Digital giants need a code of conduct

V Sridhar/Udai Mehta | Updated on January 02, 2020 Published on January 02, 2020

Common sight Digital platforms are characterised by network effects, that result in near monopolies in most cases   -  bluebay2014

Monopolies are not per se bad in the digital arena. Rather, stakeholders should commit firms to adopt ethical practices

December 5, 2019 was the 39th anniversary of the adoption of the the United Nations Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices by the UN General Assembly. These later encouraged and guided countries across the world to develop their own competition policy and law.

India enacted its Competition Act in 2002 and set up the Competition Commission of India (CCI) in 2003. The commonly held view is that competition is the most effective market structure to ensure low prices and high quality for the benefit of the consumers. However, in industries such as landline telecom services and electricity distribution, economies of scale and scope are large enough to warrant low levels of competition, even monopolies. The economists held forth the view of having a “natural monopoly” in landline telecom service even in the US until competition was introduced through Telecommunications Act 1996.

Monopolistic behaviour

The same conundrum of whether competition is required — and if so, how much — haunts regulators worldwide in the case of digital platforms as well. Digital platforms are characterised by network effects, that result in near monopolies in most cases. As per the United Nations Conference on Trade and Development (UNCTAD), the top 10 global companies by market capitalisation in 2009 included only one technology company and three oil and gas companies; however, in 2018, the list included five technology companies and two consumer services companies (Amazon and Alibaba), which are large online marketplaces. The list also included Facebook and Google, who are both the dominant players in their relevant markets.

Dealing with such imperfect markets due to the presence of network effects is often tricky. One of the most often used regulatory weapon in such circumstances is to reduce the power of such monopolies by invoking antitrust laws. At the moment, about 50 state attorney generals in the US are involved in an antitrust investigation against Google’s company’s search and Android businesses. The US Trade Commission has also started an antitrust probe into Amazon’s cloud services. The European Union antitrust regulators are investigating how Facebook collects and monetises private information of its users.

A noteworthy case in India was the investigation of Ola Cabs by the CCI on its practice of predatory pricing that distorted fair competition in the market as filed by its competitors. As digital business integrates vertically — as in the case of Amazon — or horizontally — as with Google — regulators need to watch out for possible anti-competitive behaviour.

Monopolies per se are not bad, especially in the digital markets, where cross-side network effects necessitate the scaling-up of market platforms. However, the abuse of dominant position by the firms is taken very seriously and invokes the attention of the antitrust regulators. Abuse can be in the form of discriminatory practices either against consumers or producers, or as unfair competitive practices that erect high entry barriers for other firms.

Scaling up

Digital firms are often characterised by large research and development investments which result in breakthrough innovation, reminiscent of the pharmaceutical industry. However, the marginal cost of software products and services is often minimal, enabling them to scale up economically. There are more global firms extending their operations worldwide, making it difficult to apply territorial regulation.

Of late, there is criticism of digital firms monetising personal information of their users, sometimes unethically, to grow their businesses. There are also instances of powerful digital firms such as Amazon Web Services converting open source software to proprietary through a process known as “strip mining” to thwart competition.

Realising the importance of innovation and entrepreneurship, most regulators often turn a blind eye to tech companies in the evolution phase of their technologies. They also often lack adequate capacity to review the developments in the ICT markets. However, when firms scale up, and elements of abuse are witnessed, they take notice. The OECD office has developed a competition toolkit that helps regulators determine when competition in the market place is disrupted and provide measures for removing restrictive practices.

While regulators struggle to define factors such as significant market power, relevant market, thresholds for pricing, mergers and competition, extent of business integration, it is important for the digital firms also to practice a code of ethics when they dominate their markets.

Ethical practices

Noting the difficulty of regulating digital firms, Tim Berners-Lee, the inventor of the World Wide Web, has proposed a “Contract for the Web”. This contract or ‘code of conduct’ to be followed by digital firms goes beyond competition to include consumer welfare as its primary goal. Inclusion, protection of consumer rights, proper accoutnability for work done, and investing for the good of the society are some of the basic principles espoused in the new contract. When followed, firms can become trustworthy and non-abusive in the market.

Designing a code of conduct is just the first step. It may not be adopted unless appropriate incentives for adoption (or disincentives for non-adoption) are put in place. Stakeholders, particularly consumers and regulators, will need to come together to push digital firms to consider responsible business practices as a service and price differentiator. It will be important to continuously call out (‘name and shame’) firms that do not practice ethics while appreciating and using services of firms which do, to enable effective competition in digital markets and prevent abuse.

The role of civil society and consumer organisations in generating awareness and building capacity of consumers and regulators in this regard will be critical. Needless to say, digitisation has enabled transparency, disintermediation, effective price discovery, flexibility, and other associated benefits to users and societies at large. It is the responsibility of digital behemoths who have become what they are today to respect welfare of consumers and societies. Corporate ethics will drive the future of digital firms.

Sridhar is Professor, IIIT-Bangalore. Mehta is Deputy Executive Director, CUTS International

Published on January 02, 2020
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