[Mudit Nigam is a 4th Year Student of National Law Institute University, Bhopal]
The increased demand for products such as smart phones, ultra-HD televisions, LED lights, high-end laptops and computers, has promoted technological innovation and market growth, leading to the prominence of the high technology market in India. The country is emerging as a global digital lab with more than 20,000 technology companies, with an increasing focus on innovation, of which nearly 50% are digitally focused.
The manufacturers of the high-tech products adopt various market strategies to promote their products and increase its sales. One example of such strategy is resale price maintenance (RPM) which is a type of price fixing arrangement whereby the manufacturer fixes the price at which the retailer can sell the product to the end customers. The manufacturer may fix the maximum or minimum price at which its product can be sold and may also fix the maximum and minimum limits of discount offered on its product to the end customers. RPM is a vertical restraint as it is imposed by a player operating at a higher level in the market chain on a player operating at a lower level in the market chain. For example, Samsung Electronics adds a clause in distributorship agreement that no distributor can offer a discount of more than 10% to the end customers of Samsung’s products. Even in India, the manufacturers of high tech products impose a cap on discounts offered to the end customers.
The technological innovation and high technology market is not only governed by the market forces but also by the prevailing laws. In India, RPM is classified as an anti-competitive agreement under section 3(4)(e) of the Competition Act, 2002. However, an RPM agreement would be void only if it creates an appreciable adverse effect on competition within India. This condition is generally based on the rule laid down by US Supreme Court in Leegin Creative Leather Products, Inc. v. PSKS, Inc. In Leeginit was held that RPM is not illegal per se and the rule of reason must be applied by court in assessing the impact of RPM on competition in the market. The rule of reason allows an inquiry as to the economic rationale and competitive consequences of a manufacturer’s RPM policy.[i] Under the rule of reason, the fact finder weighs all of the circumstances of a case in deciding whether a restrictive practice should be prohibited as imposing an unreasonable restraint on competition.[ii]
In India, the Competition Commission of India (CCI) in Fx Enterprise Solutions India Pvt. Ltd. & Anr.v. Hyundai Motor India Limited observed that an agreement that has as its direct or indirect object the establishment of a fixed or minimum resale price level may restrict competition. In this case, CCI held RPM through discount restrictions imposed by the manufacturer to be anti-competitive because of the potential harm to consumers.
Nevertheless, RPM has an important role in high technology market. Intra-brand competition is the competition between the distributors (wholesale or retail) of the products of a particular manufacturer operating at downstream level.[iii] For example, consider competition among sellers of Samsung smart phones. On the other hand, inter-brand competition refers to competition among various brands of a particular product. Imposition of RPM leads to restriction on intra-brand competition in the market as fixation of price by the manufacturers hampers the ability of distributors to decide the prices. When a minimum RPM is imposed by the manufacturer of a particular brand, distributors are prevented from decreasing the sale prices. In other words, the mechanism does not allow the dealers to compete effectively on price.[iv]
However, restrictions on intra-brand competition can actually enhance market-wide competition by fostering vertical efficiency and maintaining the desired quality of a product.[v] Instead of competing on price and attracting customers by offering heavy discounts, the sellers or distributors compete on services. In high technology market involving complex products, consumers likely require more guidance from vendors of such products than from vendors of other types of products. Thus, by imposing RPM, the manufacturer can prevent the distributors of its product from competing on price, which in turn will force the manufacturer to offer better services to customers such as product demonstrations, repair services, advertising, showrooms. It will be beneficial to consumers as well as the manufacturers of the product. This could be further explained with the help of following example.
Suppose X Co., a manufacturer of high-end laptops fixes minimum resale price of its laptops and mandates that no retailer should sell the product below Rs.1,00,000. There are two retailers selling the same product of X Co. Since, neither of them can sell the product below Rs. 1,00,000, they will try to attract customers by providing better services such as a detailed explanation of high-end laptop or demonstration and compete with other retailer. This could potentially ensure consumer satisfaction and would result in high sale of product of X Co.
RPM is also necessary to prevent online distributors or sellers of high-tech products from abusing their market position. In today’s world, most of the high tech products are available in the online marketplace at very low prices. Online sellers often utilise their capabilities to offer heavy discounts on high tech products. Due to such excessive discounts, customers often shift to the online market thereby reducing the sale of offline sellers. The shifting of the consumer base from the offline market to the online market may result in foreclosure of the offline market. Through discount restrictions, RPM can be helpful to prevent such foreclosure. When discount restrictions are imposed on online as well as offline sellers, there would be a parity in prices and online sellers will no longer be able to attract customers by offering heavy discounts.
The high-tech market is altogether different from other markets and RPM in such market can be beneficial to end consumers as well as the manufacturer. It is rightly so that RPM is not illegal per seand that circumstances in the high-tech market may call for RPM to be prevalent. However, it does not suggests that RPM in high tech market is always pro-competitive and essential. The competition regulators in India have not dealt with a case of RPM in high-tech market and it would be interesting to witness the evolving jurisprudence of competition law in this regard.
– Mudit Nigam
[iii] Continental T. V., Inc(above).
[iv] Fx Enterprise Solutions India Pvt. Ltd. (above).
[v] K.m.b. Warehouse Distributors, Inc. and Kmb/ct, Inc. v. Walker Manufacturing Company & Ors, 61 F.3d 123 (2d Cir. 1995) (US).