Algorithmic Price Fixing And Cartel Conducts: Analysing The Competition Concerns In A Digital Economy

Technological advancements due to artificial intelligence and algorithms has led to the e-commerce industry adopting various pricing algorithms to determine prices of products. Cartels are generally formed to fix prices in the market and make the sellers a price-maker.  With the advent of artificial intelligence, and reducing roles of humans, forming and maintaining cartels has become easier than ever. This article discusses the competition concerns arising out of the growing use of algorithms by e-commerce companies.

Cartels[1] are considered to be one of the anti-competitive agreements as per the Competition Act. The definition is given a wider interpretation as the term “includes” is used in it. This therefore implies, a cartel can exist where there is indirect determination/control of prices by the cartel members. Thus, a clear competition concern arises where e-commerce companies engage in similar pricing algorithms, leading to a collusion in prices.

However, the ingredients to establish the existence of a cartel are A] the presence of an agreement, B] Act done in furtherance of the agreement to achieve an anti-competitive, C] The agreement leading to an Appreciable Adverse effect on competition.

A. The existence of an agreement

Competition Act recognises agreements not as per the Indian Contract Act but provides for a wider and inclusive definition of an agreement.[2]Therefore, agreements can also be understood as an implied arrangement and no formal proof of agreement is required.[3] While, the standard of proof in establishing the existence of an agreement is based on preponderance and probability, the burden of proof to prove the existence of an agreement still lies on the Informant. The use of algorithms to determine and fix prices is not per se anti-competitive however when used by enterprises to collude by exchanging market information and fixing high prices it becomes problematic. Executives of different firms may agree upon such a plan and carry it out by using specifically designed pricing algorithms. However, this collusion becomes extremely difficult to be proven because there is no direct interaction between the companies to set prices but it is automatically done by the pricing algorithms. Thus, it becomes almost impossible to prove the existence of a price-fixing agreement between the enterprises and the law turns out to be inadequate.

B. Act done in furtherance of anti-competitive objective.

As per the Indian Competition jurisprudence mere existence of a cartel agreement is not sufficient, an act should be done in furtherance with it.[4] And the knowledge of the act being done is important. In cases of algorithms used by e-commerce or any company, this liability can easily be shifted due to lack of human intervention in fixing of prices. Another form of cartelisation is the hub and spoke model of cartelisation where competitors exchange crucial and sensitive information on prices to form a cartel through a third party. However, in case of hub and spoke cartels where exchange of information takes place, it presupposes that the spokes  i.e. in the present case an e-commerce company to receive the material information. However, this step is eliminated as the algorithm automatically decides and changes the prices without the intervention of e-commerce company and no information is specifically received by the e-commerce company. 

C. Causing an Appreciable Adverse Effect on Competition

AAEC is the impact an agreement has on the competition. As mentioned earlier, the act mentions a presumption of AAEC in cartel cases. [5] However,presumption is not an evidence in itself and it only shifts the burden of proof to rebut the presumption of AAEC on the respondents. Whether or not a cartel has an AAEC is determined by using the parameters under Section 19(3) of the Competition Act. It mentions various conditions which can be broadly divided into positive and negative factors. In case of algorithmic cartels, the defence of promotion of technological advancements can be taken. However, since many economic factors and other economic situations are also considered like structure of markets, government economic policies etc. rebutting the presumption becomes extremely easy.[6]This further restricts and makes it more difficult for detecting and punishing cartels, where algorithmic pricing software are used. As there is no direct impact on competition.

Conclusion

Competition Jurisprudence globally has evolved to consider price-fixing cartels as per se illegal, while recognising the pernicious effects they have on the competition and consumers.[7] However, the Indian Judiciary does not recognise the per se rule and only relies upon ‘the rule of reason’[8]

However, with the growing use of technology and complex business models, detecting and prosecuting cartels has become even tougher. Thus, penalising a cartel must not be restricted to the impact or the success of the cartel. One of the landmark case, dealing with algorithmic cartels, is the US case of David Topkins[9]It was held that using similar pricing algorithms can be held as under the definition of “agreement”.

There is not only a need for coping with the international jurisprudence and recognising the developments, but also to make comprehensive laws specifically to deal with the use of algorithms in the e-commerce sector.

Use of algorithms in e-commerce must definitely not be prohibited but however it is necessary for formulate regulations which ensure algorithms are not built in way that promote collusion.

Indian Competition jurisprudence also needs to evolve to recognise per se rule as opposed to the rule of reason in cases of cartels as the existence of an agreement is in itself sufficient to be considered as an illegal and anti-competitive act.

Author:  Bhumica Veera, NMIMS School of Law, Mumbai, Intern at Khurana & Khurana, Advocates and IP Attorneys. In case of any  queries please contact/write back to us at swapnils@khuranaandkhurana.com.

References:

[1] Competition Act, 2002, Section 2(c).

[2] Competition Act 2002, Section 2 (b)

[3] Builders Association of India Vs Cement Manufacturers’ Association, Competition Commission of India [2012 CompLR 629 (CCI)]

[4]OECD Round Table, ‘Information Exchanges Between Competitors under Competition La’ (OECD, 2010) <http://www.oecd.org/competition/cartels/48379006.pdf>

[5]Competition Act,2002,Section 3(3).

[6]Rajasthan cylinders and containers Limited v. Union of India [(2018) SCC OnLIne SC 1718]

[7] Society of Ind Gasoline Marketers V. USA.

[8]Hindustan Lever Ltd. v. The Monopolies and Restrictive Trade Practices Commission, [(1977) 3 SCC 227]

[9]United States of America v. David Topkins No. CR 15-00201 WHO (2015, US NDC)

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