CCI will need to explain why it felt RJio’s pricing was not predatory while Amazon/Flipkart’s was
It is early days yet, but the fact that the Competition Commission of India (CCI) has ordered an investigation into the practices of etailers like Flipkart and Amazon suggests it is doing a rethink on how anti-competitive behavior is to be decided. While ‘deep discounting’ (or predatory pricing) is the main issue to be investigated, the others include vertical agreements with preferred sellers, giving them preferential listing, and exclusive tie-ups for selling mobile phones for instance.
The ordering of an investigation, and the findings – assuming CCI finds the etailers guilty – are critical since many of these issues apply to other businesses including offline brick-and-mortar retail. One allegation made is of Flipkart classifying some sellers as ‘assured sellers’ so they show up on top when buyers are doing a search and then even partially funding their deep discounts – the etailers deny the charge; Amazon uses the term ‘fufilled’ for such sellers. Apart from the fact that, in the case of Flipkart, ‘assured sellers’ means those who store their goods in its warehouses, if such arrangements are unacceptable, will offline retailers be compelled to store the goods of every seller?
Exclusive tie-ups are also frowned upon, but if CCI rules against a Xiaomi selling a phone exclusively on Amazon, will CCI decide on the marketing strategy for all firms?; after all, this is not as much about Amazon as it is about Xiaomi’s decision to use a platform that offers it the best bang for its buck. And if showing some sellers first in a search – this is the charge Google is facing in many countries – is unacceptable, why is is okay for an offline retailer like Reliance Retail to offer better shelf space to some brands or to use their ‘standees’ in its aisle?
The use of sellers who are related – that is, the owners of Flipkart/Amazon have a significant stake in the firms who are selling on their platforms – is another issue CCI finds objectionable. While online marketplaces claim to be abiding by the government rules on this, does this mean a Future Retail cannot stock goods made by any firm in which it has a stake since that is the stipulation for online retailers? And how does that work for private labels that, by definition, are store brands created so that customers can get value for money; whether this is done through a third party or a group company is surely a decision that the retailer takes?
Much of the furore, it is clear, centres around the issue of predatory pricing which is seen as a combination of below-cost pricing (average variable cost is looked at, not marginal costs) with the aim of eliminating competition and, once the competition is finished, the firms raise tariffs. In this scenario, market-share is critical; a Maruti Suzuki pricing cars at 25% below cost, just by way of an example, will crush the market, while a Kia doing the same won’t have the same impact since it is a rank newcomer.
Since, even after the massive discounts they are said to be offering, online etail firms still don’t have a market share of more than 2-3%, if the CCI is planning an investigation into their pricing, this means it is junking the traditional market-share principle. If CCI is examining the firm’s ability to do damage thanks to its deep pockets, it will need to explain why, when the older telcos like Airtel/Vodafone/Idea were complaining about RJio’s predatory pricing some years ago, it did nothing. Indeed, even if RJio had a negligible share of the voice-call market, it was the dominant player in the data market a very long time ago.
It gets worse. After RJio’s pricing strategy wrought havoc in the telecom market, the government appears to have dictated a strategy to the three remaining telcos which involved them raising prices together. It may not matter right now since it is clear pricing is below-cost today, but surely acting in concert – with the government an active participant – should have got the CCI to take note?
Being a creation of the government, possibly, CCI doesn’t think its mandate involves scrutinizing government action. Why else would it keep quiet when, over the years, the government gave Air India Rs 33,000 crore; since this money prevented Air India from shutting down, it altered the competitive landscape. Had Air India shut operations, fares would have risen and airlines like Jet Airways may never have shut down. Nor did CCI raise an eyebrow when, for decades, the government subsidized sales of petrol and diesel by PSUs like IOC, HPCL and BPCL but not at either Reliance or Essar even though this policy led to the private firms shutting down retail outlets or slowing down on their expansion.
Using the deep-pocket approach to predatory pricing – the Supreme Court asked CCI to do that in the Uber-Meru case – makes sense in many cases, but the approach has to be nuanced and take into account the extent of the potential damage. In this case, etailers are not even giving huge discounts in most of their products any more; the latest iPhone costs roughly the same online or offline without the discounts that some credit card companies throw in. More important, several other questions come up that CCI and the government need to address them upfront.
If ‘deep discounting’ is to be frowned upon, how does one calculate the ‘appropriate’ level of discounting? And is this discount factor – 35%, say – to be applied at the level of each product or at the level of the firm, and does it apply at any point in time or is it over a year; since most offline retailers offer 60-70% off on various articles in their clearance sales, or they offer significant discounts on ‘loss-leaders’ throughout the year to draw in customers, is this kosher? And how do you calculate the discount, or the MRP, for products like sarees that are not sold by manufacturers at one price across the country?
And what is the base price against which the discount is to be calculated since, after all, different firms have different cost structures. In the case of RJio, the firm argued that its superior technology allowed it to drop the prices dramatically whereas the older telcos argued that, the relevant factor was not technology but the amount of money invested; since RJio had invested over Rs 2 lakh crore to set up its network, it simply could not make money at the prices it was charging. If predation is to be judged by the losses run up by firms, well most businesses incur losses in the first few years.
The government too needs to do some serious soul-searching over what it really wants. Amazon and Flipkart have invested over $15 bn in creating warehouses and cold chain logistics – apart from large data centres – across the country and, as a result, have 4-5 lakh sellers who, till now, didn’t have access to pan-India markets. If the government wants Amazon/Flipkart to be just a marketplace – like its GeM which is just a portal to get price quotes and place orders – it can’t hope to provide market access to millions of small sellers including farmers which offers some form of quality control, assured payments, refunds etc. Instead of berating Amazon and Walmart for not complying with the law, the government should spell out what it really wants.