Online platforms may have to rethink their parity deals
11 Jan 2023
There were many interesting developments in the antitrust space last year, including two reports by a parliamentary panel—one on proposed amendments to the Indian competition law, and the other on a new Digital Competition Act (DCA) to regulate anti-competitive practices of digital gatekeepers. Based on a statement made by the chairman of the panel in his first public interview of 2023, the government is working towards getting parliamentary approvals for the proposed amendments and the DCA this year itself. Another highlight of 2022 was a surge in Competition Commission of India (CCI) pursuits in the digital sector, which included ordering various detailed investigations and imposing hefty fines on Google, MakeMyTrip (MMT) and Oyo for not complying with Indian competition rules.
A recent CCI order worth a mention is the one against MMT and Oyo which dealt with allegations that MMT imposed price-parity and room-parity obligations on its hotel partners. In other words, hotel partners were not allowed by MMT to offer rooms on their own website or any other online travel agent at better terms than offered on the MMT platform. Such clauses, through which a platform coerces a seller not to offer its products or services at better terms on competing platforms or on its own website, are known as parity or ‘most-favoured nation’ (MFN) clauses. Although the focus of competition authorities has been price MFN clauses at the retail level (as these directly impact the final retail price), such clauses can also be for non-price terms and even at a wholesale level. Non-price terms may include access to the entire inventory of a seller, additional services, free upgrades and other promotions.
Retail MFN clauses are broadly of two types: (i) Wide MFN clauses, restricting better terms on the seller’s own website and any other sales platform; and (ii) Narrow MFN clauses, restricting better terms only on the seller’s own website. Views on the anti-competitive effects of wide MFN clauses seem to be more or less consistent across the world. Such clauses are likely to soften price competition among platforms, leading to higher prices for consumers, increase entry barriers by disabling new entrants from competing on prices, and facilitate collusion among platforms by increasing price transparency.
On the other hand, narrow MFN clauses are generally prohibited if their anti-competitive effects outweigh their efficiencies. The latter includes ease of ‘search and compare’, lower prices for consumers and protection of a platform’s investment (against the free-rider problem). Several European countries like France, Austria and Italy now have specific legal provisions to generally prohibit MFN clauses in the online hotel booking space. However, some of them have acknowledged the efficiencies associated with narrow MFN deals. The test involves weighing the extent of restrictions against the efficiencies arising from them. In doing so, the scope of such restrictions must be limited to what is indispensable to achieving the desired efficiency.
As far as digital gatekeepers go, the trend is to prohibit them from imposing both wide and narrow MFN clauses. After Europe’s Digital Markets Act, the Indian parliamentary panel has also recommended this prohibition in the proposed DCA. Based on the market power of gatekeepers, the anti-competitive effects of MFN restrictions imposed by them are likely to outweigh any efficiencies.
Although the term “MFN” found a passing reference in the CCI’s Snapdeal/Kaff order of 2019, the MMT-Oyo case is the first instance when the CCI has provided concrete guidance on the anti-competitive effects of a systematic MFN system. The CCI examined the “combined effect” of retail MFN clauses with MMT’s deep discounting strategies. MMT not only ensured the lowest room rates and best conditions (e.g., free breakfast and gym access) from hotels, but also offered additional discounts. This effectively reduced the net final price to the end-customer below the best available room rate. This practice led to the creation of an ecosystem where MMT could cater to a majority of online hotel bookings due to its low prices, accumulate massive commissions from hotels, and use them to fund higher discounts. The CCI observed that such an arrangement would reduce any incentive for other online travel agents to compete on commissions and would eventually lead to higher prices for consumers. Although the CCI has made its position clear on wide MFN arrangements through its MMT order, it has not conclusively opined on narrow price parity. It has only indicated that narrow clauses may be justifiable on grounds of deterring free riding. It may not be possible to draw general conclusions on narrow MFN clauses as compared to wide ones, as their effects could vary with the characteristics of different markets. However, efficiencies arising from narrow clauses must not be overlooked and must be weighed against their ill-effects.
MFN clauses are likely to stay on the CCI’s radar, especially those imposed by dominant players. Whilst the MMT order discussed concerns around those imposed by a dominant platform, similar concerns exist even for non-dominant yet popular platforms. Zomato and Swiggy are already being investigated by the CCI for imposing such clauses on restaurants. It may thus be prudent for popular platforms to keep themselves up to date on this issue and self-assess risks of their MFN deals. Prevention would be better than a cure.
Divyansh Prasad, associate, DMD Advocates, contributed to this article. These are the author’s personal views.
Vivek Agarwal is partner, DMD Advocates and co-chair, competition committee, PHD Chamber of Commerce & Industry