The Efficacy of Competition Law in a Digital Economy

Introduction

Competition laws are based upon the principle that in a free market there is always an element of desirability for free competition, and in the absence thereof, monopoly breeds. The purpose of having competition laws is for the prevention of any practices which may be detrimental or harmful to the welfare of the consumers. This principle is different from that which has been laid down under the MRTP (Monopolies and Restrictive Trade Practices) Act whereby the primary focus was to curb monopolies in the market. But under the Competition Act, the primary objective is to promote and sustain competition in the market along with protecting the interests of the consumers. Another important feature of the Competition Act is that it sees to it that the various businesses in the market carry out their operations in a manner which will not lead to any anti-competitive agreements, practices or control. This in turn will ensure the level playing field in the market.

A ‘digital economy’ which is also known as a digitalized economy, an internet economy or an online economy is an economy which is based on digital technologies and makes use of communication and data processing for the conduct of its business. With the accessibility of the internet from mobile devices, more and more people are engaged in this digital economy thereby causing a growth in this sector. In the current scenario, digitalization can be seen in all economic sectors and this made certain sectors more popular which includes the internet search engine, social networks as well as E-commerce.

Search Engines

When we look back to the 1990s, search engines have not yet come out in a large scale but in the present times, Google and Bing are considered as the pillars of multi-billion dollar businesses in the field of search engines. The net market share shows that Google holds the highest share in the search engine market which is followed by Bing and Yahoo. This is an indication that Google has its dominant position in the search engine market.

Social Networking

Another area in the digital economy which occupies a very important position is the ‘social networking’. This area is considered to be very popular all around the world for the simple reason that it has helped people to be able to stay in touch with each other wherever they are. An example to this is Facebook which has helped people to feel much closer to their friends and families across many places. However, there are various other social network platforms which serve different purposes. For example, the purpose of Facebook is basically for social contacts; LinkedIn which is another social network platform serves basically for business purposes. Therefore, we can say that these two different networks target the same audience but having their own purpose. With the growth and development of different social networking platforms, they are also at the same time under the supervision of various competition laws governing their operations.

E-commerce

Further, when we look at the digital economy, one cannot forget the significant role played by the digital markets which is also known as E-commerce which has made life quite easy for everyone. For example, Flipkart, Amazon, Ebay has really helped in the purchase of various goods and having wide range of choices. Other categories include Netflix, Amazon Prime, MakeMy Trip (for hotel and flight bookings, etc) which also provide services to the end user in digital form. Therefore, in such situations, competition law also plays an important role in monitoring the activities of such enterprises to prevent any anti-competitive practices or misuse of their market position.

The Amazon-Flipkart Case

The CCI in the month of January had given an order that investigation should be conducted as allegations had been made against Amazon and Flipkart as they were contravening provisions of the Competition Act, 2002.

A society which comprises of “Micro, Small and Medium Enterprises (MSME) traders dealing in smart phones and related accessories approached the CCI with a complaint against Amazon and Flipkart alleging contravention of Section 3 (4) read with Section 3 (1) and joint dominance under Section 4 (2) read with Section 4 (1) of the Act. The allegations involved issues relating to: (a) exclusive launch of mobile phones, (b) preferred sellers, (c) deep discounting, and (d) preferential listing or promotion of private labels. The CCI noted that the allegations are interconnected and warrant a holistic investigation to examine – (a) how the vertical agreements operate; (b) what are the key provisions of such agreements; and (c) what effect do they have on competition. The CCI’s assessment of the issues involved in the complaint is as follows:

  • Exclusive launch of mobile phones: It was noted by CCI that exclusive launch of mobile phones had been done by Amazon and Flipkart on their respective platforms whereby, Amazon exclusively launched 45 mobile phones in the year 2018 and 67 mobile phones were exclusively launched by Flipkart.
  • Preferred sellers: Allegations were also such that both Amazon and Flipkart were having their own preferred sellers and that these preferred sellers have nexus with the e-commerce platforms. Based on this allegation, it was noted by CCI that the exclusive launch along with giving preference to few sellers and the discounting practices which they were engaging may prima facie lead to an ‘appreciable adverse effect on competition (AAEC)’.
  • Heavy discounting: CCI also examined the prices of different smart phone brands which were  being sold through Flipkart and Amazon making comparison of the original price as well as the discounted price. CCI came to the conclusion that certain smart phone brands were available at significantly discounted price on these platforms and they were also being sold largely through the ‘preferred sellers’ only. Accordingly, investigation was directed by CCI to find out ‘whether funding of discounts is an element of the exclusive tie-ups between the platforms and the sellers’.

Based on the above observations, Amazon and Flipkart were prima facie found by CCI to be contravening Section 3 (1) read with Section 3 (4) of the Competition Act, 2002 and directed the Director General to make investigations. CCI noted that the allegations in the information were interconnected and warranted a holistic investigation of examining the vertical agreements in operation and their effect on competition. Further, it noted that since both Amazon and Flipkart appeared to follow the same strategy with respect to exclusive tie-ups and preferential terms with brands or sellers, competition between the platforms prima facie did not play a role in mitigating the potential adverse effect on competition on the platforms”.

Challenges of Competition Law

The technology companies are generally admired for their ability to bring about modernization and advancement in the digital economy. However, such businesses are vulnerable to acquisition and abuse of market power. As has been witnessed in the current scenario, competition in India is transforming rapidly and various concerns have also arisen from numerous unfair practices in the market. There are situations whereby the dominant entities in the market acquire the smaller firms to eliminate competition. The CCI could review such agreements which have been entered by the parties under section 4 of the Competition Act dealing with abuse of dominant position. By doing this, it will regulate the practices of the dominant entities which had acquired the competitors and thereby abusing their position. Also, due regards should be given by CCI while examining the practices of huge enterprises having extensive capital who eliminate their competitors by enticing customers through their practice of ‘predatory pricing’ or ‘below-cost pricing’.

To be able to differentiate between what is predatory and legitimate pricing in a competition is not an easy task due to various factors prevalent which determine the market price. Therefore, substantially high standards of evidence is required to punish those who actually engage in such predatory pricing practices and at the same time to also prevent those who are actually engaged in legitimate pricing. One of the commonly used benchmark test is the ‘equally-efficient-competitor benchmark test’ which scrutinizes whether competition can be maintained between the competitor on one side and the dominant enterprise on the other. However, one may observe that such a test is not enough to determine whether the practices are anti-competitive or not and certain other ways and means should be implemented to meet the requirements.

The Ola case

An information had been filed against Ola stating that it had abuse its dominant position as it was involved in ‘predatory pricing’ in the relevant market by “offering heavy discounts to passengers and incentives to cab drivers, which contravened Section 4 (2) (a) (ii) of the Competition Act. Allegations were such that Ola being in control of over 50% of a highly concentrated market shows its dominance in the market. The Informants also alleged that there were considerable entry barriers present which made it difficult for a new player to effectively compete. Consistent payment of high incentives along with exclusivity clauses in agreements with drivers allowed Ola to prevent effective competition and created a wide base of customers. Allegations were also that due to the reason that Ola has a large network across the nation it has restricted the power of consumers to negotiate and substantially affect the service provider by shifting to a competing network. CCI was of the view that Ola was having a dominant position in the relevant market of ‘Radio Taxi services in the city of Bengaluru’ and therefore, a detailed investigation was directed to the Director General. The Director General came to the conclusion that the relevant product market would be the ‘market for radio taxi services’ and the relevant geographic market would be the ‘city of Bengaluru’. The Director General made comparison of the number of rides carried out by different players in the relevant market between the year 2012 and 2016 and observed that Ola’s growth rate was 63% whereas Uber’s growth rate was 1200% in the same period. Therefore, Uber being a healthy competitor defeated the argument for presence of entry barriers and the Director General came to the conclusion that Ola was not in a dominant position.

The informants’ contention that the control of more than 50% of the relevant market by Ola was sufficient to determine test of dominance was rejected by CCI. It held that the test enshrined under Section 19 (4) of the Competition Act has to be met to determine dominance and such a numerical threshold cannot be accepted as a valid test under the Act. Although CCI held that Ola was not in a dominant position, it made certain observations on its ‘pricing strategies’. The Commission rejected the contention of the informants that ease of access to wide pool of funding exclusively with Ola acted as a key constraint on smaller competitors and new entrants from effectively competing in the relevant market. The Commission observed that in an innovative technology industry, a level playing field in access to funding would be the key element to determine the existence of an entry barrier as opposed to a mere high requirement of capital. On the basis of an analysis of pricing strategies of the players in the market, the Commission concluded that Ola’s alleged ‘aggressive pricing strategy’ was not an independent strategic choice but was rather a reaction to Uber’s aggressive pricing which was itself indicative of the competitive forces already present in the relevant market”.

Another challenge faced by the authorities is due to the dynamic nature of the market. The companies in a digital economy keep on implementing new strategies in the market thereby leading to an ever-changing nature to the digital markets. Take the example of PayTM whereby it has made its entrance in the market being a money transfer application and has evolved tremendously in just a short span of time.

The next challenge is with respect to mergers. Under the Competition Act, 2002, it states that, “any merger or combination which causes or is likely to cause Appreciable Adverse Effects on Competition (AAEC) is void under the Indian Competition Act”. Mergers and combinations are also considered to be one of the daily activities of the technology related companies as well. For example, Facebook taking over WhatsApp and Microsoft acquiring Skype and several others are examples of some of the well-known mergers in the sector of technology. Due to the emergence of such technological enterprises, the CCI is faced with yet another challenge which is the ‘pre-emptive merger’. The main objective of ‘pre-emptive mergers’ is to “acquire the potential competitors in order to be able to prevent disruption of one’s own business model”. This method is contrary to the principles of a competitive market as it will reduce the competition as well as innovation thereby consumers will be given very limited options to select from. The biggest challenge here lies in the fact that it will be difficult for the authorities to identify such mergers either as possessing competitive business strategies or anti-competitive strategies because in some cases such acquisition may also be for motivating smaller firms to innovate.

Lastly, the anti-competitive practices which the dominant players in the market conduct are indescribable. One of such practices is the ‘restrictive trade agreements’ which involves ‘exclusivity agreements’. Exclusivity agreements are “those agreements between two or more parties to purchase goods exclusively from a specified seller in the agreement”. Here, the buyer has been restricted to promote, buy or use similar products from any other vendor or provider. For example, Apple and Amazon were engaging in exclusivity agreements. The audiobook by the name ‘Audible’ is a subsidiary which belongs to the e-commerce giant Amazon. As per the terms of the agreement, Apple was not permitted to purchase digital audiobooks from other suppliers thereby making the whole agreement anti-competitive and Amazon stands in a dominant position. But later on the companies decided to end the agreement.

Another example to similar agreements is that which Google had entered with Mozilla Firefox, etc. Google had signed exclusive agreements with Mozilla Firefox, Opera and Apple Safari whereby in each of these browsers Google is the search default.

The abovementioned challenges are only a few out of the many which the competition authorities are dealing with in a digitalized economy. The problems and challenges are present at every level of the market operations. The competition authorities should focus more on generation of profits by the companies as well as their turnover. Further, the authorities should also observe the potential competitors who are in a position to steal profits from the incumbents.

Conclusion

As had been discussed, social networks, search engines and E-commerce are the main facets in a digitalized economy and only few firms are in domination of these areas. The leading firms will try to employ numerous methods to maintain that dominant position in the market. At times when activities which are anti-competitive or unfair emerge, the authorities are faced with the challenges to analyze them in a proper manner to identify their anti-competitive nature. The digitalized economy is developing rapidly; therefore, more tests and means to analyze such anti- competitive practices should be discovered and implemented for the benefit of the consumers and the market as a whole.


ABOUT THE AUTHOR

Aditya Kumar Tomar

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Aditya is a second-year LLM student from RGSOIPL, IIT Kharagpur. Prior to pursuing LLM, he was practising as an advocate at the Supreme Court of India.

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