• Pooja Dhamor, Priyashi Chhajer

Deep Discounting on E-Commerce Platforms: A Misplaced Approach to Reinstalling Fair Competition

[Pooja and Priyashi are students at National Law University, Jodhpur. The following post is the winning entry for the IRCCL Blog Writing Competition 2020.]


Online marketplaces can be seen as an infrastructural facility which is critical to numerous sellers. Dual role played by online marketplaces, such as Amazon and Flipkart, by providing (a) intermediary services, as well as (b) selling on the same marketplace, allows e-players to exploit other sellers listed on their platform by exploiting data of competitors, allowing deep pockets to tie-up sellers, etc.


In January 2020, the Competition Commission of India (CCI) passed an order (Amazon/Flipkart) which recognized deep discounting as an anti-competitive factor. This judgment has been treated as a departure from the consistent stand of CCI (see here). However, a careful and contextual reading of the order shows that CCI still has not found deep discounting as inherently anti-competitive; it is only the discriminatory treatment by online intermediaries meted to enlisted sellers which faced the brunt of CCI.


While many argue that deep discounting is beneficial for consumers and, therefore, should not be declared as inherently anti-competitive, a risk of elimination of competitors in future threatens this very consumer welfare. The debate about the anti-competitive nature of deep discounting finds base on two prime elements, which are relevant market and predatory pricing. In further parts, the authors analyze these two elements in the context of deep discounting.


Relevant Market - Inconsistency in Judicial Trail


One of the prime hindrances CCI faced in adjudicating against deep discounting was over the definition of the 'relevant market'. For the longest time, CCI has treated offline and online markets as two different channels of the same market. This has allowed e-commerce giants to escape liability for deep discounting under predatory pricing for not fulfilling the prerequisite criterion of a position of dominance in the relevant market.


For example, in Ashish Ahuja v. Snapdeal, CCI observed that offline and online markets are merely two different channels of distribution. In doing so, it rejected e-commerce as a separate market which, in turn, outcast e-commerce giants from liability under an abuse of dominance. A similar line of argument was followed in Mohit Manglani v. Flipkart India Private Limited as well where the online market was found to be substitutable with offline markets and hence a part of the same market.

However, CCI had been highly inconsistent in defining relevant markets (here and here). A very pertinent example would be to point out how in Fast Track Call Cab Private Limited v. ANI Technologies Private Limited, the commission relied on "convenience to the customers’" to declare radio cab services as non-substitutable and, therefore, a separate market in itself. This recent case of Amazon/Flipkart is the latest order on this position in which CCI has held the parties to be dominant in the e-commerce realm, recognizing it as a separate market.


Assessment of Dominance


Online retail currently acquires 3.4% of the market. In the first quarter of 2019, Amazon and Flipkart were holding 36% and 53% respectively of the market share in the relevant market. Furthermore, four times of the current growth in online retail is anticipated owing to the increase in online penetration, and the availability of cheap data, mobile phones and other electronic devices.


In the case of All India Online Vendors Association v. Flipkart, 2018, CCI refused to consider any individual online platform to be in a dominant position by stating that such platforms are still evolving in the market and that, looking into their current market construct, it cannot be said to be a case of abuse of dominance. In contrast to this order, the Supreme Court under its appellate order in Uber India Systems Private Limited v CCI did not take into account market share as the sole criterion to determine domination in the marketplace. Rather, the court decided against Uber under Section 4 of the Competition Act 2002 by stating that Uber was deviating the relevant market in such a manner which was in its favour and was against competitors. The apex court highlighted that Uber by its capacity to operate in losses had a position of strength in the market, which it used against the competitors by offering unfair prices. Accordingly, investigation was ordered to look into ‘predatory pricing’ by Uber.


Cues should be taken by regulatory authority from the above mentioned apex court judgment while looking into the matters of unfair pricing by an online platform. Apart from market share, the position of strength should also be taken into account while investigating predatory pricing by online marketplaces. Below-the-cost pricing by such enterprises coupled with preferential treatment and misuse of data collected from users have anticompetitive effects on relevant markets.


Although discounts seem to promote consumer welfare in the short run, on the other side, they create distortions in the supply side of the market. Deep discounts can also throw small competitors out of the market as they diminishes the value of goods and services in the market if continued for a longer time. This may, in effect, also harm consumer welfare since this approach might leave few options in the market for consumers to choose from; and because of less competition, such enterprises will have the leverage to increase prices or decline quality of products, harming the interests of the consumers. Discounts per se are not anticompetitive. However, in the case of e-commerce, such discounts could be considered anti-competitive when they are used to enter into exclusive agreements with other retailers or to restrict such retailers from entering into business with other platforms.


Predatory Pricing - Analysis of Inadequacy Surrounding Present Framework


Below Average Cost Pricing


There are various concerns associated with the determination of predatory pricing and applicability of costing tests for such determination in the context of e-commerce.


Presumption of predation leads to inquiry in price setting by e-commerce. However, below-the-cost measure is itself ingrained with several setbacks. In Indian jurisdiction, while Regulation 3 of the Competition Commission of India (Determination of Cost of Production) Regulations 2009 provides for average variable cost as the standard cost, ample space is provided for other any other type of costs to be taken as a threshold. This can also be observed from the judicial precedents such as in MCX v. NSE, wherein it was held that it was at the regulator’s discretion to decide which interpretation of cost is to be taken on a case-to-case basis. There is no straitjacket method recognized by the antitrust authorities.


The standard and test of the cost vary depending on a host of factors, such as different industry and market patterns. However, where on one hand this approach seems to provide regulatory authorities with sufficient space to promote competition law principles, on the other hand, deep discounting by e-commerce platforms might go unnoticed because of the loose boundaries of below-the-cost concept. For instance, during the period from 2007 to 2009, Amazon was able to acquire 90% of the e-books market by way of selling its Kindle and ebooks much below their cost prices in the United States. Interestingly, no action was taken by USFTC against such practices. They were of the view that this should be treated as a loss-leading strategy as against predatory pricing strategy. However, in reality, Amazon was selling below cost to capture maximum relevant market share as possible. It should be taken into account that such online platforms can easily make up for losses by recouping them from unrelated goods and services on their platform and can easily capture major market share without much financial hassle.


Recoupment in Adjacent Markets


Antitrust authorities all over the world have time and again used ‘aggregate profitability’ as a justification to allow deep discounts on particular products. E-commerce marketplaces might use this as an excuse to escape liability, as we saw in the Amazon/Kindle case. However, such practice allows the e-conglomerates to undertake predatory pricing in one sector and cover for losses through the rest of the sectors.


At this juncture, it becomes difficult to differentiate between healthy discounting and unhealthily deep discounts. To solve this doubt, the intention of elimination of competition (such as when other e-marketplaces are not in a position to offer such discounts) is pertinent. In order to decipher this anti-competitive intention, courts resort to a test of recoupment. It is important to point out that losses led through predatory pricing can be recouped in multiple forms, which are often ignored by the courts.


In several instances, antitrust authorities have rejected possibilities of recoupment in adjacent markets. Contradictorily, there is no dearth of real-life instances where firms did recoup from adjacent markets. For example, Microsoft booked losses on browser technology to prevent competition from Netscape; it never recouped losses in browser technology, but through an adjacent market, that is operating systems. Similarly, in the conflict between Liggett and Brown & Williamson (B&W) Tobacco, B&W recouped the losses in the generic cigarette market from upscaling prices in the branded cigarette market. In United States v. AMR Corp., it was observed that predatory pricing becomes a profitable venture, particularly in multi-market context, where recoupment can be done from adjacent markets of complementary, substitute, replacement goods, etc.


Non-recognition of this likelihood of recoupment in other markets while adjudicating on predatory pricing by online platforms is an extremely narrow approach. E-commerce companies manipulate competition by financing deep discounts to selected sellers, only to recover from such losses through increased sales of non-discounted products. A discussion paper by the European Competition highlights that the concept of predatory pricing is also applicable not only when the dominant company predates in the markets it has dominance in, but also in adjacent markets if such predation has the effect of protecting or strengthening its dominance in the dominated market. Therefore, a parallel can be made where e-commerce companies indulge in predatory pricing by offering deep discounting (as sellers) in order to gain an advantage in the market they are already dominant in (i.e. of intermediary e-marketplace platforms).


Establishment of Intention to Predate


Furthermore, the presence of mala-fide intention, which distinguishes predatory pricing from competitive price cutting, in itself is a difficult ingredient to establish. Online platforms have huge financial backing and investor’s support because of which they are in a position to devise unique below-cost structures that favour them in relevant markets. Therefore, regulatory authorities should introduce a presumption of predatory pricing for such online platforms which enjoy a position of strength in the market and undertake below-the-cost pricing method.


This presumption can again be bolstered by the fact that online retail platforms enter into several exclusive arrangements with the sellers whereby such sellers are provided support to perform excessive price cutting and are allotted preferential treatment. Because of this, many businesses have to bear the brunt and consumers get inclined to sellers providing deep discounts. Online retail platforms also tend to dive in price manipulation and price discrimination by the help of consumer data that they acquire, bringing the presumption of predatory pricing to the fore.


Conclusion and Suggestions


The importance and vitality of e-commerce have gained immense popularity in Indian markets. The growing importance is such that e-marketplaces might now act as an essential infrastructural facility relied upon by sellers. Indian jurisdiction is witnessing unsettling changes on both judicial as well as legislative front on this matter.


The Consolidated Foreign Direct Investment Policy 2017 (FDI Policy) released by the DIPP restricts e-commerce entities from exercising any ownership over the inventory of the sellers listed with them or influencing sale prices of goods and services in any manner. While this assists in addressing the issues to some extent, this policy is still not applicable to all competitors in the market. There is an absolute dearth of any legislative tool prohibiting domestic players from undertaking such unfair conduct. This leads to an utmost need for clarity and certainty on the part of CCI.


To curb the deceptive deep discounting a few public utility measures should be implemented. First, a non-discriminatory policy should be introduced. As can be seen in the case of online retail platforms, where they provide preferential treatment to those with whom they have tie-ups, exclusive arrangements or vertical agreements. By way of such treatment, they get unfair advantage and chances of their involvement into unfair and deep discounting increases. Therefore, such practices should be curtailed by way of transparent mechanism wherein the sellers present on online retail platforms report their basis of discounts, disclose any participation by online platforms in reimbursing such forgone amount and business justifications for deep discounts, if any. Second, proper data privacy policy should be set in place so that online platforms do not use consumer data to further price manipulation and price discrimination.


Third, the recent FDI policy released by the government prohibits ‘foreign’ e-commerce players from deriving more than 25% sales from a single seller. This was done to ensure that they do not indulge in anti-competitive practices by favouring certain sellers against others. However, there is no rationale in keeping this restriction limited to ‘only foreign’ e-commerce companies and shall be made applicable to the domestic companies as well. Additionally, while the intention of the government might be to preclude unfair seller-marketplace tie-ups; this might in fact act as an entry barrier to those e-marketplaces which are in their initial phase and have only a few listed sellers. To avoid this unwanted effect of imposing an upper limit on revenue from a single seller, a defence should be carved out to support such new entrants.


A fair assessment should be made into the online platform’s structure, the position of authority that it holds onto the stakeholders it deals with and financial or investment structures that allow the online platform to undertake deceptive and below-the-cost pricing. E-commerce platforms are a vital tool for economic up-gradation of the country. Thus, they should be provided with enough space and flexibility to grow. However, such growth should not be backed by anticompetitive conduct and should not make other businesses in relevant markets unviable. There is a pressing need for revision of traditional antitrust policies to make it suitable for filtering such unfair activities/false positives of online platforms and keep consumer welfare along with healthy competition intact.

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