By Aayushi Mehta, University of Mumbai.
Since time immemorial, consumers have known only one way of shopping- and that is going to the shop and buying what they need. We can know from the history of the early Roman Empire that efforts were made to prevent anti-competitive practices. Fines were imposed on anyone who deliberately stopped supply ships, death penalty for anyone violating a tariff system. Later, with the growth of civilisation various legislations were enacted to ensure fair competition in the market. Anti-competitive practices which fixed outputs, market shares, prices etc. were frowned upon and heavily penalised.
In keeping with the trend among other countries and the growing commerce, India passed the Monopolies and Restrictive Trade Practices Act, 1969. This was then replaced by The Competition Act, 2002.The act condemned practices such as Anti-competitive agreements, abuse of dominant position, predatory pricing etc. It helped keep a check on the traders and their trading practices, and ensured that it did not adversely affect consumers.
However nobody ever imagined shopping on the internet. The idea of ordering goods via the internet and having them delivered at your doorstep was merely a distant dream. But, E-commerce is now a booming industry and holds immense potential. The present laws are not competent enough to deal with the problems that may follow.
Recently there has been a lot of speculation regarding the huge discounts given my E-commerce websites. The Big Billion Day Sale of Flipkart and similar sales by Amazon, Myntra, Jabong etc. have been brought under the scanner of the Competition Commission of India. Flipkart earned over 100 million dollars in over 10 hours, double of what the company expected. The Ministry of Commerce and Industry received complaints from traditional brick and mortar traders that Flipkart was indulging in unfair trade practices.
These local traders claim that the e-retailers are guilty of predatory pricing. According to explanation under section 4 of The Competition Act, “Predatory price means 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.”
Section 4 states that “No enterprise shall abuse its dominant position.” One of the ways of abusing dominant position is by charging goods at unfair or discriminatory prices. Dominant position is defined as a position of strength which enables an enterprise to (i) operate independently of competitive forces prevailing in relevant market or (ii) affect its competitors in the relevant market.
The local traders claim that these discounts given adversely affect their sales. People are getting more attracted to online shopping because of the easy access and various schemes and discounts it provides. This is reducing their sales. They believe that since the e-retailers have lesser overhead costs as compared to their offline counterparts, they are able to afford such discounts.
In order to prove the claims of the local traders, we first need to look at the important aspects:
- Whether the practice of giving discounts amounts to predatory pricing?
The immediate goal of e-commerce businesses is not to gain profits but to acquire a market share. They are known to incur huge losses on every sale they make. However their long term goal is to capture the market, and then recover the losses. Many feel that since this is their goal, the huge discounts given by them now, will consequently have an adverse effect on the market. It will drive out the local traders and once these online portals hold a monopoly, they will abuse this position. The ultimate sufferer would be the consumer and hence this practice is frowned upon.
However as we have seen under the definition of predatory pricing, only an enterprise in a dominant position can be held guilty of it. There is nothing in the Act to state that it is a crime to sell goods below the cost price if they are sold by a seller merely to make his position in the market and put up competitive prices to sell his goods. Predatory pricing is a crime only if done by a seller who holds a dominant position in the market, because it can appreciably affect the market. Whether the e-commerce websites hold a dominant position or not will be in the next question.
Also as we know, the local stores also give discounts regularly and sell goods at discounts as low as 90%. These sales are never brought under the scanner and held to be fair competition. This is because none of them hold a dominant position by themselves and all of them follow such practices. Similar logic must be used in the case of e-commerce.
- Whether the online shopping portals hold a dominant position in the market.?
No, they cannot be said to hold a dominant position because they form a very small share of the entire retail market. In the case of Ashish Ahuja vs Snapdeal[1], the CCI held that all websites like Flipkart, Amazon, ebay etc. thrive on the special discounts and offers given by them. Hence they, along with Snapdeal cannot be prima facie termed as dominant player. Sources in the CCI said it was not predatory pricing as online retailers represent only a small portion (about 1-2%) of the overall retail market. “It becomes predatory pricing only if you are a dominant player in a category which would result in killing competitors and thwarting the entry of new players. This is clearly not the scenario here,” sources said. [2]
- Is the pricing scheme anti-competitive? What would be its effect on the market?
The pricing scheme cannot be said to be anticompetitive. In re Modern Food Industries (India) Ltd, the MRTP Commission[3], observed that in order to determine predatory pricing, it is important that it must be done with a mala fide intention to drive out other competitors. There is no evidence to prove that such reduction in costs by the e-retailers had any mala-fide intention attached with it. The low costs were simply a way to draw the consumers towards online shopping, which is an alternative to the brick and mortar shops.
Even if the discounts of these sites cause some local traders to be driven out of the market, it cannot be held to be anticompetitive merely because it is causing some hardship to others. The scenario of all local traders being put of business seems to be too far-fetched and is not reason enough to regulate the pricing scheme of online markets. It would be a clear violation of their right to freedom of profession. Thus as of now, we cannot claim that the practices are anti-competitive.
What many fear is that once the local traders are driven out of the market, the websites will then abuse their dominant position. Further no website can hold a monopoly by itself. Even if they drive out the local traders, there will be competition among them, which will keep their trade practices in check. The present Competition Act, 2002 does not deal with collective dominance, wherein a dominant position can be held by a group of enterprises too. Hence holding them guilty for a law not even in force is a clear violation of their rights.
[1] Case No. 17 of 2014 Mr. Ashish Ahuja vs Snapdeal.com & Sandisk Corp
[2] http://timesofindia.indiatimes.com/business/india-business/E-sales-may-not-fall-afoul-of-CCI/articleshow/44765232.cms
[3] 1996 3 Comp LJ 154