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‘Key to new-age competition laws: Digital vs traditional vs digital’

Ease of doing business for MSMEs: Creating a separate competition law for digital markets suggests first, that it is possible to identify a clear set of business models and companies that can be called ‘digital’ and second, that all such identified models can be similarly regulated. Both of these premises are suspect.

Ease of doing business for MSMEs: The Committee on Digital Competition Law (CDCL) was constituted on February 6 this year to look into the need for a separate competition law for digital markets and also give a draft version. The buzz is that the committee is close to finishing its deliberations and a draft competition law will be released soon. So this may be a good time to get one last word in before the committee finishes its task.

Creating a separate competition law for digital markets suggests first, that it is possible to identify a clear set of business models and companies that can be called ‘digital’ and second, that all such identified models can be similarly regulated. Both of these premises are suspect.

Regulatory Arbitrage

Airbnb entered a market dominated by hotels with centralized ownership and created a niche for itself by matching property owners with short-term renters. But the key to its success was not its digital interface. Hotels could also be booked online and booking aggregators had already reduced the search cost of finding hotels. It was that properties on AirBnB did not have to comply with the stringent regulations that hotels had to comply with. The lack of compliance costs made them cheaper for both renters and investors/landlords.

Consequently, AirBnB, while competing in the market with hotels, got a regulatory exemption for being a digital platform. In this context, therefore, it is conceivable that AirBnB’s core offering of rooms to hire should have determined how it should be regulated, rather than its digital presence. In the former, it would be seen as operating in a very competitive market. In the latter, it was a digital pioneer, a potential gatekeeper.

It is clear that in at least some cases in the past, firms have benefited from lax regulatory oversight on account of being considered a digital platform. But the alternative cannot be to invert the logic and subject digital players to regulations that do not apply to their competitors deemed to be traditional. All else being equal, firms will migrate to areas of weaker regulations. Therefore enforcing regulations on as broad an area of operations as digital markets will almost certainly spur the discovery of another area of weak regulatory oversight. Where firms today highlight the “digital nature” of their business proposition, tomorrow, they might emphasize and focus instead on the aspect of their business that is not the regulatory crosshairs.

The Need for Nuance

Recently, Google’s Play Store and Apple’s App Store were found to have steering provisions (forcing users to pay via their platform for services/products provided by third parties) on their platforms. In this context, the CCI found enough grounds to order an investigation, and it has since penalised Google for similar activities.

However, consider ride-hailing apps like Ola or Uber, which also typically engage in the process of steering payments from passengers to drivers via their platform. But there is a key difference between the ride-hailing market and the app market. In the former, the driver and the passenger meet in person and they can, if they so wish, disintermediate the platform. The passenger can pay directly to the driver and the driver can choose not to pay anything to the platform.

Even if it is not disintermediated, the threat of it happening is competitive pressure on the commission the platform can charge. Drivers and passengers can coordinate without the platform, as they did in the days gone by. But the existence of a platform that creates matches in real-time based on distance and availability is more efficient and therefore better for society as a whole.

If steering provisions are penalised, these services will likely backwards integrate and operate a fleet of cars they own. They might still offer a digital interface, but they would no longer be a platform business, but rather an old-fashioned operator of a fleet of cars. Are such operators better for competition in the market? The platform model allows a new firm to enter with a relatively low upfront investment and creates a decentralized market with many players. A market with fleet operators, on the other hand, has a much higher entry barrier and all the capital in the market is concentrated in the hands of firms.

The Path Ahead

India’s tryst with digital markets is at a critical stage. Building up an ecosystem that can leverage the 907 million strong customer base will require a mix of prudent regulations, large amounts of capital, and skilled and motivated entrepreneurs. In this context, it would be prudent for policymakers to adhere to the barbell approach (succinctly described in the Economic Survey of 2021-22), where policymaking is done incrementally based on real-time inputs.

Digital markets are by and large functional. Any hasty attempt at regulating them can lead to unintended consequences that can damage the entire ecosystem. We need more time, more data, and more competition economists working on the problem before we commit to any large-scale regulatory changes. Making only platform markets and all platform markets the focus of regulation may be counterproductive.

In the meanwhile, it would be wise to target parity in the regulatory treatment of businesses across traditional and digital markets/operations. Favouring one over the other will create incentives for the market will lead to suboptimal outcomes with investments responding to regulatory pressures (and the need to position themselves favourably) as opposed to value creation in the market. To avoid blanket, acontextual regulations targeting any business with a digital presence or interface, we should leave regulations to sector-specific regulators and have competition policy operate in its conventional role as an ex-post enforcer of market rules, at least for now.