish the dominance of the enterprise.
Section 19(6) of the Act lists down the factors that the Commission must consider while determining the relevant geographical market. Some of them are:
1. Regulatory trade barriers
3. Transport costs
4. Adequate distribution facilities
5. Local specifications requirements
Section 19(7) deals with the factors that must be considered while determining the relevant product market. Some of these factors are:
1. The physical characteristics or end-use of goods
2. The price of the goods or services
3. Consumer preferences
4. Existence of specified producers
After determining the relevant market, the next step for the Commission is to establish the dominance of the enterprise in the relevant market. Section 19(4) of the Act lists down the factors that the Commission can take into account while determining the dominance of the enterprise. Some of these factors are:
1. The size and resources of the enterprise
2. The market share of the enterprise
3. The goodwill of the enterprise
4. The dependence of the consumer on the enterprise
5. The economic power of the enterprise
6. The structure and size of the market
After establishing the dominance, the last step is to prove the abuse of dominance by the enterprise as enumerated under Section 4 of the Act.
Amazon and Flipkart: Dominant Enterprise?
In Re Deepak Verma and Clues Network Private Ltd case, the Competition Commission of India held that the online shopping platforms do not fall under the category of different relevant markets compared to the traditional stores. The Commission held that online platforms are channels through which the products or services are delivered to the consumers. Thus, do not fall under the category of the relevant market. Since the market share of either Amazon or Flipkart does not exceed 30%, they cannot be put under the category of dominant position. Since both the e-commerce services do not come under the category of dominant position, there is no chance of the abuse of dominance.
E-Commerce Platforms & Fair Competition in India
Lina Khan, the Chairman of the Federal Trade Commission of USA, had published a research paper in 2017 at Yale Law Journal. This paper is worldwide famous as the Amazon Paradox. It underlined how Amazon abused its power over data to establish its dominance over the other companies in a relevant market. A recent example is highlighted in the report released by Reuters. This report highlighted how Amazon analysed the data of the John Millers shirt to promote its product brand. By getting the idea about the customers' wants, Amazon made the desired changes in its clothes brand, making the clothes up to customers' demand. Amazon uses its platform to show its product at the top of the list and under the category of the preferred seller. As a result, Amazon establishes its leverage over the other brand products up for sale on its platform. It is a blatant infringement of the right to have fair competition in India. The use of the platform for purchasing goods by the consumers enables Amazon to store massive data regarding the consumers' preference for the products and use or sell that data for direct marketing purposes, thereby creating a strong network effect in its favour. Creating a network effect makes it difficult for the new entrants in the e-commerce market to trade in a fair and competitive market.
Moreover, the availability of a vast database makes it easy for the e-commerce giant to conduct research for manufacturing new goods without resorting to the expense of conducting research. It again gives an advantage to the company over its other competitive partners. The ability of Amazon to recoup its losses through these activities satisfies one of the conditions necessary for establishing dominance by indulging in predatory pricing. Since the brick-and-mortar traders cannot recoup their losses by indulging in these activities, it is evident that there is no fair competition between Amazon and the everyday trader.
The preamble of our Constitution states that India is a socialist state and one of the directive principles of state policy urges the government to take measures to enhance the livelihood of the people of India. On this basis, the government must initiate an expedient investigation into the charge of anti-trust activities carried out by these companies so that the danger these companies pose to the livelihood of the traders can be ironed out.
The decision given by the CCI in the Deepak Verma case needs to be re-visited. There is a difference in the conditions that govern traditional stores, and online stores are different. In traditional stores, there is the concept of Average Variable Cost, and the Marginal Cost reduces with an increase in the sale of products. On the other hand, there is no Average Variable Cost in the online markets as there is no need to maintain a salesperson or pay other expenses like electricity. There is a need to do away with the notion that the online and offline markets are the same. When the online market is treated as a separate market, the dominance of Amazon and Flipkart can again be investigated, and the actual position of the online markets can be disclosed.
Since the economy's future depends on the freedom of trade in the digital market, it is essential to have fair competition in the digital market, and at the same time, the user's data must be protected.