BY PRIYAM INDURKHYA AND RITURAJ SINGH PARMAR, THIRD-YEAR STUDENTS AT NLIU, Bhopal
CCI, the antitrust watchdog of India, has ordered a probe against food service aggregators like Zomato and Swiggy (FSAs) on a complaint filed by National Restaurant Association of India (NRAI) for the violation of section 3 of the Competition Act. Out of the several anticompetitive malpractices alleged by NRAI, the CCI, vide order dated April 4, 2022, has observed that a prima facie case exists against Zomato and Swiggy on the following three conducts— (i) dual role played by FSAs by listing their own cloud kitchen brands exclusively on their platform, akin to private labels, thereby creating an inherent conflict of interest in their role as an intermediary on one hand and as a participant on the other hand, (ii) entering into exclusive contracts with restaurant partners, (RPs) thereby compelling them to be exclusively listed with FSAs, (iii) imposing price parity terms on the RPs, thereby restricting them to offer lower prices or providing better terms to customers on the platforms other than that of the FSAs.
In light of the recent developments, this article attempts to analyse the anticompetitive concerns arising out of the dual role played by Zomato and Swiggy. The authors, in addition to examining the violation of section 3, also delves into the violation of section 4 of the Act.
Analysis of probable violation of s. 3(4) read with s. 3(1) of the Act
The Act, under s. 3(1), prohibits enterprises from entering into an agreement which causes or is likely to cause appreciable adverse effect on competition within India. Furthermore, s. 3(4) of the Act defines vertical agreements as those agreements which are entered into between enterprises which operate in different markets, and at different levels of the production chain. In the present case, the agreement between the FSAs and the RPs is in the nature of vertical agreements since both of them are in different markets and at different levels. The FSAs are in in the market of application-based food delivery platforms in India, while the RPs cater to the market of providing food services.
Vertical agreements are not per se anticompetitive and they require a rule of reason analysis to determine their legality. The rule of reason analysis under s. 19(3) of the Act entails weighing various procompetitive and anticompetitive effects of the agreements. The authors herein contend that the vertical agreements entered into by Zomato and Swiggy with a select few RPs fail to pass the rule of reason test, and are therefore, in violation of section 3(4) read with s. 3(1) of the Act.
The anticompetitive effects arising out of the dual role played by the food intermediaries significantly outweigh the procompetitive effects, if any. The anticompetitive effects listed under s. 19(3)(a)—(c) include creation of entry barriers to new entrants in the market, foreclosure of competition, and driving existing competitors out of the market. It is contended that the listing of cloud kitchens on their own platform certainly causes these anticompetitive effects.
Having their own vested interests in the downstream market, the food intermediaries are more inclined towards those RPs which are either their private labels or those which pay huge commissions to them. This inclination can be manifested in a host of ways which include, but are not limited to, skewed search results, customer reviews, favourable listings, among others. The data masking and lack of transparency in sharing the modus operandi of the intermediaries further exacerbates the situation. Given such a background, it becomes extremely difficult for the new entrants to cross the entry barrier and break into the market. Moreover, such a conflict of interest is also detrimental to the interests of the existing players in the market. The vested interest of the intermediaries in favour of a select few RPs puts other players in a disadvantageous position, and has a potential to drive them out of the market. Thus, Zomato and Swiggy acting as a participant as well as an intermediary, gives rise to anticompetitive effects listed under s. 19(3)(a)—(c). Moreover, such a dual role neither promotes any technological innovation, nor does it lead to accrual of benefit to consumers.
In fact, the Competition Commission of India (CCI) had earlier released a Market Study on E-Commerce. The study focused on competition aspects pertaining to e-commerce marketplaces and platforms. Out of the five major concerns identified by CCI, the first one was the Platform Neutrality (or lack thereof). The other concerns included, deep discounting, i.e., discounts of preferred sellers being selectively funded by the platform, price parity clauses in the agreements, exclusive agreements, and the skewed search rankings along with misuse of data The study delineated two major issues concerning the neutrality of e-commerce platforms. The first is the intermediary’s access to competitively sensitive transaction data on its platform. This data is utilised by the intermediaries to enter into and strengthen their position in the downstream market through private labels. The second is the intermediary’s control over search parameters and results which gives preferential listing and favoured placement to its own brands and preferred sellers on the website. Interestingly, the concerns identified by the CCI in the Market Study are similar to those which are identified by the Commission in its prima facie order against Zomato and Swiggy.
Analysis of probable violation of s. 4 of the Act
It is to be noted that the prima facie order passed by the CCI only suspects the probable violation of section 3 of the Act due to the dual role played by the intermediaries. However, the authors herein contend that the said conduct of Zomato and Swiggy also attracts section 4 of the Act.
For analysing the violation of section 4 of the act i.e., Abuse of dominance, it is indispensable to firstly, delineate the relevant market, secondly, show that the enterprise is dominant in the relevant market and thirdly, it has abused its dominant position.
Unlike section 3, section 4 in strict sense requires delineation of relevant market to assess the competitive constraints that the enterprise faces. The relevant market in the present case is the ‘market of application-based food delivery platforms in India’. The market has two major players viz., Zomato and Swiggy. The said delineation of relevant market is justified because, firstly, there is substitutability in the delineated market, which is an essential criterion for the relevant product market under section 2(t) of the Act. The service of app-based food delivery is user friendly and unique as it allows customers to order food hassle free from any location. It also provides an array of choices to the consumers in terms of budget, cuisine, restaurant partner ratings, mode of payment and safety classifications. These attributes make app-based food delivery services non substitutable with other services of like nature viz., dine-in, take out, direct orders and vertically integrated food chain services. Secondly, the market of app-based food delivery also satisfies touchstone of section 19(7), like the consumer preferences, and price of goods or services. Furthermore, CCI has also approved this delineation of relevant market in the case of In Re Prachi Agarwal & Ors. v Swiggy.. In this case, it was alleged by the informant that Swiggy was abusing its dominant position in the market by charging unreasonable and unfair prices. CCI, in that case, had delineated the relevant market as “App based food delivery with restaurant search platform across territory of India”. Given that Swiggy is involved in the present case as well, the delineation of the relevant market should be on similar lines in this case as well. The relevant market delineated in the present analysis, i.e., “Market of application-based food delivery platforms in India” is similar to that of the market delineated by the CCI in the Prachi Agrawal case. Therefore, the said delineation of the relevant market is justified.
After establishing relevant market, the next stage is to assess dominance of Swiggy and Zomato in the relevant market. There is a twofold approach in assessing dominance of any enterprises under the Act viz., the definition of dominance under section 4 and the factors enunciated under section 19(4) of the Act. The definition provides that dominant position means position of an enterprise which enables it to operate independently of competitive forces prevailing in the market. In the much-celebrated DLF case, CCI has held that the presence of one-sided agreements generally results in loss of customers, however, if such agreement doesn’t result in loss of customers, then this amplifies the ability of enterprise to operate independently of the competitive forces. Zomato and Swiggy also entered into one-sided terms and conditions with the RPs, like committing them exclusively to be listed on their respective platforms, charging exorbitant commission ranging upto 25%-30%, imposing price parity terms, and compelling the RPs to fund the discount provided by platforms. Despite these unviable conditions, Zomato and Swiggy have duopoly in the market of food delivery business with a cumulative market share of 95%.This shows the dependence of consumers (RPs) on these platforms which in turns reflect their ability to operate independently of competitive forces prevailing in the market.
The conduct of Zomato and Swiggy also satisfies factors mentioned under section 19(4). The first factor is market share of an enterprise. Market share of around 50 per cent could be considered large enough for an undertaking to be presumed as dominant. The market share of Zomato and Swiggy is 52% and 43% respectively. The second factor to be considered is the creation of entry barrier in the market. It is pertinent to note that there has not been an entry of any significant player in the food delivery market from the last three years. The application-based food delivery market requires huge fleet in order to deliver food on time. Both Zomato and Swiggy have a fleet consisting of 1.5 lakh and 1.3 lakh drivers respectively. Mobilising such a huge fleet of drivers on a pan India level is not a cakewalk for a new entrant. The third factor is the countervailing buying power. The presence of duopoly between Zomato and Swiggy in the relevant market left RPs with a Hobson’s choice because despite of anticompetitive practices of Zomato and Swiggy, RPs have no other option but to keep availing services of these FSAs. This reflects the sheer absence of countervailing buyer power in the relevant market. Moreover, the acquisition of Uber Eats, Blinkit, and other app-based food delivery platforms by Zomato further reflects upon its dominance in the relevant market. Thus, the cumulative factors of market share, entry barrier, countervailing buying power, and the acquisition of existing market players establish the dominance of Zomato and Swiggy in the market of application-based food delivery platforms in India.
Abuse of dominance
The next and final stage is to prove abuse of dominance as dominance per se is not prohibited under the Competition Act. The market of application-based food delivery platforms in India provides wide array of food choices to customers and they have to choose in accordance with their taste and preferences. But it is not that easy because human character is tuned in a way that it directs more attention towards the thing it sees and the entire advertisement industry is cashing on this tendency. Thus, a product’s visibility is directly proportional to consumer’s propensity to purchase it. Both Zomato and Swiggy have equity participation in their platforms through their cloud kitchens and their private labels. It is alleged that they manipulate the search results and divert user traffic to increase visibility of these kitchens. Furthermore, the platforms provide access to data like consumer preferences and patterns to their cloud kitchens and private labels. The cumulative effect of all these is that it puts the other RPs in discriminatory conditions for sale and therefore the act of FSA squarely falls under section 4(2)(a)(i) i.e., imposing discriminatory condition in sale of goods.
The conduct of FSA also violates section 4(2)I of the Act, i.e., using dominant position in one relevant market to enter into another relevant market. As discussed earlier, Zomato and Swiggy are dominant in the market of app-based food delivery. In addition to their principal role of acting as a medium between customers and RPs, they also list their own cloud kitchen brands exclusively on their platform, akin to private labels. These private labels like the Bowl Company, Homely and Breakfast Express fall under the relevant market in which the other RPs are operating. Thus, FSAs like Zomato and Swiggy use their dominant position in the market of app-based food delivery to enter into another relevant market in which the other restaurant partners are operating in the first place.
It is clear from the above analysis that the conduct of Zomato and Swiggy perpetrates abuse of dominance in the market of application-based food delivery platforms in India.
It is pertinent to note that Zomato has not denied the allegations of listing its own cloud kitchen brands on its platform. In its defence, it has only contended that, “…it does not have any ownership in any of the restaurants listed on its platform nor own or operate cloud kitchens or private labels or restaurants. Thus, no claims for discrimination and preferential treatment can be made against it.” The CCI did not find merit in Zomato’s contentions as they solely relied upon the ‘ownership’ of the RPs and cloud kitchens to argue that there can be no anticompetitive malpractice.
As highlighted by NRAI, in lieu of providing access to the Kitchen Spaces, Zomato charges a commission from the RPs, on the rents as well as on the orders received by them through the Kitchen Spaces. Therefore, even though Zomato does not ‘own’ the Kitchen Spaces, or the RPs which function through those Kitchen Spaces, the revenue structure employed by Zomato for this arrangement has a potential to attract anti-competitive concerns and thus calls for a deeper scrutiny. Moreover, the Commission should not limit its examination only for the violation of section 3 of the Act. Instead, it should also consider the dominance of the FSAs to enquire into the possible violation of section 4 of the Act.