Avirup Bose: A case of 'consumer unfriendly' brands

Consumer goods companies that boycott discounted sales of their products by e-tailers could be liable for scrutiny by the competition regulator for restricting free trade and customer choice

India's e-tail triumvirate of Flipkart, Amazon and Snapdeal is suffering from a regulatory headache, given that the Competition Commission of India (CCI) could potentially launch an antitrust probe into their pricing strategies and trade practices. Of the two principal antitrust questions that CCI needs to probe the issue of alleged "predatory" pricing strategies by online retailers has received disproportionate attention from the financial and legal commentariat, while considerable less attention is being paid to the antitrust implications of the proposed boycotting by consumer goods companies of e-tail firms like Flipkart.

The Competition Act 2002 provides that vertical restraints imposed upon distributors that directly or indirectly restrict their capacity to competitively distribute or price goods could be anti-competitive in nature. In the wake of Flipkart's "Billion Day Sale", several consumer goods makers, including LG Electronics, Sony and Samsung have issued advisories indicating possible denial of warranties/service coverage on their branded products sold on e-tail portals because they could not vouch for their genuineness. Others have been more direct and written to the online retailers threatening to stop supplies if the discounts aren't withdrawn.

E-tail firms typically operate on a market-place model, providing a platform for vendors to sell their goods without holding any inventory themselves. Consequently, such firms are dependent upon vendors agreeing to use their platform to sell products. If consumer goods companies can successfully prevent their branded goods from being sold on e-tail websites, or impose price or service/warranty restrictions on products retailed online, it would severely restrict consumer choice besides irreparably damaging the prospects of an industry that experts believe will be valued at Rs 50,000 crore by the end of 2016.

By boycotting sales on e-tail websites or by imposing other asymmetrical product options, marketing support, or pricing restrictions between online and traditional retailers, manufacturers could intend to insulate brick-and-mortar stores (accounting for almost 90 per cent of their sales) from tough innovative competition. Such protectionist and anti-consumer strategies, allegedly justified on grounds of consumer heath or fears of brand dilution, are against the very core of CCI's mandate - to ensure freer trade and enhanced consumer choice. Such marketing strategies could be branded as anti-competitive and could risk facing substantial antitrust penalties.

At the same time, CCI will need to strike the appropriate balance between vigorous antitrust enforcement and encouraging investment in selective distribution networks and other valid online distribution management strategies. Simply put, a manufacturer's right to determine the most appropriate means of marketing its goods needs to be balanced with the need to create a more level playing field in the Indian retail industry.

Last month, the Delhi High Court stayed a "caution notice" issued by kitchen appliances maker Kaff, accusing online retailer Snapdeal of selling counterfeit products and undercutting prices and similar decisions have been reached by the competition law agencies and courts of mature antitrust jurisdictions. European Union (EU) regulations on vertical restraints and EU courts have consistently held blanket bans of internet sales as anti-competitive in nature. Further, antitrust authorities of France and Germany have explicitly rejected the argument of imposing restrictions on distributors selling online to protect consumer health, finding that the real concern of the manufacturer was the price pressure that sales on e-tail portals would exert on its products.

EU courts have been more lenient when different sets of supply/warranty conditions are imposed by manufacturers on online retailers compared to traditional retailers, which reflects objective differences between the two distribution channels. For example, given that traditional retailers provide customised installation services that are not provided by online retailers, denial of warranties linked to any defects arising out of faulty installation of consumer goods would be less problematic under competition law. However, a blanket denial of warranty benefits for the products sold on the internet would more likely make such restrictions illegal.

With Prime Minister Narendra Modi's stress on the creation of a vibrant digital economy for India, issues related to internet and antitrust will only become more common in the future. CCI will need to think out of the box to ensure that consumers are able to enjoy the competitive benefits of e-commerce, and that its remedies do not potentially curb the Schumpeterian business/marketing models of one of India's most vibrant sectors.

The writer is a former expert consultant to the Competition Commission of India.
These views are personal