Even though under a strict standard ‘non-exclusive vertical agreements’ may not invite competition scrutiny, various factors such as allegations of deep discounting, predatory pricing, growth-over-profit strategy and VC-funded model of ecommerce would suggest the contrary.

Introduction

Vivo recently tied up with Zepto for the sale of its smartphones. The arrangement comes at a time when quick commerce is at a boom and the government is paying renewed focus on the growth of the digital economy. As per the information available, the tie up is on a market-model basis where Vivo would continue selling its smartphones through offline retailers and Zepto would be at a liberty to list smartphones from other brands as well.

Competition law framework

The competition body could look into such agreements under two substantive provisions of the law, i.e. section 3 (anti-competitive agreements) and section 4 (abuse of dominance) of the Competition Act, 2002. As far as anti-competitive agreement is concerned, the same could be further classified into two categories, i.e. horizontal restraints and vertical restraints. In the given facts of the case, the said agreement could be scrutinized under vertical restraints as mentioned in the law.

The efficiency defense

Based on available jurisprudence, agreements under vertical restraints are generally covered under the ‘efficiency’ defense which means that there are pro-competitive effects of such arrangements. To put it simply, Vivo benefits from the market reach of Zepto as a quick commerce platform and the latter benefits from the wide inventory pool of the former enhancing consumer choice.

As per what is known, the efficiency in the given case would be further pronounced as there is no exclusivity mentioned. This would simply mean that there would be no foreclosure of the market, the gold standard for intervention by any competition authority, on either side, i.e. be it the smartphone-maker end or on the side of the quick commerce platform.

The offense

The advent of e-commerce, of which quick commerce is a subset, has often been at the crossroads with the growth of small retailers in India. The dominant perception is that any business conducted by online platforms is a direct cut from the offline channel as the net demand of the consumer remains the same. This cross gets highlighted where the traditional retailers have filed multiple suits at the Indian competition authority alleging anti-competitive nature of commercial agreements between ecommerce platforms and selected stores in a preferential manner. Some of the additional concerns which have been mentioned is the possibility of deep discounting, a practice which has already been held to be anti-competitive by the CCI on another occasion in the case of digital markets.

Zepto as a quick commerce platform is no exception to this market dynamics. The All India Consumer Products Distributors Federation (AICPDF) has already alleged that quick commerce companies are engaging in predatory pricing, an offense much worse than deep discounting, given its below-cost pricing strategy. Combine it with the fact that the company is observing mounting losses despite remarkable growth and the puzzle is solved.

Conclusion

The objective of any law cannot be divorced from reality. Competition law in India is no exception to this rule. Even though under a strict standard ‘non-exclusive vertical agreements’ may not invite competition scrutiny, various factors such as allegations of deep discounting, predatory pricing, growth-over-profit strategy and VC-funded model of ecommerce would suggest the contrary. The fact that India is an emerging economy, and it attaches great significance to the MSME sector just reflects its public policy. The same is being continuously reiterated by Indian ministers. The non-exclusive nature of the Vivo-Zepto tie up could anyway just be a matter of time given the incentives an exclusive arrangement generates. In such a case, the competition authority ought to up its guard at the very bare minimum. Alas, ‘competitive process’ secured is ‘competition’ promoted in a regulated market.