Beruflich Dokumente
Kultur Dokumente
Bhawna Gulati*
INTRODUCTION
The most probable reason why minimum RPMs were, and remains to be,
prohibited because they are considered to have adverse effect on theintra-
brand price competition at the distributor/retailers level. This indicates that
competition authorities not just aim at competition at the
producer/manufacturer level, but at each level in the vertical chain
However, the past few decades have led to the evolution of considerable
literature in many parts of the world that negates this proposition. The
literature, which will be illustrated in detail in this paper, shows how RPMs
can be consumer welfare enhancing.
The first part of paper discusses at length the types of RPM agreements and
how they distort the competition process. The second part lays down the
treatment accorded to resale price maintenance agreements in India
starting from the Monopolies Enquiry Committee report till the Competition
Act (2002) and points out how the Indian law on this subject have moved
from hard core prohibition to safe harbors provisions allowing for efficiency
enhancing arrangements. By comparing the provisions in the Competition
Act with those provided in the repealed MRTP Act, the paper highlights the
differences in the two statues to ensure that the jurisprudence based on the
former does not affect the unfolding of the latter statute.
The third part of the paper focuses on the substantive and procedural
provisions of the Competition Act, 2002, pertaining to minimum RPMs. This
will provide insight into the investigation procedure followed once a
complaint3 regarding RPM is filed. The fourth part of the paper will briefly
provide the existing debate on the resale price maintenance agreements, i.e.
2This chain may include/exclude the levels depending upon the middlemen
involved between the manufacturer and final consumer.
whether they are competition distorting. This part will also provide the
practices prevailing in some select countries on this issue. Considering the
relevance and influence of the US and EU jurisprudence on the Indian
competition cases, as evident from the CCI orders and Supreme Courts
ruling in CCI v.SAIL4,it may be interesting to study in brief the approach
adopted by some select jurisdictions. The Competition authorities, generally
in any jurisdiction, adopts one of the three most prevalent practices while
dealing with resale price maintenance agreementsper se prohibited,
prohibited under rule of reason, allowed unless collusion or abuse of
dominance can be proved. This partwill critically analyze these approaches
by illustrating the countries which have adopted these particular
approaches and attempt to suggest which approach is most efficiency
enhancing.
After having a birds eye view of the working of provisions relating to resale
price maintenance agreements in India, the following section will focus on
the legislative history of resale price maintenance agreement in India. The
section will analyze various committee reports and statutes that sought to
The history of RPM goes back to the history of economic reforms in India. In
1964, Government of India issued a notification under the Commission
Inquiry Act, 1952, to set up a Commission, known as Monopolies Inquiry
Commission (MIC).9 The mandate given to MIC mainly required an inquiry
into the extent and effect of concentration of economic power in private
hands and the prevalence of monopolistic and restrictive practices in
important sectors of economic activity and also to suggest legislative and
other measures to deal with such issues. The MIC report, while dealing with
the monopolies and restrictive trade practices, observed (amongst other
things) that minimum resale price maintenance is restrictive of competition
as it kills competition between the actual distributors of the product (or
good) and often keeps the prices which the ultimate consumer has to pay
higher than they would otherwise have been.10 The committee also recorded
the justifications proffered by various producers for imposing minimum RPM
which inter alia included the following:
The producers, when inquired by the committee, accepted that they impose
strict sanctions in case of violation of the RPM agreement i.e. in case the
supplier tries to sell below the stated price, the repercussions were serious.
10Id., at 129.
The committee also reviewed legislations of various countries e.g. US, UK,
Europe, Belgium, Demark, Sweden, Australia, New Zealand etc. and
recommended various policy changes. One such change with regard to
restrictive trade practices was [m]onopolistic and restrictive practices
must be curbed except when they conduce to the common good. 11 The
committee noted that resale price maintenance requires special treatment
considering that most foreign jurisdiction (reviewed by the MIC) consider
resale price maintenance harmful and objectionable per se.12 The
Committee concluded13 that the harmful effect of resale price maintenance
outweighs its advantages and recommended that in the interest of general
public the resale price maintenance should be prohibited subject to
exceptions being made as regards loss leader sales14.
11Id., at 159.
12It is noteworthy that many of those countries have now loosened the approach
on RPMs.
It will be interesting to discuss some of the cases decided under the MRTP
Act for understanding the view of the regulator towards such practices. In
the case ofM/s Mohan Meakins Limited and others 19, one of the respondents
(manufacturer), engaged in manufacture and sale of soft drinks, entered
into a franchise agreement with the other respondents (dealers/suppliers)
for bottling and selling its products. One of the conditions of the said
agreement provided that The manufacturer shall sell the products under
the trademarks only at prices in consultation with the company. The
additional director general (Registration) stated that the condition
completely eliminated competition amongst the respondents interse. It,
therefore, prevents, distorts and restricts the competition at the suppliers
level. The respondents argued that the arrangement is only consultative and
not binding. The Commission observed that although consultation did not
necessarily bestow any right of veto, the inherent nature of the parties
entering into the agreement did provide a significant measure of superiority
to the first respondent vis-a-vis the other respondents. In such
circumstances, consultation could in effect amount to a directive. The
Commission passed a cease and desist order under Sec 37 (1) of the
MRTP Act and directed for amendment of the clause to state that [t]he
manufacturers will not serve the beverages to the retailers at prices higher
than agreed to or recommended by the Company in writing. The
manufacturer will, however, be free to sell them at prices lower than the
recommended prices.
18Id.
During the existence of the MRTP Act, another committee was constituted
to carry out a report on Companies and MRTP ActsThe Sachar
Committee20. The Committee, chaired by Mr. RajinderSachar, analyzed
various restrictive trade practices and with regard to minimum resale price
maintenance agreement recommended that such agreements should be
prohibited unless they are covered by the general defences.21 The general
defences included (i) defence requirement of security of State; or (ii)
compliance with any of the conditions by the government by general or
special order in relation to the particular goods or services; or (iii)
agreements expressly authorized or approved by the Central Government or
under any law for the time being in force or if the Government is a party to
such agreement.22
Therefore, it can be seen that minimum RPM agreement was a hard core
restriction under the MRTP Act subjected to per se standard of evaluation.
There was no economic or commercial justification that could redeem such
an agreement once its existence was established. The Sachar Committee
report further authenticated this conviction by unequivocally stating that
minimum RPMS are prohibited unless they are covered by the general
defences. And none of these defences can be categorized as an economic or
efficiency defense. Therefore, minimum RPM agreements were per se void
The next part will explain, in detail, the prevailing substantive and
procedural framework for dealing with RPMs. It may be noted here that the
following part, especially the procedural part, also applies to other
violations under Sec 3, as much as it applies to RPMs.
A) SUBSTANTIVE PROVISIONS
RPMs are covered under Sec 3(4) of the Competition Act, 2002, which
deals with vertical agreements that are anti-competitive in nature. Sec
3(1) states that [n]o enterprise or association of enterprises or person or
association of persons shall enter into any agreement in respect of
production, supply, distribution, storage, acquisition or control of goods
or provision of services, which causes or is likely to cause an appreciable
adverse effect on competition within India. Sec 3(2) declares all such
agreements as void. Sec 3(3) and 3(4), however, provides specificity to
the general statements provided in Sec 3(1) and (2). Sec 3(3) recognizes
certain horizontal agreements between the competitors which are
presumed to have appreciable adverse impact on competition and Sec
3(4) deals with vertical agreements that are recognized to be void if they
are proved to have appreciable adverse effect on competition. Sec 3(4)
states as follows:
(e) "resale price maintenance" includes any agreement to sell
goods on condition that the prices to be charged on the resale by
the purchaser shall be the prices stipulated by the seller unless it
is clearly stated that prices lower than those prices may be
charged.
World over there are two types of evaluation standardsPer se and Rule of
reason. Though these approaches to evaluate the anti-competitive
agreements were evolved by the US Supreme Court while interpreting
different provisions of the US Antitrust Act (The Sherman Antitrust Act,
1890), most countries today follow one/both of these standards while
evaluating anti-competitive agreements in their jurisdiction. A per se24
violation requires no further inquiry into the practice's actual effect on the
B) PROCEDURAL PROVISIONS
The procedure regarding the alleged RPM agreement starts with the
initiation of the inquiry of the CCI into the said practice. As stated earlier
that the Commission can initiate inquiry into any alleged violation either on
the basis of the information received by a person (informant) or reference
made by the government/statutory authority or on its own motion as per Sec
19(1). Once the information is received, the procedure for inquiry by the
CCI, mentioned under Section 26 of the Act, is followed. Section 26 contains
8 sub-Sections which lay down steps in inquiry procedure. The steps lay
down different permutations based on the path a particular case might
follow during investigation. Section 26(1) states that if CCI is convinced that
a prima facie case exists, it shall direct the Director General (Investigations)
[DG (I)] to undertake an investigation into the matter. Alternatively, if the
Commission is convinced that no prima facie case exists on the basis of
information received by it, the case is closed [Sec 26(2)]. Thereafter, the DG
(I) submit a report on his findings within the period prescribed by the
Commission [26(3)].On submission of DGs report under Section 26(3), the
commission may forward the copy of the report to the parties concerned
[Section 26(4)]. If the report of the DG suggests that there is no
contravention of the provisions of the Competition Act, CCI shall invite
objections or suggestions from the government (Central or State depending
on who have referred the matter to CCI) or the parties concerned [Section
26(5)]. If after considering the objections, CCI is convinced that no
contravention has taken place, then it can pass an order to that effect under
Section 26(6). However, if after considering the objections, CCI is of the
opinion that contravention has taken place, then it may direct further
investigation under Section 26(7). Finally the last sub-section [Section
26(8)] lays down that if the DGs report indicates that there is a
contravention, the Commission may direct further investigation if it is
required. Appeal to the Competition Appellate Tribunal (CAT) under Section
53A and B lies against Section 26(2) and (6). Notably both these sections
pertain to closure of a case pursuant to the finding of no contravention of
the provisions of the Competition Act.
After dealing with the substantive and procedural provisions under the
Competition Act, it may be meaningful to move to a larger policy question
which has kept many antitrust29 scholars busy in the US. The question
28This is beyond the scope of this Chapter. For detailed provisions refer to the
Competition Act, 2002. Also note that these orders of CCI are appealable.
29In the US, competition law is more popularly known as the antitrust law.
pertains to the very righteousness of prohibiting minimum resale price
maintenance agreements. The following part will explain the kind and
gravity of distortion caused by RPMs and then move to its justifiability in
any competition law regime.
Production efficiency occurs when the firms seek to achieve the goal of
producing goods at the minimum possible cost of production and they have
an incentive to find newer ways to reduce costs as far as possible to earn
maximum possible profits32. It is uncontestable that the manufacturers sales
and profits are inversely related to the price of the product 33, i.e. lower the
price at which the distributors resell the products to the consumers, the
greater will be the demand for the product and the profits will also increase
accordingly.34 Therefore, the manufacturers desire to eliminate the intra
brand price competition by imposing a minimum RPM cannot be but with a
strong commercial justification. Lester G. Telser 35, has beautifully explained
why a manufacturer is motivated to impose minimum resale price when
he36 himself will benefit the most if the price of the product is kept at a
32Id.
33For the purpose of this article, monopoly market model has not been considered;
otherwise the results of situations considered will lead to variant consequences.
34Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 JOURNAL OF LAW
AND ECONOMICS 86-105 (1960).
This part of the paper explicates how imposition of minimum RPMs on the
retailers incentivizes them to provide useful pre-sale services. In the
absence of an RPM agreement, the motivation to provide pre-sale services,
if not altogether missing, is minimal. If the retailers choose to provide pre-
42Shor, Mikhael, Free Rider, Dictionary of Game Theory Terms, Game Theory.net,
available athttp://www.gametheory.net/dictionary/FreeRiderProblem.html (Web
accessed: 24 September, 2010).
sale service like expert pre-sale assistance on the product information, trial
usage of the product etc, the cost of such service will accelerate the cost of
the product to the final consumers. The problem arises when some retailers
provide and some do not provide the important product specific pre-sale
services. The consumer can go to the former retailer, see the product and
avail all the pre-sale services which are free of cost and buy the product
from the latter retailer at a discounted price. The latter retailer can give
heavy discounts because he is not incurring any cost on providing pre sale
services. RPM solves this free riding problem by making retail prices
uniform, so that customers no longer have a reason to shop from one store
and buy from another. With no possibility to compete with each other on the
basis of price, retailers that operate under RPM conditions will focus on
non-price factors, i.e., services43.
44Here a distinction can be made between experience goods and search goods, as
the latter will not require much of pre-sale service while the former will. An
example of search good can be cotton, pencils, pens etc where consumer do not
require much information or pre sale service to make a right choice. This, however,
is not the case with experience goods where the absence of pre-sale services can
lead the consumer to make a wrong choice.
demand is the function of product features and quality as well as the price
of the product45. Therefore, to know those product specific features,
consumers need pre-sale services. But the problem is that, in the absence of
minimum RPM, the retailers compete with each other on the price at which
they offer the products to the final consumer. In the effort of attracting
consumer, the retailers may bring down the price further and further to
make their product seemingly more economical. The dilemma here is that
whether such a price war at the retailers level is welfare maximizing?
Whether intra-brand price competition should be motivated?
The author is of the opinion that such intra-brand price competition is not
only illusory but is also welfare diminishing because it might disincentivize
the full service retailer to offer the important retail services that he was
offering before. It will not only adversely affect the manufacturer but also
the consumer. On the one hand, the manufacturer will be harmed because
the product will not be able to capture the demand (at least that part of the
demand which is directly proportional to the pre-sale services) in the
absence of pre-sale services. On the other hand, the consumer will make
lesser informed choices and they might end up making a wrong decision
thereby resulting in diminished consumer welfare. However, by imposing
minimum resale price restraint, a manufacturer can eliminate the
unnecessary intra-brand price competition which in turn encourages
retailers to invest in tangible or intangible services or promotional efforts
that aid the manufacturers position as against rival manufacturers.46
C) INTERNATIONAL PERSPECTIVE
In the U.S., presently, RPM agreements are evaluated and adjudged under
the rule of reason approach. For decades, however, the position in the U.S.
was not the same as it stands today. The venerable Dr. Miles Medicalcase47
condemned per se48the resale price maintenance (RPM) agreements and
such agreements were considered per seillegal under antitrust law since
1911. It was only after Leegins49 when the US Supreme Court reversed Dr.
Miles dicta and held that RPM is no longer condemned per se but is instead
to be treated under the rule of reason. 50 So today RPM is no more a hard
core restriction under the US Antitrust Law and is subject to rule of reason
approach, meaning thereby that the alleged agreement can be allowed if the
pro-competitive benefits arising from such an agreement outdo the anti-
competitive effects.In EU, the competition law, though adopts a lenient
47Dr. Miles Medical Co. v. John D. Park, 220 U.S. 373 (1911).
49Leegin Creative Leather Products, Inc., v. PSKS, Inc., 127 S.Ct. 2705 (2007).
50Kenneth G. Elzinga and David E. Mills, Leegin and Procompetitive Resale Price
Maintenance, 55 (2) THE ANTITRUST BULLETIN 349 (2010).
approach while dealing with the maximum resale price agreements,
categorically presumes minimum resale price as a hard core restriction. An
agreement imposing maximum resale price can be exempted from the
applicability of Art 101(1)51 if the market share cap of 30% is not exceeded. 52
The minimum RPMs, however, have been condemned on various occasions.
Even the New EU Vertical Restraint Regulations 53 make it clear that resale
price maintenance is a hardcore restriction and the exemptions and safe
harbor provisions introduced in other vertical restraint agreements will not
apply to vertical agreements that establish a fixed or minimum resale price.
However, the new regulations recognize certain situations where RPM
agreements could generate efficiencies.54 Canada and Australia55,also
impose a per se prohibition on resale price maintenance agreements.
55In Australia, RPM agreements are per se illegal for both goods and services but
can be authorized on public benefit grounds.
unless the entity (or person) imposing it is dominant. Although Singapores
Competition Act is primarily on the lines of UK competition law, the
provisions relating to vertical restraints are different. Third Schedule of the
competition law in Singapore very specifically states that, Section 34 56
prohibition shall not apply to any vertical agreement, other than such
vertical agreement as the Minister may by order specify. Singapore follows
allowed unless specifically prohibited by order approach as opposed to the
prohibited57 and prohibited unless allowed because of efficiency
consideration58 approach. The probable explanation for following such an
approach is that rule of reason analysis is quite a costly exercise and lack
ofinformation to analyse any such agreement might lead to false positives
and false negatives. Therefore, Singapores competition authority finds it
better to focus on whether firms with considerable market power can
engage in successful exclusionary practices rather than proscribing vertical
conduct in the first place.
CONCLUSION