Vaibhav Choukse & Rimali Batra: E-tailers and the future of friction-free capitalism

The government has sought the competition authority's views after Flipkart's Big Billion Day Diwali sale but trends in global regulation suggest that despite traditional retailers' objections, online retail is here to stay

The Indian marketplace has been teleported from the real bazaars to the virtual ones but little has changed between the 2006 Big Bazaar's "Sabse Sasta Din" to the "Big-billion day" online sale by Flipkart. When the supermarkets were first introduced in India, traditional brick-and-mortar retailers expressed fears that doomsday was looming. With the battleground being the online marketplace, big brands including LG, Sony, supermarkets and book publishers protested against the jaw-dropping online discounts offered by online players and accused them for predatory pricing and devaluing their brands. While many are questioning the strategy adopted by e-retailers; traders and Department of Industrial Policy and Promotion is seeking the Competition Commission of India's (CCI) intervention. The verbal spat over "maintaining hygiene pricing" has indeed grabbed CCI's attention.

Not that the CCI is an outlier. Competition authorities around the globe have been investigating the business practices of online players such as Amazon, Google and eBay. The crucial question from a competition policy perspective is whether this is a temporary or permanent trend, as history has seen many once-popular online companies suddenly finding themselves on the verge of failure.

The manner in which courts define the concept of "relevant market" in addition to the role played by e-commerce companies - whether they are e-retailers (that is, companies holding inventory/stock and/or providing a marketplace like Flipkart) or an e-marketplace owners like Snapdeal and Amazon - will determine whether such companies ultimately face antitrust liabilities. Pure e-marketplace owners and non-dominant e-retailers are unlikely to fall foul of predatory pricing norms. However, the dominance of these companies (and the abuse of dominance, if any) cannot be ruled out in their respective relevant markets. For instance, retailer Walmart was prohibited by the German Competition Authority (GCA) from selling food items below its purchase cost (on grounds of it being predatory pricing).

Generally, competition authorities struggle to apply traditional rules to novel market practices. For instance, luxury or technical goods manufacturers use a selective distribution system, a method by which the suppliers agree to supply only those distributors who meet certain minimum criteria. Authorities are increasingly suspicious of suppliers limiting the ways their distributors compete in the electronic sale of their product. The challenge for CCI will be to protect competition without impairing the competitive, dynamic and beneficial processes in the nascent online market by achieving the right balance between caution and intervention.

Indian competition law is broadly modelled on European Union and US competition law. Over the years, major competition authorities leading the way for the CCI have earmarked some clear rules for online traders:

• Banning internet sales: In the Pierre Fabre case of 2011, the European Court of Justice ruled that any de facto ban on the distributor/retailer on the use of the internet as a channel of sale amounted to hard-core restriction that is not objectively justified. Similarly, in the Ciba Vision Case, GCA rejected the argument that restrictions imposed on online sales of contact lenses were, given the specific nature of the product, necessary to protect consumer health. GCA observed that less restrictive options could have been adopted to fulfil this purpose. Recently, Adidas abandoned its ban on sales via online marketplaces after GCA started investigations.
   
• Fixing the resale price: In online distribution contracts, companies need to carefully consider the risks of provisions that could have the effect of setting resale prices. These risks are viewed as more acute in the online world.
   
• Most Favoured Nation (MFN) clause: Also known as "price parity" or "best price" clauses, MFN clauses are agreements between seller and an electronic trade platform under which the seller undertakes not to charge on that platform a price that is higher than the price that he charges on other platforms. Such agreements are condemned by most competition authorities (the recent Apple e-book case being one example).

Given the impact of e-commerce on the way competition works, most competition authorities agree that e-commerce does not require the application of a specific regulatory regime. Fifteen years ago, Bill Gates imagined that the internet would help achieve "friction-free capitalism", a marketplace that rests economic power in consumer's hand and eliminates intermediaries. The internet has transformed marketing and distribution systems. Given that these issues are newly emerging in India, many of them have not yet found their way to the inside of a courtroom. But even with more regulations and tighter monitoring, the fact remains that online retail is here to stay.

Vaibhav Choukse is a Competition Lawyer and Rimali Batra is a Regulatory Lawyer, practising in New Delhi.
These views are personal.