During the ongoing pandemic, online purchases from Tier II and Tier III cities have been recording skyrocketing rates of growth. This reflects the altered Indian consumer’s habits, who now prefer to use online platforms such as Amazon and Flipkart for their purchases. Health concerns, convenience, and increased data connectivity have only accelerated this change.
This, however, is disastrous for small retailers, many of whom have either joined these e-platforms or have folded due to economic uncertainty. Conversely, these tech behemoths have recorded a consistent spike from the pre-Covid numbers. With Diwali nearing, Amazon, Flipkart and others are offering deep festive discounts, while brick-and-mortar retailers struggle to limp back to normalcy.
A recent US House committee report criticised the abusive tactics used by Amazon. The report found that Amazon had strangled and undercut the small retailers on its platforms by setting unfair terms. Indian retailers too face such abuse. However, due to the current approach of determining market dominance by the Competition Commission of India (CCI), they have no recourse under the competition law.
Where is the dominance?
CCI determines abuse of dominance by analysing the market share of a firm. This, however, does not paint the true picture of the dominance commerce portals wield. Case in point: Amazon and Flipkart enjoy a market share of 31-35 per cent. This means that these players cannot be said to be dominant in the classical sense of having over 50 per cent market share.
This is because the e-commerce market has come around to become a duopoly market, where two similar platforms dominate the market simultaneously. These duopolies set the rules of the market and change them as per their whims.
The CCI found in a study that e-marketplaces exploit sellers by giving deep discounts on products of preferred sellers, modifying search results to suit their own or partners’ products, and mandating opaque dispute resolution mechanisms. Curiosity beckons: what explains such exploitative behaviour if none of these firms have dominant market share?
The answer is that albeit these firms do not have monopoly share of the market, they have dominant market power. Given the duopolistic nature of these marketplaces, small retailers trying to go online have no choice but to sell their products on both the platforms to have the maximum consumer reach. Realising this, the duopolies set rules which exclusively benefit them and though the consumers enjoy discounted prices, the sellers face hefty costs.
The sellers are burdened with the cost of dominance, and the CCI must change its approach from looking at what percentage of total sales take place on a platform to what percentage of total sellers are registered on that platform to investigate dominance.
Abuse through data exploitation
The key method of abuse by e-commerce platforms is through data exploitation. Platforms like Amazon collect immense data on both sellers and buyers. As these tech giants act both as a marketplace and as a competitor to other retailers, the collected data gives them an unfair advantage. Due to the sheer quantum of data that e-commerce giants have on their buyers, they are always in a position to target specific products to specific customers with exclusive pricing. The consumers tend to buy them due to ease of discovery and specialised pricing. Brick-and-mortar stores and other retailers cannot compete with this.
Insidiously, this data allows the behemoths to analyse the most popular and profitable items on their platforms. They then manufacture those products themselves, price them lower, and display them prominently on their platform. Amazon founder, Jeff Bezos has admitted to using third-party seller data to develop competing products.
India has taken proactive steps to curb this practice by changing the Foreign Direct Investment policy which bans e-commerce sites from offering exclusive sales. It also makes it illegal for them to sell products from companies that they have more than a 25 per cent stake in. However, e-market platforms get around this by using a variety of structures to create legally independent vehicles to sell their products.
What lies ahead?
Lina Khan, an eminent academician, has noted that the dual nature of e-commerce platforms as retailers and marketplaces helped them elude the consumer welfare framework of anti-trust regulators. With the accelerating rise of e-commerce portals in India, it is necessary for the CCI to immediately step in.
The change in the approach of analysing market power instead of market share is codified within the Competition Act, 2002. Section 19(4) of the Act allows the Commission to consider 13 factors to determine the dominant position, of which market share is just one. It also empowers the Commission to take into account any factor which the Commission may consider relevant for the inquiry.
Thus, the CCI has sufficient discretion to emerge as the saviour of small retailers. It must penalise these platforms for setting unfair contractual terms, for deep discounting, selling their own products and exploiting data to game the system. If the CCI does not act now many retailers will go bust even as e-platforms will rake in unprecedented revenues.
Binit Aggarwal is a final year student of the National Law School of India University, Bengaluru. Dhruv Jadhav is an advocate practising at the High Court of Bombay.