Growth of Digital Economy – A Challenge for Competition Regulators

Introduction

Competition policy is a public policy which is aimed at ensuring that competition in the marketplace is not restricted in any manner that is detrimental to society. The most significant goal of competition policy is to shield society from harmful competitive behaviour.

The digital economy is dynamic and fundamentally different from other sectors. Digital services have a unique feature of network effects, which means that a product or service gains additional value as more people use it. This, on one hand, promotes concentration of markets, but at the same time there are multiple routes through which digital services can be delivered to the end-users for example, the daily news can be watched via TV, websites, apps and social media and on devices such as phone, tablet or PC. This implies that entrants can challenge market power more easily and fast.

The dynamic growth of digital markets has resulted in competition problems. These arise specifically in certain areas such as digital monopolies., tax planning, problems with patent etc. Service providers and content developers have myriad options for delivering content or services to end-users, who experience it through different electronic mediums such as phone, TV, social media etc. Once digital companies acquire a dominant position, they end up creating a deadlock for users at both ends of the platform and make their intervention indispensable.

Pre-emptive mergers are an indication of the same. In this model, a merger is made by acquiring a smaller company, so that potential competition that can pose harm to the company’s business model can be thwarted. This set of multiple exclusive agreements are potentially problematic because they hamper competition and innovation.

However, it is difficult to make a distinction between anti-competitive motives and normal business strategies in digital commodities as it largely involves future markets. Anti-competitive behaviour refers to rival interactions that are not based on the merits but on collusion or foreclosure and impose harm to competitors and consumers. The dynamic nature of digital markets makes collusion unlikely. The challenges for analysing anticompetitive behaviour in digital markets mainly relate to foreclosure and bottleneck leveraging. An error in labelling such strategies as anticompetitive may adversely impact the market dynamics. Competition authorities should be cautious to not label all acquisitions as anti-competitive, as sometimes these takeovers serve as an incentive for smaller firms to innovate. Similarly, traditional methods of assessing relevant market and dominance; which include describing market boundaries, analysing market power, whether the behaviour of the firm is anticompetitive, is not the most pertinent approach now. This is because digital firms have dynamically been redefining the boundaries of markets by competing largely on the basis of innovation, which has redefined the structure of the markets. Therefore, market shares or profit margins are less useful for determining market power.

Challenges in India

Technology companies are generally revered for their innovation and efficiency, however, as highlighted above, such businesses are susceptible to acquisition and abuse of market power. The Indian competition scenario is evolving rapidly and has stared facing these concerns. Apart from acquisition, another way to establish market power is to entice users by subsidising their goods with the help of their financial capital. This strategy is particularly more attractive for big firms having access to larger financial capital, who resort to practices like deep discounting, cash-back offers and other schemes designed to attract new users and establish the network effect. Sometimes, they sustain heavy losses for years on end. Companies such as Uber, Ola and PayTM have adopted this strategy.

These practices are now becoming increasingly difficult to be juxtaposed with an introductory offer by a new player, rather they appear to be systematic competitive strategies which are using capital as their competition weapon. This raises the primary concern of market eventually tipping in favour of the player, which might not have the most innovative product or service, but the one that can manage to obtain huge capital and entice as many users as possible through its introductory offers. This might appear to serve the interest of both the entities initially but in the longer run, such practises raise a concern about competition in terms of market power and then raising prices in following years when losses are recouped.

Such issues have come to the attention of the Competition Commission of India (CCI) recently. The CCI, in April 2015, passed a prima facie order which recommended a detailed investigation into the allegation that Ola had indulged into abusive market practises to garner greater market power in Bengaluru from substantial funding received from various investors. Apart from this, CCI has set up an in-house panel to understand the practice of cash-back incentive that is offered by various online companies from the point of provisions of predatory pricing under the Competition Act, 2002.

Strong network effects exist in the market, which results in significant inequalities in profits and market share, even if any specific anti-competitive practice does not exist. In such a situation, if the competition authorities try to influence the market structure in any way, for example by inducing more competition, it might have an adverse effect and may diminish overall surplus. Therefore, it is important to distinguish between a situation where a firm has adopted the exclusionary practice to turn the market condition in its favor and the natural competition that exists in the market. After the said distinction and subsequent identification, the interventions required by competition authorities to correct these problems must be prompt. It is an established fact that the pace of growth of internet-based businesses is much more rapid than the traditional sectors. The Supreme Court of India has noted that in the event of any such delay, the very purpose of the Act shall be defeated and there shall be the possibility of great damage to the market, which will inevitably affect the country’s economy. A major requirement for this is the adoption of a robust mechanism of findings by the competition regulation agencies to ensure that they keep abreast with the dynamic market conditions. One way to enforce this is by letting the competent authorities accept commitments from the firms whose conduct hint at possible concerns related to competition and thereby thwart the detailed investigation.

In situations where there are instances of competition elimination by dominant players in event of acquiring smaller firms, CCI could follow the approach of the European Court of Justice (ECJ) and review such agreements under section 4 of the Act, which deals with abuse of dominant position. In the Continental Can case, the ECJ was of the view that Article 102 of the TFEU, which is similar to Section 4 of the Act, can be used to regulate practices of dominant entities acquiring competitors and thus abusing the prerogative of their position. The way to determine this is, if the position of the undertaking in the market is very prominent and acquisitions can have the potential to curb consumers’ freedom of action in the market, then irrespective of any fault of such undertaking, the action would qualify as abuse of dominant power.

Further, while examining the practices of big companies with considerable capital, who eliminate their competitors by luring customers through their practice of below-cost pricing as introductory offers, CCI should give due regard to the economic principles that form the rationale of these businesses and the impact their practices are going to give in the long run. This would include focusing not just on the market share of these firms but on the overall scenario such as the status of funding of the industry, whether the primary goal is the expansion, and the existence of incentives for the firm. CCI should also analyse the investment pattern of the firms who invest in these companies that expands their capital pool.

However, substantial funding by companies should not, by default, be assumed to be an indicator of unfair market practises. Such an assumption could severely jeopardise the investment inflow in the most dynamic sector in the country. Another crucial aspect is to assess the possibility of recoupment in the sense, whether it is feasible for the company to maintain its prices at a level so that it can recover the loss it incurs. It could be useful as it would give an idea of the harm that the consumers may incur in the long run, once the company is successful in eliminating its competitors and establishing a monopoly. Due to below-cost pricing, firms initially incur losses but then after establishing a monopoly raise the prices, leaving consumers with very little alternatives. This assessment should also be extended to ‘predatory prices’ even though it is not a requirement as per the provisions of the Act as continued predatory pricing also has the potential to drive the competitors out of the market or could create high entry barriers which make it unprofitable for new firms to enter the market, which subsequently establishes a monopoly of the firm.

In addition to these, CCI should adopt methods that facilitate interoperability between dominant payers that could indulge in anti-competitive practices with other players in the market. This would facilitate access. For instance, if an interoperability requirement is imposed on a dominant payment network, such as PayTM, it will help extend the network effect of this on the whole digital economy, rather than being limited to a network. But this has to be balanced with other factors such as reasonable access fee, the structure of this arrangement; its complexity and impact on future prospects of innovation.

In this fast-paced digital economy and the emergence of increasingly technical issues, it becomes difficult for authorities to intervene in time and prevent further harm to competition. Therefore, competition authorities should consider the possibility of adopting a system of voluntary settlement of cases. This will encourage the firms indulging or having the potential to indulge in anti-competitive practises to alter their behaviour and avoid a detailed investigation. This would ensure that CCI is in a better position to avert the harm and before the market structure has irrevocably molded in one party’s favor. As for the cases that do go through a detailed investigation, there should be strict time-bound periods for both investigation and issuance of final order so that the findings remain uniform and pertinent despite the dynamic economy.

Section 2 of the Sherman Act in the United State recognizes an ‘attempt to monopolize’ as an anti-trust violation, whereas The Competition Act 2002 requires that there has to be conclusive evidence of dominance before any action is taken. A possibility of adopting such practise in India can be considered by CCI, wherein it should be empowered to look into situations wherein the firm is not presently dominant but has systematically been using benefits of network effects and venturing in the path of dominance. Such a mechanism would enable CCI to implement preventive mechanism from abusive practises but on the other hand may foster a new regime that would deter new entrants from entering the market. This perspective can further be weighed on its merits depending upon the growth of the Indian Online sector.

Conclusion

Distinct economic features of high technology businesses should be taken into account and practice like deep discounting, cashback offers when looking into the allegations of adoption of anti-competitive practices by them. For this, a robust economic analysis of the impact of increasing returns to scale and network effects is essential for understanding the present and future impact of these practices on competition and consumer interests. There can also be a collaboration between the investors in the multiple firms that they invest in.

The gains that the consumers incur from the heavy discounts are short-run and there is a need to assess it in a larger context. The recoupment test examines the extent to which market power can be achieved in the future, after which prices can be raised. This test can be used to assess the pattern of behaviour of the firms which are not very big presently but might become dominant in the future after driving out its competitors and would then raise prices and recoup earlier losses.

Further, in appropriate cases, the CCI could rely on the essential facilities doctrine to facilitate interoperability between a dominant player, that is found to be indulging in the abuse of its position, and other operators in the market. This would promote the extension of network effects and would not limit the economy from being a one.

In the fast-changing nature of online businesses, there are concerns that the time taken by detailed investigation would delay the process of determination of violation and taking of subsequent steps to prevent it. CCI needs to work towards adopting stricter time frames for the disposal of cases, particularly those relating to firms forming part of the digital economy. Also, a voluntary settlement process can be adopted that will allow a business that is under investigation to voluntarily alter its market behavior so that a detailed process of investigation is avoided.

The authorities must follow a future-oriented approach because of the central role that potential competition plays in the process. In practice, this means following an approach that is cautious and relies on the power of the self-correction of digital markets. There should be greater involvement of external IT experts that can understand the business model of the companies better so that they can be regulated more efficiently and authorize can understand the future trends better.

There should be a milieu of cooperation with competition authorities from various nations/continents as the digital economy, and thus the relevant geographical market has become worldwide in scope.

Author: Ms. Simran Jain, an intern at Khurana & Khurana, Advocates, and IP Attorneys. Can be reached at swapnils@khuranaandkhurana.com

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