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15 January 2020

CCI directs investigation against two major e-commerce platforms for alleged vertical agreements in sale of smartphones

Looking into the alleged violation of Competition Act based on four alleged practices, namely, exclusive launch of mobile phones, preferred sellers on the marketplaces, deep discounting and preferential listing/promotion of private labels, being followed by two major e-commerce platforms, the Competition Commission of India has directed the Director General to cause an investigation to determine whether the conduct of these platforms has resulted in contravention of the provisions of Section 3(1) read with Section 3(4).

The CCI was of the view that the allegations are interconnected and warrant a holistic investigation to examine how the vertical agreements operate, what are the key provisions of such agreements and what effects do they have on competition.

Observing that online channel constitutes a predominant channel of distribution for smartphones, the Commission also held that the exclusive arrangements between smartphone/mobile phone brands and e-commerce platform/select sellers selling exclusively on either of the two platforms, as demonstrated in the information, coupled with the allegation of linkages between these preferred sellers and OPs, merits an investigation.

The CCI in its Order dated 13-1-2020 in the case of Delhi Vyapar Mahasangh v. Flipkart Internet Private Limited and its affiliated entities & Amazon Seller Services Private Limited and its affiliated entities further held that it needs to be investigated whether the alleged exclusive arrangements, deep-discounting and preferential listing by the OPs were being used as an exclusionary tactic to foreclose competition and were resulting in an appreciable adverse effect on competition contravening the provisions of Competition Act.

It may be noted that the CCI while directing the investigation against the two platforms also observed that since both the platforms are stated to follow the same mechanics in terms of their exclusive tie ups and preferential terms with brands/sellers, competition between the platforms prima facie does not play a role in mitigating the potential adverse effect on competition on the platforms.

Exclusive launch, preferential treatment and deep discounts

The CCI was of the prima facie view that exclusive launch of certain mobile phones coupled with the preferential treatment to a few sellers and the discounting practices create an ecosystem that may lead to an appreciable adverse effect on competition.

The Commission in this regard perused the prices for different smartphone brands sold through the two platforms and observed that certain brands/models were available at significantly discounted price on these platforms and were sold largely through the sellers identified, by the Informant, as the platforms’ ‘preferred sellers’. It held that whether funding of discounts is an element of the exclusive tie-ups is a matter that merits investigation.

Market Study on E-commerce in India

Interestingly, the Competition Commission of India had on 8th of January 2020 in its ‘Market Study on E-commerce in India: Key Findings and Observations’ also observed that issues like lack of platform neutrality, unfair platform-to-business contract terms, exclusive contracts between online marketplace platforms and sellers/service providers, platform price parity restrictions and deep discounts, may, directly or indirectly, have a bearing on competition, or may hinder realisation of the full procompetitive potential of e-commerce.

The report also states that the Commission, under Section 3(4) of the Competition Act, can evaluate vertical agreements in a rule of reason framework to assess whether the disparity in discounts offered is used as a mechanism to induce exclusivity and whether the same leads to appreciable adverse effect on competition.

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