“Determination of correct relevant market is the sine qua non for finding the market position of an enterprise or group. Significantly, the order against Jaypee Group aptly underscores the importance of relevant market towards the outcome of any antitrust litigation”.
The Competition Commission of India (CCI)’s latest order dated 26.10.2015, exonerating the Jaypee Associates Ltd. and Jaypee Infratech Ltd., Jaypee Greens (“Jaypee”) from allegations of abuse of dominance in the market for sale of residential apartments in Noida and Greater Noida has shocked not only the complainants but also market analysts observing the real estate sector. Moreover, due to the diametrically opposite decision by the dissenting minority order, imposing a penalty of Rs. 666 Crores on the same Jaypee, a debate has inevitably generated on the moot issue as to in what circumstances can a real estate developer be considered as dominant over its competitors and whether this order of CCI is the final word for the real estate sector? Let us examine.
In this case, by a majority order, CCI has, inter- alia, noted that Jaypee cannot be considered as dominant in the “relevant market” which was determined by the majority order as the market for “..Development and sale of residential apartments in Noida and Greater Noida regions” in terms of three identifiable indices viz. the number of projects of residential apartments developed/launched, the land reserves held and the financial resources . Basing its decision on some findings of the investigation conducted by the Director General, the majority order notes that with 25.09% market share in terms of the number of projects launched/developed, Jaypee was behind its near competitor Amrapali with 27.32% market share during the period 2009 to 2011and that the availability of a number of other major players such as Supertech Ltd. ,with 16.18 % market share ,3C with 8.33% market share ,Unitech with 6.82% market share etc. are sufficient toprovide competitive constraint on Jaypee to prevent any exercise of market power ,Similarly, in terms of land reserves held, the land measuring about 452 acres leased to Jaypee by the Greater Noida Industrial Development Authority in the year 2000-01 combined with 6175 acres given as a part for Yamuna Expressway was of varying nature and not comparable to the land allotted /leased out to other builders by statutory authorities so as to give any commercial advantages to Jaypee over its competitors. Further, in terms of the financialresources too,Jaypee was found to be behind the Unitech in terms of cash reserves and surplus (INR 10580 Crores of Unitech as compared to INR 7898 Crores held by Jaypee).
Let me emphasize at the outset that , unlike the practice in the European Union and some other advanced economies, the determination of dominant position or market power in India , under the Competition Act, 2002 (“the Act”) , does not depend mainly on market shares held but on more economically sound factors such as capability of an enterprise to be able to act independently of competition in the market, which is very subjective and requires a detailed analysis backed by statistical evidence. The other most important premise is that the dominant position is always to be seen in context of the “relevant market” in which the enterprise accused of any violation of the Act operates. The relevant market, as defined under the Act has further to be seen in terms of both market for the product or service, which in turn depend upon the degree of substitutability with other similar products or services in terms of price, characteristics and end use, offered for sale, as well as the geographical region in which such offer is made. Thus, determination of correct relevant market is the sine qua non for finding the market position of an enterprise or group. Significantly, the order against Jaypee Group aptly underscores the importance of relevant marketand consequently the role of economic analysistowards the outcome of any antitrust litigation.
In the above context, this CCI order is both interesting and striking! It is interesting because the majority order overruled the final findings of the director general (“DG”), the investigating arm of the CCI , recommending that Jaypee being dominant in the relevant market (interestingly, the findings of DG ,also changed over a period of one year viz. whereas in the first report of December,2013 it found Jaypee not dominant and in the supplementary report of December,2014 , it found it dominant ) has abused its dominance, based on the same evidence though differing with the DG on the substantial definition of the relevant market ,which is on what the dissent is made, which is the striking aspect .
The striking aspect of the CCI order is the dissent on not only the delineation of the “relevant market” but also analysis of the way the evidence on the other two indices land reserves and financial resources of the Jaypee have been analyzed. The present article analysis the contrasting approaches to relevant market definition between the majority and minority orders to comment on the evolution of the concept of relevant market and its applicability in real estate litigation.
On the “relevant market”,whereas the majority order follows earlier decisional practice and decides the relevant market as the market for sale of residential apartments to analyze the dominant position of the Jaypee Group as being not dominant. However, the minority order narrows down the product market to the market for sale of residential units in integrated townships. The narrower market consequently results in the finding of Jaypee Group enjoying a dominant position and resultantly an abuse of dominant position due to unfair and one-sided conditions in the flat buyer agreements leading to imposition of penalty as afore mentioned.
In perhaps the most famous of CCI decisions, the 2011 DLF case, the CCI considered the “high-end residential apartments” were not substitutable with the“low-end or mid-end apartments” and hence should be considered as a separate product. DLF was found dominant in the market and penalized for abusing its dominance. In the ensuing appeal, the Competition Appellate Tribunal (COMPAT) upheld the definition of the market. The final appeal is currently pending with the Apex Court.(You can read my analysis of the DLF decision here)
More recentlyin another real estate case, however, the CCI adopted a broader definition of the market and started considering the market in real estate cases as the market for provision of services of “sale of residential apartments”. Noticeably, there was no dissent. It is to be assumed that the broader market would include the market of premium high-end apartments. However, if that was so, the definition of the market adopted by CCI in the present Jaypee case deviates its earlier definition in the 2011 DLF case. To re-phrase the same, the buyers did not consider high-end apartments (costing more than INR 2 Crores) as substitutable with low or mid end apartments costing INR 40-60 lakhs in 2011 DLF decision but this crucial price difference has been overlooked by CCI in that case as well as in the present Jaypee case.
It may be noted that in the present Jaypee case, in its supplementary report of December, 2014, the DG had defined the market as market for residential apartments in integrated townships. The DG was of the view that an integrated township and standalone residential apartments are two distinct products and are not similar enough for consumers to switch from one another. It was stated that an integrated township is a mix of residential and commercial space along with well-developed infrastructure and other recreational amenities and facilities within its marked areas. That standalone residential apartments do not offer facilities like schools, hospitals, shopping malls, golf-courses, parks, entertainment centers, convention centers, gym, etc. which are generally included in an integrated township. The DG ,therefore, considered that the residents of such apartments would have to depend on independent markets, hospitals, educational institutions, etc. located at a distance whereas the residents in an integrated township do not have to depend on anybody to avail such services as they are constructed within the township. The minority Order accepts this view of the DG.
The majority order of CCI though notices the ever changing landscape of demand and supply substitutability and therefore recognized the fact that he concept of “integrated township”is of recent past only but finds it to be a nebulous and evolving concept and at this stage of developments of markets and holds that it cannot be said with certitude that all so called “integrated township”constitute a separate product market. Thus, the majority order of CCI shows its disinclination to accept the idea of the “integrated townships”as a separate product market, at least at present.
The minority order, on the other hand, concurs with the finding of the DG and considers the residential apartments in integrated townships as a separate product market. Thus, in the opinion of the minority order, the residential apartments in the integrated townships offer premium residential experience to the residents and hence should be considered as a distinct and separate product market in itself.
Regardless of the merits of the minority order, the author is of the opinion that the majority order could have given a more detailed outlook at the distinction between standalone apartments and apartments in integrated townships before arriving at the delineation of the relevant market. Of particular importance is the way CCI defined the geographic aspect of the relevant market(Noida and Greater Noida). The CCI considered that the geographic region of Noida and Delhi are distinct from the consumers’point of view since, Delhi region cannot be considered as there are considerable price differences in the properties located in Noida/ Greater Noida and Delhi. A small increase in the price of an apartment in Noida would not make a person shift his preference to Delhi. This vital test, in antitrust parlance, is referred to as the “Small but Significant Non-Transitory Increase in Price” test. (SSNIP Test or the “Hypothetical Monopolist”test) but however, the CCI abandons this very test when it comes to defining the product dimension of the relevant market.
Whereas, the CCI makes a conscious effort to list all differences in the physical characteristics and other attributes of the integrated market. Nonetheless, the CCI does not dwell into the most important aspect of the pricing of the standalone apartments as compared to the apartments in integrated townships. This is to say that hypothetically, if a standalone apartment is available INR 40 Lakhs and a residential apartment of a similar nature is available in an integrated townships for INR 60 Lakhs, would the consumer consider them substitutable? Perhaps not, but statistical analysis of this kind is unfortunately missing from the majority order.
Another particular omission from the Jaypee Order is the disregard of the “Wanadoo Test”. As already summarized, the majority as well as the minority order list various premium services available to the buyers in a residential township as opposed to a standalone apartment. A generic internet search reveals that there exists a significant price difference in the per- sq. ft. rates of the same type of apartments in the standalone projects as compared with those in the integrated township . For instance, a 3 BHK apartment in JP Orchid (integrated township) is available for sale at the rate of Rs. 5800/ per sq.ft. as compared to a 3 BHK apartment in Amarpali Crystal Homes at the rate of Rs. 4400/- per sq. ft. . The question arises would a buyer like to switch to a 3BHK apartment in an integrated township available at a much higher price just because of the attendant amenities and facilities available? May be yes, maybe not. Consequently, the situation presents a ripe case for segmenting the market on the basis of the buyer’s inclination to pay premium prices in return for the premium services available with the product- something which is colloquially referred to as the “Wanadoo Test”. This test was adopted by the European Commission (EC) for determination of the relevant marketin the market for high speed internet access for residential customers. EC examined the differences in performance between high and low speed internet access and concluded that the differences were clearly perceived by the consumers and that an analysis of price differences between them showed that consumers were prepared to pay a premium for the extra performance and convenience of high speed.
Incidentally, the same Wanadoo Test was considered by the CCI in determining the relevant market in the 2011 DLF decision. However, the CCI in its wisdom decided against applying it in the Jaypee case.
Since the CCI rejected the finding of the DG, the present order cannot be appealed in COMPAT. However, in the humble opinion of the author, the CCI would have served itself even better by using a more statistics-based analysis of the relevant market for employing modern econometric tools such as the SSNIP test or the Wanadoo test, as stated above, before reaching the final decision.
In nutshell, the present order of CCI in the Jaypee case, shows that the analysis of “relevant market” is yet to evolve to an extent to lay down a settled jurisprudence for the determination of dominant position for real estate sector.
Nevertheless, the Order serves a warning signal for large real estate players to be more cautious before continuing to impose the same set of unfair and one sided terms and conditions in the flat buyer agreements on prospective buyers , in the light of an earlier inquiry by CCI, lest anyone of them may face the brunt of severe penalties if found to be dominant in their respective geographical regions considering that the concept of relevant market is yet to evolve but the present Jaypee case is a significant landmark decision in that context.