x

July 2019

Controlling price of supply down the ladder: An antitrust breakdown


By Charanya Lakshmikumaran & Puneeth Ganapathy

Pricing of goods or services, by corporates, is typically a fine balance, among other factors, between the brand image and competition. To this effect, manufacturers and producers often try to control the price of goods or services in their downstream supply chain. Resale price maintenance (‘RPM’) refers to this determination of the price of goods or services at a downstream level such as at the level of a distributor. However, RPM may attract scrutiny of the Competition Commission (“CCI”) for being anti-competitive, if, for instance, the agreement stipulates a minimum price that must be maintained by the distributor at the time of sale.   

However, do all vertical RPM agreements fall foul of the Competition Act, 2002 (“Act”)?  This article aims at encapsulating the existing law relating to RPM agreements and their treatment under Indian competition law.

The law
RPM is expressly proscribed under the Act, amongst other practices[Endnote 1], but only if it causes an “appreciable adverse effect on competition” (‘AAEC’) in India[Endnote 2]. Thus, it is necessary to understand circumstances when RPM agreements may cause AAEC in India. 

AAEC is determined by weighing the negative and positive effects that an agreement has or may have on competition in the market. Various factors have to be weighed, such as assessing the competitiveness of the market, entry barriers or foreclosure of existing competitors etc. Some positive effects of an agreement include accrual of benefits to consumers and improvements in the production or distribution chain etc.[Endnote 3] which also are analysed.

The conundrum
Manufacturers may be interested in the downstream market price of their products for a variety of reasons, such as avoiding welfare-reduced “free-riding” by market players.[Endnote 4] Online retailers operating in the e-commerce space may similarly employ pricing algorithms to meet the latest pricing revisions made by competitors.  
 
However, in principle RPM is by its very nature considered to be anticompetitive. While European courts have held that it “impair(s) the franchisee’s freedom”[Endnote 5] to determine prices, and arguably thus, takes away the possibility for the consumer to be benefited by competition between franchisees, Indian law finds a middle path in the analysis of anti-competitiveness, in that an RPM agreement does not necessarily result in an AAEC on the basis of the factors contained in the Act, as stated above.

The jurisprudence
The CCI has consistently held that a vertical price restraint such as RPM needs to be proven to be anticompetitive on an analysis of the factors for determination of an AAEC.[Endnote 6] In other words, such agreements are not presumed to be anti-competitive, but have to be proven to cause or likely to cause AAEC on competition in India. The effect of an RPM agreement on the ability of competitors, both new and old, to compete in the market is thus crucial to determine an AAEC.[Endnote 7]

What must therefore be shown is that the RPM erodes or demolishes the distributor’s flexibility in pricing. But stating “recommended” prices or “monitoring the downstream market’s price” in a distributorship agreement does not automatically become anti-competitive[Endnote 8] Because it does not impar the distributor’s right to determine his price. The Act itself defines an RPM agreement and explicitly allows a maximum price to be prescribed, as long as no inflexible floor price is fixed.[Endnote 9]

Where an RPM does in fact set a floor price,  it would arguably cause an AAEC unless strong market analysis shows otherwise. Restricting the downstream distributor’s freedom to sell at a price below an identified level, is in the words of the CCI, intended to “avoid price competition between retailers”.[Endnote 10] Squarely, this removes any incentive or ability to compete, for both existing and potential retailers, thus causing an AAEC.  An RPM also effects inter-brand competition by reducing pressure on competitors at the horizontal level (i.e. competing manufacturers) as to product pricing.[Endnote 11]

Even in such an instance, the CCI has found that no AAEC is caused where not all downstream distributors were restrained by a purported RPM agreement.[Endnote 12] In such a case, for RPM to take effect, according to the CCI, the restraint has to be imposed evenly on all the relevant downstream distributors and not only on a few of them. Arguably, this is correct since the scope to compete on prices is not entirely absent in such a scenario. Those that escape the imposition of the restriction can compete on prices to the end-consumer’s benefit, in theory. Yet, a legitimate AAEC analysis requires balancing this with the potential for discriminatory and preferential treatment for particular distributors.

Interestingly, market dominance is also an important factor adopted by the CCI to conclude the existence of AAEC caused by an RPM agreement. In one decision, the CCI noted that even where price was fixed by the manufacturer, unless the manufacturer had ‘significant market power’, (a concept foreign to the Act ) no AAEC could be established.[Endnote 13] In another order, the CCI indirectly invoked market dominance by referring to the de minimis effect on the market when the agreements under question were between ‘weak’ enterprises.[Endnote 14]

The lack of significant market power does indeed signify that the market is sufficiently filled with competitors at a horizontal level. Yet, it is arguable that an AAEC analysis of vertical agreements is really meant to be aimed at ensuring competitiveness of the market for the specific product at the retailer/distributor level, and not only to ensure horizontal competition at the manufacturer level.

Thus, taking the CCI’s guidance further, analysis of market power, along with all its nuances, will likely become a pre-requisite not only on allegations of abuse of dominance but also while judging the effects of vertical restraints.

Arguably, in the CCI’s jurisprudence it will thus be impossible for ‘weak’ parties to ever enter into an anti-competitive agreement, almost being exempted from the operation of the Act, being considered too weak to cause an AAEC.

The only question that then remains is the subjective determination of weakness or strength of the contracting parties – as a last-straw-defense to an otherwise anti-competitive agreement.  

Notable illustrations
The EU targets agreements which even in their object, amount to RPM. Resultantly, the threshold for showing an AAEC-causing-RPM agreement appears higher in Indian competition jurisprudence than in the EU. However, it is helpful to refer to the inexhaustive listing in the EU Guidelines,[Endnote 15] of the possible forms an RPM may take, as it is formulations of these common kinds of agreements that are likely to add to competition jurisprudence in India.

  • Fixing margins for distributors
  • Fixing the maximum level of discount a distributor may grant
  • Tying the grant of rebates or reimbursement of promotional costs to a fixed selling price
  • Linking resale price to prices of competitors
  • “threats, intimidations, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to the observance of a given price level”
  • Use of retail pricing algorithms by players in the e-commerce segment
Conclusion
Given the infancy of competition jurisprudence in India, issues pertaining to resale price restraints are far from settled. As business practices and the laws evolve –  free market, innovation and investment in supply chains will hopefully stand to be the real winners.  

[The authors are Partner and Principal associate, respectively, in Commercial dispute resolution practice, Lakshmikumaran and Sridharan, Delhi]
 
NB: In a clear case of bad drafting, the wording of the RPM definition in the Act appears to be limited to ‘goods’, although omitting ‘services’ from its scope is very unlikely to have been the legislative intent.
  
Endnotes:

  1. Sec. 3(4(e)), Competition Act, 2002
  2. Ibid
  3. Sec 19(3), Competition Act, 2002
  4. When a distributor/manufacturer expends considerable resources to sell products, it naturally hopes to recover these expenses, in addition to being profitable. For example, a  dealer ‘X’ of ‘Y’ brand of automobiles will spend money for setting up a large showroom, training staff and advertising on hoardings. Other dealers, A and B dealing in the same brand of automobiles, will benefit from this promotion. However, A and B, having not incurred this promotional expenditure, will be in a position sell Y branded vehicles with lesser margins than X, while possibly making the same or even more profits. This results in a race-to-the-bottom, where A and B will always be able to price lower than X. Eventually, it will become unprofitable or unviable for X to even stock and sell Y branded vehicles, thereby distorting the market. Setting a resale price usually ensures a minimum margin thus aimed at avoiding a race-to-the-bottom intra-brand competition.  
  5. Ronuptia de Paris v. Schillgallis Case 161/84, [1986] ECR 353, para. 25
  6. In re: Counfreedise and Timex Group India Ltd. Case No. 55/2017
  7. Sec. 19(3(a)-(c)), Competition Act, 2002
  8. In re: ESYS Information Technologies and Intel Corporation,  Case no. 48/2011
  9. Sec. 3(4), Competition Act, 2002
  10. In re: Jasper Infotech Pvt. Ltd. and Kaff Appliances India Pvt. Ltd., Case no. 61/2014
  11. In re: FX Enterprise and Hyundai Motor India Ltd., Case nos. 36/2014, 82/2014
  12. In re: Counfreedise and Timex Group India Ltd. Case No. 55/2017
  13. Ibid, supra n. 12
  14. In re: Ghanshyam Dass Vij and M/s Bajaj Corporation Ltd., Case No. 68/2013
  15. European Commission Guidelines on Vertical Restraints (2010), para. 48

Browse articles