Aftermarkets and the Aftermath: A Competition Law Perspective
[Kavya and Rishabh are students at Rajiv Gandhi National University of Law, Punjab. The following post won the third prize in the Second IRCCL Blog Writing Competition (2021-22), organised in association with Khaitan & Co.]
An important aspect of competition law is the delineation of a relevant market. This helps in assessing the dominance of an entity in that market for determination of the abusive conduct as per Section 4 of the Competition Act 2002 (Act). In certain cases involving a primary product and secondary products (i.e., complementary products and services required after the purchase of the primary product), a separate “aftermarket” may be delineated. An aftermarket refers to a secondary product market, distinct from the primary product market, covering only secondary products and services relating to the primary product.
Competition issues in aftermarkets, such as charging locked in consumers with exploitative prices for after-sale services of the primary product, are globally recognised. International and national competition regulators have relied on factors such as ‘whole life costing analysis’, ‘reputational concerns’ and ‘switching costs’ to determine if a separate aftermarket exists.
While the Act comprehensively lays down the factors to be relied upon while delineating the relevant market, it fails to provide clear direction on factors relevant for delineation of separate aftermarkets. In this context, this essay argues that the Competition Commission of India (CCI) has adopted an incongruent approach to the factors used in delineating separate aftermarkets. To demonstrate this, it analyses four factors used in aftermarket delineation — whole life costing analysis, product lifespan, reselling options, and product price. Finally, it argues for a consistent and balanced approach to be followed by the CCI in weighing the factors for aftermarket delineation.
Trends of CCI
One of the earliest references to the concept of separate aftermarkets in India can be found in the dissenting opinions of CCI member R. Prasad in cases such as Surinder Bhakoo v. HDFC Bank Limited and Pravahan Mohanty v. HDFC Bank Limited. While dealing with allegations of abuse of the dominant position held by the bank, he identified that there would exist an aftermarket involving only the bank and a customer due to the existence of the factors of ‘information asymmetry’ (i.e. lack of information or inability of a consumer to understand the information provided to them, thereby preventing a consumer from making an informed choice) and high ‘switching costs’ (i.e. the financial burden a consumer will have to incur to switch to the product or services of another competing manufacturer).
However, it was only in Shamsher Kataria v. Honda Siel (Shamsher Kataria) that these factors were exhaustively analysed by the CCI. It was held that in place of a unified systems market, an aftermarket would be delineated on the existence of certain factors including substantial switching costs, the inability of the consumers to engage in ‘whole life costing’ (i.e. determining the cost that would be incurred in the lifetime of the product) and ‘reputational concerns’ not acting as a deterrent (i.e., when the manufacturer may choose to charge exploitative prices from their locked-in consumers for repairs and after sale services without considering the impact it would have on its reputation). Further, while dealing with switching costs, the CCI highlighted that consumers would have to incur a loss when they attempt to sell their product and switch to another, due to depreciation in value.
Subsequent cases mention these broad factors while considering the delineation of a separate aftermarket. Yet, the CCI, in most of these cases (discussed below) did not comprehensively consider all the factors and preliminary dismissed the complaint under Section 26(2) of the Act. Furthermore, the CCI’s interpretation and application of the factors has also been inconsistent. This will be elaborated further in the next section.
Analysing the Incongruity in CCI’s Approach
In this section, the incongruent approach adopted by the CCI while considering factors used in delineating separate aftermarkets is analysed by juxtaposing the orders given by the CCI in Shamsher Kataria, Shri Amitabh v. Kent RO Systems (Kent RO), Trend Electronics v. Hewlett Packard India Sales (Trend Electronics) and the more recent case of In Re Star Imaging and Path Lab v. Siemens Limited (Siemens).
Whole Life Costing Analysis
The CCI, in Shamsher Kataria, held that the relevant product market in the automobile industry can be classified under the heads of primary market, consisting of manufacture and sale of automobiles, and an aftermarket for spare parts and after sale services. While delineating the aftermarket, one of the key factors that CCI relied on was that an Indian consumer does not undertake a whole life costing analysis while purchasing the product. Relying on the United States’ Supreme Court decision in Eastman Kodak Company v. Image Technical Services, the CCI held that at the time of purchasing the product, a consumer should be adept in assessing the whole life cost that the product will incur during its lifespan. For determining this whole life cost, the consumer should have access to information specifying the price of the products that would be needed to maintain or enhance the primary product, repairs that will be required, service costs etc. The CCI further noted that such ‘raw data’ may not be provided to the consumers at the time of making the purchase. However, even if it is made available in the public domain, most of the consumers would lack the sophistication to analyse and determine the life costs of the product.
Contrastingly, in the case of Trend Electronics, the CCI refused to bifurcate an aftermarket for service and repair of laptops and held that at the time of purchasing, a consumer can reasonably assess the cost they would incur in the lifespan from the information that is available publicly.
These two cases are representative of the opposite end of the spectrum while dealing with the factor of whole life costing analysis. On the one hand, the CCI in the case of Shamsher Kataria, while relying on studies that date back to three decades, has adopted a rigid stance with respect to a consumer’s ability to determine the whole life cost of a product. Based on the CCI’s conclusion that the Indian consumer does not have the sophistication to analyse the information and undertake a life-costing analysis, an aftermarket may be delineated even in a case where the manufacturer has provided the information publicly. This approach seems to be lopsided and goes against the interests of manufacturers of primary products. On the other hand, it must be observed that this factor was only superficially examined in Trend Electronics, wherein the CCI failed to account for the fact that the consumers may not be able to make an informed choice by conducting a life costing analysis due to unavailability of important information on a product.
A more balanced approach was adopted by the CCI in Kent RO and Siemens. In these cases, the CCI noted that the consumers had access not only to the price of the product but also the average maintenance costs by way of the annual maintenance contracts that were negotiated at the time of the purchase. Since these factors would help the consumer determine the future costs of owning the product, the CCI held that the consumers could determine the whole life cost of the product during purchase. This is a comprehensive approach to ascertaining the feasibility of the whole life costing analysis, as it takes into account the availability of both product prices and maintenance costs in the public domain.
Lifespan of the Primary Product
The factor of the lifespan of the primary product, in determination of the existence of a separate aftermarket, has been inconsistently approached by the CCI. In Trend Electronics, the CCI considered the “high rate of obsoletion and low-life span of laptops” in holding that unfair business practices, while providing after-sale services, would affect the sales of laptops. It concluded that these reputational concerns would prevent the manufacturer of laptops from increasing costs in the aftermarket. Notably, the average lifespan of an HP laptop is three years. On the contrary, Ford’s argument about the average lifespan of a passenger vehicle being five years in India, was ignored by the Competition Appellate Tribunal in the appeal against Shamsher Kataria. In other cases such as Kent RO and Siemens, the lifespan of the primary product was not considered at all.
The CCI was correct in identifying that a lower lifespan would make it easier for the consumer to switch from one primary product to another; however, it failed to identify what would be classified as a “low” lifespan. While the lifespan of a laptop (three years) was considered to be low, the lifespan of a Ford car (five years) was not taken into account. Furthermore, the CCI should be consistent and consider the lifespan of products as an important factor in determining aftermarket delineation.
Option to Resell the Primary Product
In Shamsher Kataria, while discussing the switching costs, the CCI noted that the price of the purchased car would depreciate post registration, because of which consumers would incur a loss if they attempted to sell the second handed car and buy a new one. Thus, the CCI relied on the option of reselling the primary product at a loss to show the existence of switching costs. However, in later cases such as Trend Electronics and Kent RO, the CCI interpreted the option to resell in a diametric manner. In both these cases, the CCI noted that consumers have several options available to resell the used primary product, i.e., laptops and water purifiers respectively. The CCI held this to imply that the consumers can easily switch to a different brand of primary product if they wished, and thus denied the existence of substantial switching costs.
Arguably, the mere option to resell a used product should not suggest that the consumers can easily switch to a different primary product. Even though the loss in value due to depreciation may be more in case of cars, when a consumer attempts to sell a used laptop or water purifier, they would still incur a significant loss in value as the product would not be worth the same as a brand new one. While there exists an ambiguity caused by subsequent rulings, the obiter in Shamsher Kataria rightly identified the issue and should be followed consistently.
Price of the Primary Product
In Shamsher Kataria, the CCI had elaborated upon the role of “product price” in determining switching costs. Juxtaposing the average price of a car (INR 3 lakhs or more) to the average price of a Gillete razor (INR 500), the CCI stated that it is more likely in the case of the former, more expensive product that the consumer would continue paying exploitative prices for secondary products and services rather than switching to a primary product of a different brand. Per contra, the consumer of a razor could easily switch to a different brand of razors.
While this reasoning is tenable, the range of product prices that might cause difficulties to the consumer base in shifting to a different brand is unclear. For instance, in Kent RO, the CCI found the price of water purifiers, ranging from INR 10,000 to INR 15,000, was not high enough to prevent consumers from switching to a different brand of water purifiers. Similarly, in Trend Electronics, laptop models priced around INR 25,000 to INR 35,000 were held to not have high switching costs, even though the monthly salary of Indians is averaged to be around INR 32,000.
Therefore, this categorization by the CCI is arbitrary. Instead of preliminarily rejecting a separate delineation of an aftermarket based on the price of the primary product, the CCI should instruct the Director General to include factors such as the targeted consumer base and their average salary in its investigation report on the basis of which, the CCI can give a reasoned decision with respect to the impact of the product price.
The discrepancy in CCI’s approach while delineating separate aftermarkets is a major hindrance to developing the jurisprudence in this sphere. In light of the growing competition law concerns in the aftermarket and in the absence of any specific guidance of the Act with respect to the delineation of separate aftermarkets, it is important that CCI takes a proactive role. While CCI may accept or refuse to recognise an aftermarket as the relevant market in adjudication of cases, it is imperative that the factors for the purposes of such delineation are comprehensively discussed and consistently interpreted. Further, the CCI should be vary of its extensive powers with respect to the imposition of penalties that may have profound adverse effects on commercial entities. In this regard, the CCI should adopt a consistent and balanced approach.