Today, at the ease of a click, you can buy groceries or book your accommodation and vacation. Your smart phone and internet can do most of this.
In little over a decade E-Commerce has become a fastest growing market. This mobility has got fuelled through intermediary intervention- online service provider/ platform/ OTA. This has helped start-ups to adjust in a short span within sectors such as food, grocery, apparels etc.
The E-Commerce platforms follow can follow either of the two types of business models:
- Marketplace Model; or
- Inventory Model.
Where the platform facilitates transaction between the buyers and sellers along with fulfilment of orders through handling logistics, deliveries etc. it is termed as marketplace model in the CCI Market Study Reports. and where the retailers are allowed to own inventory and sell directly to the consumers through their platform it is considered as inventory model.
In hospitality sector, online platforms like Airbnb, Oyo follow Aggregator Business Model where the aggregator entity simply collects the information of a particular offering providers followed by signing of contracts with such providers and then sell their services under its brand, though the services provided by these aggregators differ if dug deep.
Foreign e-commerce companies can only work in, the marketplace model as they are not allowed to sell directly to consumers.[i]
These platforms are termed as intermediaries as they act as a link between the buyers and sellers.
Under Information Technology Act, 2000, intermediary with respect to an electronic record is defined as any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record. It includes internet service providers, web hosting service providers, search engines, online payment sites, online market places etc.
The demand for Online Market platforms has grown exponentially, and the Pandemic has accelerated this growth.
A Indian Brand Equity Foundation report reveals, around 64% of digital trade in India takes place online and largely by third-party platforms. These intermediaries are often found to be beneficial for those businesses which cannot operate on their own but want online presence.[ii] Eg., small scale enterprises, kirana stores etc.
Price Parity Clause (PPC) (Most Favoured Nation Clause) is the type of agreement the parties in a vertical arrangement would enter into. An agreement, to keep uniformity in price across various platforms including seller’s own website to avoid anti-competitive practices such as free-riding.
The PPCs are divided into wide and narrow restrictions by competition authorities, globally.
The former is aggressive as it restricts sellers from charging lower prices or providing better terms of sale on their own website as well as through other sales channels, such as MMT-Go was considered wide in nature since the hotel partners were obligated to maintain room as well price parity between MMT-Go and other OTAs including themselves.
In the latter, a pro-competitive justification, in various jurisdictions, the sellers are restricted from setting lower prices only on their websites in comparison to the offers/ prices offered on the platform imposing such restrictions to avoid free-riding by the seller and customers on the online platform.
If an online platform provides for an advertisement of a room listed on its platform for X price (as agreed by the seller) and the same room seller makes available for X-Y price on its website, it purposely tends customers to book through the seller’s website thereby cut-shorting the commission of the online platforms.
Indian Context
The PPC were first discussed in the case of In Re: Rubtub Solutions Pvt. Ltd. And MMT & Ors., Case No. 01/ 2020 wherein Make-My-Trip (MMT) was alleged of contravening the provisions of section 3 & 4 which deal with anti-competitive agreements in the horizontal and vertical market and abuse of dominant position respectively of the Competition Act, 2002. The Opposite Party (OP) entered into two agreements with Treebo (Informant), the Exclusivity Agreement and Chain Agreement wherein it demanded the Informant to maintain Price Parity with respect to the price charges on the OP & other OTAs and to not list its Category A hotels on its competitor’s platforms, Booking.com & Paytm for a period of 72 hours and Category B hotels 30 days prior to check -in for hotels. Informant, which was already incurring huge loss after the de-listing of all its properties from OP’s platform in 2017, agreed to the same but unfortunately the agreements were terminated as a result of OP and OYO’s agreement since, Informant was OYO’s competitor.
The CCI held the price parity clauses as anti-competitive for restricting the online platforms to compete on the commission they charge to hoteliers as well as restraining entry of new low-cost platforms. Further, the exclusivity agreement to de-list from two of OP’s competitors was prima facie held to be unfair, exploitative for denying the opportunity to list on other OTAs and to gain consumers during busy booking periods as well as exclusionary for denying potential market access to those two OTAs with regard to the hotels branded by Treebo.
Previously, a case was filed alleging with other anti-competitive practices, the imposition of price parity agreements by MMT on hoteliers along with the room parity arrangements which restricts the inventory made available to other OTAs vis-à-vis MMT-Go.
Recently, the CCI vide its interim order dated 09.03.2021 in the matter In Re: Federation of Hotel & Restaurant Association of India (FHRAI) & Anr. And MMT & Ors., has directed the Opposite Parties to re-list FabHotels, Treebo on its portals to attain visibility as it affects competition in the market by denying access to important channel of distribution. It was further observed that the dominant platform acts as a gateway for online hotel booking and represent as an important route for the independent hotels to reach the end-users. Moreover, stated that the de-listing by OP would affect the associated budget hotels of FabHotels and Treebo that avail of their franchise services and providing of such entrance to these hotels would not cause any significant competitive harm to OP.
Foreign Context on PPC
The Competition Authorities in various jurisdictions have mixed views on PPC. As per the European Commission’s Vertical Block Exemption Regulation, in the absence of a hardcore restriction under Article 4 of the VBER, the parity clauses in vertical agreements find aid in the VBER provided the market shares of the parties do not exceed 30%.
In Europe, the PPC have been in discussion for a decade. The 2019 ruling by the German Federal Cartel Office (FTO) has cleared the uncertainty over PPC by concluding Booking.com’s ‘narrow’ parity provisions as permissible by relying on the ancillary restraints doctrine.
The doctrine assesses and determine whether, in the specific context of the main non-restrictive transaction, the restriction imposed is necessary and proportionate for the implementation of that particular transaction. The Dusseldorf Court assessed and agreed with Booking.com that the narrow parity clauses are necessary to avoid the free-riding by customers.
If hotels are free to offer best deals at their websites then customers would get the valuable information from Booking.com’s portal and make the final booking via the hotel causing revenue loss to the OTA.
The French, Italian and Swedish competition authorities also hold the same view. The French brought Loi Macron, 2015 and the Austrian regulators amended the unfair competition law to renders OTA price parity clauses null and void.
Analysis
The CCI usually deals with price parity agreements under section 3(4) of the Act and section 4 if the entity in question possess dominance in the relevant market. Section 3(4) agreements are decided under Rule of Reason such that they are considered anti-competitive only if they cause Appreciable Adverse Effect on Competition (AAEC) unlike section 3(3) which are considered per se void. To decide the AAEC the Commission refers to the factors provided under section 19(3) which ranges from negative to positive ones like accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; or promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
In India, PPC is quite fresh in the hotel segment of e-commerce and therefore, it has not been laid down decisively and exhaustively that what could amount to per se void agreements in terms of PPC restrictions. This makes the role of CCI crucial for laying down a framework for the online platform intermediaries, sellers and buyers. For instance, for determining the abuse of dominance cases, the CCI must consider factors such as data access, network effects, frequency of intervened transactions along with the market share and turnover of the OTAs. The consumers today prefer online hotel booking thus the visibility of budget hotels and franchisee service providers on OTAs becomes crucial. Similarly, an equally competitive & sometimes dominant OTA also suffers competitive injury through these parity restrictions.
It can be assertively said that the restrictions in the name of price parity have actually led to reduce of competition and has acted as a foreclosure for many new and old entrants. As per the online hotel booking sector market report by EU, 2016, it was reported that the switch from the wide to narrow restrictions by Booking.com and Expedia actually led to an increase in the room price differentiation between OTAs by hotels. A significant positive effect was also observed after prohibition on Booking.com parity clauses in observed price differentiation between OTAs. Moreover, one in five hotels reported that at least one OTA they engaged with obliged them by contract to offer price parity relative to other. Some even didn’t report any change in their dealing with OTAs for the fear of being dropped out by these OTAs. On a bright side, the report mentioned the entry of new players and the introduction of new strategies and technologies by existing players, since the implementation of the parity clauses of the large OTAs from wide to narrow. Players such as Airbnb and Google were also mentioned.
The results pretty much concludes that the wide restrictions possess harm. By firstly, softening the competition between OTAs in the relevant market thereby removing the scope to compete on the commission fees and other conditions they offer to hotels and secondly, by creating hinderance in the entry or expansion of new and small players. From the lens of a hotelier, it washes off the scope to reward the OTAs charging less commission through lower room price rates and vice-versa.
This blog on Price Parity in E-Commerce Intermediaries is only for information purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter with legal analysis, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.