‘Ex-ante regulation for digital markets in India’
- Posted By
Science & Technology
9th January, 2021
The world is increasingly witnessing a shift to online marketplaces and online platforms. However, this shift also poses many unprecedented challenges for antitrust/ competition law.
- Rapid technological advancement has given birth to new products and services which are ever-evolving and an unchartered territory for competition regulators.
- Digital markets have grown from being considered an extension of brick and mortar markets to an alternate market unto themselves in less than half a decade.
- Digital economy is dynamic and fundamentally different from other sectors.
- The dynamic growth of the sector has resulted into competition problems and anti-trust issues all over the world.
- These arise specifically in certain areas such as digital monopolies, tax planning, problems with patent etc.
- As witnessed in a series of antitrust cases against big tech firms such as Microsoft, Googleand Facebook, the antitrust enterprise was found struggling for various reasons.
- As of October 2020, 59% of the world population is using the Internet. (i.e) 4.66 Billion Users. In these users 4.28 are unique mobile users & 4.14 are active social media users.
- The total number of users on internet in 1995 was less than 1% of the world population.
- This shows the growth of digital marketing in last 20 years.
- India has surpassed USA in total number of users, with the emergence of Reliance Jio, India has seen a great increase in internet users, which gives more scope for digital marketers to reach target audience.
Why digital markets are ‘peculiar’?
- Products in digital markets are often built on self-learning algorithms that feed on big data.
- In the Artificial Intelligence (AI) ecosystem, big data is considered the most vital input and, therefore, players compete to have access to the same.
- Data and, more specifically, the knowledge extracted from data are a source of a significant competitive advantage, which may work in favour of large incumbent platforms.
- The concern arises when large digital firms reinforce and exploit this data advantage through anti-competitive means.
- Multi-sided business models facilitate access to user data by offering services for free to users while charging the other side (mostly advertisers).
- These markets often experience high entry barriers in the form of network effects (both direct and indirect), economies of scope and massive investment requirements.
- Resultantly, such markets quickly shift to the monopolistic structure. Even if there are competitors, they are largely insignificant.
- It is, therefore, no surprise that most of the people are regular users of Google (Internet search), Facebook (social media), and Amazon (online shopping).
Data generation and consumption
- Data is being generated at a tremendous rate in India. As per a study, by 2022, India’s data consumption is projected to grow at 72.6 percent (CAGR).
- The country already has the highest data usage per smartphone user owing to the sudden boom in the telecom market, especially sparked by the launch of Reliance Jio in 2016 that changed the mobile data usage landscape in India.
- Even the large-scale government projects such as smart cities, airports, and security and surveillance infrastructure are built with the capability of collating data at a massive scale.
- In recent times, innovation in technologies related to collecting as well as analyzing data such as IoT, artificial intelligence (AI), data science, Big Data, and edge analytics have been revolutionary.
- More and more companies are adopting the concept of SMAC - integration of social, mobile, analytics and cloud technologies to leverage customer’s behavior and buying patterns to achieve their business goals.
- This data can be the key for many enterprises to unlock and explore new business models and strategize their future decisions.
Why a dominant market position is a problem?
- A dominant market position, in itself, is not a problem. Should a firm abuse its dominant position, for instance, by excluding its rival, competition law may step in and prohibit such conduct.
- However, as experience suggests, the competition enforcement machinery is too slow in such complex technological sectors and by the time effective orders are passed, the market may already ‘tip’ in favour of the delinquent firm.
- For instance, the European Commission’s (EC) investigation into Google’s anti-competitive practices in online shopping took seven years to produce an order.
How few firms become de facto ‘gatekeepers’?
- The importance of some platforms has made them de facto ‘gatekeepers’ to certain online markets, in that they determine the terms of access to users.
- Interestingly, in digital markets, a firm may adversely affect competition even below the dominant position.
- The Furman report in the UK identifies a platform having a Strategic Market Status (SMS), which is below the dominant position, as the right candidate for ex-ante regulation.
- In addition, certain platforms act in a dual capacity — not only do they act as facilitators, but they also compete with the other businesses in the verticals they facilitate.
- Google and Amazon both provide platforms to businesses, but have their own competing businesses in the downstream— a ready recipe for self-preferencing.
Assessing on-going efforts to regulate digital companies
After much debate, some jurisdictions have started moving towards regulating big tech firms.
- The UK is establishing the Digital Markets Unit to this end.
- More concrete steps have been proposed in the EU, where the European Commission has come up with a proposal for a Digital Markets Act, which intends to ensure contestable and fair digital markets through a set of ex-ante regulations for digital gatekeepers.
- Efforts to reign in digital gatekeepers are underway in the United States (US) as well.
Where does India stand?
- India is a prominent market where tech firms, both domestic and foreign, are jostling for space. The antitrust issues that have arisen elsewhere have resonated in India as well.
- There have been five cases against Google before the Competition Commission of India (CCI) spanning search, Android OS and Play Store.
- Indian antitrust authorities are also investigating Amazon and Flipkart for exclusive sale of certain smartphones.
- The E-commerce market study by the CCI also flagged several concerns of Indian stakeholdersin the e-commerce market, such as platforms not acting in a neutral way, unfair contract terms, use of price parity clauses, exclusive agreements, and deep discounts.
Competition Commission of India
- Competition Commission of India is a statutory body of the Government of India responsible for enforcing ‘The Competition Act 2002’.
- It was founded in 2003.
- It is the duty of the Commission:
- to eliminate practices having adverse effect on competition
- to promote and sustain competition
- to protect the interests of consumers
- to ensure freedom of trade in the markets of India
What India needs to do?
- While the CCI is doing its bit to ensure fairness in digital markets, a need for some form of regulation is already felt.
- In its e-commerce market study, the CCI has mentioned the need for marketplace platforms adopting self-regulation to ensure transparency concerning search ranking:
- collection, use and sharing of data
- user review and rating mechanism
- revision in contract terms
- discount policy
- Consequently, India should adopt binding ex-ante regulations for digital ‘gatekeepers’ to ensure market contestability for businesses including start-ups and fairness for users.
What is the role of private sector in regulation?
- The role of the private sector in regulation is significant.
- The private sector is well positioned in the digital economy to increase awareness among consumers on the best practices required for the industry.
- Further, it should also participate extensively with the government to create a co-regulatory framework to maintain the digital economy.
Anti-trust issues in the digital economy may not only harm economies but also societies and democracies. There is a pressing need, therefore, for cooperation between competition authorities at the bilateral, regional and international levels, to address the challenges posed by the digital economy and to deal with any negative outcomes that may arise from digital platforms.