antitrust

Too Deferential: Critiquing CCI’S Approach in the Amazon Private Label Brands Case

Bipasha Kundu

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In this piece, the author argues that the CCI should have taken a more inquisitorial approach in the case of In Re: Allegations pertaining to private label brands related to Amazon sold in Amazon India Marketplace, borrowing from the inquisitorial practices of its Italian counterpart.

Introduction

Amazon has recently decided to delist Appario Retail as a seller in the marketplace amidst allegations of self-preferencing and consequent raids conducted by the Competition Commission of India (“CCI”). However, this is not the first time that allegations of self-preferencing practices undertaken by Amazon have come to the forefront. The CCI had ample opportunity to look into the alleged anti-competitive practices carried out by Amazon in the case of In Re: Allegations pertaining to private label brands related to Amazon sold in Amazon India Marketplace. Unfortunately, the CCI had severely limited itself by deciding not to look into the veracity of the submissions made by Amazon, deciding the matter solely on its face value.

This case is based on a Reuter’s report, which accuses Amazon of engaging in imitation of successful products and self-preferencing through the manipulation of search results. However, the CCI decided to drop the case at the initial stage, relying solely on Amazon’s submissions. In this piece, I begin by briefly explaining the concept of self-preferencing, followed by an evaluation  of the suo moto case. Following this, I contrast the CCI’s approach in the suo moto case with the AGCM’s (Italian Competition Authority) approach in the Amazon Logistics case. I conclude that the CCI had enough powers under the Indian Competition Law framework to pursue a detailed investigation like its Italian counterpart did.

What is Self – Preferencing?

In simple words, self-preferencing  refers to a process by which an internet platform gives preferential treatment to the products and services it provides. Self-preferencing practices are generally considered undesirable, even when they may result in consumer welfare. This is because competition authorities undertake an evaluation beyond the outcome, including “structures and processes of competition” within their ambit. The primary objective of calling for the prohibition of self-preferencing seems to be to maintain platform neutrality, i.e., a non-discriminatory approach of the platform towards all services even when some of them are provided by themselves. The argument to prohibit self-preferencing stems from the fear that mammoth companies might use their dominance in one market to enter into a different market where they were not dominant.

Self-preferencing is often linked to vertical integration. In a hypothetical situation, if a platform creates or acquires a specific supplier, it might not only favour this supplier more than other suppliers, but it might also restrict the acquired/created supplier from dealing with other competing platforms. However, the anti-trust legal framework does not deem practices leading to vertical restraints illegal per se, and it seeks to prevent such practices which are “explicitly anti-competitive.” It is often argued that consumer preferences and welfare might be stifled as a result of preventing self-preferencing; however, it is seen that big platforms have, in fact, used self-preferencing to promote their own products at lower prices, to the detriment of other brands. However, it has to be noted that the success of a brand promoted by a platform depends on the popularity and success of the platform itself, and this factor acts as a check on the extent to which a platform favours a certain brand at the cost of others. Prohibiting self-preferencing to protect comparatively inefficient competitors would not be a logical course of action either. Self-preferencing can be distinguished from tying and bundling strategies because in the former, no condition is imposed on the consumer to buy the complementary product. Self-preferencing is often used as a source of self-promotion, which, in fact, can increase competition and spur innovation in the market. Self-preferencing in furtherance of anti-competitive conduct can happen in multiple ways, like excluding a specific competitor without any reason and using the inoperability of products or services to exclude competition.

Self – Preferencing Allegations Against Amazon & CCI’s Suo Moto Action

In 2021, CCI took suo moto cognizance of allegations of Amazon engaging in anti-competitive practices to favour its own products based on the Reuters report.

The Reuters Report, titled “Amazon copied products and rigged search results to promote its own brands, documents show,” was relied upon by CCI in the In Re: Allegations pertaining to private label brands related to Amazon sold in Amazon India Marketplace. It claims to be based on internal documents of Amazon. It levels serious accusations on Amazon of running a “systematic campaign” to create an imitation of products and influencing search results to favour its own products. Allegedly, Amazon used internal data from the repository of Amazon.in to create knock-offs of products created by third-party sellers using the Amazon platform. Customer return data was carefully studied to identify “benchmark” products that could be replicated. Amazon had also planned to use certain manufacturers specifically for imitation. It was also alleged that it manipulated its search results in such a way that its own products would generally feature in the top two or three results.  

Even though Jeff Bezos (Amazon founder) had testified before the U.S. Congress in 2020 that the platform does not use data pertaining to individual sellers to engage in self-preferencing, internal documents of Amazon showed the opposite. Other internal documents showed that Amazon sought to introduce the existing private brands and launch other new brands to cater to Indian needs to make its business sustainable in the country.

To sum up, the two primary allegations levelled against Amazon were that it creates knock-offs of popular products, and that it manipulates the search results to promote its own brands. In response to these allegations, Amazon submitted to the CCI that it does not own or sell any product. Third-party sellers using the Amazon Marketplace platform to sell products set the retail price after acquiring them from whole sellers and suppliers. It only owns only one third-party seller – Amazon Retail India Private Limited (ARIPL). It further states that DIPP had given its approval to ARIPL to conduct retail business. The share of its Private Brand’s sales in the total sales was just 1.26%. The ranking and listing criteria with regard to search results apply uniformly to every seller on the Amazon Marketplace, including third-party sellers. Amazon’s Private Brands creates more competition instead of causing an appreciable adverse impact on it. The CCI, relying on Amazon’s submissions, decided not to pursue an inquiry at the given stage.

The AGCM’s Decision in the FBA Amazon Case

Given the deferential enquiry of the CCI that was stifled before it could properly begin, I shall now examine the enquiry that the ACGM undertook for a similar allegation of anti-competitive behaviour.

In this case, Amazon was found in breach of Article 102 (Prohibition of abusive conduct by a dominant company) of the Treaty on the Functioning of European Union (“TFEU”) by the ACGM. It noted that Amazon was engaging in self-preferencing with regard to benefits it gave to merchants with “Fulfillment by Amazon” (“FBA”) subscription. It said that Amazon wanted to become dominant in the “logistics services” market of Italy with the help of the FBA scheme, at the expense of other competitors. Two kinds of sellers use the Amazon Marketplace website for selling goods, the ones directly owned by Amazon and third-party merchants. Hence, Amazon essentially works in two capacities.

As far as the third-party sellers are concerned, they can either choose to manage storage, logistics, and delivery through an independent operator (known as the Merchant Fulfilment Network. Hereinafter, MFN) or through Amazon itself (through Amazon’s Logistics Network. Hereinafter, ALN). If a third-party seller decides to go through the ALN route, then it has to subscribe to the “Fulfilled by Amazon” (hereinafter, FBA) service. FBA includes services like – warehousing, inventory management, packaging, labelling, shipping, transportation, delivery, returns, and customer assistance.

The AGCM had to find out whether the benefits given by the FBI subscription allowed Amazon to use its dominant position to create a monopoly at the expense of other competitors. The AGCM delineated two relevant markets in this case. The relevant markets were –

(i) “Intermediation services on e-commerce platforms.”

The AGCM has adopted a multi-market approach because of the fact that Amazon acts both as the platform where third-party sellers sell their products as well as the owner of certain sellers who use the Amazon Marketplace platform. E-commerce platforms as a market were considered independent from that of sales from brick and mortar stores and proprietary websites because they are “complementary” and not alternative to each other. However, it included both hybrid (platforms on which both third-party’s products as well as its own products) and traditional (platforms that only sell third-party products) platforms in the ambit of the relevant market.

(ii) “Logistics services for e-commerce.”


The AGCM also focused on the growth of the market of logistics services for e-commerce platforms in Italy. There have been multiple new entrants in the market of integrated logistics due to the expansion of the e-commerce industry in Italy. According to the AGCM, Amazon had “super-dominance” in the market of e-commerce platforms as far as Italy is concerned. It also emphasized the presence of multiple entry barriers in the market, namely, customer loyalty, a wide range of products and services, and network effects. The AGCM concluded that Amazon had used its “super-dominance” to the detriment of the competitors.

Amazon provided a host of advantages to third-party sellers on the subscription of FBA, including non-application of performance metrics, Prime Badge, BuyBox (Customers begin the purchasing process in the BuyBoX, and Amazon decides which products are to be displayed there, giving the featured products a significant advantage over the competitors) in certain cases, participation in offers and events, and free shipping.

The majority of transactions (by value) are made by Prime customers of Amazon, who, in turn, prefer products with Prime badges. Hence, this makes third-party sellers more dependent on FBA. The cost associated with FBA subscription was also found to be high enough to disincentivize third-party sellers from multi-homing (using different platforms simultaneously). Even though Amazon submitted that the benefits associated with the FBA were associated with the “superior quality” of its services, AGCM said Amazon could not sufficiently prove such superiority.

The AGCM said that Amazon is engaging in a “single, complex and articulated exclusionary strategy” and has violated Article 102 of the Treaty on the Functioning of the European Union (hereinafter, TFEU). Amazon contended that it never forced any third-party seller to subscribe to FBA and never did it impose any minimum inventory requirement. However, AGCM countered by highlighting that Amazon attached certain benefits with the subscription of FBA without providing any alternative route to gain those benefits. The Seller Fulfilled Prime (hereinafter, SFP) programme launched by Amazon is designed to qualify the warehouse management capabilities of third-party sellers to get certain benefits if considered “suitable for Prime experience,” but it cannot be said to counter the anti-competitive practice of Amazon as it is not launched as an alternative to FBA.

In this case, the AGCM focussed on three major effects of Amazon’s practices: (i) exclusion of potential competition and acting as a disincentive for technological growth; (ii) absence of a level playing field in the relevant market; (iii) exponential increase in Amazon’s influence in the delivery industry.

Further, the market share of the competitor e-commerce platforms has substantially decreased, and multi-homing has become increasingly difficult as far as logistics services are concerned. The effect of all these factors combined is that many third-party sellers are forced to sell their products only on the Amazon Marketplace. Following this enquiry, the AGCM imposed a fine of 1.2 billion euros on Amazon. Further, it asked Amazon to treat all sellers equally. It also said that the FBA and SFP schemes would be liable for monitoring and verification. In the following section, I compare the inquisitorial nature of this enquiry with the deferential nature of the CCI’s.

Comparing CCI’s Approach In Its Suo Motu Action To That of AGCM In The Amazon Logistics Case

In order to decide the FBA Amazon case, the AGCM undertook an extensive investigation to see the extent to which Amazon was dominant in the delineated markets in Italy. It found that Amazon accounted for more than 75% of the entire revenue generated by the marketplaces by supplying intermediary services. Moreover, Amazon.it alone accounted for more than 70% of the seller’s marketplace transaction value in Italy. Amazon.it’s consumer visits recorded a jump from 80 million / month to 220 million / month in a short span of three years (2016-2019). During the same period, the number of products sold on the platform increased from 100-200 million to 600-700 million. In 2019, Amazon’s consumer base recorded a 60% increase from 2016, while another platform, eBay.it recorded a 20% drop in the consumer base in the same time frame. On the basis of these findings, the AGCM concluded that Amazon was indeed dominant in the relevant markets.

The investigation further revealed that the third-party sellers opted for the FBA service primarily to gain visibility associated with the “Prime” label and increase their sales, rather than a “superior quality” of services, as Amazon claimed. The share of FBA transactions increased from about 30% to over 80% from 2016 to 2019. The cost incurred by sellers for multi-homing increased, too, as a result of Amazon’s conduct. The AGCM scrutinized the evidence provided by Amazon in favour of the superior quality of services provided by FBA but concluded that it was not convincing enough.

On the other hand, in the Amazon self-preferencing case, the CCI decided that it would not pursue the inquiry at this stage, based only on Amazon’s submissions. It did not even ask Amazon to substantiate its claims. On the other hand, the AGCM asked Amazon to prove its arguments (for example, when Amazon submitted that FBA advantages are linked to superior quality service providers). It did not stop at imposing a hefty fine on Amazon but decided to impose rectification measures to stop anti-competitive conduct (mandating Amazon to treat all merchants on the platform in the same manner; subjecting FBA and SFP to monitoring).

The question which arises is whether the CCI had enough powers within the Indian Competition Law framework to pursue a detailed investigation. The CCI under s. 36 (2) of the Competition Act, 2002, and under Regulation 44 and 45 could have perused the internal documents of Amazon on which the Reuter’s Report claims to be based. When Amazon’s response was sought with regard to the allegations levelled against it by the Reuter’s report, it said that according to them, the claims are “factually incorrect and unsubstantiated” as Reuters did not share the documents it had relied on. Hence, without perusing the relevant documents and relying solely on Amazon’s submissions, the investigation has remained incomplete. The CCI is meant to be an inquisitorial body, and it is not expected to take a party’s submissions for its word.

Conclusion

The digital sector is a fast-moving one, and it is important for the CCI to actively take action against any anti-competitive conduct that comes to its notice. It should make most of the powers vested in it by the Indian Competition Law framework. Even though CCI’s suo moto cognizance of the self-preferencing allegations against Amazon was a step in the right direction, it is not enough. Several independent studies have found that Amazon has been engaging in self-preferencing activities. The CCI should have gone into a more detailed investigation, perusing the relevant documents on which the Reuter’s report was based, rather than relying only on Amazon’s submissions. Relying solely on one party’s argument defeats the purpose of an investigation.[KK10] [U11]  Even though Amazon has decided to terminate its relations with Appario, which can be seen as a behavioural change on its part, it is not necessary that it changes the dynamics of the Amazon market place beyond a superficial level. Amazon had previously terminated its relations with Cloudtail (one of the erstwhile biggest sellers in the Amazon Marketplace) too, but interestingly, several new sellers emerged on the platform which are run by the people previously employed by Cloudtail. Hence, the CCI’s role becomes imperative when it comes to checking self-preferencing practices being carried out in the market. Although initiating investigations is necessary, it is high time that CCI starts focussing on actually conducting the investigation and imposing appropriate sanctions when necessary.


Bipasha Kundu is a third-year student at National University of Juridical Sciences (NUJS), Kolkata.