The Competition Commission of India (CCI) must develop standards, tests and clear criteria to guide its analysis in abuse of dominance cases, as is practiced in many jurisdictions globally. The Leaflet breaks down why the CCI’s recent decision in MakeMyTrip-OYO case is problematic.
THE recent order of the Competition Commission of India (CCI) finding that MakeMyTrip-Goibibo (MMT) had abused its dominant position and entered into an anticompetitive vertical agreement with Oravel Stays Private Limited (OYO) may well be the right decision, but the CCI’s reasoning has weakened competition law jurisprudence at a time when the CCI must show itself to be an objective, evidence-based regulator.
The CCI found that MMT, a dominant travel intermediary, had imposed unfair conditions in their contracts with budget hotel franchisors, Treebo and Fabhotels, primarily with regard to room parity, rate parity and exclusivity conditions. These clauses required budget hotel franchisors to offer the same rates for their hotel rooms across platforms (rate parity), to make rooms available to MMT if they were being sold on other platforms (room parity) and exclusively list on MMT for certain time periods (exclusivity conditions).
Abuse of dominance and vertical restraints are aspects of competition law where the line between conduct that may or may not be a legal violation is thin.
The CCI held that these clauses, taken together with other business practices of MMT, lead to denial of market access to other online travel aggregators (OTAs) and that these were an abuse of dominance under section 4(2)(a)(i) and section 4(2)(c) of the Competition Act, 2002 (CA).
The CCI also found that the agreement between MMT and OYO which required MMT to delist Treebo and Fabhotels from MMT’s platform was an anticompetitive vertical agreement (an agreement between entities at different levels in the chain of production such as a manufacturer selling to a retailer) amounting to a refusal to deal under section 3(4)(d) read with section 3(1) of the CA.
To be fair, the CCI’s task in such cases is not easy. It has to balance considerations of MMT’s popularity with consumers and the benefits of its discounts against the harm to hotel franchisors by imposition of unilateral terms. Abuse of dominance and vertical restraints are aspects of competition law where the line between conduct that may or may not be a legal violation is thin.
This is all the more complicated in digital markets where different sets of users are affected diversely and it is not very straightforward to determine if markets are being harmed. The CCI must develop standards, tests and clear criteria to guide its analysis in abuse of dominance cases, as is practiced in many jurisdictions globally.
For each of the conduct considered an abuse of dominance in section 4, the CCI should develop and consistently apply a set of elements that must be met for a violation to occur. For instance, predatory pricing (the practice of pricing below cost to drive competitors out of the market), which is an abuse of dominance, has certain elements to it such as proving that the price is below a certain measure of cost. These elements are also helpfully incorporated into the wording of section 4.
Proving that those elements are present gives certainty that the conduct is harmful to competition and differentiates predatory practices from deep discounting where those elements are not present. (Deep discounting is a practice of reducing prices below the prices fixed by manufacturers or prices at which goods or services are generally sold. Deep discounting is different from predatory pricing as it is not the sale of products or services below cost.)
Unfortunately, the MMT order is entirely devoid of any explanation of what criteria was met for the conduct in question to be considered an abuse of dominance under the relevant sub sections.
Given that the wording of section 4(2)(a)(i) is not conducive to punishing deep discounting, the CCI should have clarified under which section of the CA deep discounting was an abuse of dominance.
Intuitively, many would agree that when a dominant enterprise imposes parity and exclusivity conditions on relatively smaller franchisor entities and delists them from the platform, it is not fair competition.
The problem here is with the manner in which the CCI reached this conclusion. In particular, the CCI was not able to successfully explain: firstly, how competition between OTAs would improve from punishing MMT for imposing parity clauses when many other OTAs impose similar parity clauses and may continue to do so. The CCI has brought in deep discounting to show the particular harm that MMT causes through parity clauses but that reasoning is unconvincing as discounts are generally beneficial to consumers. The CCI may have done better to stick to global jurisprudence and held parity clauses to be unlawful under section 3(4) of the CA.
Secondly, the delisting from MMT had already provided other OTAs the opportunity to compete for the business of budget hotel franchisors (by offering them lower commissions) and gave OTAs the opportunities that the CCI kept stating were opportunities they did not get because of the existence of parity clauses. These factors were particularly relevant to the CCI’s finding that parity clauses lead to denial of market access to OTAs. Yet, it is not clear that existing OTAs were denied access to markets.
Conversely, these two factors indicate that the bigger competition problem here may be a softening of competition between OTAs for prices / commissions. The CCI indicates this themselves on page 98 of the order, “it cannot be completely ruled out that such industry practice was the result of softening of competition between OTAs pursuant to the operation of rate parity obligations.”
Another troubling aspect of the order is the theory under which the CCI has coupled deep discounts with parity and exclusivity clauses and held that this conduct, taken together, is abusive. Deep discounts cannot be considered an imposition of an unfair condition under section 4(2)(a)(i), though it may be a practice leading to denial of market access under section 4(2)(c).
Given that the wording of section 4(2)(a)(i) is not conducive to punishing deep discounting, the CCI should have clarified under which section of the CA deep discounting was an abuse of dominance. The CCI’s criticism of deep discounting, while recognising that deep discounting is not in itself a competition law violation is troubling. It opens the door to punishing behavior that was considered pro-competitive by competition law.
Looking more closely at the theory of the CCI, parity clauses remove competition on price, which MMT re-injects into the market by offering discounts so that consumers flock to MMT and hotels have no choice but to accept the parity clauses imposed on them because they get many more bookings (and thus make more money) by being listed on MMT.
The more bookings made through MMT, the more money MMT has to fund discounts. All of this is regular market behaviour, unless commissions charged are excessively high, which the CCI does not make clear. The CCI finally states that the higher commissions “may adversely impact the prices at which the hotel’s rooms are being offered to end-consumers.” This would be a problem but the CCI has not produced any evidence of prices increasing for end consumers or if so, whether this is a result of the general softening of competition between OTAs or even how deep discounting is affecting prices.
Price competition is one of the pillars of a competitive market and an important feature of competition in markets that benefit from network effects. It is here that tests like the ‘equally efficient competitor test’ may be usefully deployed by the CCI to ensure it is not punishing better use of resources by dominant enterprises.
The CCI’s concern with deep discounts is primarily in MMT’s ability to offer them through its earnings from commissions; but there are differing views on whether this is a harmful practice as discounts benefit consumers. It is well established that the ability to offer discounts that competitors are not offering is not abusive unless the discount is unsustainable.
Price competition is one of the pillars of a competitive market and an important feature of competition in markets that benefit from network effects. It is here that tests like the ‘equally efficient competitor test’ (which asks whether conduct will exclude a competitor that is as efficient as the entity being investigated) may be usefully deployed by the CCI to ensure it is not punishing better use of resources by dominant enterprises.
If the imposition of parity clauses led to higher commission rates and that was an unfair condition imposed on budget hotel franchisors, the CCI should also have determined whether MMT would anyway have charged higher commission rates absent parity clauses due to its market position and because other OTAs have signaled that they are not interested in competing on commission rates.
Establishing causality between conduct and the harm to markets is an important jurisprudential element that will make competition law analyses less subjective. It is also essential so that the harm to markets can be remedied. Moreover, it remains unclear as to what degree of increase in commission rates would be considered ‘unfair’ by the CCI.
It is time for the CCI to develop criteria for what is considered an unfair condition. It was always the intention of the drafters of India’s competition law framework that guidelines be created to guide the CCI’s enforcement of the provisions on abuse of dominance and the time has come for such guidelines to come about if India is to mature in its enforcement of competition law.