Can e‑commerce marketplaces charge sellers commissions differently without breaching competition law?

In the context of e-commerce platforms, charging sellers differentiated commissions is a common practice. E-commerce marketplaces often tailor their commission structures based on factors such as the product category, seller performance, product demand, or market conditions. However, these practices must align with competition law, specifically the Competition Act, 2002, which aims to prevent anti-competitive behavior and promote fair competition in the marketplace. The question arises: can e-commerce platforms differentiate their commission charges without violating competition law?

Competition Law and Commission Differentiation

Legal Framework: The Competition Act, 2002

The Competition Act, 2002 is the primary law in India designed to promote and sustain competition in markets. The Act prohibits anti-competitive agreements, abuse of dominant position, and combinations that may negatively affect competition. Key provisions relevant to commission differentiation include:

• Section 3: Prohibits anti-competitive agreements, particularly those that may distort or restrict competition, such as price-fixing, bid-rigging, or market allocation among sellers.
• Section 4: Prohibits abuse of dominance, which may include unfair pricing or imposing discriminatory terms on sellers.

In this context, the ability of e-commerce platforms to charge different commission rates is closely tied to whether it impedes competition or discriminates against sellers.

Can Differentiated Commissions Breach Competition Law?

Price Discrimination and Fairness

Differentiating commission charges can be legally acceptable as long as it does not amount to price discrimination or unfair competition. Price discrimination occurs when a platform charges different sellers for the same goods or services under conditions that may harm competition or limit market entry. For instance:

• Unjustified Price Differentiation: If an e-commerce marketplace charges disproportionately higher commissions to sellers based on factors like size or negotiating power, without objective justifications (like higher service costs), this could be seen as an unfair practice that limits competition.
• Predatory Pricing: If a dominant platform charges very low commissions to attract sellers, with the intention of eliminating competitors or harming consumer welfare, it may be seen as predatory pricing, which is prohibited under the Competition Act.

Vertical Agreements and Fair Competition

Under the Competition Act, certain vertical agreements between sellers and e-commerce platforms (like commission structures or sales conditions) are permissible, provided they do not restrict competition. Platforms can charge varying commissions as long as:

• Differentiation is based on legitimate factors: The platform’s policies should justify why certain sellers pay more or less. For example, a seller with better performance metrics, more sales, or greater market reach might be charged a lower commission because they offer more value to the marketplace.
• No Collusion or Price-Fixing: Sellers must not collude with the marketplace or with each other to set prices or agree on commission structures. This would violate Section 3 of the Competition Act, which prohibits price-fixing and market allocation agreements.

Abuse of Dominance

A major concern arises if an e-commerce platform with dominant market power abuses its position to unfairly charge higher commissions from smaller sellers or impose discriminatory terms that restrict competition. This would amount to an abuse of dominance under Section 4 of the Competition Act.

• Example of Abuse: If a platform with a large market share forces smaller sellers to accept higher commissions or unfavorable terms, or provides better commission rates to large sellers with significant bargaining power, it could be seen as discriminatory and anti-competitive.
• Differentiated Commission Rates: For example, if a platform offers much lower commissions to certain sellers that sell only on that marketplace, while charging significantly higher commissions to third-party sellers, it may harm competition by giving preferential treatment to a specific group.

Benefits of Differentiated Commission Rates

• Seller Performance: Platforms might charge higher commissions from sellers with lower sales or those who require more support, while charging lower commissions for top-performing sellers with established reputations.
• Market Demand: Higher commissions may be applied to niche product categories where the marketplace offers more exposure or handles additional logistics.
• Cost of Services: The costs of supporting different sellers might vary, and commissions can reflect these costs. For example, a seller that requires more advertising or marketing support might be charged more.

Example of Acceptable Differentiated Commission Charges

• Top-performing sellers: (with high ratings, consistent sales, and low return rates) pay a lower commission because they are self-sustaining and contribute more to the platform’s growth.
• New or small sellers: may be charged a higher commission to compensate for the additional support or marketing the platform provides to help them grow.

In this case, the platform justifies the differing commission rates based on objective criteria such as seller performance, product category, or the resources required to support the sellers. As long as this differentiation is transparent, non-discriminatory, and based on legitimate business reasons, it is likely to comply with the Competition Act.

When Can Differentiated Commissions Breach Competition Law?

• Discriminatory Commission Rates: If an e-commerce platform charges unreasonably higher commissions from smaller or independent sellers compared to larger, more established sellers, without clear and fair justification, it may be seen as discriminatory.
• Example: A marketplace charges a smaller seller 20% commission, while giving a large seller (often affiliated or related to the platform) a 5% commission. If this disparity cannot be explained by legitimate business needs (such as different service levels or additional support), this could be a violation of competition law.
• Harming Market Entry: If higher commission rates are used strategically to block new or small players from entering the market or expanding, this could amount to anti-competitive behavior under the abuse of dominance provisions in the Competition Act.

Conclusion

In India, e-commerce marketplaces can charge differentiated commissions to sellers, provided that such differentiation is based on objective business reasons and does not lead to anti-competitive practices. Key principles from the Competition Act, 2002 include:

• Legitimate differentiation: based on factors like seller performance, market demand, and costs of service is permissible.
• Discriminatory commission rates: or practices that unfairly disadvantage smaller sellers or block competition may breach competition law, especially if they are used by platforms with dominant market power.
• Platforms must avoid: collusion, price-fixing, or using commission structures that harm consumer welfare or restrict market entry.

By maintaining transparency in commission structures and ensuring that different rates are applied for fair, non-discriminatory reasons, e-commerce platforms can comply with competition laws while still charging differentiated commissions.