By Esha Goyal, fourth-year student at NLSIU, Bangalore.
On 21st January, 2020 Zomato acquired Uber Eats India in an all-stock transaction which gave Uber (the parent company of Uber Eats) a 9.9% stake in Zomato. At the time, Zomato was the second largest player in the delivery sector of the food service industry in India and Uber Eats was the third. Competition Commission of India [‘CCI’] did not investigate this deal or hold it to be anticompetitive, and hence void immediately, and is only investigating now, a year after the acquisition concluded. The CCI was unable to act – even though it was cognisant of the allegations of price and supply manipulations against the two entities, which would potentially be aggravated by the acquisition – because the current threshold for holding a deal to be anticompetitive is very high and only capable of being addressed ex post. However, this article argues that the creation of a middle standard – of potentially anticompetitive deals being closely monitored by the CCI – would be more suited to fulfilling the goals of the Competition Act, 2002.
The CCI published its findings of the Market Study on E-Commerce in India where the food service industry was specifically analysed. The report noted that there were only three dominant players in the industry in terms of market share and transaction value: Swiggy, Zomato and Uber Eats, in that order. It further noted the allegations by restaurants against these three platforms which were first, though search results and restaurant ranking were touted as being objective to the customers, the platforms discriminated between sellers by offering better ranking and visibility to the restaurants paying them higher commissions. Second, the platforms unilaterally decided the discount schemes even though the costs of such discounts had to be borne by the sellers, who additionally, were penalized for non-participation. The CCI concluded this report by suggesting self-regulation by the industry by adopting clear and transparent policies for search algorithms, pricing and discount policies. Since this was not a formal investigation, these guidelines were not binding for any of these platforms.
Balancing the goals of the Competition Act
Section 3 of the Competition Act, 2002 [‘the Act’] states that “any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India” shall be void. In this context, it is proposed that the acquisition ought to have been held as void as per a strict reading of section 3(2) of the Act. This is of significance in light of the goals of the Act as have been highlighted in the preamble. The Act not only has to protect customers but also has to ‘ensure freedom of trade carried on by other participants in markets,’ which would include the restaurants listed on Zomato and Uber Eats. Further, since the acquisition combined two of the three most dominant entities in the market, it can directly and indirectly affect sale price and limit the market and the provision of services within that market by converting the industry into a duopoly. By giving the resultant food delivery service provider (Zomato) even more economic and market control over restaurants, they would lose the option to migrate to other platforms or control their visibility, pricing or discounts and thus be completely at the mercy of the food delivery service provider. This is especially true in the aftermath of the CCI report which had already recognised the adverse effects of the trade practices being carried on by these two entities, it can be said to have an ‘appreciable adverse effect on competition’ as per sections 3(3)(a) and 3(3)(b).
However, one faces a dilemma at this point. Currently, as per a conjoint reading of section 3(3) and 3(4) of the Act with 3(1) and 3(2), whether a deal is anticompetitive or not is within the sole discretion of the CCI but rather has to be based on an objective analysis of facts and the market position subsequent to the deal to determine what the real impact on competition in that industry has been. Though the report noted the existence of price manipulations – partially brought about due to the dominance of three platforms to the exclusion of all others – a mere two weeks before the acquisition, CCI nevertheless had to let the deal go forward.
One reason for this could be the standard of proof required to hold a deal as anticompetitive. The Act itself is broad enough to include even the possibility of an adverse effect on competition by accounting for indirect effects. However, the meaning of the term ‘anti-competitive’ has been held to a higher threshold by the CCI, as is evident from the present case itself, with very few deals being held void for being anticompetitive at the preliminary stage. This standard implicitly adopted by the CCI in practice seems to correspond to the higher standard of ‘beyond reasonable doubt’ analogous to that followed in criminal law, even though section 3(1) itself seems to favour the lower standard of ‘preponderance of probabilities.’ Given that the Act currently envisages only a binary of competitive-anticompetitive, and the severe consequences of holding a deal to be anticompetitive, CCI has taken upon itself to test deals on actual adverse effect on competition and abuse of dominance, instead of the mere possibility of being so, even though section 3(1) seems to grant the Commission the power to nullify the latter.
However, this leads to an anomalous situation where the goals of the Act have to be sacrificed to meet the standard of proof required by the Act. As mentioned earlier, one of the purposes of the Act is to protect freedom of trade, which could be in the form of breaking down entry barriers or safeguarding against predatory pricing. At the same time, the CCI cannot hold too many deals to be anticompetitive because that itself would vitiate the general goal of efficiency and impose heavy costs on the market and its players by increasing transaction costs. In this scenario, a middle ground is needed to reconcile the Act’s protective goals with the economic development of the country.
A New Middle Ground
This could be fulfilled by amending the Act to differentiate between the powers of the Commission for acts which actually have an ‘appreciable adverse effect on competition’ and those which merely have the potential to do so. While the former would retain the consequences of being held void and other penalties, the latter, instead of being wholly unregulated could warrant a mandatory investigation for a fixed period of time to analyse its consequences. Following this standard in the Zomato-Uber Eats deal would hence require the allegations brought forward by the E-Commerce Report against the practices of these companies to be reviewed for a few months following the acquisition, after which CCI could take an informed decision as to whether it was anticompetitive or not.
The difference between status quo and the proposed model lies in the fact that while the former deals with ex post measures following the damage to the consumers and the market, the latter through its monitoring of all potentially anticompetitive deals as they happen would be able to prevent anticompetitive behaviour to a large extent and thus sustain a healthy competition in the markets while also protecting the interests of the consumers as well as other market participants, just as the preamble envisages. In the case at hand, it would imply a study of the actual effects of the acquisition on the market, brought on by the mere fact of the acquisition, rather than brushing it under the carpet till the anticompetitive behaviour cannot be ignored any longer.
Some might argue that the proposed model would give CCI overbearing powers or lead to increased conservatism at the expense of market freedom and economic efficiency. However, the author posits that economic efficiency in the form of lower regulation is not the sole purpose of the Act. It has to be balanced against other goals of sustaining market competition, protecting consumer interest, and ensuring freedom of trade for all market participants. Perhaps as a compromise, a minimum threshold defined in terms of market share, as opposed to the current threshold of net revenue or asset value as mentioned in Section 6 could be a good starting point to determine which cases need to be examined instead of creating unnecessary delay by scrutinizing every single deal in the market. Thus, the proposed middle ground would only further this objective, rather than derogating from it.
This article proposes a new way of viewing competition law; instead of merely using it as a post-facto tool to correct a grossly unbalanced market, it should be used as a preventive, regulatory measure as well, similar to the Federal Trade Commission in the USA which also has under its mandate “practices that are likely to reduce competition”. As the Zomato-Uber Eats deal has been used to illustrate, some deals might not be out rightly anticompetitive, but are only one step away from being so because of the market situation at the time. Whatever be the reason, the monitoring of such deals by the CCI would not only fulfil the aims of the Act itself but would also help reduce long term social costs.