Abstract

Despite the growing importance of e-commerce to the Indian economy, the regulatory attention paid towards competition issues arising in platform-to-business users (‘P2B’) relationships leaves a great deal to be desired. Several allegations of unfair trade practices against E-marketplaces such as self-preferencing, skewed search rankings and placements, and opacity in regards to the use of consumer data have come to the fore. This inadequacy is largely attributable to two factors: that the CCI may only intervene if anti-competitive conducts are carried out by ‘dominant’ entities and; second the ex-post model of regulation followed by the CCI wherein it only intervenes after the entity has abused its dominant position. To address these shortcomings, a new ex-ante approach to selectively regulate large powerful incumbents despite their statutory non-dominance is the need of the hour.

Introduction

The E-commerce boom today is at the forefront of the digital revolution in India. Online marketplaces (‘e-marketplace’) have grown increasingly popular in the past decade owing to the multiplicity of benefits they offer to both merchants and consumers, in comparison to traditional brick and mortar markets. E-marketplaces are platforms that serve as an infrastructure upon which merchants operate upon in order to reach consumers, and therefore act as ‘gatekeepers’. Additionally, merchants can also purchase services from the e-marketplace such as warehousing facilities for the products, where the e-marketplace handles storage, packaging and shipment of products and provides customer service on behalf of merchants. To consumers, such e-marketplaces offer products at massively discounted rates coupled with facilities such as door-step delivery and return services, which thereby result in high consumer satisfaction.

This is however not without problems. The E-commerce market In India clearly exhibits a concentration, with a large part of the market share held by a few e-marketplace giants. Flipkart, Amazon, Swiggy, Zomato and MakeMyTrip are popular examples of such E-marketplaces in India. Allegations such as of self-preferencing, deep discounting, imposition of unfair and discriminatory usage terms upon merchants have been routinely levelled against E-marketplace giants. This has resulted in, several trade organizations and unions in India to repeatedly approach the CCI and the Ministry of Commerce and Industry to alleviate their problems.

The Competition Framework in India

The Competition Act, 2002, (‘the Act’) prohibits dominant companies and commercial entities from abusing their dominance. It presupposes that practices enumerated in section 4 are abusive only if carried out by dominant entities. As such, establishing ‘dominance’ is an inevitable first step for the CCI in assessing whether a certain practice is abusive.

Section 4 of the Act defines ‘dominance’ as a position enjoyed by an enterprise that allows it to operate independently of competitive forces, and/ or affect its competitors or consumers in its favour. While assessing dominance, the CCI delineates the ‘relevant market’, within which the position of the enterprise is examined. Following this, the CCI assesses whether an enterprise enjoys dominance by accounting for factors which include inter alia market share, size and resources of the of the enterprise and barriers of entry to competitors. As there is no statutory bright line test for dominance, it is assessed on a case-to-case basis. It is of note that CCI has not, as of date, declared any E-marketplace to be ‘dominant’ in accordance with the Act.

Adding to it certain features of platform markets such as consumer data feed-back loops, network-effects and economies of scale. The joint effect of these features pivots the market in favour of an incumbent entity, making such markets inherently prone to concentration. As such markets are not designed to support multiple firms competing on quality or price, market share does not serve as a useful proxy for dominance. Further, the advantage of beginner’s move of an incumbent E-marketplace, coupled with data-driven network effects and feedback loops, present exponentially laborious barriers of entry to competitors, the magnitude of which is not adequately comprehended in the present framework for dominance. This results in situations where an entity, although not statutorily dominant, may behave and influence markets in ways that dominant entities do (such as acting as gatekeepers!)

In light of the above, the questions remains that in a market that is oligopolistic at best, and one that structurally disincentivizes a competitive process, (such as the market in which E-marketplaces operate) is an ex-post intervention adequate?

Exploring the need for a complementary ex-ante code of conduct for ‘Gatekeeper’ entities

Competition authorities globally, including India, have preferred an ex-post approach to ex-ante intervention, in the spirit of laissez-faire and to minimize any chilling effect on competition and innovation. This premise may, however, require rethinking in the case of e-marketplace platforms, for reasons explained below.

First, ex-ante and ex-post models of regulation work symbiotically. Ex-post competition enforcement works best when supplemented with ex-ante regulation. Sectoral regulators who have the technical expertise in a given sector mandate what ought to be done by entities, while competition authorities, with their economic expertise, prescribe what should not be done. The combined enforcement of the two models effectively regulates a market and sets boundaries for players to operate within. In India, E-marketplace platforms do not fall under the purview of a specific sector or a statute, although aspects of it are regulated in a fragmented manner. The lack of a streamlined ex-ante regulation has not only created a blind spot in the regulation of E-marketplaces but has also compromised the efficacy of ex-post regulation by the CCI.

Second, ex-post competition enforcement alone may not be adequate to optimally restore competition in markets that are prone to concentration, especially involving gatekeepers. As noted by the United Kingdom’s Office of Telecommunications, an ex-ante approach assumes particular significance in cases of entities that “escape the legal/economic definition of dominance (although they have the clear potential to become dominant).” Further, ex-post investigations into incumbent players in such markets can be resource-intensive and time-consuming. In the meanwhile, the market may tilt in favour of the incumbents and consequently drive out competitors, causing irremediable harm to competition.

Third, ex-post competition investigations are an ad hoc solution, as the investigation and remedies are limited to the specific issues culled out in each specific case. They may do little to address similar anti-competitive conduct arising in regard to same entity’s conduct in a different / associated market ( Google, for instance, has been subjected to the CCI’s scrutiny in multiple relevant markets in India) or a different entity’s conduct resulting in the same issues as investigated. Addressing them through ex-ante regulation results in increased administrative efficiency as opposed to recurring investigations into similar issues.

In light of the above limitations, a recourse to an ex-ante competition framework for E-marketplaces is the need of the hour: one that sets the rules for platforms to play by and thereby ensures that the market remains fair and contestable. This approach finds support in the regulatory responses of the European Union, the United Kingdom, Germany, Australia, the United States of America and China which advocate for the use of ex-ante competition intervention as a complimentary tool to effectively tackle anti-competitive behaviour by incumbent platforms that are not necessarily statutorily dominant. A detailed overview of the practices in the aforementioned countries may be accessed here. Alternative thresholds such as ‘Gatekeepers’, ‘Significant Market Status’ are being proposed in order to regulate powerful incumbents ex-ante, before they acquire the status of dominance.

In this vein, as a way forward, an ex-ante code of conduct to regulate those platforms that have achieved such a gatekeeper status may be explored. The Ministry of Corporate Affairs may formulate the code in the form of ‘rules’ under section 63 of the Act and direct the CCI to enforce the same. For this purpose, it may be prudent to set up a specialized ‘Digital Markets Division’ within the CCI with an array of experts such as economists, engineers and policy makers, to review and periodically suggest changes to the code of conduct in accordance with the course of the E-commerce market.

[Manjushree RM is a Research Fellow at the Vidhi Centre for Legal Policy. She is the co-author of Vidhi’s working paper ‘F.A.C.E.| The Business Users’ Narrative’ that comprehensively discusses P2B issues in Indian e-commerce and surveys leading international regulatory responses to similar issues. The Working Paper can be accessed here. The views expressed here are in her personal capacity.]