According to an industry report by India Brand Equity Foundation, India is the fastest-growing e-commerce market in the world. The digital economy in India is estimated to be worth a trillion US dollars by the year 2025.
The rapid growth of the e-commerce market has invited increasing scrutiny by competition law regulators, including the Competition Commission of India (“CCI”). In April 2019, the CCI launched a market study into the e-commerce market in India (“Market Study”). The interim findings on the market study were published by the CCI in August 2019.
One of the key competition concerns identified by the CCI in the market study was the imposition of parity clauses by e-commerce platforms on sellers using their platforms. The market study specifically identified the online travel agency market (“OTA”), and the online food ordering and delivery market (“Food Delivery”) as examples of markets where such parity clauses were prevalent. Following on the heels of the Market Study, the CCI in October 2019, directed its first investigation into platform parity clauses in Federation of Hotel & Restaurant Associations of India (FHRAI) v MakeMyTrip India Pvt. Ltd & Ors., Case No. 14/2020 (MMT case).1
Parity clauses, in essence, oblige sellers/retailers to offer on their marketplace/platform the lowest price and/or best terms, thereby restricting the sellers from offering better prices or terms to competing platforms/marketplaces or on their own websites. Parity clauses are commonly categorized into two based on their scope and effects.
A ‘narrow' parity clause restricts the seller from offering prices and terms on its own website, which are more favourable than what the seller has provided to a particular platform. Sellers are, however, permitted to offer better prices and terms to competing platforms.
A ‘wide' parity clause restricts the seller from offering better prices or terms to competing platforms or even the seller's own website. Thus, the difference between narrow and wide parity clauses is in the scope, i.e., the scope of coverage in wide parity clauses are broader than the scope of coverage in narrow parity clauses.
Restrictive effects of parity clauses
The primary theory of harm associated with parity clauses, particularly wide parity clauses is that they soften competition between platforms. Most e-commerce platforms in India operate under an agency model where they charge commission/fee for every sale made by a seller through their platform.
A wide parity clause removes the incentive for platforms to compete on the commissions that they levy on their sellers. This is because the sellers are prevented from rewarding the platforms that levy lower commissions with lower listing prices on the platforms.
Secondly, parity clauses may result in higher prices for the end-users and incentivize platforms to increase the commissions that the levy on their sellers. The parity clause ensures that the seller does not react to the higher commissions by correspondingly pricing a product higher only on platforms that charge higher commissions. If a price increase is effected on a particular platform, the seller is constrained to correspondingly increase prices in other platforms as well by virtue of the parity clause.
This, in turn, may lead to price uniformity across different platforms. At the same time, it may also lead to other platforms increasing their commissions as a response to the higher listing prices by sellers.
Thirdly, parity clauses may operate as a barrier to entry in the downstream market for platforms. One of the means by which a new market entrant in the downstream platform market attracts upstream suppliers is by offering lower commissions and better terms in comparison to their competitors. However, the parity clauses prevent suppliers from rewarding the platform with lower listing prices or better terms because a lower price offer or an offer of better terms would trigger a demand for parity in both prices and terms from other platforms.
Enforcement of Parity clauses in foreign jurisdictions
From the year 2010 onwards, parity clauses have increasingly come under the scrutiny of competition law regulators across the globe. In 2015, Amazon's use of parity clauses came under scrutiny when the European Commission (EC) opened a formal investigation into Amazon's e-book distribution arrangements. In 2017, the EC adopted a decision in which Amazon undertook not to enforce the parity clauses in its agreements with publishers.2
Another notable instance where parity clauses were addressed is in the Online Travel Agent (OTA) market. In December 2013, the German Competition Regulator (Bundeskartellamt) prohibited ‘wide' parity clauses used by a major German OTA (HSR-Hotel Reservation Service). The Dusseldorf Higher Regional Court subsequently upheld the decision in January 2015.
In April 2015, following a coordinated investigation into the price parity clauses imposed by Booking.com, the French, Italian and Swedish Competition Law authorities accepted commitments from Booking.com to change its ‘wide' parity clause to a ‘narrow' parity clause.
Position in India and the way ahead
Since sellers and platforms operate at different stages/levels of the production chain in different markets, parity clauses are likely to be assessed under Section 3(4) of the Competition Act, 2002 (“Act”). Further, provided the platform is a dominant player in a particular market, the imposition of a parity clause can also be assessed under Section 4 of the Act.
Agreements under Section 3(4) of the Act are anti-competitive only if they cause an appreciable adverse effect on competition (AAEC) in India. The question as to whether an agreement causes AAEC is an analysis of a balance between the positive and negative factors listed under Section 19(3) of the Act. The pro-competitive factors provided under Section 19(3)(d)–(f) of the Act include (i) the accrual of benefits to consumers if any; (ii)improvements in production or distribution of goods or provision of services; or (iii) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
Arguably, parity clauses also have pro-competitive effects. Parity clauses prevent free-riding by the sellers and competing platforms, thereby facilitating the welfare-enhancing investments that platforms make in the promotion of the goods listed on the platform. Another important aspect that the CCI may consider while assessing parity clauses is the market share of the parties. The decisional practice of the CCI indicates that competition concerns in a vertical relationship only arise when either of the market operators possesses the market power to impose unreasonable restraints on the other.3 This `is in line with the practice followed by foreign regulators. In Europe for instance, the EC's final report on the e-commerce sector inquiry provides that both wide and narrow parity clauses are not considered problematic if the parties' market shares are below 30%.4
Thus, the assessment of parity clauses under competition law is a complex balancing act between its pro-competitive and anti-competitive effects. The analysis is also dependent on the market context in which they are entered.
With the further development of the e-commerce market, it is anticipated that the CCI will continue to examine instances of parity clauses in the future. The CCI's decision in the MMT case will provide further clarity and certainty on this aspect.
Footnotes
1 Order under Section 26(1) of the Act dated 28 October 2019.
2 https://ec.europa.eu/commission/presscorner/detail/en/IP_17_1223, last accessed on 28 July 2020.
3 Sonam Sharma v. Apple Inc. USA and Ors, Case No. 24/2011; Dhanraj Pillay and Ors. v. M/s Hockey India, Case No.73/2011
4 European Commission Final Report on the E-Commerce Sector Inquiry, Paragraph. 621
Originally published 29 July, 2020
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