RESALE PRICE MAINTENANCE
ABSTRACT
The purpose of this paper is to show a brief description of the Resale Price
Maintenance, there legislative history, treatment under the Indian Competition
Law,2002, Economies of Resale Price Maintenance, and the Competition
Commission of India Approach towards the Resale Price Maintenance. This paper
also provides an understanding of the basic provisions, substantive as well as
procedural under the Competition Law, 2002, which helps in understanding the
process of inquiry by the CCI. This paper also focuses that how the CCI should
lay down guidelines for evaluating different kinds of agreements which are going
in the market like vertical agreements, instead of putting all of them to a general
rule of reason approach.
CHAPTER- I
INTRODUCTION
The competition Act of 2002, is a very recent law. Though the Act was passed in 2002, section 3
and 41 became operational only in 2009 and other combination provisions in 2011. The
common-law doctrine of ‗restraint of trade‘ has a played an important role in the development
towards new or modern competition law. Based on the landmark case of Standard Oil Company
1
Section 3 and 4 of Competition Act of 2002.
v. US.2 the Court concluded that the term "restraint of trade" had come to refer to a contract that
resulted in monopoly or its consequences. The Court identified three such consequences: higher
prices, reduced output, and reduced quality. The Court concluded that a contract offended the
Sherman Act only if the contract restrained trade "unduly" which means if the contract resulted
in one of the three consequences of monopoly that the Court identified.
The Indian manifestation of a modern antitrust law can be seen with the development of
Competition Act of 2002. It deals with the ―Anti-Competitive Agreements‖, ―Abuse of
Dominance‘‘ and incorporates ―Appreciable Adverse Effect on Competition (AAEC)‖. The
resale price maintenance can be examined as a vertical restraint, as anti-competitive agreements
in India is still at very early stage. Though courts had adopted many mechanisms but it has not
attracted more attention towards the problem. There are various forms of vertical restraint which
are grouped into price and non- Price restraints. The former refers mainly to resale price
maintenance, where a distributor commits to a retail price. This can take the form of a fixed
price, either minimum or maximum resale price or even a recommended price. This restriction
has several variants, including maximum retail price (price ceiling), minimum price, nonbinding recommended retail price or advertised price. Resale price maintenance or price floors
supposes that price cuts can be detected at a sufficiently low cost. These price cuts can take the
form of non-monetary concessions such as free delivery for instance.
CHAPTER- II
RESALE PRICE MAINTENANCE
Resale Price Maintenance (RPM) is a form of price fixing. Whenever, a manufacturer sets the
price at which a retail shop, which he does not own must resell his products to the public, or at
2
221 US 1 (1911).
which a wholesale business he does not own must resell the product to the retailer, the practice
is known as resale price maintenance.3
In a way, RPM is such a practice where any manufacturer and its distributors agree to sell the
products to the manufacturers at certain price (resale price maintenance), or above a price floor
(minimum resale price maintenance) or at a below a price ceiling (maximum resale price
maintenance). The main issue is that if any of the reseller refuses to maintain the price, either
directly or indirectly, or openly or covertly, the manufacturers may stop doing business with
such reseller.4
RPM may be done either individually or collectively. Under individual RPM, the supplier
prescribes the wholesale or retail price for the goods to be resold and takes actions to enforce
the same. Where as in collective RPM suppliers of the good decide the price either at the
wholesale rate or the retail price for the resale of the goods. RPM is often referred as a vertical
restraint in the anti-trust as it is opposed to price fixing arrangements among the manufacturers
and distributors in respect of the sale of goods or either the purchase of the goods by the buyers
as it is covered under section 3 (1) (a).5
When a RPM is enforced, the price of goods becomes same all over the place of resale
irrespective of difference in location, the character, the quality of services provided with the
goods and different demands on the resources of the wholesaler or retailer.6 It is very important
3
SM Duggar, GUIDE TO COMPETITION LAW, Vol 1, 5th ed. 2010, p. 753. Also see, Fair Trade, Resale
Price Maintenance Re- examined by PWS Andrew and FA Friday, (Macmillan), p.9.
4
Resale price maintenance, available at http://en.wikipedia.org/wiki/Resale_price_maintenance, visited
on October 5, 2016.
5
Supra note 3, at 754.
6
to differentiate RPM from direct price maintenance by manufacturer, who owns a chain of retail
stores and stipulate the price at which each of these must sell his products. Such direct price is
very much prevalent in Indian market, like footwear industry. Where as in the agency
arrangements the wholesaler or distributor may act as an agent of the manufacturers on whose
behalf they use to sell7. But such cases do not fall within the ambit of RPM as such ownership
of the goods remain with the manufacturers itself.
It is generally seen that a branded good are subject to RPM as compared to non- branded goods.
This is generally because a non-branded goods cannot be controlled as they pass through
various trade channels. Non- branded goods also pass through various trade channels but it has
to suffer with the complexities of the unorganized market, where markets are divided between
rural and urban, language barriers and costume barriers which specifically deals with the
category of elite, middle or lower middle class. The case is worst when it comes to unbranded
goods and thus, it may not provide services like free-ride or provide batter retail services.8
CHAPTER- III
RPM UNDER COMPETITION ACT 2002
Resale price maintenance limits the pricing opportunities and the not the resale itself. The price
stipulation can be described in 3 following forms-
Divya Sharma, Resale Price Maintenance as a Vertical Restraint Under the Competition Act, 2002,
Competition Commission of India, New Delhi, June 2012.
7
Supra note 3, at 754.
8
Supra note 6, at 8-22
i. FIXED PRICE- when the goods are to be sold only at the prescribed price and no
further departure is permitted. A fixed price contract places minimum administrative
burden on the contracting parties, but subjects the contractor to the maximum risk
arising from full responsibility for all cost escalations.
ii. MINIMUM RESALE PRICE- minimum RPM is a vertical restraint which is imposed
by an upstream manufacturer on downstream distributors, retailers or dealers. It is
done when goods are not being sold below the price decided and if any retailer do
not follow this than supply of the products are stopped to such retailers and even
they have to pay compensation.9 For example Sony, Samsung and Panasonic have all
employed minimum RPM strategies.10
iii. MAXIMUM RESALE PRICE- When the goods shall not be sold below but not
beyond that price. Resale Price maintenance enables a supplier to exercise control
over the distributors by prescribing the price and margin of profit at each stage of
distribution. Thus, he can secure the support of distributors at each level of
distribution by ensuring an adequate margin to them.11
9
V.K Aggarwal, COMPETITION ACT, 2002 (PRINCIPLES AND PRACTISES), 1st ed. 2011, p. 131.
10
Joseph Pereira, ―Why Some Toys Don’t Get Discounted, The Wall Street Journal, December, 24, 2008,
at D1; Joseph Pereira, ―Discounters, Monitors Face Battle on Minimum Pricing, The Wall Street Journal,
December, 4, 2008, at A1
11
DPS Verma, Regulation of Resale Price Maintenance, 21 JILI 74(1979).
CHAPTER- IV
ECONOMICS OF RPM
There are many reasons which indicate that RPM enhances consumer welfare, whereas other
shows the opposite. It completely depends upon the facts of the situation with other competing
theories in view. Thus, it becomes necessary to understand the positive competitive effects and
its harmful effects of maintaining RPM. The following are said to be the positive effect of
RPM-
i. EFFICIENT RETAIL SERVICE- it may tend to ―repair market failure by establishing
a retail floor price‖12. Thus by agreeing on the condition that each retailer‘s price do
not fall below the same minimum level, the manufacturers prevent any retailer from
taking sales away by giving it to some other retailer at a lower price. Generally, RPM
takes place in the market where goods do not require any detailed information,
extensive product demonstration or any kind of service commitments.13 Such
products may include shoes, designer clothes. A manufacturer may use RPM to
ensure that reputable retailers—those who help the manufacturer build and maintain
a good reputation for its brand—carry its brand by affording those retailers
protection from free-riding discounters.14
12
Lester G. Telser, Why Should Manufacturers Want Fair Trade? 3 J.L.&ECON. 86, 91 (1960).
13
Kenneth G. Elzinga, and David E. Mills, The Economics of Resale Price Maintenance, available at
http://www.virginia.edu/economics/Workshops/papers/mills/RPM%20ABA%20volume%202008.pdf, visited on
October 5, 2016.
14
Supra note 10.
ii. RPM AND FREE- RIDER PROBLEM- A free rider is such a person who enjoys the
investment of someone else‘s benefit without paying any compensation. Many
Economist believe that RPM is such method which can be addressed to bring
changes in the free- rider problem.15 An example of the free- rider problem could be
a high-tech, information-intensive consumer durable good, where presale assistance
by a knowledgeable salesperson at a retail establishment is required to inform and
persuade a consumer of the product merits.
iii. BEYOND THE FREE- RIDER PROBLEM- Minimum RPM can mitigate problems
between manufacturers and retailers even when consumers are unlikely to free-ride.
For example, when retailers decide on the level and types of services and sales effort
to provide for a product, they consider their own markup, not the manufacturer‘s
markup. Suppose that Levi Strauss & Co, a popular denim wear manufacturer, has a
$50 wholesale markup on a brand of women jeans while its retailer has a $10 retail
markup. The retailer would not spend $15 on promotional displays or extra sales
efforts that would induce one additional consumer to buy; however, Levi‘s profits
would increase, so it is in Levi‘s interest to motivate the retailer to invest and
compete for incremental sales.16 This example illustrates just how easily the private
interests of retailers and manufacturers can be misaligned, especially when there is a
large difference in markups.
15
Supra note 9.
16
Supra note 6, at 8-22
The following can be harmful effects of RPM-
i. RPM INDUCED RETAILER CARTELS- In the case of a cartel among retailers,
those firms conspire to set retail prices at monopoly levels and get manufacturers to
enforce their agreement and prevent opportunistic discounting. In this scenario,
retailers use the Manufacturer‘s RPM policy as a cover for their own price-fixing
arrangements. Retailers thereby delegate both the implementation and the
enforcement of the cartel to the manufacturer. Another problem is that manufacturers
have several other distribution channel for their products. If retailer is one channel
attempted using RPM, it might be diverted to other channels.17
ii. RPM AND FORECLOSURE- Since RPM permits a manufacturer to control its
retailers profit margins, this practice might facilitate an implicit contract between the
manufacturer and those retailers of the following nature. The manufacturer ensures
retailers of an attractive profit margin on sales of its own brand in exchange for their
refusing to take on the distribution of competing brands, including brands offered by
new entrants.
iii. RPM INDUCED MANUFACTURER CARTELS- In the usual manufacturer cartel,
sellers collude on the price they charge their customers and do not endeavor to set
the resale price of their product. a cartel of manufacturers might use RPM to help
monitor and enforce the cartel‘s agreement. Once parties to the cartel reach an
agreement to raise prices, each of them has a strong incentive to cheat on that
agreement by secretly cutting price and expanding output. Incremental sales that
17
Supra note 6, at 8-22
stem from furtive discounts can be very remunerative if the cartel has jacked up
prices well above incremental costs.18
CHAPTER V
CCI APPROACH TOWARDS RESALE PRICE MAINTENANCE
The CCI has taken up investigations in relation to RPM in the automobile sector and ecommerce sector along with other issues such as exclusivity and tie-in. In India, vertical
agreements are considered to have pro-competitive effect and thus it can be tested on the rule of
reason. The approach of CCI in the cases would be seen where the CCI has decided to refer the
vertical agreements for further investigation.
Fx Enterprise Solutions India Pvt. Ltd v Hyundai Motor India Ltd – (The Hyundai Case)19Facts
Fx Enterprise Solutions [“FES”] –authorized dealer of Hyundai Motor India Limited
[“HMIL”] for reselling and servicing of Hyundai Products. HMIL–engaged in manufacturing,
sale and servicing of Hyundai automobile range, accessories, spare parts, etc. Dealer has to
order number of vehicles to be eligible for incentives offered by the manufacturers. HMIL
works on zero credit policy.
Allegations
18
Warren S. Grimes, Resale Price Maintenance: A Competitive Assessment, Federal Trade Commission
Workshop on Resale Price Maintenance Panel on Anticompetitive Effects, 2009.
19
Sundar Ramanathan, The Competition Commission of India initiates investigation in relation to resale
price maintenance (Enterprise Solutions India / Hyundai Motor India), National Competition Laws Bulletin,
September 2014.
Multiple layers of incentives coupled with unrealistic targets gave rise to certain malpracticesfabricating invoices for sales of vehicles against incentives for achieving targets.
Exclusive dealership arrangement- dealers to seek prior consent of HMIL before taking
dealership of another brand.
Procurement of all spare parts, accessories, and all other requirements either directly from
HMIL or its specially approved vendors.
HMIL has a Discount Control Mechanism to monitor maximum permissible discount leveldealers were not allowed to give discount above the recommended range.
HMIL employees avoided use of official email address to co-ordinate discount control
mechanism and encouraged dealers to report instances of price/discount undercutting in the
region.
Penalty sheet circulated every month.
HMIL is responsible for price collusion amongst competitors through hub and spokes
arrangement- bilateral vertical agreement between suppliers and dealers and horizontal
agreements between dealers that come about through the role played by the supplier.
Issues
Discount Control Mechanism amounts to ‗resale price maintenance‘ (RPM) restriction under S.
3(4)(e).
HMIL is limiting competition between dealers by specifying limits on their discounting policies.
Discount Control Mechanism determined by HMIL- illegal activity.
Illegal tying- HMIL controls sources of supply and ties the purchase of the desired cars to the
sale of high-priced and unwanted cars to the dealer.
Entry Barrier- dealers required to seek approval of HMIL to undertake business not related to
‗Hyundai‘- adverse effect on consumers as well.
Commission opinion
Existing dealership agreements prohibits dealers to source spare parts requirements from any
source other than its approved vendors- dealers forced to source ‗Hyundai line Products‘ only –
agreement in the nature of exclusive supply violates S. 3(4)(b)
By not allowing dealers to deal in competing brands, HMIL is restricting competition in the
market if the dealers have to seek prior consent- such restriction violates section 3(4)(c)
Maximum permissible discount appears to be RPM- violates S. 3(4)(e)
Illegal tie-in- violates S. 3(4)(a)
HMIL responsible for price collusion amongst and along with dealers through hub and spoke
2. Jasper Infotech Pvt. Ltd v KAFF Appliances (India) Pvt. Ltd arrangement- (the Snapdeal
case)20Facts
Jasper owns and operates the Snap deal which is an online market place which provides the
medium for buyers and sellers to meet and do transactions.
Allegations
One KAFF appliances company alleged that sale of its product at discounted price on snap deal
were counterfeit, infringing its trademark, deceive the public by trading on the goodwill of
KAFF and were also cutting the price of authorized dealers.
It was also alleged that KAFF mentioned in the notice that it will not honor the warranties of the
products sold in its brand name through snap deal.
In retaliation jasper alleged that KAFF had violated the provision of the Act and was imposing a
RPM which was proved through an email exchange which was sent by KAFF to Jasper in which
it was stated that KAFF will not allow the sales of its products on Snap deal if the Market
Operating Price (MOP) is not maintained.
20
Sundar Ramanathan, The Competition Commission of India initiates an investigation in relation to resale
price maintenance in the e-commerce sector (Snap deal), National Competition Laws Bulletin, June 2015.
Issues
The issue in question was the violation of section 19 of the Act.
The contravention of section 3 (4) (e) of the act read with section 3 (1), where KAFF was
alleged to be hindering the ability of dealers, distributors to compete on the price of the product
and thus it was in contravention of the Act.
Another issue was of AAEC, where it was seen that in India KAFF had 28% market share and
restriction was imposed on the dealers through RPM.
Commission opinion
The CCI concluded that there was RPM based on the 28% market share not only harm the
consumers but also are likely to have an adverse effect on Competition in India. The CCI had
identified that 28% market share is sufficient for there to be an ‗appreciable‘ impact on the
market. Therefore, even in cases where the party does not have more than 30% market share the
CCI has decided to inquire into vertical agreements at a prima facie stage.
CHAPTER- VI
CONCLUSION
Resale Price Maintenance (RPM) do pose serious concerns, anxieties, and experiences on both
sides, namely favorable to promoting competitiveness as well as many times causing
impediments or negative impacts on competitiveness. Though RPM agreements have the
potential competitiveness in many requests but should not be attached to per se illegality. But at
the same time should not be conferred with the status of legality even of these arrangements
destroy the market, cause failure of the market, foster a culture of cartelization and creating
barriers for new entrants. The need is for striking a balance that is not neutral per se. The CCI
should have a skeptical view upon minimum resale price maintenance because it tends to
suppress discounting. The CCI should lay down guidelines for evaluating different kinds of
agreements which are going in the market like vertical agreements, instead of putting all of
them to a general rule of reason approach. There should be a balance approach to decide the
legal framework for determining when and what will amount to cause AAEC by RPM
arrangements on competition. For testing the adverse effect in the relevant market the factors
should be determined like physical characteristics, end use of goods, price of goods or services,
consumer preferences, exclusion of in- house production, existence of specialized producers and
classification of industrial products