[Ed Note: The following post is part of the TLF Editorial Board Test 2019-20. It has been authored by Sanchit Khandelwal, a second year student of NALSAR University of Law.]
The last decade has been marked by the emergence of technology and innovation driven industries, mainly in the form of start-ups being turned into massive capital infused giant companies in no time because of the peculiar characteristics of this sector. This technology and innovation driven sector, also known as new economy sector needs to play the kind of role what the real estate sector played in first decade of the 21st century, to create employment opportunities like what the real estate sector did when large chunk of population from diseased states abandoned farming and made their way to urban areas in search of work and earn livelihood but at present times when real estate sector has been under severe crisis for a long time, experts see these high technology companies as rescue to the present dismal employment scenario. Contrary to the common notion of technology being inversely proportionally to employment opportunities we now have before us several examples in form of Uber, Ola, Zomato, Paytm, Amazon, Flipkart, Jio, etc. that these tech companies if provided required capital and an environment to sustain and grow can provide good number of employment avenues to semi-skilled and highly skilled labour.
Key features that set these new economy firms apart from traditional or ‘old economy’ are high rate of innovation and rapid innovation changes, increasing returns of scale and network effects. Continuous innovation and low entry and exit barriers, including in the form of regulatory requirements, have enabled the rapid growth of Internet-based businesses. The phenomenon of increasing returns is there because these industries experience higher fixed cost (investment in research and development or creation of a physical or virtual network) and relatively lower marginal costs. The most important of all is the network effect, which occurs when the benefit that a consumer derives from a product or services increases with an increase in the number of other users.
The increase in the presence and importance of these new age companies calls for regulatory measures for their smooth functioning as we have experienced that some technology-driven businesses are prone to the acquisition and abuse of market power by the established financially backed market leaders. Armed with the capital generated by the investors’ desire to load the start-ups up-front and expedite customer acquisition, online start-ups are engaging in a range of practices to facilitate the tipping of the market in their favour. The resulting monopolistic or oligopolistic market structure arising from the entry barriers created on account of network eﬀects, coupled with the exit of eﬃcient competitors from the market, cannot be easily self-corrected by market forces. This should be a matter of concern for competition authorities. I argue that the existing competition law regime in India needs to be fine-tuned for technology-enabled markets with significant network effects, to address the possibility of new kinds of abusive conduct. The Indian Competition regime is an evolving one and has only recently started facing such concerns, therefore the need for some tangible reforms on the part of the Competition Commission of India (CCI). I argue that there are grounds for concerns about the harm to competitive dynamics from these new business strategies, also at the same time what is should be kept in consideration is to avoid intrusive interventions that brings the state into excessive involvement in the world of business.
Concerned authorities should take into account the distinct economic features of certain high-technology businesses when looking into allegations of anti-competitive practices or conduct by them. An extensive economic analysis of the impact of increasing returns to scale, and network effects, is required for understanding the present and future impact of these practices on competition and consumer interests.
The modern age technology and innovation driven companies are characterised by the availability of significant capital resources to support the funding requirement to achieve a head start in the race to deliver a useful product or service, which will be rewarded with windfall gains as financial investors understand the impact of network effect upon profitability. To get the gauge the effect of network effect on the return on investment we have several recent examples before us, for instance Sequoia’s US$ 8 million investment in WhatsApp in 2011 is reported to have translated into about US$ 3.5 billion of returns when the latter was acquired by Facebook in February, 2014. Financial investors are in quest for business models that contain network effects, and the market power that they confer. In the last decade, India was home to Private Equity investment of over US$ 27.6 billion in the IT and IT enabled services sector. Softbank (Japan), Tiger Global, Nexus venture Partners, Alibaba are some of the major deep pockets funding Internet businesses.
It is because of such chunk of capital infusion and confidence by the investors that these firms are ready to bear heavy losses through heavy discounting practices and it is testimony to the value that these businesses expect to gain from ensuring early control over the market. The combined losses of India’s top ten e-commerce companies quadrupled in the financial year 2014-15 to a total of Rs. 51.5 billion. The global taxi company ‘Uber’, using financial capital as a competitive lever made worldwide losses in the first half of 2016 of US$ 1.27 billion. On a similar note, the Indian taxi company ‘Ola’ reported a net loss of Rs. 7.96 billion in March, 2015.
Practices like deep discounting and cash back offers be aimed at building sufficient scale in the market to ensure that the business is able to sustain and capture future market to the exclusion of other competitor has created new barriers to competition. It is difficult to rationalise these prolonged losses as being an introductory offer by a new entrant. Instead these practices appear to be a systematic competitive strategy. This give rise to concerns that the market may eventually tip in favour of the player that may not necessarily have the most innovative product or service, but one that succeeds in obtaining more capital and enticing more users in early days using predatory pricing. However, any form of discounted pricing by an online business should not always be frowned upon as being predatory. The question that we need to ask are what is the conduct in question, for how long is it carried and what will e its ultimate impact on competition in the sector? While prima facie it may seem beneficial for the customers in the short run, such practices raises concerns about competition on account of the creation of market power and elevated prices for customers in the following years when losses are recouped. In case of investigation of charges of predatory prices CCI should adopt the recoupment test, which examines the extent to which market power can be achieved in the future, after which prices can be raised to recover the long sustained deep losses.
The commission needs to take into consideration that the cost structure of the network industries is different from other traditional industries, allowing players to adopt innovative pricing strategies. It is the responsibility of CCI to access whether the average variable cost is an appropriate standard for examining the pricing strategies for business driven by technology and innovation and if not, then what?
Also, an existing player with a significant large customers base may resort to unfair practices like restricting the competitiveness of other firms by making sure that rival products are not compatible with its own. To take an example, Google was charged for making its advertising platform Google AdWords incompatible with competing ad platforms. Similar concerns were raised in case of digital payment platforms where absence of interoperability between players lead to concentrated networks, thus enhancing monopoly powers and hampering the widespread adoption of digital payments. The CCI could, however, in appropriate cases, use its powers under the Act to mandate interoperability by a dominant player that is found to be indulging in an abuse of its position.
Another issue which hampers the spirit of competition driven by free and natural forces is Horizontal shareholding, where a common set of investors own significant shares in competing firms in concentrated markets, have the potential to reduce the incentives of the firms to compete with one another. for instance, both Oppo and Vivo operating within the same price range of smartphones industry are backed by the same investor, Tiger Global Management LLC has invested in a number of taxi aggregation companies such as Ola in India, Didi Chuxing in China and Grabtaxi in Singapore. Tiger Global also has significant stake in Uber Technologies, the direct competitors of each these taxi companies, which hints towards direct potential conflict of interest. New economy firms as a part of their strategy to consolidate their market share, eliminate potential threats or expand into new lines of business often resort to mergers and acquisitions. If it can be proved that the two or more investors have entered into an anti-competitive agreement to influence prices or supply of products, then it would call for the scrutiny by the CCI under section 3 of the Act. When the ulterior motive behind such merger or acquisition is to eradicate competition, the CCI could also follow the lead of the European Court of Justice (ECJ) in reviewing such agreements under the section 4 of the Act.
In general, the CCI approach involves identification of relevant market, establishing whether the company in question is a dominant player in the market, and then an assessment of abuse of dominance. However, the Raghavan Committee (2000), the basis for the enactment of the Act, was of the view point that “The law should ensure that only when dominance is clearly established, can abuse of dominance be alleged. Any ambiguity on this count could endanger large efficient firms”. Therefore, it is important that the market reports being to assert dominance of an Internet based business should follow a robust, concrete and consistent methodology of data collection, analysis and scrutiny. Also, CCI using the statutory powers bestowed to it should call for information from the respondents from the initial stage itself if doing so could allow the commission to get a better approximation of their actual market shares.
The concerns about the elapsed time between a full-fledged investigation and the determination of a violation are something to ponder upon by the CCI. Therefore in light of these concerns it seems that CCI should implement some suggested reforms like adopting stricter time frames for the disposal of cases, a voluntary settlement process that allows the company under scanner to voluntarily alter its market conduct, with the concurrence of the authority but without the need of a conclusive finding of violation by the CCI and a separate wing to deal with any kind of anti-competitive conduct before the accused company reap the benefits in form of increased profit, increased market share, etc. In the context of a settlement entered into between the parties pending an investigation before the CCI, the Madras HC held that it is possible within the ambit of the Act to allow settlement and compromise to be reached between parties.
Competition law assessment of industries in the new economy should necessarily be grounded in a deep understanding of the economic features of the markets in question. Since we are well aware of the fact that markets with network effects tend to be natural oligopolies, hence the most efficient outcome may be for the market to be dominated by a few firms but it is the duty of the concerned authorities to ensure that winners are determined by the market forces and not by the exclusionary practices. Excessive intervention by competition authorities may leave ﬁrms with less incentives to innovate. Assuming presence of substantial funds to be unfair could prove to be counter productive as that can chill the inflow of investments into one of the most dynamic and potential sectors of the Indian economy. In toto since the competition law regime in India is an evolving one it is the duty of CCI to make our competition laws to be future ready which will facilitate further investment, continuous innovation and fair play in the market.
 Smriti Parsheera, Ajay Shah and Avirup Bose, The nature of competition in online businesses, Competition Issues in India’s Online Economy (May 29, 2019, 4:32 PM), https://www.nipfp.org.in/media/medialibrary/2017/04/WP_2017_194.pdf.
 Smriti Parsheera, Ajay Shah and Avirup Bose, Implication for competition in the sector, Competition Issues in India’s Online Economy (May 29, 2019, 4:32 PM), https://www.nipfp.org.in/media/medialibrary/2017/04/WP_2017_194.pdf.
 Smriti Parsheera, Ajay Shah and Avirup Bose, Brain versus Brawn, Deconstructing the competition issues in India’s online economy (May 29, 2019, 4:18 PM), https://qrius.com/deconstructing-the-competition-issues-in-indias-online-economy/.
 Supra 2.
 Supra 2.
 Smriti Parsheera, Ajay Shah and Avirup Bose, Determination of dominance, Competition Issues in India’s Online Economy (May 29, 2019, 4:32 PM), https://www.nipfp.org.in/media/medialibrary/2017/04/WP_2017_194.pdf.
 Smriti Parsheera, Ajay Shah and Avirup Bose, The way ahead, Competition Issues in India’s Online Economy (May 29, 2019, 4:32 PM), https://www.nipfp.org.in/media/medialibrary/2017/04/WP_2017_194.pdf.