The unprecedented growth in digital markets and tech-based businesses has compelled policymakers to rethink policy frameworks to keep up with the pace of innovation and growth of technology, especially with regard to competition laws. In 2018, in an attempt to define the problem statement more accurately, the OECD held a series of roundtables on e-commerce to understand its implications for competition policy.
While being circumspect of the risk of the emergence of dominant online platforms, the OECD, even in these early stages, acknowledged the impact of e-commerce and digital markets, from delivering significant consumer gains, improving distribution chain efficiencies, and boosting competition within the retail sector, to providing consumers with multiple options and triggering innovations across the value chain.
By 2022, the OECD had managed to identify and refine the problem statement further. Notwithstanding the impact that digital and traditional markets have on consumers and competition, the OECD has identified nine broad factors that distinguish digital markets from traditional markets, which could aid policymakers in tailoring interventions.
At a glance, these factors are inherently related to the business model of a fair share of digital businesses. For instance, a majority of digital businesses tend to operate in multi-sided markets (meaning two or more trade groups are involved, for instance, restaurants and diners), whereas a large majority of traditional businesses are single sided (catering only to one set of retail or business customers). Similarly, the OECD noted that digital markets relied significantly more on user data, algorithms, etc. to define marketing practises and operations, as opposed to traditional markets. Other factors included the ability of digital markets to attain economies of scale and the presence of network effects in digital markets.
Taking cognizance of the peculiarities of digital markets, law makers across the globe initiated a process of redesigning their existing competition law frameworks to allow their respective regulators to intervene effectively in digital markets. In India, this has taken the form of the Competition (Amendment) Bill 2022, and the inquiry led by the Parliamentary Standing Committee on Finance (PSC) into anti-competitive practises and big-tech.
The bill proposes amendments, including the right to regulate mergers and acquisitions based on deal value rather than just the size and financials of the parties involved, allowing for settlements and commitments, and expanding the scope of actionable arrangements and harms. The bill is currently in the process of finalisation and re-introduction in the Parliament, to account for the PSC’s recommendations specific to the bill.
As for the PSC’s inquiry into \”big-tech\”, it concluded with a recommendation for ex-ante regulations for digital markets. Noting that this would be in line with international jurisdictions, the Committee asked to introduce a new concept on classifying systemically important digital intermediaries (SIDI), similar to a systemically important financial institution (SIFI), over concerns of network gains \”tipping\” large companies into monopolies in the next five years. A systemically important institution in a sector is one that is deeply integrated with multiple facets of the economy and could have a cascading impact on the economy when at risk. The Committee has also suggested the creation of a separate Digital Competition Act and revamping the Competition Commission of India (CCI) to enable them to deal with the challenges of digital markets. Apart from these, a series of recommendations on price discounts, mergers and acquisitions, and exclusive tie ups, among others, have been further suggested by the Committee.
Even though these changes are mostly in line with plans that are being thought about in other places, they may not be right for India right now.For one, they fail to take into account the risk of attributing disproportionate sanctity to factors such as those outlined by the OECD, as well as the growing digital transition of traditional industries. If trends in sectors such as retail are anything to go by, the lines of distinction identified by the OECD may soon be blurred.
The amendments suggested in the Competition (Amendment) Bill 2022, which have been made after extensive and careful consideration, through a process that started in 2018, can be a first step towards enabling more agile enforcement in digital and traditional markets alike. It would be wise to study their impact, a sentiment expressed by the Hon’ble FM in her budget speech as well, before taking further steps in the direction of revamping the competition regulatory landscape. While international jurisdictions may have opted for ex-ante regulations or a separate act for digital markets, India must be more patient and focus on collating data and studying the impact of such laws on competition and on digital markets. We must not forget that the EU’s own Digital Markets Act is yet to come into force and remains an untested experiment at best.
The debate, therefore, is not about whether India needs to update competition laws for digital markets, it is about how it is done, when it is done, and, if it is, how it accounts for the requirements of industries at varying stages of evolution and digitization. In order to effectively answer these questions, competition laws in India will have to take into account the nature of the industries, such as the retail sector and the share of e-commerce and digital markets in it currently.
The e-commerce sector in India, for instance, has shown tremendous growth in the past decade and is ranked 2nd in the Global Retail Development Index 2021. The sector, currently valued at USD 42 billion, is expected to grow at a phenomenal rate of almost 25 percent until 2025. Juxtaposed with the Indian retail sector as a whole, which is expected to reach an overall value of USD 1.8 trillion by 2030 (Kearny Report), e-commerce is expected to reach USD 350 billion in terms of gross merchandise value. However, despite these numbers, it must be noted that e-commerce will only account for 20 percent of total retail trade in 2030, leaving room for ample growth and increased digitization of traditional businesses.
For now, India must take care not to overregulate and stymie growth on the basis of apprehensions. Instead, it must focus on capacity building within the CCI to enable them to deal with any cases that may emerge at a later stage, and on data collection and impact assessment of the proposed amendments to the Competition Act. India has the luxury of time to observe how digital markets evolve in other jurisdictions under newer laws. For now, India must adopt a wait, watch, and assess policy rather than rush into new regulations.
The article is authored by Ms. Nirupama S, Economist and CEO, Pahle India Foundation and Arindam Goswami, Research Fellow, Pahle India Foundation