The Advent of E-commerce Market: CCI'S Implications & Regulations
Authors: Anisha Bhandari & Lavish Sharma
The authors are students at the Institute of Law, Nirma University, Ahmadabad
India is becoming a digitized economy with the advent of the e-commerce market. It is by far the fastest-growing segment in India due to an increase in internet access, a relaxation of the FDI standards that has allowed major international players to enter Indian markets, an increase in the adoption of ever-evolving technology and creative practices, increasing consumer demand and, inter alia, growth in the period of digital wallets.
The Competition Commission of India (CCI) released a detailed report listing the 'Market Study on e-commerce in India' on 8 January 2020 to address key concerns of a digitalized transaction in India. The study began back in April 2019 with the primary intention of studying and properly understanding the modus operandi of e-commerce in India, as well as its ramifications to markets and competition in the economy.
II. Rising E-Commerce
The rise in e-commerce, highlighted in Chapter 2 of the CCI report, is dramatic and is anticipated to increase from USD 39 billion in 2017 to USD 120 billion in 2020(¶12), at 51% annually, the highest rate of increase in the world.
The Online Marketplace Platforms connect sellers, buyers, and advertisers to facilitate transactions between them. The study reveals that digital retail trade in India is an estimated 64%(¶34) through online platforms.
Secure payment methods such as Cash, Net Banking, and Cards help in acquiring customers. Increased user connectivity, like broadband connectivity and economically viable internet-enabled devices, makes it possible for customers to access the online platform easily. The lack of any intermediary between customer and seller reduces the production cost, a factor that allows vigorous product price competition, one of the major contributors in building a phenomenal growth with a vast consumer base on a single platform.
Most of the e-commerce industry's growth has been triggered by rising internet and mobile penetration. Smartphone users are projected to reach 859 million by 2022, while the e-commerce market is expected to expand by 1200 per cent by 2026. For instance, the sale of mobile phones online accounts for around 40% of total mobile phone sales in India. This illustrates the dominance of the online market in the category of smartphones.
III. The Key Findings
A. Platform Neutrality
The issue of platform neutrality originates from the situation when online platforms such as Flipkart, Amazon, Swiggy, Zomato dominates the e-commerce market. The manipulation of the unlimited access of data, customer search rankings, preferences, and prices of competing products in the competitive landscape raises the question of platform neutrality. It is a situation when the operator works both as a marketplace and retailer via private labels on the marketplace. Another issue involving platform neutrality is the status of 'preferred seller'. A platform may give 'preferred seller' status to specific retailers in exchange for additional commissions.
With this issue, the CCI in its report of market study recognized that lack of transparency in the functioning of the platform could distort competition. Also, the potential for the imposition of unfair requirements or price variations during the sale or purchase of certain commodities by these dominant enterprises may be alleged to be contravening Section 3 and 4 of the Competition Act. While acknowledging the issue, the report provides guidelines for the platforms to ensure clear and transparent policies to reduce the risk of sharing information with third parties or related entities.
B. Exclusive Agreements
Section 3(4) of the Competition Act states provides that an agreement causing an Appreciable Adverse Effect on Competition is void. AAEC refers to restrictive practices in the market. For example, big platforms may abuse their dominant position and place anti-competitive arbitrary terms in contracts, leaving retailers at a competitive disadvantage. In themselves, large platform agreements may not be anti-competitive but when these agreements are combined with other exclusionary practices, such as exclusive dealing, they could produce an anti-trust impact within the market.
For instance, Flipkart and Amazon's involvement in the exclusive launch of smartphone brands on their platforms happens to raise this issue. In 2018, Amazon released exclusively 45 mobile phones and Flipkart 67 mobile phones. The CCI’s Direction for an investigation observed that the launches of these new products, in exclusive association only with preferred sellers, may result in an appreciable adverse effect on competition and contravening Section 3(1) read with Section 3(4) of the act (¶26):
Thus, the Commission observes that the exclusive arrangements between smartphone/mobile phone brands and e-commerce platform/select sellers selling exclusively on either of the platforms, as demonstrated in the information, coupled with the allegation of linkages between these preferred sellers and OPs alleged by the Informant merits an investigation. It needs to be investigated whether the alleged exclusive arrangements, deep-discounting and preferential listing by the OPs are being used as an exclusionary tactic to foreclose competition and are resulting in an appreciable adverse effect on competition contravening the provisions of Section 3 (1) read with Section 3(4) of the Act.
The E-commerce market study on these lines recognizes a lack of transparency in terms of the contract offered by the platforms and the search ranking requirements that create an anti-competitive market environment for other retailers on e-commerce marketplace platforms. It suggests that platforms strike a balance between maintaining transparency and decreasing the risk of sharing information.
C. Deep Discounts
The central characteristics of healthy competition is providing producers level playing field and make the market for the welfare of consumers. Deep discounts offered by e-commerce platforms often tend to create price differentiation between the physical and virtual markets, thus deforming the 'level playing field.' This practice has been recognized as anti-competitive by the CCI as it leads to price discrimination against retailers. When the e-commerce companies offer deep discounts, they force the retailers to discount heavily to compete with them.
The Flipkart/Amazon Direction for an investigation observed that the preferred sellers on these platforms may be economically connected with the platforms through investors, directors, or shareholders, and that the preferred sellers are really “extensions” of the platforms themselves (¶24) and that deep discounts funded by platforms for customer on-boarding leads to, service providers lose control over the price of their products via online marketplace platforms.
The report on this line stated that the online platforms should adopt transparent policies for discounting of products. It should provide a rationale on which the e-commerce companies offer discount rates and the implications for the customer on non-participation in these discounting schemes.
The growth of the e-commerce market within the country creates a competitive marketplace that can ensure prosperity in the Indian economy. This new technology makes sit convenient and economical for consumers to be able to buy a wide range of products, delivered to their doorsteps.
Strong cooperation between offline and online activities can be an effective long-term sustenance strategy. At the time of this global pandemic, customers have also turned to the online marketplace to buy vital grocery supplies. Regulatory authorities such as the CCI need to guarantee that the practices adopted by suppliers on these portals do not end up distorting the foremost free-flowing market mechanisms of demand and supply. Thus, the CCI's report has been comprehensive in addressing serious potential issues in the digital marketplace.
 E-retail market led by Flipkart, Amazon India and Paytm Mall is expected to continue its strong growth, by registering a CAGR (Compound Annual Growth Rate) of over 35 per cent and to reach Rs. 1.8 trillion (US$ 25.75 billion) by FY20.