New market, new problems—unfair trade practices rising with ‘Digital India’. CCI, take note

There is a fine line between acceptable and unacceptable market competition—and the law needs to carefully outline when to intervene, and when not to.

22 June, 2022
The Print

Competition has emerged as a major concern in digital markets. The Department Related Parliamentary Standing Committee on Commerce, in its report on Promotion and Regulation of E-Commerce in India, has highlighted the potential anti-competitive behaviour by e-commerce marketplaces, such as “self-preferencing, lack of platform neutrality, deep discounting, exclusive agreements and preferential treatment to selected sellers.” The government has also announced its intention of bringing in a new Digital India Act, which will find some intersection with issues of competition.

As our digital markets become pervasive, it is important to first develop a consensus on how to approach the issue of competition, before rushing ahead with heavy-handed use of state power to ostensibly protect competition.

Uptick in abusive behaviour

Economists have traditionally been worried about monopolies because they do not produce maximum output, lead to higher prices, and are likely to thwart innovation. This is detrimental to consumer welfare.

However, the questions that policymakers have always grappled with are as follows—First, is the firm truly a monopoly? If two firms are seeking a merger, will the merged entity become a monopoly, and should therefore not be allowed to merge? Second, is a monopoly (or firms acting as a cartel) killing competition through unfair means such as imposing unfair purchase or selling prices, and limiting technology innovations by smaller competitors? For example, in 2016, the Competition Commission of India (CCI) had imposed a penalty against 11 cement companies for fixing prices. Third, maybe it is not killing competition but is engaging in practices that harm consumers and other stakeholders, who have no other choice. For example, in 2021, a case against Apple at the CCI alleged that the latter was abusing its dominant position in the mobile application market by imposing restrictions on developers and preventing them from reaching devices outside the Apple App Store.

A new concern in the digital space is that harm is not just price-related. Risks to privacy, and cognitive manipulation of users are other downsides. These issues are assuming significance as online platforms are increasingly becoming ‘gatekeepers’ of the digital market.

Tackling monopolies in the Indian market

The answers are non-obvious, and establishing evidence of monopoly or abuse is easier said than done. The task is made harder in the digital space where firms give away products and services to users free of cost, or at deep discounts. One may rightfully ask, if there are no high prices, where is the immediate harm? The answer is also driven by how much importance one gives to only estimating effects on prices and efficiency in the market. Should we not consider the impact on rivals, or on issues such as the spread of misinformation and other fundamental rights even if they do not necessarily affect consumers in the present? How then, should we approach the regulation of competition and of non-price harms?

First, we need to establish basic facts on the ground and sustain a system wherein these facts are regularly updated and evaluated. Without clarity on what the ‘relevant markets’ are, or whether there is price discrimination or abusive behaviour vis-a-vis smaller sellers, interventions may actually turn counter-productive. For example, one has to ask, what is the relevant market (of say an Amazon), and can a consumer easily switch out of this market to another in response to an increase in price? Does Short Message Service (SMS) constitute an alternative market when examining WhatsApp?

Second, we need to peer into the future—what if the counterfactual is that some new technology would have led to more competition anyway? For example, Facebook is losing users without any competition-related intervention by the State. Sometimes, investments by one firm to attain critical mass can benefit later entrants, as has been seen in the case of Facebook gaining over MySpace. A world of low growth will limit the ability of venture capital to establish one lone survivor, as we are seeing with ride-hailing services like Uber. It is incorrect to assume that the market is stagnant, and that ex-ante regulation is the best recourse.

Third, we need tools to evaluate what aspects of a firm’s business practices cause a problem, or whether or not there is a network effect. For example, for those aspects that are termed as ‘essential facilities’, competition regulation can and should mandate a framework of interoperability or access to the essential facility.

Finally, non-price-related harms should be best left to privacy and consumer protection regulations, as these problems are larger than the issue of competition.

The Parliamentary Committee rightly suggests that several competition issues fall under the ambit of the Competition Commission of India and that it is the Competition Act that needs to be updated to deal with these new marketplaces. The law also needs to carefully outline when not to intervene, given the gaps and uncertainty in the information set of regulators. A cautious approach to these new challenges in market competition will serve our best interests.

In the debate over freebies, India is forgetting it traded rule of law for welfare services

India's want for freebies comes from envy of European welfare countries. But the govt must fix the law first.

17 August, 2022
The print

The debate on the issue of ‘revdi’ or freebies has raised questions on whether government welfare spending constitutes a freebie and if such spending is justified. The popular narrative in India assumes that the provision of healthcare, education, food, and other subsidies is a fundamental responsibility of the government, partly because we see such provisions in richer OECD — Organisation for Economic Co-operation and Development — economies. However, what welfare to provide and how to carry them out are questions that each society has to address from first principles and arrive at a social contract that fits its conditions best.

The role of the State

Before we get to the question of government spending on welfare, it is useful to reflect on the role of the State. Its fundamental role is the provision of public goods: Those that are non-rival and non-excludable. That is, my consumption of the good does not mean there is any less for you, and once the good is supplied, one cannot be stopped from consuming it. This implies that there is no incentive for anyone else to provide the good, and therefore, justifies the government collecting tax from citizens to finance expenditures on such public goods.

Very few goods classify as ‘public goods’, but one can imagine defence, clean air, and safety as core elements of what constitute public good. It is useful to remember that what we think is good for the public is not necessarily a ‘public good’. Healthcare and education do not classify as public goods. They are rival and excludable, and there exist private markets that are able to provide these services at a cost.

However, when there are externalities, private parties do not internalise the social cost of their actions and some government intervention may be justified. Take the example of vaccines. I may not want to incur the expenditure of taking a vaccine, but my call to not take it has implications for the rest of society. Or think of education. I may not want to incur the cost of getting a higher education, especially if the returns are not that high, but a more educated population may have significant benefits for society as a whole.

In Europe, the idea of State-provided social insurance got firmly established after the devastation caused by the Second World War. Different countries have chosen different forms of welfare models. Nordic countries such as Denmark, Finland, Sweden, and Norway provide universal provision of services throughout the State. In the UK, many welfare services are dependent on conditions such as age, poverty status, and employment status. The conventional wisdom today is that the government should provide some degree of welfare. This is not because welfare is a right of a citizen, but because a social contract mediated through the State is seen to have benefits over and above the perverse incentives that any welfare scheme may create.

The challenges of welfare delivery

In India, we often look at the European welfare State with envy and wish to replicate the same model here. But we must be careful before we agree on both the role of the State and the channel through which it fulfils that role.

Government provision, or financing of welfare services, is not free. It requires a high tax rate and high State capacity to deliver on its promises. In a country with a low tax to GDP (Gross Domestic Product) ratio, financing ‘large-scale’ welfare expenditures may hit budget constraints. We need to remember that it is economic growth that brings in the tax revenues that finance welfare. In a country where State capacity is inadequate, the production of the service by the government may lead to dilution in quality as well as quantity. If school teachers often don’t show up, government schools may squander precious resources, especially when research suggests that there is no large-scale difference in learning outcomes between students in public and private schools.

Government provision of welfare also opens up individual lives to surveillance by the State — the more the State promises welfare services, the more it demands a window into the lives of its citizens. For example, State-controlled education and schools become more politicised and can more easily become a propaganda machine for the government of the day. A State that provides cash transfers can more credibly demand an Aadhaar-like ID system. Where the rule of law is weak, the links between welfare provision and State surveillance become more perilous.

How do we provide welfare?

There is an argument that improving welfare will take many of our fellow Indians out of misery and put them on the path to prosperity. This view ignores the impact that a weak rule of law and pervasive State control on almost all economic activity has on the very people who welfare seeks to rescue. We may provide all manner of health and education, but if we can’t protect the poor from the vagaries of a corrupt policeman, enforce contracts and create infinite hurdles that effectively increase the ‘cost of engaging in economic activity’, we will not make much progress on improving the lives of our people.

In our development journey, we have prioritised welfare over the rule of law and have probably ended up with a poor score on both. The State’s primary responsibility should be to fix the foundation of the rule of law and build well-functioning police and courts before getting into the production of health and education. This does not mean that there should be no welfare. Cash transfers or ‘vouchers’ can be provided to citizens to choose services produced by the private sector. Government financing of institutions can be conditional on certain parameters that will drive their behaviour towards social objectives. This can free up government resources from running the complex machinery of procurement, logistics, and staffing required to actually provide ‘in-kind’ transfers. The government will still have a role in regulating the private sector, and while regulation can be challenging too, it may be more effective than providing the services itself. This should not be seen as a cynical retreat of the State but as its re-orientation towards core public goods.