Discount and Resale Price Maintenance

Picture Courtesy: https://dndlaw.com/minimum-alcohol-pricing/

This article was written by Nishka Tyagi, a student of ILS Law College, Pune.

Competition law is a recent law which came into effect in 2009 with some provisions coming into effect even in 2011. This article will show a brief description about Resale price maintenance and discount control under The Competition Act, 2002.Discount control leads to what is called a Minimum Resale Price Maintenance that is you restrict the seller from charging below a specified price. Recently, the Competition Commission of India in a case[1] found a company guilty of Resale Price Maintenance because of a discount control mechanism being followed by the company. This would be the first time a proper decision about Resale Price Maintenance has been taken by the CCI. In this article we will see whether discount control always lead to anti-competitive effects on competition.

Section 3(4)(e) of The Act^[2] defines Resale Price Maintenance as 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.Resale Price Maintenance is assessed under the doctrine of Rule of reason.[3] Rule of Reason was first established in the Leegin case[4]. Under the Rule of Reason Doctrine, the pro-competitive and anti-competitive effects are weighed and then it’s decided whether there has been a violation or not. Thus, defining the relevant market under Section 2(r) of the Act becomes crucial to determine the effects of Resale Price Maintenance.As mentioned in a paper by Thomas A. Lambert[5] , “The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied.[6]”

Pro-competitive can help the consumer and retailer.  The customers and manufacturers are benefitted in a parallel way through a restriction on discount applicable on products as manufacturers usually use this restriction to check on intra-bran competition among retailers. Usually this competition leads to price competition which is not beneficial for the customers. Restriction on discount keeps a check on such exploitation as retailers now fight on the basis of service provided by them through pre or post sale services through a knowledgeable and informed sales person or other ways. This in turn increases the ability of the consumer to choose from the large variety of products available on the market. Even though the discount may lead to a little higher price, the manufacturer strives to improve its product quality or to promote its brand because it believes this conduct will lead to increased demand despite higher prices.  This was also held in the case of GTE Sylvania[7]. Another advantage is the prevention of the discounter from under-cutting other service providers. In his concurring opinion in White Motor Co. v. United States, MR. JUSTICE BRENNAN noted that, unlike non-price restrictions, “resale price maintenance is not only designed to, but almost invariably does in fact, reduce price competition not only among sellers of the affected product, but quite as much between that product and competing brands.” With price competition decreased, discounts ensure sufficient margins for retailers to engage in advantageous point-on-sale services as it would reduce “free-riding” by price cutting dealers that would otherwise make it unprofitable for other retailers to incur the cost of providing such services.This is especially beneficial due to the potential of free-riding being magnified by the coming of high volume of internet retailers and price cutting over the brick and mortar stores. It has been said in the case of GTE Sylvania that Resale price Maintenance like any other vertical restraint has been recognised to be a response to a supplier’s problem of inducing distributor’s to provide adequate level of distribution of its products. High prices are consistent with both pro and anti-competitive harm which are known to the customers and these high prices would be present, absent the RPM, so it is unfair to make the manufacturer implementing the discount liable. Some of these discount restrictions are induced due to complaints from retailers suffering due to other price-cutting retailer or other problems which could penalise a perfectly legitimate conduct. It could be the manufacturer’s efforts to enhance demand for its products by encouraging dealer’s efforts to sell the product.

But restriction on the amount on discount allowed can also lead to anti-competitive effects too. The first and foremost being a retailer’s collusion. RPM arrangement was dealer-initiated meaning that it was adopted after a demand made by dealers collectively or on a request by a dominant retailer. When a group of retailers collude, they compel a manufacturer to fix prices according to their needs to achieve an unlawful arrangement and when a manufacturer agrees, he agrees not to establish the practice to stimulate services or to promote its brand thus making it an anti-competitive practice. Secondly, it also affects competition for new entrants in the market. Any new entrant’s ability to compete will be restricted due to the high prices in the market and with no capability to reduce the prices. As mentioned in Hyundai“Minimum Resale Price maintenance leads to stifling of intra-brand competition.”

       Discount induced resale price maintenance as explained above, could have both pro and anti-competitive effects. Restricting discount induced Resale Price to having only anti-competitive effects will not only be unfair, but also show only a very black and white picture of it. Business environment, market, consumers have to be taken into account while deciding the effects of discount induced resale price.

[1]Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Limited, Case No. 36 of 2014,   CCI, [hereinafter, ‘Hyundai’].

[2] The Competition Act, 2002 (India), [hereinafter ‘the Act’].

[3] Raghavan Committee Report, Para 4.4.1.

[4][4]Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), [hereinafter, ‘Leegin’

[5] Thomas A. Lambert, Dr. Miles Is Dead. Now What?, 50 WM. & MARY L. REV. 1937, 1961 nn.82, 83

[6]Chicago Board of Trade v. United States, 246 U.S. 231

[7]Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977),