Resale Price Maintenance in the Online Retailing Era: Exploring an Alternative

[Divyansh Prasad is a 3rd Year BA LLB (Hons.) student from Dr Ram Manohar Lohiya National Law University, Lucknow]

Section 3 of the Competition Act, 2002 proscribes any horizontal or vertical agreements that may have appreciable adverse effects on competition. Section 3(4)(e) specifically prohibits agreements between two or more enterprises operating at different levels of production which results in fixing the minimum resale price of a product (Resale Price Maintenance or RPM). However, such an arrangement is not per se anti-competitive and merits a rule of reason analysis in reference to the factors mentioned in section 19(3) of the Act.

The pro-competitive defense pleaded in favor of RPM is the elimination of the ‘free rider’ effect and promotion of competition based on services rather than price. However, the meteoric rise of the online retailing sector in India demands a revaluation of such arguments in favor of RPM. The competitive advantage of online retailing lies in comparatively lower prices possible due to the reduced operational costs. Allowing RPM would amount to subjecting these retailers to unfair conditions for trading and limit the flexibility of online retailers to respond to the idiosyncratic behaviour of the consumer.

Ineffectiveness of RPM

The primary objective of RPM is to elicit services from the retailers. This objective cannot be realized with respect to online retailers due to the practical impossibility of inducing such services from them. Online retailers cannot create an environment like a brick and mortar shop or arrange for product demonstrations. The maximum they can do is display video demonstrations, customer reviews on their websites which incur no overhead costs and is done irrespective of the imposition of RPM.

Another aim of imposing RPM is shielding the market from the ‘free riding’ effect. The threat of the free riding effect, which is itself constrained to luxury goods which require highly skilled demonstrators or knowledgeable sales assistance, has further diminished due to the plethora of information available on the internet. This makes product demonstrations superfluous for customers who are well informed about a specific product and adversely affects their welfare as they pay for the services they do not require.

It may be argued that RPM has certain legitimate justifications as the customers do not necessarily choose to shop at internet sites just because of the overall lower prices, but due to the convenience which it brings along. This factor is exploited by the online retailers by offering lower prices, thereby driving the brick and mortar stores out of the market.  Significant free riding concerns may arise in markets dominated by online market players which can entirely disrupt the distribution market.  A trade restraint like RPM may prove to be justified, but it can still be prohibited and supplanted by a less restrictive alternative.

The drawback with RPM is that it has the potential to undermine the efficiency benefits that online retailing brings along.  The ability to compare prices and make informed choices are certain pro-competitive consequences of online retailing which the guardians of competition should constantly protect. Therefore, any vertical restraint which results in denying these benefits to the consumers should be scrutinized and prohibited.

IMAP as a less restrictive alternative

Discarding RPM completely may lead to the unwanted consequences of softening the competition in the market, thereby increasing the price for the consumer. Offline retailers have no incentive to lower their prices which shall be easily matched and beaten by online retailers who have low operational cost advantages. Internet Minimum Advertised Price (IMAP) policy can be used as an alternative to RPM which would accomplish the intended efficiency benefits of RPM as well as restrict its anti-competitive effects to a large extent.

The essential difference between the two is that IMAP will not restrict the retailer from offering a price which may be lower than the advertised price. The retailer shall retain the flexibility to determine the price at which it wants to sell the goods to his customers. The only restriction will be on the price at which the product is advertised online. IMAP policies, through their actual price flexible structure, can comprehensively counter the anti-competitive consequences which a RPM policy brings along.

The online sellers shall not be abridged of their inherent advantage to sell their products at comparatively lower prices. The impetus for the consumer to buy from the online retailer shall not be the price but other efficiency benefits such as low search costs, a wider range of products etc. This shall further ensure the consumers do not free ride the services they obtain from the brick and mortar stores.  

Furthermore, the manufacturer can also be rest assured of the brand value of its product. High discounts and low prices tend to have an adverse impact on the brand value of products, especially those which cater to a specific set of consumers. IMAP policies would ensure that no high discounts other than those set by the manufacturer shall be advertised to the consumers. If a consumer wishes to purchase such a product irrespective of such advertisements, the discretion to offer the final price is to rest with the retailer. The final price can be revealed through the application of promotion codes or after the product has been added by the consumer to the virtual shopping cart.

Although an unexplored issue in the Indian competition regime, IMAP policies have been debated and discussed in jurisdictions like the European Union (EU) and the United States (US). IMAP policies have been constantly upheld by regional courts in the US in cases like Campbell v. Austin Air Systems, Ltd [423 F. Supp, 2d 61 (W.D.N.Y, 2005)] and Worldhomecenter.com, Inc. v. Franke Consumer Products, Inc. [No. 10 Civ. 3205 (S.D.N.Y. June 22, 2011)]. The rationale behind such decisions is the restriction of only the minimum price for which a dealer could advertise on the Internet and no restrictions with respect to the actual sales price.

With respect to the EU, attempts have been made to introduce American pricing system of Minimum Advertised Prices (MAP). The petition for the aforementioned purpose advocated such policies as a good way to create and maintain a stable price so that all parties can obtain a healthy profit in principle. But the EU has explicitly held that MAPs will likely be restrictive of competition within the meaning of Article 101(1) of the Treaty of Functioning of the EU. The reasoning is that MAP would constitute an indirect RPM as it would influence retail prices by limiting the possibility of retailers to inform potential customers of available discounts.

A profound analysis of the difference in opinions between these jurisdictions would link us to the respective treatments fettered out to RPM policies in such jurisdictions. RPM policies are adjudged under the ‘rule of reason’analysis in the US whereas the EU treats RPM as a hardcore restriction unless efficiency benefits are proved substantially.

Conclusion

With regards to the Indian Competition Act, a rule of reason analysis shall be the way forward to adjudge on such policies. However, the manufacturer may avoid the scanner of the Competition Commission of India (CCI) altogether if the policy is implemented unilaterally and uniformly. The ascent of online retailing has undoubtedly given birth to a need for imposing certain restrictions, the absence of which may lead to detriment of the traditional brick and mortar stores. IMAP policies can definitely be used as an answer to these concerns as against the RPM policies which deprive the retailers of their prerogative to decide the actual selling price. However, the advent of IMAP policies would give rise to unique concerns and challenges for the watchdogs of competition in the country. Though RPM and IMAP policies can be said to be related, there are critical contrasts which merit analysis by the CCI while examining the IMAP policies. Hence, the CCI should be well armed with specific rules and regulations regarding such policies which can be implemented as and when the need arises.

Divyansh Prasad

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