E-commerce policy needs to be specific

With the closing of the invitation for stakeholders’ comments on the draft National e-Commerce Policy, posted by the Department for Promotion of Industry and Internal Trade, it is time to take a deep dive and look at important issues that are specific to e-commerce.

Of all the different types of e-commerce models noted in the MeitY definitions (B2B, B2C, C2C, C2B; B – Business, C – Customer), the C2C model is the one that is of importance for regulatory oversight. The B2C models are typically inventory-led and are similar to retail stores and the like; B2B is not concerned about retail customers and hence is not of prime concern for regulators and policymakers; C2B e-commerce is often limited in scope and scale. Hence the focus needs to be on e-commerce of goods and services enabled by aggregators/marketplaces/intermediaries in the C2C model.

The policy gives prominence to privacy, consumer protection, data protection and localisation, intellectual property rights, and content liability of the marketplaces. These have been addressed in the various extant laws such as the IT Act 2000 (Amended) and Rules, IT Act draft Intermediary Amendment (Rules) 2018, Competition Act 2002, Consumer Protection Act, National IPR Policy 2016, National Data Sharing Policy 2012, Personal Data Protection Bill 2018, Unsolicited Commercial Communication Regulation 2018, and the OTT consultation paper 2018 published by TRAI.

Recognising the inter-departmental nature of e-commerce, the policy proposes the setting up of a Standing Group of Secretaries on e-commerce (SGoS). Though this is a welcome step, it is preferable that the SGoS adopts the above rules as much as possible and makes only minor amendments in the context of e-commerce. It is, however, important to address the following issues that are specific to e-commerce.

Network effect

First, as pointed out in the draft policy, network effect is an important characteristic of digital market platforms, especially in C2C markets. The network effect results in monopolisation of the marketplace. However, the regulators and policymakers should go beyond thinking that “monopolies are inherently bad”. Only abuse of monopoly power should be checked and regulated as clearly pointed out in the Competition Act.

The policy mentions that the presence of network effect prevents second-movers from entering the market. This, though true, is not really an economic problem that regulation should try to address, unless abuse is noticed. Mergers and acquisitions of platforms increase network effect and hence value for customers as well. Vertical or horizontal integration per se is not harmful in the platform business, except if there is abuse.

Second, in C2C platforms, users/vendors either participate only in one chosen platform (referred to as single homing) or in multiple competing platforms (called multi-homing). The platforms act as monopolies for the single homing user. Hence the monetisation model of the platform super-charges the single-homing user (usually small players) to subsidise the multi-homing user, offsetting the competition effect.

This aspect is of concern to the regulator as it might be discriminatory and burdensome for the single-homing side (also referred to as Water Bed Effect as propounded by Economides & Tag in their 2012 paper). Small sellers are normally single home and their grievance regarding exclusive contracts, non-adherence to labour laws in case of services, and high platform charges need to be addressed by the regulator.

Third, digital platforms can be local clusters (taxi aggregators, for instance) or global clusters (example, AirBnB and MakeMyTrip) that connect their producers and consumers locally or globally. It is difficult, though not impossible, for global clustered e-commerce firms to adhere to Permanent Establishment requirements or establishing local representatives in each country they operate.

For example, MakeMyTrip aggregates and provides hotel accommodation reservations around the world. If each of the 190-plus countries requires a PE, the business model of MakeMyTrip will go bust. Hence, as described in the 2018 Budget, determination of PE on the basis of “significant economic presence” is an apt condition.

Fourth, consumer protection for e-commerce services is being put in place in different sectors. For example, the cab aggregator rules by the Department of Transport in many States have imposed a ceiling on surge pricing, and mandated emergency calling services and digital metering along with other rules to enhance customer safety. The Food Safety and Standards Authority of India (FSSAI) has mandated that online food aggregators and distributors source only from FSSAI-certified restaurants to maintain quality of foods. Since these are industry specific, the rules may be incorporated in the extant regulation in part or full by the individual sector regulator/government departments.

Improving efficiencies

Finally, ‘sharing economy’, which aims to improve the efficiencies of under/un-utilised services, are being promoted by C2C e-commerce platforms (AirBnB, Task Rabbit, Freelancer, WeWork, Faircent) across industries such as hospitality, finance, and digital services to transform the way in which goods and services are used. Due to lack of brand and product identities, users of these platforms depend on “trustworthiness” and “due diligence” of the platforms to engage in commercial transactions.

There should be benchmark rules across sectors (that is, horizontal rules) on certain mandated features that enable safety, security, quality and privacy that are derived from the previously mentioned extant regulations. While innovations in sharing economy have immense benefits to the economy, regulations also needs to be agile to address consumer issues.

E-commerce in goods and services reduces information asymmetry, provides dis-intermediation, cuts search costs, and increases network effects. Hence, e-commerce benefits the users of associated platforms as well. These have a profound impact in emerging economies that have ingrained inefficiencies and poor associated infrastructure.

Since these platforms evolve with technology, regulation is often trying to catch up. Hence it is better for the regulators to extend a carefully selected set of mandatory rules ex-ante and adopt a soft regulatory approach that encourages self- and co-regulation of e-commerce.

This writer is Professor, IIITBangalore

COMMENT NOW