Ensuring free and fair digital markets

Vedika Mittal Kumar / Manjushree RM | Updated on December 20, 2019 Published on December 20, 2019

With the Big 4 — Google, Amazon, Facebook and Apple — posing a threat, understanding market peculiarities becomes crucial

Digital behemoths, whether Amazon for e-commerce, Facebook for social networking, Apple for its operating system or Google, the panacea for all queries, undeniably improve our lives. However, globally, regulatory circles have begun to view ‘GAFA’ (Google, Amazon, Facebook and Apple), as trojan horses, with the potential to cause unforeseen harm to unsuspecting users and the markets they operate in.

India is no exception to these challenges, and the difficulty our laws face in coping with digital markets is a matter of concern. Such difficulty stems from the contrast between digital markets and traditional markets that most laws, including competition law, centre their understanding on. To formulate a competition policy that accounts for the peculiarities of digital markets, therefore, one must understand what manifests this contrast.

Platform-based markets: In these markets an intermediary provides a technological foundation connecting other parties such as buyers, sellers or advertisers. Platforms are often ‘multi-sided’, with business models that rely on connecting distinct user groups, either enabling transactions between these groups, or — as is the case with advertising — charging one group to reach the other.

A unique feature is that the platform plays an infrastructural role which third parties transact upon. This results in the entrustment of inordinate power upon the platform, often making it indispensable for those operating upon it. This may make the platform an “essential facility”, if it is dominant in the market. For instance, Microsoft is designated as an essential facility in Europe, as access to information about its Operating System, Windows, is indispensable for developing applications for it. Similarly, the Competition Commission of India (CCI), in its order in the MakeMyTrip case, stresses on the power of platforms to influence the visibility and discoverability of hotels.

This situation is complicated further if the entity controlling a platform also transacts upon it, thereby operating in dual capacity — such as Amazon, which markets products of its in-house brand, Amazon Basics. This may lead to “self-preferencing”, or a platform being biased towards its own offerings, thereby distorting competition. It is interesting to note that the CCI, in the 2018 Google case, slapped a whopping ₹136 crore penalty for such self-preferencing. Europe, too, has hauled Google up for self-preferencing, favourably featuring Google Shopping in its search results.

Additionally, many platforms use large amounts of data derived from consumers. This is a goldmine for businesses that require large data samples to study population-wide trends, such as consumer preferences. Some have taken to monetising and selling such data, enabling them to subsidise one side of their platform by the other.

For instance, in zero-priced products like Google or Facebook, the putative ‘product’ — the search engine, or the social networking platform — is subsidised by businesses that buy the data these companies collect. What appears ‘free’, therefore, isn’t really free — the implicit price is data on the user’s behaviour itself, unlike traditional markets, where money is the sole medium of exchange.

As things stand, this ‘price’ is extracted from consumers passively, and consumers have little to no idea of what data a platform acquires from them. This fundamentally alters the relationship between consumers and businesses, in ways that monetary price-based laws do not comprehend.

Network effects: These exist where users derive increased utility from a good or service when the number of other users consuming the same good or service increases. For instance, increases in the user-base of a social network increase the possibility of connecting with other users, thereby enhancing its utility.

Digital products often demonstrate strong network effects. Consequently, it is not enough for a new entrant to merely offer better quality and/or a lower price than the pre-existing ones, but it must also convince users of existing applications to migrate to its platform. Therefore, the manner in which substitutability manifests and factors that must be accounted to assess dominance are different in digital markets.

The CCI, despite acknowledging the network effects operating in favour of taxi aggregators such as Ola and Uber, has not yet sustained a claim of dominance based on network effects by itself.

Return to scale: Economies of scale are the savings generated when the per-capita cost of production/delivery of a good/service decreases with an increase in the number produced/delivered. However, this phenomenon is amplified in the case of digital markets as every consumer of a digital good or service pays a price for the same without the seller incurring a significant marginal cost towards its provision.

This return on investment in digital markets is therefore amplified far beyond traditional markets. This peculiarity also results in incumbents securing a huge advantage over new entrants in terms of the price at which a product can be offered, thereby calling for reappraisal of concerns like barriers to entry in such markets.

The way forward: As evidenced by the international experience the incongruence of digital markets with traditional markets mandates nuanced application of competition law to digital markets. While existing legislation with some tweaks may accommodate for certain challenges posed by the digital markets, there is a need for a competition policy that acknowledges the contrast and guides the practice in such uncharted territory.

The need of the hour is to shun policy-making in silos and instead pursue a comprehensive policy which covers competition law, data protection law, information technology law as well as foreign investment and e-commerce policy.

The writers are with Vidhi Centre for Legal Policy. The views are personal

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Published on December 20, 2019
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