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  • Writer's pictureRFMLR RGNUL

EXCLUSION OF IN-HOUSE PRODUCTION IN RELEVANT MARKET DELINEATION: EXPLORING THE UNEXPLORED

Updated: Jan 12

The Editorial Column is authored by Vivek Kumar and Jatin Manghanani, Senior Editor and Copy Editor respectively at the RGNUL Financial & Mercantile Law Review (RFMLR).



1.INTRODUCTION


Relevant market delineation is one of the most important aspects of any antitrust investigation. Section 2(r) of the Competition Act 2002 defines relevant market and lays down that a relevant market consists of all products or services that are considered interchangeable or substitutable by consumers due to their shared characteristics, prices, and intended use.


On the other hand, section 19(7) lays down the considerations that the Commission must keep in mind while delineating a “relevant products market.” Clause (d) of section 19(7) mentions “exclusion of in-house production,” which essentially means that the productions manufactured by a firm for its own captive use should not form part of the relevant product market. 


In-house production or captive use products are products or services that a manufacturer might produce for its own internal usage, and such products or services are not available to the general public to buy independently. A good example of a captive use product is the iOS (or iPhone OS), which is the operating system that Apple uses in its phones. This operating system is not available to the general public independently or to other Original Equipment Manufacturers (OEM). On the other hand, Android operating system is available to other OEMs which they can use to manufacture their own products.


This particular provision has not garnered much attention of the competition authority. In fact, to date, there has been no case where the CCI has had the opportunity to apply this particular provision. However, section 19(7)(d) is an important provision, both for the CCI and the firms being scrutinized as exclusion or inclusion of in-house production can significantly affect the relevant market delineation. 


In this article, we will explore some of the judicial decision that loosely explore this concept. Based on these decisions, we can understand how exclusion of in-house production might work in future decisions.


2. EXPLORING THE JUDICIAL PERIMETER FOR CAPTIVE USE PRODUCTS


In-house production refers to products made exclusively for the enterprise's own use, not for the broader market. For example, if BMW produces horns only for its cars, this production may be excluded from the overall horn market. The Competition Commission of India has not had a chance to apply this provision to any case so far. However, in the Google Android Case, the Commission while delineating relevant market for Operating Systems (OS) concluded that Apple iOS does not fall under the same relevant market as Google’s Android by virtue of it being a non-licensable OS, which was only available to Apple as an OEM for its captive use, as opposed to Android which was a licensable OS.


In Umar Javeed v Google LLC, there was an alleged abuse of dominance by Google in the Relevant Product Market. In this case, Google required consumers to have pre-installation GMS on their devices and sign a non-exclusive contract which is termed a Mobile Application Distribution Agreement (MADA) which in turn requires them to install numerous Google applications. It was held that this requirement or condition amounted to an abuse of dominance and was unfair to the device manufacturers.


In Kshitiz Arya v Google LLC,the same reasoning as Umar Javeed was employed as the Commission delineated the relevant market from the perspective of a Smart TV OEM and concluded that only OSs that are licensable would form the part of the same relevant market.  In relation to the smart TV ecosystem, the Informants have averred that there are various TV operating systems like Android TV OS (Licensable OS developed by Google), Fire TV (Licensable ‘forked android’ OS developed by Amazon), etc.


However, from the perspective of smart TV OEMs, only those operating systems are accessible to them that are licensable by the developers thereof and Google competes against all such licensable operating systems. Therefore, as per the Informants, all smart TV operating systems that are not licensable and tied to a particular brand such as Tizen (Samsung) and WebOS (LG) are beyond the scope and purview of the relevant market since they are not available for license to third party OEMs. The Commission was of the view that from the OEMs perspective, only those operating systems which are accessible to them through licensing form part of the relevant market. Therefore, non-licensable operating systems do not appear to be part of the same market.


 In Together We Fight Society v Apple, the Commission took into consideration the OS-specific nature of the app stores and the inability of the app developers to distribute their apps to iOS users through a non-iOS app store. The Commission held that prima facie the relevant market would be the ‘market for app stores for iOS in India’ considering that app developers, to maximize their profits, offer apps on both platforms (iOS and Android). The logic in this case is identical to the abovementioned cases.


A closed-ecosystem OS like iOS cannot be a substitute for a licensable OS since consumers cannot switch between the same without incurring substantial switching costs (cost to buy a new device).  Thus, it is sufficiently clear from the above cases that the Commission has been of the view that captive use OSs like iOS and apps like Apple App Store cannot form the same relevant market for OSs and app stores available freely in the market. However, this leads to the question of whether all non-licensable OSs would form the same relevant market or not.


3. POSSIBLE MARKET DELINEATIONS FOR CAPTIVE USE PRODUCTS


The relevant market in case of captive use products might be defined in two ways – (1) one market for all non-licensable OSs or (2) a single-brand relevant market.

The first kind of relevant market would be untenable on account of section 2(t) of the Competition Act as it defines a relevant product market as consisting of those products or services that are regarded as interchangeable or substitutable by the consumer. Such delineation would be artificial and legally untenable.


 If we prefer the second market delineation, it would also pose certain problems. The CCI, in Sonam Sharma v Apple noted that single-brand relevant markets are rarely tenable and relevant markets generally cannot be limited to a single manufacturer’s products. However, the case of Shamsher Kataria v Honda Siel Cars India Ltd. supports the brand-specific market delineation method. In this case, the Commission delineated primary (manufacture and sale of cars) and secondary (sale of spare parts and repair services) for each brand of car. The Commission found that “each OEM is a 100% dominant entity in the aftermarket for its genuine spare parts and diagnostic tools and correspondingly in the aftermarket for the repair services its brand of automobiles.” 


The spare parts, in this case, can be construed as captive-use products that were not available to the market outside of the brand ecosystem (either directly from the OEM or approved vendor) and were also not substitutable by any other parts available in the market. The unavailability of substitutes in this case is similar to non-licensable OSs in the Google Android case. Therefore, in the absence of any authority directly dealing with the question of delineation of the relevant market in the case of captive-use products, the approach taken in Shamsher Kataria, which supports the single-brand/single-product relevant market appears the most viable.


4. HYPOTHESIZING RELEVANT MARKET DELINEATION IN CASE OF CAPTIVE USE PRODUCTS


The judgment in Shamsher Kataria which applies to situations where the captive use product does not have a product substitute outside the brand ecosystem, the situation would be different when product substitutes outside the brand ecosystem exist. For example a restaurant that offers complimentary mouth fresheners to its customers cannot be considered part of the relevant market for mouth fresheners, as a customer cannot use the restaurant’s mouth freshener as a substitute for their preferred mouth freshener without incurring extra costs (in this case the cost of using the restaurant’s service).


On the other hand, a customer, who is inside the restaurant’s ecosystem cannot use other mouth freshers available in the market as substitutes because anything outside the restaurant ecosystem will be infinitely more expensive as compared to what is available in the restaurant, the price of which is zero.


However, the result might be different when the cost of such a product is non-zero and it is more or less equal to the price of the products similar to those available in the open market. For example, if the cost of the mouth freshener is the same as the other mouth fresheners available in the market, the other products will compete with it and will also act as a substitute.


In such a case, the relevant product market of the mouth fresher provided by the restaurant would be wider as other mouth fresheners available in the market would act as substitutes, but not vice versa. So, the relevant market for “mouth fresheners” would not include the mouth fresheners available in the market, however, the relevant market for “mouth fresheners available in the restaurant XYZ” will include other substitute mouth fresheners available in the market.


Based on this, we can hypothesize:

1. In the case of captive-use products where substitutes are available in the market and the price is zero, the relevant market would include only the captive-use product as consumers will not find it profitable to switch to other products as the price is zero (as per the SSNIP test).

2. In the case of captive-use products where substitutes are available in the market and the price is non-zero: the relevant market would include other substitutes available in the market.

3. In the case of captive-use products not having any substitutes, irrespective of the price of the product will resemble the situation in the Shamsher Kataria case and the relevant market will only be the brand ecosystem. Therefore, captive-use products cannot be included in such a relevant market as substantial switching costs will be involved.

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