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CCI Not In Favour Of Most-Favoured Nation Clauses: A Case For Intermediation Platforms

Abhismita Goswami
25 Jan 2023 4:00 AM GMT
CCI Not In Favour Of Most-Favoured Nation Clauses: A Case For Intermediation Platforms

In the last year, the Competition Commission of India (“CCI”) came down heavily on the digital sector, with it passing orders against Google, MakeMyTrip and OYO and imposing hefty fines on them. In addition to this, the parliamentary panel in one of its reports has also proposed bringing in a Digital Competition Act, an ex-ante framework, in order to regulate the anti-competitive practices in the digital market.

On 19 October 2022, the CCI found MakeMyTrip India Private Limited, Ibibo Group Private Limited (collectively referred to as “MMT-Go”) and Oravel Stays Private Limited (“OYO”) guilty of indulging in anti-competitive practices. Along with levying a penalty of INR 223.48 crore and INR 168.88 crore on MMT-Go and OYO for contravening Section 4 and Section 3(4) of the Competition Act, 2002 respectively, the CCI directed MMT-Go to, inter alia, modify its agreements with hotels and hotel chains to remove parity and exclusivity related obligations.

The imposition of price parity clauses by MMT-Go on its hotel partners is one of the key competition concerns dealt with in the order. Under such price parity obligations, the hotel partners were prohibited by MMT-Go from selling rooms on their own online portal or any other competing online travel agent (“OTA”) at a price lower than the price offered on MMT-Go’s platform.

The order has spurred fresh debate around the legitimacy of parity clauses, also referred to as ‘most-favoured nation’ (“MFN”) clauses.

MFN clause and its anti-competitive effects

An MFN clause is an obligation imposed by a platform on its seller, preventing the latter from offering its products or services at better terms on other platforms or on its own website. MFN clauses can pertain to both price as well as non-price terms. However, owing to the impact price MFN clauses have on the final retail price of a product or service, the competition authorities across different jurisdictions have been focusing on price MFN clauses at the retail level.

Based on scope and effects, MFN clauses can either be ‘wide’ or ‘narrow’. Wide parity clauses restrict the seller from offering better terms on other platforms as well as its own website. On the other hand, narrow parity clauses restrict the seller from giving better prices and terms only on its own website. In MMT-Go’s case, agreements with the hotel partners included both types of parity obligations involving price as well as non-price terms. However, the CCI focused on the effects of price parity clauses (“PPCs”) imposed by MMT-Go in the relevant market.

The CCI concluded that the PPCs imposed by MMT-Go on the hotel partners adversely affected the relevant market by way of softening price competition across platforms, thereby giving rise to higher prices for consumers. The CCI was of the view that the PPCs affected the relevant market in the following manner –

  1. It is pertinent to note that, for every sale made by a seller through an online platform, the platform charges commission/fee from that seller. In such a setting, obligations like PPCs imposed by one platform (MMT-Go in this case) reduce the incentive for other platforms to compete on the commission that they levy on their sellers. The parity obligations imposed by MMT-Go made sure that it was offered the lowest listing price, thereby restricting the hotels from offering other OTAs a listing price lower than that offered to MMT-Go. Thus, there was no incentive for the other OTAs to offer lower commission to the hotels. This prevented the hotels from rewarding the other platforms that levy lower commissions with lower listing prices, thereby, softening the price competition between the OTAs (in terms of competition on commissions and prices for end-customers).
  2. Parity clauses provided incentive to MMT-Go to levy higher commission on the hotels. PPCs ensured that the hotels did not react to such higher commission by correspondingly keeping the listing price higher on the other OTAs charging higher commissions. By virtue of the parity obligations, a price increase in one platform coerced the hotels to increase the price on the other platforms as well. This resulted in higher prices for the end-users.
  3. PPCs imposed by MMT-Go created difficulty, for a new player to enter in the downstream market for platforms or, an existing player to establish its presence in the relevant market. The parity obligations enabled MMT-Go to get the lowest prices and best conditions from its sellers. It also gave MMT-Go the leeway to unilaterally levy higher commissions on the hotels, which further helped it to give higher discounts as against the other OTAs. Offering lower commissions and better terms as compared to the other competitors is one of the ways by which a new player in the downstream platform market attracts suppliers in the upstream market. But owing to the parity obligations imposed by MMT-Go, the suppliers were prevented from rewarding the new entrants offering lower commission with lower listing price and better terms. This, coupled with MMT-Go’s ability to provide the highest discounts to the customers, raised concerns for the new entrants whether they would survive in the relevant market, thereby, creating barrier to entry.

One of the other key allegations against MMT-Go that the CCI looked into was its practice of deep discounting. While assessing the effects of price parity obligations, the CCI took into consideration the combined effect of the MFN clauses with MMT-Go’s deep discounting practice. CCI was of the view that deep discounting strategy might be justifiable if the same is used, by a new entrant to establish its presence in the market or, by an existing player to attract new customers. However, deep discounting combined with contractual obligations like wide parity clauses adversely affects the relevant market.

The CCI found the combined effect of wide and narrow parity clauses along with deep discounting practice and exclusivity listing obligations imposed by MMT-Go anti-competitive and abusive in nature. While the CCI made it abundantly clear on its stand on wide parity obligations, the order does not conclusively establish the view on narrow parity clauses. The CCI is of the opinion that narrow parity clauses might be justifiable if its pro-competitive effects (such as deterring free riding) offsets the adverse effects. Nonetheless, the CCI has not provided a definite opinion on narrow parity obligations.

The way forward

This is the first CCI order in which the competition regulator has extensively discussed the anti-competitive effects of MFN clauses and has provided concrete guidance in that regard. Although in majority of the cases it can be seen that the party imposing MFN clauses is a dominant entity, it is not a necessary requirement for the competition authority to prove dominance in every case. While the present order addressed concerns around parity obligations imposed by dominant platforms, the CCI may initiate antitrust scrutiny in cases where MFN clauses are imposed by non-dominant but popular platforms enjoying significant market power. Therefore, whether dominant or not, it may be judicious for all online platforms (including multi-sided intermediation platforms) to take the CCI views into account and revisit the parity obligations they impose on their sellers while undertaking a self-assessment (based on the factors and dynamics impacting the relevant market) of the risks attached to such MFN clauses.

Views are personal.

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