Examining the Price Parity Clause Through the Lens of Competition Law
Mayank Gandhi is a second-year student at Maharashtra National Law University, Nagpur.
The unprecedented growth in the e-commerce market in India and various business practises adopted by online intermediaries/marketplaces have invited the attention of the CCI to scrutinise the competition in this novel and dynamic market. Recent judicial developments and CCI’s E-Commerce Report have highlighted that the price parity clause adopted by marketplaces, particularly by online food service aggregators and travel agencies, is prone to significant competition concerns. The price parity clause is a type of vertical restraint that is imposed by a platform/marketplace on suppliers/retailers to restrict them from offering the goods lower on other sales channels. Various investigations conducted around the world have shown that MFNs can adversely affect the competition in the market. Therefore, in this article, the author will critically analyse the competition concerns attached to such clauses. It will also analyse the regulatory approach of the European Union. Lastly, this article will undertake the task of identifying viable solutions to effectively regulate the price parity clause and maintain fair competition in the market.
Critical Analysis of the Price Parity Clause with Respect to the Competition Act, 2002
The price parity clause can be divided into two different categories - the "narrow" price parity clause and the "wide" price parity clause. A narrow price parity clause restricts the retailers/sellers from selling the goods at a lower price than that offered on the platform or on their direct sales channel. The wide price parity clause prohibits the sellers from offering the most favourable terms to any other competing platform, including their own direct sales channel (i.e., website). Recently published, CCI’s e-commerce report has shown that the price parity clause can be examined under Section 3(4) of the Competition Act read with Section 19(3) of the Act. The major competitive concerns attached to the price parity clause are as follows:
Creation of entry barriers: a wide price parity clause can prevent the entry of new entrants into the market. Due to the constraints created by such a clause, new marketplaces that are charging lower commission rates will not be rewarded by retailers/suppliers in terms of lower prices or better terms as compared to their competitors. Thus, it will de-incentivize their entry into the market.
Softening the competition: Due to the wide price parity clause, retailers will be bound to provide equal/same prices on all the platforms. This will soften price competition among online marketplaces because a marketplace will be able to offer goods at the same price at which other competing platforms are operating pursuant to a wide price parity clause. Hence, there will not be any incentive for other competing platforms to charge lower commission rates, which could subsequently motivate these competing marketplaces to increase their commission rates. Further, if retailers want to increase prices on a particular platform by charging a higher commission rate, then these retailers will be required to increase their prices on all other platforms as well. Thus, a wide price parity clause will increase the prices for end consumers.
Discourage innovation in the downstream market: The online marketplaces invest heavily in technologies to provide quality services to consumers and reduce their transactional costs, which subsequently leads to lower commission rates. However, due to the wide price parity clause, there will be no effect on prices charged by the retailers from marketplaces. Thus, marketplaces, even after innovating new technologies, might not be able to sell goods at a lower price than that charged on other platforms, and this will thereby lead to resistance from the intermediaries in inventing new technologies.
Distorting the offline market: The narrow price parity clause is likely to distort the direct sales channels of retailers/service providers. In the presence of a narrow price parity clause, retailers/service providers will not be able to offer goods at a lower price on their website, and thereby their sales from the website will be likely to decrease. It will also reduce the bargaining/competitive power of the retailers. However, retailers can still offer lower prices on other platforms. Thus, it can be inferred that although the narrow price parity clause does not severely affect competition as the wide price parity clause does so, it is still having anti-competitive effects on competition.
One of the major pro-competitive effects/efficiency gains of the price parity clause is the prevention of free-riding and accrual of consumer benefits.
Prevention of free-riding: The danger of free-riding is quite prominent in the online food and travel service markets. The narrow price parity clause allows online intermediaries to attract customers to their platform by offering goods at a lower rate. However, in the absence of such a clause, retailers will attract customers to the platform and will lure them away by offering goods at a lower price in their physical outlets. Further, consumers can also free-ride the investment made by an intermediary/marketplace in providing quality pre-sale services such as customer reviews and smooth search functioning. In the absence of a wide price parity clause, consumers can use the high-quality interface of an intermediary to search and read reviews regarding the product and purchase it from another platform where it is available cheaply. Therefore, the intermediary will not be able to get a substantial return from the investment made in developing the high-quality interface. Hence, intermediaries implement a price parity clause to prevent free-riding, protect their investment, and encourage innovation in the market.
Reduction in the search cost of consumers: The presence of a wide or narrow price parity clause makes the consumer aware of the fact that the prices offered on the platform are the best available prices in the market. It makes the search process more effective for consumers. Therefore, it reduces the search cost for consumers.
The Regulatory Approaches of India and the European Union
In the case of Re: Federation of Hotel & Restaurant Associations of India (FHRAI) v. MakeMyTrip India Pvt. Ltd. and Ors., the CCI differentiated between narrow and wide price parity clauses. However, it only dealt with the anti-competitive effects of the wide price parity clause and ignored the anti-competitive aspects of the narrow price parity clause. Further, given the dominant position of MMT-Go, the wide price parity imposed by MMT-Go on hotels was held to be prima-facie anti-competitive and was directed to be investigated u/s 3(4) as well as 4 of the Competition Act. A similar decision was made in the case of Rubtub Solutions Pvt. Ltd v. MMT. These decisions have highlighted that CCI has adopted “a rule of reason” framework and is likely to investigate APPAs if an entity is dominant in the relevant market.
Furthermore, the European Commission and various independent national competition authorities of European countries have also dealt with the issue of the price parity clause. Apple/Ibookstore is one of the most well-known price-parity cases. In that case, the commission found that Appel’s broad MFNs had a significant adverse effect on competition. Similar reasoning was laid down by the commission in the case of Wikingerhof v. Booking.com. On one hand, the European Commission as well as the NCAs of different European countries (Sweden, France, and Italy) have explicitly restricted the wide price parity clause and allowed the narrow price parity clause but on the other hand, the German Federal Supreme Court held that narrow best-price clauses applied by Booking.com in Germany breach EU competition law. Additionally, the French and Italian legislators prohibited wide as well as narrow price parity clauses. Thus, it is pertinent from global practise that there is a lack of a unified approach for regulating the price parity clause. Therefore, it is required to investigate both narrow as well as wide price parity clauses on a case-to-case basis to remove the ambiguities regarding their validity and to gauge their impact on competition in a particular relevant market.
Conclusion and Way Forward
The assessment of the price parity clause under the Competition Act is a complex task. It has been pointed out that both wide and narrow price parity clauses have anti-competitive and pro-competitive effects. Thus, the author is of the opinion that a blatant prohibition on the price parity clause (wide and narrow) will not be a sound practice.
Further, the author is of the belief that while determining the validity of the MFN clause, it is required to identify the network effect, consumer base, and economic strength and position of the enterprise adopting the price parity clause. It is also required to consider the nature and characteristics of the market and the manner of implementation. Moreover, it is supposed to unfold to what extent a price parity clause can prevent free-riding and protect the investment of online marketplaces in a particular relevant market. For example, in its e-commerce report, the European Commission pointed out that wide or narrow price parity clauses used by companies with a market share of more than 30% must be looked into by the competition regime.
Lastly, a unified and case-to-case basis approach is required from CCI in gauging the competitive impact of price parity clauses on the market.