The Food Service Aggregators (Zomato, Swiggy, etc.) and their Pricing Practices

Introduction

Since the launch of online food delivery startups, a revolution has started in the food industry. The consumers now have the option to choose and order from a variety of food options from different restaurants. The rapid expansion of this industry led to the rise of successful startups like Zomato, Swiggy, etc. With the kind of success witnessed by these startups particularly Swiggy and Zomato, it raises concern about their pricing strategies and whether these strategies are maintaining the adequate competition in this market.

The major source of revenue for these FSAs comes from advertisements, commissions from the restaurants, delivery services, etc. These platforms are majorly engaged in a race to attract larger consumers and therefore provide massive discounts on their platforms often by the use of subscriptions (like Zomato Gold).¹ On the other hand, they also charge high commissions from the restaurants in the range of 25-30%.² These platforms have also started opening up their own cloud kitchens (a type of online restaurants) like Swiggy’s Bowl Company and Zomato’s Hyperpure.³ They are also looking for other avenues to further expand their consumer base.

While these FSAs are indulging in a variety of strategies to become a dominant force in the food delivery market, these strategies came up with their own problems. The excessive discounts, high commission rates from restaurants coupled with other issues raised important problems of competition law. Various allegations have been levelled against them by the stakeholders like NRAI (National Restaurant Association of India).

The allegations against these FSAs ranges from data masking, breaching platform neutrality, deep discounting policy, high commissions, bundling of different services (making a mandatory condition that the restaurants have to use the delivery service of the platforms).⁴ Moreover, there are also allegations that these platforms mandate restaurants to offer discounts on their platforms on the threat of delisting.⁵ The popularity of these platforms have increased manifold during the pandemic and given the network effect, it became compulsive for the restaurants to list with these platforms even at such harsh conditions. The tussle between the NRAI and FSAs also led to the “logout campaign” in the past where many restaurants were delisted from these platforms.⁶

It has been argued by the opponents that these pricing strategies of preferential listing, deep discounts, cloud kitchens, data masking, etc. can come under the clause of “abuse of dominance” under Section 4 of the Competition Act, 2002⁷ (the Act) and the Competition Commission of India (CCI) must take appropriate actions against these platforms under Section 19(1) of the Act⁸. Recently, the CCI has also ordered a probe into the practices of these FSAs by finding a prima facie case against them.⁹

However, I believe that these allegations, though substantial may fail when it comes to proving “dominance” under the competition law if one adopts an ELP perspective to this problem. Given the law as it exists, it might be very difficult to prove the “abuse of dominance” under the Competition Act¹⁰. The paper is an attempt to prove that under the current legal structure these FSAs might easily escape these allegations and there is also a need to bring a change in the law to deal with the challenges raised by these FSAs.

In the paper, firstly, I will look into the aspect of the “dominance” of these entities under the competition law, then about the allegations of predatory pricing and thirdly, the issues with the cloud kitchens of these companies. This paper shows that how these allegations can easily be refuted because they do not satisfy the requirements of the Act.

Are these FSAs “dominant” under Section 4

As mentioned earlier, there are various claims made by NRAI and other institutions that these FSAs are engaged in predatory pricing and subsequently in the “abuse of dominance” under Section 4 of the Competition Act. However, most of these allegations assume that companies like Zomato and Swiggy are “dominant” in their relevant market. I argue that this contention cannot be proved under the current law.

It is clear that in order to prove the “dominance” of any entity under the Act there is a need to look into the “relevant market” and then prove the dominance of the entity concerned in the market. In the present case, the “relevant market” can be the market for “online food delivery services”.¹¹ However, whether there is a dominance of Swiggy or Zomato in this relevant market is difficult to prove. This is because under Section 4(1) of the Competition Act, the wording prohibits the abuse of dominance by “an enterprise or group”. Similarly, in the explanation the “dominant position” is also defined with respect to “an enterprise or group”. Hence, we will have to provide the dominance of Zomato or Swiggy on their individual level, which is difficult given the nature of the food delivery market.

There are many tests laid down by the courts on the aspect of “dominance”. I will analyse these tests to look whether these FSAs can come within the definition of “dominance”. One test was laid down in Belaire Owners Assn. v. DLF Ltd.¹²; where the test of dominance was based predominantly on the market share of the entity, advantage of being an early mover and the resources of the entity vis-à-vis the competitors. In the present case, it is very difficult to prove the dominance of either Zomato or Swiggy through this test. Because in terms of resources both the entities are at an equal pedestal with both companies able to raise equal money through the market.¹³ Both the entities entered into this market at the same time¹⁴, so there is no question of an early mover. Lastly, in terms of market share, currently both the entities have around same market share of 45%¹⁵, even during the last year; this figure remained roughly the same with Zomato at 44% and Swiggy at 43%.¹⁶ Therefore, even in terms of market share it is difficult to show that there is a dominance of one entity in the food delivery market.

Besides market share, there is another test laid down in MCX Stock Exchange Ltd. v. National Stock Exchange of India Ltd.¹⁷, wherein the stress was given to the specific position that a player holds in the market as compared to its competitors. If a player in terms of historical legacy, technology and brand value is able to do certain things which cannot be replicated by its partners then that show the dominant position of the player.¹⁸ If we apply this test, it shows that while Zomato and Swiggy together can do certain things like deep discounting, it cannot be replicated by other players. However, if we compare these two entities, in most factors, no one is at a comparative advantage as compared to the other.¹⁹ Hence, even in this test, none of the player can be said to be in dominant position. Therefore, it becomes clear that irrespective of whichever parameter we use, proving “dominance” becomes problematic in the case of FSAs.

Another important aspect that must be looked at is the use of deep discounting by these FSAs which can allegedly come under the purview of predatory pricing. “Predatory pricing” under Section 4 happens when a player sells the goods and services below the costs that in turn reduces the competition in the market.²⁰ The complaint filed by the NRAI also alleges that the deep discounts by these FSAs forces the restaurants to lower their prices and this in turn cause severe repercussions to their business. The impact of these deep discounts often attracts customers as can be seen from the increase in sales through Zomato gold²¹, this in turn compels more restaurants to stick to these platforms which in turn attracts more customers which creates a network effect.²² This network effect is difficult to be replicated by other players in the market.²³ Therefore, we can say that the discounts offered in these platforms often leads to decrease in the competition in the market, hence they can come within the definition of “predatory pricing” under Section 4. This claim of predatory pricing can also be stretched to prove “dominance” of these FSAs. In Uber (India) Systems (P) Ltd. v. Competition Commission of India²⁴, the Supreme Court held that the presence of predatory pricing can itself be prima facie indicative of the presence of dominance in the market.

However, there are multiple problems with this allegation as well. Firstly, the concept of predatory pricing is prohibited because by lowering the prices, the competition is usually wiped out and then the player gradually starts increasing the prices.²⁵ However, this strategy does not seem to work in the case of FSA. This is because in their case, the competition is not entirely wipeout because other players are also present. Moreover, deep discounts are also not providing consumer loyalty which means that if discounts are reduced there is no certainty of a loyal consumer base.²⁶ Moreover, owing to increased pressure from the NRAI, the companies are compelled to lower their discount rates which seem to have created an impact on their consumers as well.²⁷ If the discounts are lowered, it is very difficult to attract new customers. Therefore, the FSAs are still not in a position despite so many years, to make profit out of their discounts. Secondly, the reliance on Uber case²⁸ may also not work entirely as the legal position in not entirely clear on that aspect. This is because recently in Fast Track Call Cab (P) Ltd. v. ANI Technologies (P) Ltd.²⁹, the Court has held that the discounts given by Ola Company may not come under the purview of predatory pricing because this market also has the presence of other significant players like Uber, etc. Therefore, these discounts by Ola can be seen more as an attempt to establish its position in the market.³⁰ The same argument can be extended in the case of FSAs wherein they can claim that owing to the existence of the other dominant player; the discount is merely an attempt to sustain the competition by the other player. Thirdly, despite providing discounts for so many years, they are still not in a position to benefit out of it; this shows that given the dynamic nature of the market, these discounts are not a predatory measure.

In addition, there are some other arguments raised against FSAs based on search bias and preferential listing of restaurants.³¹ However, even these allegations are unsustainable because these contentions are difficult to be proved as these search algorithms act as a black box.³² Moreover, they are anyway subject to the test of “dominance”.

Contention with the food kitchens

Another important argument that is levelled against these FSAs is the launch of food kitchens by these companies. The allegation is that through these food kitchens these companies are basically engaged in leveraging, which is not allowed under Section 4(2)(e) of the Competition Act. The leveraging happens when any economic player uses its position of dominance in one relevant market to protect or enter the other relevant market.³³ This section considers “leveraging” as an abuse of dominance. In the present case, it was alleged that these FSAs are using their online platform to extract consumer data and then using that data to sell their own food products through the same platform.³⁴ Thus, these food kitchens are in better position as compared to the other restaurants to sell their own products by using the consumer data which is not available to the other restaurants.

Even if we assume the “dominance” of these FSAs in the food delivery market³⁵, still these allegations can be refuted on the basis of the precedents of CCI on this matter. Firstly, in order to prove leveraging, one has to prove the presence of two relevant markets. Further it has to be shown that the “dominant” position in one market is used to enter/protect the other market. This aspect of “leveraging” was discussed in Baglekar Akash Kumar v. Google LLC³⁶, where the CCI looked into the issue of Google using its dominant position in e-mailing services (Gmail) to “enter” into the market of specialised video- conferencing (Google Meet). The CCI held that since no customer of Gmail is forced to use the Google Meet by virtue of using Gmail and there are no consequences that the customers have to face by not using “meet”, there is no case of leveraging made out.³⁷

If we apply this test, it appears that allegations of “leveraging” against these FSAs are also not made out. Firstly, the two relevant markets in this case can be “online market food delivery” and the second market can be “sale of food products through online medium”.³⁸ Now, even if these food kitchens are available on the applications of these FSAs, no consumer is obligated to buy the food from these food kitchens; moreover there are no consequences that the consumers might have to accrue by ordering from other restaurants, therefore, the argument for leveraging might not succeed.

Moreover, the precedents of CCI related to leveraging involved factors like non-changeability of the products in the second relevant market³⁹ and the restraint caused to the consumers thereof. However, these contentions cannot be raised in the present case because as mentioned earlier there is already a lot of competition in the second market of “sale of food products through online medium” and the products offered by these food kitchens are easily substitutable. Therefore, there is no effective restraint caused to the consumers in the secondary market.

Conclusion and way forward

It becomes obvious that the FSAs can easily escape the allegations of anti-competitive marketing strategies if we apply a purely ELP perspective. The precedents of the CCI coupled with the provisions of the Competition Act makes it apparently clear that the pricing practices of the FSAs cannot come under the purview of the “abuse of dominance” under Section 4 of the Act. Moreover, it is very difficult to establish the dominance of one entity in the market for online food delivery. Although, these entities together cover more than 75% of the market, still on an individual level, they can easily show lack of dominance. This further emphasis the need to include the concept of “collective dominance” in the Competition Act to deal with the situations of duopolistic dominance.⁴⁰

In addition, the precedents of the CCI concerning dominance and leveraging also were restrictive in their approach. Therefore, this analysis shows that although the concerns regarding the conduct of these FSAs were genuine, their practices can still be permitted under the law. The only way to rectify these problems is by amending the law to that extent. One of the methods by which law can be amended is by making a change in the existing Section 4 of the Act.

Section 4(1) of the Act reads as:

“No enterprise or group shall abuse its dominant position.⁴¹”

Similarly, Section 4(2) reads as:

“There shall be an abuse of dominant position under sub-section (1), if an enterprise or a group.⁴²”

Both these clauses use the word “enterprise”, these clauses must be amended to include the word “enterprises”. Therefore, the amended clauses must read as “No enterprise or enterprises or group(s) shall abuse their dominant position”. The said amendment must be done in the entire section wherever the word “enterprise” alone is used.

A similar provision was also present in the EU Competition Law in the form of Article 102 of Treaty on the Functioning of the European Union (TEFU) that uses the word “one or more undertakings”. However, the words “one or more” were often understood in a narrow manner to include only the two or more companies of the same corporate group.⁴³ Later on in Flat Glass case⁴⁴, it was clarified that even economically independent companies can come within the phrase.

However, in order to avoid such confusion in India, an explanation must also be added to the existing Section 4 wherein it must read that:

For the purpose of this section, it is hereby clarified that the word “enterprises” include two or more economically independent enterprises that can jointly exert their dominance in the relevant market.

It is submitted that such an amendment in the existing Section 4 can help in introducing the concept of “collective dominance” in the Indian law which will make it easy to make companies liable for abusing their dominant positions in a duopolistic set up like that of “online food delivery”. In the wake of many markets turning up duopolistic like e-commerce (Flipkart and Amazon), cab services (Ola and Uber) and food delivery (Swiggy and Zomato), it is imperative that the proposed amendment be introduced into the existing law to deal with the problems posed by such markets.