Resale Price Maintenance AgreementsIndian Perspective and

International Practices Apropos

Bhawna Gulati*

INTRODUCTION

Resale Price Maintenance agreements are considered anti-competitive in

almost all jurisdictionsboth developed and developingbecause of their
perceived ability to distort price competition at the retailers level. Although
there have been a shift in the standard of evaluation applicable to such
agreements, they remain to be one among the most pernicious activity
under any countrys competition regime. Indian jurisprudence on resale
price maintenance (RPM) agreement is no different. It goes back to the
history of prohibition on vertical restraints. Like the erstwhile Monopolies
and Restrictive Trade Practices Act (MRTP) of 1969, Indian Competition Act
of 2002 also prohibits fixation of a resale price of any good or
service.However, the Competition Act does not categorize RPM agreements
as a distinct category of restrictive trade practices to deserve an altogether
different treatment as was accorded to them under the MRTP Act. The
MRTP Act, 1969, contained a separate chapter on minimum RPMs based on
the recommendation of the Monopolies Inquiry Commission Report1.

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

1* Presently working as Deputy Director (Law), Competition Commission of India. The

views expressed in the article are personal in nature and were written during authors
engagement with Jindal Global Law School as Assistant Professor.1 Discussed in detail in
later parts of the Chapter.
(manufacturers level, wholesalers level, retailers level etc. 2).Economic
objective of infusing competition at all levelsis to ensure efficiency that
leads to consumer welfare in the form of reduced prices and wider set of
choices. Such multi-level competition allegedly ensures a better competitive
price to the final consumer by providing check points to censor any collusive
conduct at preceding and subsequent levels. Therefore, competition
authorities aim at promoting such multi-level competition to benefit the final
consumer.

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.

RESALE PRICE MAINTENANCE AGREEMENTS

A resale price maintenance (RPM) agreement is a contract in which a

manufacturer and a downstream distributor5 agree to a minimum or
maximum price that the retailer will charge its customers6. Resale price
agreement can be any of the four mentioned typesminimum, maximum,
recommended, fixed. A price is said to be a minimum resale price when the
3It should be noted that Competition Commission of India is well empowered to
initiate suomoto investigation and in fact the first case pertaining to RPM (In re
Sugar Mills case) is a suomoto case.

4Competition Commission of India v. Steel Authority of India Ltd. (2010) available

at http://www.cmaindia.org/Admin/Legal/Files/1f3a70b2-ab1d-4892-ab2e-
dc13ba3f15ee.pdf

5Distributor, retailer and supplier are used interchangeably in this paper.

agreement disallows a resale at a price below the price stipulated in the
agreement between manufacturer and downstream distributor. The purpose
generally is to avoid price competition between retailers beyond a certain
price. This kind of price flooring also occurs in case of agricultural produce
when the government sets a price floor to ensure minimum revenues to the
farmers. Maximum resale price maintenance, on the other hand,imposes
restriction on resale at a price above the prescribed price. The maximum
resale price works as a price ceiling and is often imposed to protect the
consumer from over pricing by retailers. Generally all consumable products
have a maximum retail price (MRP) printed on it. The retailer cannot charge
above that price. The price agreement is termed as recommended (or
suggested) price when the retailer is not bound by the price stipulated by
the manufacturer because the price is only recommended price and not a
binding price generally. The intention is to help standardizing prices among
locations. This, however, may be against the principles of competition where
collusion or parallelism of any sort is considered to adversely affect the
efficiency in the markets. The last category is fixed resale price. Under this
category, the manufacturer imposes a price at which the product can be
resoldneither above nor below that price. In practice, however, even the
minimum resale price has the same effect as the fixed resale price unless
the retailers collude to collectively charge a higher than the minimum
prescribed price.This is so because in the absence of any such collusion, the
retailers will not be able to charge a higher price except at a risk of losing
out on customers, because if others charge the minimum resale price (as
stipulated) the customers of the former will approach the latter. Therefore,
although, retailers are at a liberty to sell above the minimum RPM, it is not
economically viable to do that. Therefore, competition authorities around

6ELZINGA, KENNETH G. AND MILLS, DAVID E.,The Economics of Resale Price

Maintenance, inISSUES IN COMPETITION LAW AND POLICY (Kenneth G. Elzinga&
David E. Mills, eds.), ABA Section of Antitrust Law, 2008, available at SSRN:
http://ssrn.com/abstract=926072
the world have a stricter view on price fixing and minimum RPMs because
they are perceived to have more severe effect on the competition process.
They, firstly, destroy the price competition between the retailers dealing in a
product i.e. intra-brand price competition and,secondly, makes the pricing
policy very transparent that might facilitate collusion and conscious
parallelism.7Notable, the maximum and recommended resale prices are
generally not punishable8. Indian competition law also exempts maximum
resale prices from the application. Sec 3(4) Explanation (e) states that
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. This clearly indicates that a
maximum or recommended price is allowed under the Indian Act as long as
the agreement between the parties allows the charging of a price below the
stipulated price.

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

7NikolaosVerra, Resale Price Maintenance In E.U. Competition Law: Thoughts In

Relation To The Vertical restraints Review Procedure, Vol. 16 The Columbia Journal
of European Law Online 37, available at http://www.cjel.net/wp-
content/uploads/2010/02/Verras.pdf. Conscious parallelism is not sufficient in itself
to call for a sanction under the competition regime of most jurisdiction including
the US Sherman Act. However, the Spanish Law categorizes conscious
parallelism as a prohibited practice. See, Rafael Allendesalazar, Oligopolies,
Conscious Parallelism and Concertation,2006 EU COMPETITION LAW AND POLICY
WORKSHOP/PROCEEDINGS, available at
http://www.eui.eu/RSCAS/Research/Competition/2006(pdf)/200610-COMPed-
Allendesalazar.pdf.

8See, Competition Act, 2002, Sec 3(4) Explanation (e).

govern the resale price maintenance agreements and the objective of those
policy decisions.

LEGISLATIVE HISTORY OF RPMS IN INDIA

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:

(i) Price stability attracts the consumers; and

(ii) Lesser price (than the minimum RPM) might harm the producers
reputation regarding the quality of the product.

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.

9Report of the Monopolies Inquiry Commission, See Introduction (i) (1965)

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.

It is notable that the acceptance by the manufacturers for imposing

minimum resale prices on retailers/distributors came without any relevant
justifications. The justifications recorded by the committee pertain mostly to
reasons that can be best described as wrongful presumptions lacking any
economic standing e.g. the justification that lesser price (than the minimum
RPM) might harm the producers reputation regarding the quality of the
product cannot stand an economic test when law of demand clearly
establishes an inverse relationship between demand and price of a product.

11Id., at 159.

12It is noteworthy that many of those countries have now loosened the approach
on RPMs.

13Supra note, at 162.

14Loss leaders sale refers to sale by retailer or wholesaler otherwise than in a

genuine seasonal or clearance sale not for the purpose of making profit on the re-
sale but for the purpose of attracting to the establishment at which the goods are
sold customers likely to purchase other goods or otherwise for the purpose of
advertising his business. (See, Section 40, MRTP Act, 1969)
It is also interesting to note that the committee was formed in 1964 which
analyzed the prevailing practice and legislature in other jurisdiction e.g. US,
UK, Europe etc. but didnt incorporate the other side of the emerging
literature which favored RPM as having procompetitive effects. Lester G.
Telser15, in 1960, provided the possible justification for imposing minimum
resale price mechanism by emphasizing on the free riding problem16.

The committee thereby suggested the legislative provisions (MRTP Bill)

which formed the basis of MRTP Act. Sec 39 and 40 of the Act dealt with
resale price maintenance agreements for more than 3 decades. Though the
MRTP Act underwent some significant amendments, the provisions
pertaining to minimum RPMs remained as strict as ever. The MRTP Act
envisaged that any terms or conditions of a contract for sale of goods by a
person to a wholesaler or retailer or any agreement between a person and a
wholesaler or a retailer relating to such sale, is void in so far as it purports
to establish a minimum price to be charged on the re-sale of goods in India.
Further, no supplier directly or indirectly can notify to dealers or otherwise
publish in relation to any goods, a price stated or calculated to be
understood as the minimum price which may be charged on the re-sale of
goods in India.17

Withholding of supplies purely on the ground that the person to whom

goods were supplied is not adhering to the re-sale price maintenance, is also
prohibited. There were, however, two exceptions inserted in the Act, viz. (i)
where the goods supplied have been used as loss leaders; (ii) where the

15An American Economist and Professor Emeritus in Economics at the University

of Chicago.

16This will be explained in greater details later in this chapter.

17Government of India, A Handbook on M.P.T.P. Act and its Administration 18

(1988).
supplier in addition to the ground which alone would entitle him to withhold
such supplies.18

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.

19RTP Enquiry No. 65 of 1984 (decided on 11th April, 1986).

This order of the Commission shows the mindset and perception regarding
the maximum resale prices or recommended resale prices which were
allowed under the MRTP Act, 1969.

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

20Ministry of Law, Justice and Corporate Affairs, Report of the High-Powered

Expert Committee on Companies & MRTP Acts, August 1978

21Id., para 21. 29.

22Id., para 21.27.

without any possibility of getting exempted once they came under the
scanner of the regulator and their existence is established.

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.

RPMS UNDER THE INDIAN COMPETITION LAW, 2002

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:

Any agreement amongst enterprises or persons at different stages

or levels of the production chain in different markets, in respect of
production, supply, distribution, storage, sale or price of, or trade
in goods or provision of services, including
(a) tie-in arrangement;
(b) exclusive supply agreement;
 (c) exclusive distribution agreement;
(d) refusal to deal;
(e) resale price maintenance,
shall be an agreement in contravention of sub-section (1) if such
agreement causes or is likely to cause an appreciable adverse
effect on competition in India.

Explanation.For the purposes of this sub-section,

(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.

It is quite interesting to note that, while most countries apply different

standards of evaluation to horizontal and vertical agreements, Indian law
applies rule of reason23 standard throughout Section 3 violationswhether
horizontal or vertical. In India, even the most pernicious and atrocious of
activities, cartels, are capable of escaping the anti-competitive charge if the
offenders successfully prove that there was no appreciable effect on the
competition in the relevant market in India. The only difference between the
approaches followed in these two categoriesof violation, horizontal and
vertical, is in the attribution of the initial burden of proof.

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

23Explained in detail later.

market or the intentions of those individuals are who engaged in the
practice. Once the conduct falling underper se rule is established, the
conduct is illegal without any inquiry into its actual competitive or anti-
competitive effects. Juxtaposed to this is rule of reason approach. Under
this approach, along with the requirement of proving the existence of the
alleged conduct (agreement), the complainant is also required to prove that
anti-competitive effects ofsuch conduct are more than its pro-competitive
effects. Therefore, under the rule of reason approach, the alleged
agreement can be allowed if the pro-competitive benefits arising from such
conduct outdo the anti-competitive effects. The very reason of rendering
some conducts as per se unlawful is the adverse effect of such conduct on
free market economy and competition. Per se unlawful activity is
characterized by its clear probability of anticompetitive effects and the
improbability of adequate compensating competitive virtues. 25 Therefore, in
case of per se violations, the complainant only needs to prove the existence
of the alleged anti-competitive conduct. The motive or intention or the
possible efficiency consideration are not of any value because the conduct is
prohibited per se. Cases that do not fit the generalization may arise, but a
per se rule reflects the judgment that such cases are not sufficiently
common or important to justify the time and expense necessary to identify
them. Therefore, it is also because of economic reasons (i.e. to minimize the
administrative costs) that the inquiry into such cases was excused in the US.
So, if the case involves price fixing, for example, there might be a
probability that 1 out of every 100 cases does involve efficient outcome. But
to find out that one case, inquiry into 100 cases might not be economically
justifiable.

24Per se is a Latin phrase which means in itself.

25Federal Trade Commission, Determining What is Per Se Unlawful, available at

http://www.ftc.gov/opp/jointvent/2Persepap.shtm.
These standards, though do not find place (i.e. exact words do not appear in
the statutes) in the formal statutes but most jurisdictions use these
approaches to deal with violations of their respective competition laws.
India, however, follows a different approach. As already noted before, none
of the activities in India is per se prohibited. Even the cartels, which are per
se prohibited in almost all jurisdictions, are subject to rule of reason under
the Indian Competition Act, 2002. It may be important at this juncture to
analyze the approaches woven in the Indian Competition Act for dealing
with different anti-competitive agreements. Section 3 of the Competition
Act, 2002, prohibits certain agreements as anti-competitive which cause or
likely to cause appreciable adverse effect on competition. It clearly requires
the fulfillment of four conditions before a conduct is considered to be anti-
competitive under the competition law in India. The conduct should be one
listed under Section 3; it should have an effect on the competition in the
relevant Indian market; such effect should be adverse; and it should be
appreciable.

However, a cursory look at Section 3 of the Indian Competition Act indicates

that there is an apparent distinction that is instilled in the Act while dealing
with horizontal agreements envisaged under Section 3(3) and vertical
agreements listed under Section 3(4). While Section 3(3) lays down certain
agreements to be presumed to have an appreciable adverse effect on
competition, Section 3(4) states that the type of agreements listed under
that section will be prohibited only if such agreements cause or are likely to
cause appreciable adverse effect on competition. Many a times this
distinction is perceived to be same as per se vs. rule of reason approach
as is prevailing in the US jurisprudence 26. This, however, is not correct. The
words shall presume appear in Sec 3(3) which leads to confusion. Many a
times this shall presume phrase is confused to indicate application of a per
se rule, which is not true.

A presumption is a rule of law by virtue of which, where a party proves one

fact (the primary fact) a second fact (the presumed fact) will also be taken
to have been proved, in the absence of evidence to the contrary. Sec 4 of the
Evidence Act divides presumptions into 3 categoriesmay presume, shall
presume and conclusive proof. The may presume and shall presume are
rebuttable presumptions. May presume leaves it to the discretion of the
court to make the presumption according to the circumstances of the case.
Shall presume leaves no option with the court not to make the
presumption. The court is bound to take the fact as proved until evidenced
is given to disprove it. Therefore, it is rebuttable even if court at the first
instance has to presume the existence of a fact. A per se approach on the
other hand does not require inquiry into the effects of the alleged practice.
Once the existence of practice is established it is per se prohibited. The only
defense to such per se probation is to establish that such a practice or
agreement does not exist. Therefore, Indian law, which evaluates all
agreements falling under Sec 3 on the grounds listed under Sec 19(3),
cannot be said to have per se rules application in India.

Nevertheless, the approach to be followed while dealing with agreements

falling under the purview of Section 3(3) and those falling under Section

26Pavan Vijay Kumar, Competition Law: Promoting Competition, ASSOCHAM

Seminar, available at
http://www.assocham.org/events/recent/event_649/session1/Pavan_Vijay-CCI.pdf
(last visited 28th December, 2011). Also see, SuchitraChtale, India: Overview, The
Asia-Pacific Antitrust Review 2011, available at
http://www.globalcompetitionreview.com/reviews/33/sections/118/chapters/1218/in
dia-overview/.
3(4) would be different, even if the difference is not of the same degree as
has evolved in the US antitrust law.

Therefore, the difference between the two sub-sections, as it appears while

taking the literal interpretation into account, is only that of the initial
burden of proof. In the case of horizontal agreements [Section 3(3)], the
conduct is presumed to have an appreciable adverse effect on competition
which means that the complainant only has to prove the existence of the
conduct in the first place which will be sufficient to shift the burden
automatically on the alleged party to the agreement or conspiracy. But in
the case of vertical agreements [Section 3(4)], the informant 27 has to prove
two thingsfirstly, that the conduct mentioned in the information exists and,
secondly, that the conduct is likely to have an appreciable adverse effect on
competition.

Every conduct falling under Section 3, once established, have to be

evaluated under Section 19(3) which lays down six factors to gauge the
whether the conduct has appreciable adverse effect on competition or not.
The first 3 factors stated under Section 19(3), namely, (a) creation of
barriers to new entrants in the market; (b) driving existing competitors out
of the market; and (c) foreclosure of competition by hindering entry into the
market, assess the anti-competitive impact of the alleged activity. And the
remaining 3 factors, namely, (d) accrual of benefits to consumers; (e)
improvements in production or distribution of goods or provision of services;
(f) promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services, assess the pro-
competitive effects of the alleged practice..

27It is worthwhile to note here Competition Commission of India can initiate

inquiry into any alleged violation either on the basis of information received by a
person or reference made by the government/statutory authority or suomoto (on
its own motion) as per Sec 19(1).
Therefore, every alleged practice which might have anti-competitive effects
falling within the purview of Section 3 is gauged on the parameters set in
Section 19(3). Only those activities whose net effect is anti-competitive i.e.
anti-competitive effects exceed the pro-competitive effects, will be
prohibited by the Competition Act. However, if words of the Act are to be
interpreted literally, another ambiguity can be pointed out in Section 19(3).
The opening words of the said sub-section states that Commission shall ,
while determining whether an agreement has an appreciable adverse effect
on competition under Section 3, have due regard to all or any of the factors
stated under that sub-section. That, undoubtedly, means that Commission is
not bound to consider all factors and might use its discretion while deciding
which factors should be considered for evaluating a particular agreement or
practice. The future orders and directions of CCI while dealing with
different cases are expected to provide greater clarity on this issue.

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.

Once the Commission is convinced that a contravention under the

Competition Act has taken place, it may pass all or any of the orders
mentioned under Section 27 which include, inter alia, cease and desist,
penalty ten percent of the average of the turnover for the last three
preceding financial years etc.28

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.

COMPETITION DISTORTIONS BY RESALE PRICE MAINTENANCE AGREEMENTS

Before coming to the question of how and whether competition is distorted

by imposition of resale price maintenance agreements, it will be worthwhile
to know the types of competition. Only then it will be possible to assess
whether such imposition serves any purpose or is pernicious in totality.

One of the economic rationales for competition law is production

efficiency30 which ensures that a firm has the requisite incentive to find
newer and better ways of reducing cost. Two most important desired
outcomes of a sound competition policy is lowest cost and best quality.
Competition can be price competition or non-price competition. The price
competition focusses mainly on cost reduction so that the product can be
available to the final consumer at the lowest possible cost. Such low cost not
only result in increasing sales for the manufacturer but also in higher
consumer welfare. Non-price competition, on the other hand, can be
achieved by focusing more on the non-price factors e.g. better pre sale
services, better promotional schemes, better quality products, improved
post-sales support etc. While price competition between market
participants results in cost effectiveness, non-price competition ensures
better quality. Therefore, an optimum mix of both competitions may indicate
the best solution. Many a times, however, the worth of non-price

30Also allocative efficiencyand dynamic efficiency.

competition is undermined and overshadowed by the aim to instill price
competition at all levels. The purpose of competition law is the protection of
competition on the market as a means of enhancing consumer welfare and
of ensuring an efficient allocation of resources.31 This makes it undoubtedly
clear that the protection of competition is a means to meet the greater end
which is Consumer Welfare Maximization. Therefore,it is clear that
competition law seeks to protect competition and not only price
competition and as long as the protection of competition is not leading to
welfare maximization, there should be a room for deviation.

The competition at the retailers level can be divided intointer-brand and

intra-brand price competition. When the dealers are reselling (competing)
different brand, they are said to be competing inter-brand. However, when
the dealers are selling (competing) the same brand, they are said to be
competing intra-brand. If they compete on the price, the competition
becomes inter-brand price competition and intra-brand price competition,
depending upon whether they are dealing in different brands or same brand
respectively.

Type of competition between retailers is illustrated in diagram 1.

31Economic Foundations of Competition Law,ASIAN DEVELOPMENT BANK

TOOLKIT,available at
http:/www.adb.org/Documents/others/OGC_Toolkits/Competition-
Law/documents/Chap1.pdf
 Diagram 1

Resale price maintenance agreements allegedly destroy the intra-brand

price competition because the manufacturer fixes the minimum price
beyond which his products cannot be resold. This inevitably renders the
price competition amongst such retailers impossible because they cannot
sell below a certain price; otherwise sanctions (as stated in the RPM
agreement) will be attracted. Such apprehension of the perceived ability of
minimum RPM to eliminate intra-brand price competition has instigated the
competition authorities in different jurisdiction to prohibit and punish such
conduct.

However, it is important to understand that competition law is not an end in

itself but a means to reach the larger objectives. Competition law seeks to
protect competition and not only price competition and as long as the
protection of competition is not leading to welfare maximization, there
should be a room for deviation. Therefore, if the prohibition of RPM
agreements leads to reduced consumer welfare, they should be allowed to
achieve enhanced consumer welfare.
The following sub-parts will shed light on the problems that emerge as a
result of not allowing the imposition of minimum RPMs. The following
arguments may also provide an insight into probable arguments while
dealing with the competition commissions probe into any alleged practice
relating to minimum RPM.

A) FREE RIDER PROBLEM

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).

35An American Economist and Professor Emeritus in Economics at the University

of Chicago.

36He, wherever used in this article, is intended to be a gender neutral term

implying he/she.
minimum.37 This raises an important questionwhat is the role of retailers
in the process of production of goods? Why the manufacturer wants to
regulate the retailers activities by imposing a minimum resale price?

Indisputably, the retailer is not contributing towards the production of the

goods in literal sense of the words. He is a producer of services
(distribution) and facilitates the sale of goods produced by the
manufacturer. However, in the absence of RPM, the retailer (who is not
producing the product but only selling the product which is produced by the
manufacturer) is competing on the price of the product when actually he
has no control over its cost of production at the manufacturers level. So the
reduction in price which reaches the consumer is not because the retailers
have become efficient nor they have a lower cost of procuring the products,
but because they have cut down on the services they were offering before.
Although this might makes the product more attractive in terms of price, it
takes away the services which the consumer finds useful and for which he is
willing to pay.

Chicago School38 of thought emphasizes that discounted dealers, who

appear to benefit the consumer in the short run by providing products at
cheaper prices, are in fact renegade free riders 39 who, if go unchecked, will
destroy the suppliers place in the inter-brand market and ultimately
decrease consumer choices.40 Lester G. Telser, in 1960, provided the
possible justification for imposing minimum resale price mechanism by
emphasizing on the free riding problem. Telser opined that no frills
37Telser, supra note 31, at 86.

38See generally, Richard A. Posner, The Chicago School of Antitrust Analysis, in

127(4) UNIVERSITY OF PENNSYLVANIA LAW REVIEW925-48 (1979).

39Free Rider is a situation commonly arising in public goods context in which

players may benefit from the actions of others without contributing (they may free
ride).
distributors might free ride on the promotional efforts of full service
distributors, thereby undermining the incentives of full service dealers to
expend resources on promotion.41 Thus, each person has an incentive to
allow others to pay for the public good and not personally contribute. In
short, the free rider problem occurs because one does not have an incentive
to account for the global benefits of a private act. 42 Therefore, in the
absence of minimum RPM, some retailers have the incentive to free ride on
the services provided by the other retailers and, thereby, provide his own
products at a lower price. This might sound perfectly alright situation from
a consumer point of view because as long as the consumer is benefitting
from availing free pre-sale services from one retailer and buying from
another at a cheaper price, he will attain greater consumer welfare.
However, the author believes, that this attractive strategy will survive only
in the short run because in the long run no retailer will have an incentive to
provide pre-sale services without any prospects of having a consumer
demand for the products he is selling. This is explained in detail in the
section dealing with game theory analysis of free riding problem.

B) PRE-SALE SERVICES JUSTIFICATION

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-

40Jean Wegman Burns, Challenging the Chicago School on Vertical Restraints,

inUTAH LAW REVIEW913 (2006), available at
http://privateweb.law.utah.edu/_webfiles/ULRarticles/69/69.pdf.

41Telser, supra note 31, at 91.

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.

The problem happens in the absence of RPM agreement, at least in case of

some goods44, where consumer needs some pre-sale services before making
an informed decision for buying a product. The kind of product market a
consumer is facing today, presenting a wide array of differentiated products
with specialized features and functions of every product, information
regarding the functions and usage of the particular product becomes very
important. A consumer buying an automobile will like to have a test drive
and a consumer buying cosmetics will like to have a free application test.
There are various other product categories falling in this category, namely
perfumes, electronic items, mobile phones etc. In such product markets,

43OECD Policy Roundtables, Resale Price Maintenance,DAF/COMP(2008)37,

available at http://www.oecd.org/dataoecd/35/7/1920261.pdf

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

An argument in favor or against RPMs can also be made in a competition

inquiry by relying on international practices and case laws. World over,
45Elzinga and Mills, supra Note 15, at 3.

46Supra note 14.

different competition authorities adopt 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.

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).

48Per se and rule of reason as 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). A per se
violation requires no further inquiry into the practices actual effects on the market
or the intentions of those individuals who are engaged in the practice. Once the
conduct falling under per se rule is established, the conduct is illegal without any
inquiry into its actual competitive or anti-competitive effects. Juxtaposed to this is
rule of reason approach. Under this approach, along with the requirement of
proving the existence of the alleged conduct (agreement), the complainant is also
required to prove that such conducts anti-competitive effects are more than its
pro-competitive effects.

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.

Singapore, Gambia, Vietnam etc,.however, can be seen as progressive

jurisdictions in this context. They allow imposition of minimum resale price

51Formerly Article 81(1) of the EC Treaty.

52WHISH, supra note 2, at 613.

53Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of

Article 101(3) of the Treaty on the Functioning of the European Union to
categories of vertical agreements and concerted practices (OJ 2010 L 102, p. 1),
replacing Commission Regulation (EC) No 2790/1999 of 22 December 1999 on the
application of Article 81(3) of the Treaty to categories of vertical agreements and
concerted practices (OJ 1999, L 336, p. 21). The New Guidelines can be found at:
http://ec.europa.eu/competition/antitrust/legislation/guidelines_vertical_en.pdf.

54Howard T. Rosenblatt, Eric Barbier de La Serre& Gianni De Stefano, The New

EU Vertical Restraints Regulation: Navigating the Vast Seas Beyond Safe Harbors
and Hardcore Restrictions, CLIENT ALERT(Latham & Watkins Litigation
Department), April 26, 2010, available at
http://www.lw.com/upload/pubContent/_pdf/pub3502_1.pdf.

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

This chapter provides a brief description of the minimum resale price

maintenance agreementsthere legislative history, treatment under the
Indian Competition Law, 2002, and also their subjection under the
competition regimes of other countries. The chapter also provides an

56Section 34 of the Singapores Competition Act prohibits anti-competitive

agreements. See, Clause 4.1 of the CCS Guidelines on the Section 34 Prohibition,
available at
http://app.ccs.gov.sg/cms/user_documents/main/pdf/S34_Jul07FINAL.pdf. Also see
Third Schedule to Competition Act, 2004 available at
http://statutes.agc.gov.sg/non_version/cgi-bin/cgi_legdisp.pl?actno=2004-ACT-46-
N&doctitle=COMPETITION%20ACT%202004.

57Per se approach followed in Canada, Australia and EU.

58Rule of reason approach followed in US (after Leegins case decided in 2007)

and India.
understanding of the basic provisions, substantive as well as procedural,
under the Competition law, 2002, which helps in understanding the process
of inquiry by the CCI. The chapter, along with such descriptive contents,
also touches on the broader policy question of whether such RPM
agreements should be subjected to rule of reason approach or whether
there can be a case to make them legal under the competition law. This will
not just acquaint the readers with the possible arguments in favor of and
against RPMs but also provides enough open ended questions for future
research.