India must find its own model of regulating digital markets

India has an opportunity to come up with an innovative regulatory framework that promotes diverse digital markets while enhancing competition and consumer welfare. There is already much ongoing work on regulating competition in the digital domain. The Parliamentary Standing Committee on Commerce has proposed ‘gatekeeper’ style regulations modeled after the EU’s Digital Markets Act (DMA), which comes into force next year. The Competition Commission of India has set up a Digital Markets Unit to ensure fair competition in digital markets. However, for optimal outcomes and to avoid unintended consequences, we must critically examine different types of digital entities and the markets or ‘use cases’ they serve. We must adopt frameworks that suit the complexities of our context rather than mirroring the EU’s approach.

The EU appears to have an underlying premise that big is bad. For instance, European law looks to designate entities that offer ‘core platform services’ as ‘gatekeepers’ based on factors like high market turnover and a large user base. The DMA presumes that scale itself enables companies to become gatekeepers in their fields. The Indian market, however, displays different characteristics for some digital services versus others. Consider the differences among social media platforms (Facebook, Twitter, etc), search engines/app stores (Google/Apple) and e-commerce entities (Flipkart, Amazon, etc.), all of which may be classified as gatekeepers, since they are intermediaries of considerable size. But network effects, whereby the overall value of digital services increases as more people use them, play out differently in each category. Users of social media and messaging services are more likely to face high friction in shifting to other platforms, as most of their friends may be on a particular platform.

There are also a limited number of social media networks that will be relevant at any given point in time, since the threshold beyond which such a network becomes viable is high. Similarly, the virtual duopoly that Google and Apple have in operating systems and app stores makes them gateways to most smartphone app users, so other businesses are dependent on them. Market dominance here is unmistakable.

When we look at e-commerce, though, sellers use multiple channels to reach customers. Even online, brands usually list their products on more than one platform to expand their reach. Consumers also have options to choose from among social marketing platforms, direct-to-consumer platforms, and niche platforms. Consumers often compare prices across these to optimize their purchases. Reports suggest that Indian consumers have a high preference for a ‘touch and feel’ experience, and therefore a substantial number tend to buy products offline after surveying them online and vice-versa.

India has been a pioneer of digital public goods. In the domain of e-commerce, the Open Network for Digital Commerce (ONDC) aims to extend access even to traditional kirana stores and thus support local businesses. The ONDC intends to grant sellers and consumers greater flexibility in buying and selling products by widening out choices for all. It also benefits from government support, just as we saw in the case of the Unified Payments Interface, another transformative digital public good.

Clearly, there are significant differences in how network effects play out in different domains. All business models should not be painted with the same brush. Some intermediaries, especially those that facilitate wider choice for consumers, may also create pro-competitive effects. For instance, it can be argued that despite network effects in food delivery services, Indian consumers have a wider variety of food items to choose from and at competitive prices. Similarly, online marketplaces have decreased information asymmetry on products, terms of purchase, return policy, etc, in ways that were often not possible in traditional retail settings.

The EU’s DMA banks on ex-ante regulation by laying out the contours of a competitive market through upfront rules on data usage and other business practices in an attempt to pre-empt anti-competitive behaviour. India must take a more nuanced approach to the regulation of digital markets, as a DMA-like approach may stifle our fledgling digital economy. It risks inhibiting innovation and robbing consumers of choice just when they are beginning to benefit from the digital economy. Strict pre-emptive regulations may also dampen spirits in India’s startup ecosystem. This may also dissuade investment in India’s digital ecosystem at a time when global capital could help our startups achieve scale.

Indian policymakers must examine each tech use-case to identify network effects, applicability of the ‘gatekeeper function’, the exact harm caused by the large size of an entity in a specific market and enact legislation that imposes proportionate safeguards and penalties. We must take into account how India’s unique digital public goods infrastructure levels the playing field. India has a chance to adopt an alternate model of regulating digital markets, one that is better suited for complex, diverse, emerging economies with vibrant tech ecosystems.

Our motto should be: Let competition thrive, not regulation.

MV Rajeev Gowda is a former Congress member of Parliament and former chairperson, Center for Public Policy, Indian Institute of Management Bangalore.

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