Protecting competitors . Don’t impose ex-ante rules on digital platforms

Modern antitrust laws do not view market power or market structure as problematic per se. Rather, they focus on the effects of a firm’s conduct. Implicit in this approach is a faith in the ecosystem’s ability to constantly innovate and disrupt markets, thereby keeping incumbents on their toes. Economist Joseph Schumpeter referred to this process as the “winds of creative destruction.”

Recently, the European Union adopted the Digital Markets Act (DMA), which seeks to impose ex-ante structural limitations on the practices of large technology platforms.

Traditionally, ex-ante regulation has been deployed in utility markets, such as electricity distribution. For such markets to be viable, enterprises need scale of operations and large investments in infrastructure. Given the entry barriers, utility markets are typically occupied by a single firm, enabling it to seek abnormal profits. Therefore, ex-ante obligations for non-discriminatory treatment, interconnection and price regulation, became commonplace for utilities. Recent proposals, however, seek to extend the regulatory philosophy underlying utility regulations to today’s platforms. This is problematic.

Firstly, such an approach treats the content and application layer of the internet as a utility (as opposed to the infrastructure layer, i.e., Internet Service Providers). This is an inappropriate comparison, given inherent interoperability in Web 2.0 protocols, and the tendency of consumers to multi-home (that is, obtain products and services from multiple platforms).

Second, the imposition of ex-ante regulations sans any evidence of anti-competitive effects represents a return to a structure-based antitrust approach. Enforcement premised solely on form can be counterproductive to innovation and consumer welfare.

Lastly, ex-ante frameworks tend to straitjacket regulators, and reduce their regulatory agility. Moreover, operational models for technology platforms vary significantly, thus the risks associated with such models also differ. A “one-size-fits-all” approach may benefit certain players at the cost of others and create space for arbitrage.

With a more connected and immersive internet (Web 3.0, Metaverse), challengers are primed to disrupt the landscape solely through innovation. The Unified Payments Interface (UPI) provides an excellent example of population scale innovations that disrupts existing markets, creates new markets, and continues to accelerate innovation and competition on merits.

If today’s platforms are able to innovate and survive amongst this mix of dynamic consumer demand, rapid developments in technology, and disruptive innovations, it would be a well-deserved and favourable outcome — one that could restore our faith in innovation.

The central objective of antitrust is to ensure that markets serve consumers with the best products and prices and meet evolving demand. Focusing instead on protecting competitors can prove counterproductive in the long run, insulating Indian consumers from innovation, competition, and consumer choice brought on board by today’s large global platforms.

Rushing into “plug-and-play” solutions from other jurisdictions, therefore, could prove detrimental to India’s own ambition of creating an inclusive, efficient and robust digital economy worth over a trillion dollars. The government, including the Standing Committee on Finance, the CCI, and other stakeholders, should therefore take a more pragmatic approach.

India is riding a wave of innovation and growth, which has inspired the world — however this momentum is India’s to lose, with one incorrectly balanced policy intervention.

The writer leads the Public Policy, Antitrust and Regulatory practice at Nishith Desai Associates

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