Untangling the Unaddressed: The Production Chain Argument

The authors are Malak Sheth and Hiya Diddi, second year students at NLU, Patiala.

Introduction

A division bench of the Karnataka High Court, in the case of Flipkart Internet Private Limited v. Competition Commission of India (CCI), delineated the scope of the appeal to be limited to the order passed under Section 26(1) of the Act of 2002 by the CCI for an enquiry by the Director General. On this basis, the Hon’ble Court remarked that the grounds raised in the petitions/appeals were premature and later refused to interfere with the CCI’s enquiry against the alleged anti-competitive practices of Amazon and Flipkart.

It was because of the limited scope of the appeal that a major objection by Flipkart that it does not form a part of the production chain to fall within the ambit of Section 3(4) of the Competition Act 2002 (Hereinafter referred to as “the Act”), was left unaddressed by the Court in its judgment. In this piece, I examine the claim of Flipkart and propose non-price value addition as the basis for the inclusion of online marketplace platforms in the production chain and thus negating the need for CCI’s appeal in the case to read ‘production chain’, as it appears in Section 3(4) of the Act, as ‘supply chain’.

The Production Chain Argument

According to the language of Section 3(4) of the Act, there must first be an agreement between the enterprises situated at different levels of the “production chain” and secondly, the agreement can be regarding production, supply, distribution and so on. Production chain in economics means “value-added” chains wherein the product’s value is enhanced as it moves along the chain. This is in contrast with supply chains which deal with building the product and getting it to the consumers as well. Flipkart, in the aforementioned case, argued that online marketplace platforms do not add value to the products sold and thus they do not constitute a part of the production chain. Thereby, the allegations of the informants fail to meet the requirement of the first part of Section 3(4) that the enterprises must be at different levels of the “production chain” which Flipkart, as an online marketplace platform, cannot be a part of. Furthermore, comparing online marketplace platforms to shopping malls, it argued that providing services such as parking, maintenance and so on, does not make shopping malls a part of the production chain. Similarly, the provision of services such as warehousing and storage to sellers, should not make Flipkart a part of the production chain. In order to reconcile this anomaly arising out of the term “production chain” in Section 3(4) of the Act, the CCI urged the hon’ble court to read “production chain” as “supply chain”.

The Remedy

Flipkart’s argument would have some merit in it only had it as a marketplace platform mirrored a shopping mall, which along with being a neutral player, had no skin in the game. However, online marketplace platforms such as Flipkart and Amazon, through their algorithms and data policies, add non-price value to the product by offering customization, enhancing product knowledge and education and so on. E-commerce giants such as Amazon and Flipkart have unrivaled access to consumer behavior such as how long a person hovers his mouse over a specific item, or how long he lets an item remain in their shopping cart before buying it and so on. Such data is an important input in digital markets which can be used to develop personalized pricing, and product customization by varied visibility of products and a tailored buying experience for the consumers. Furthermore, such platforms also enter into monetary arrangements with enterprises through which the search results, rather than being algorithmically determined in the order of relevance, showcase the results of such enterprises or at times their in-house brands, above the results of other sellers. Such practices of online marketplace platforms are tantamount to increasing the value of products listed on their website through enhanced visibility, tailored product choices based on consumer preferences and so on, thereby influencing the users’ clicking behavior. Such a value addition of a product, although might not be in its pricing, is still very influential in determining a consumer’s behavior towards the product. Thus, it can be seen as an enhancement or improvement of products or services beyond their basic features or attributes based on pricing and thus shall be considered to be a non-price value addition to the product. When value enhancement is seen in this light, it automatically makes such online marketplace platforms a part of the production chain without having to read ‘production chain’ as ‘supply chain’ as suggested by CCI. Lastly, because of the foregoing analysis, it can be said that Flipkart draws an incorrect analogy with shopping malls because it is not for the adjunct services such as warehousing and storage that make it a part of the production chain, but it is the non-price value that such online marketplace platforms add to the products which makes them a part of the production chain and thus brings them under the ambit of Section 3(4) of the Act.

Conclusion

The e-commerce giants such as Amazon and Flipkart are currently being investigated for their anticompetitive practices in India such as arrangements for preferential treatment with ‘preferred sellers’ and so on. Such preferential treatment falls under Section 3(4) of the Act which when coupled with other anti-competitive practices such as deep discounting, might drive out other competitors resulting in foreclosure of competition. Thus, these giants should not be allowed to derail the investigation because of a loophole within an antiquated Act. The foregoing reading of the production chain which includes those links that add non-price value to the products as well, would be of assistance in resolving the current anomaly. The same is being argued because it would bring these e-commerce giants and consequently, the vertical agreements that they make, within the ambit of Section 3(4) of the Act. Furthermore, it would also help surpass the more onerous task of reading ‘production chain’ as ‘supply chain’ which, as argued by Flipkart in the case, was not originally intended by the legislature. The present recommendation finds a solution within the framework of the Act and therefore should be devoid of any similar objection and thus more acceptable in practice.