Digital markets must be defined well for competition regulation

Context: Digital markets operate differently than traditional markets. Hence, the rise of the digital sector has presented unique challenges for Indian regulatory authorities, including the Competition Commission of India (CCI).

Further, several issues emerging from the growth of digital markets are being analysed by regulators in other countries simultaneously, resulting in a lack of guidance from other jurisdictions.

There is growing demand, worldwide and in India, to hold digital platforms responsible and accountable for adverse impacts caused by them. This is evidenced by recent investigations initiated by the CCI into the operations of digital platforms such as Google, WhatsApp, Apple, Zomato, Swiggy, etc.

Proper assessments of relevant markets is needed, so that India’s digital emergence story doesn’t end up stifled by over-regulation.

How a relevant market can be defined?

The Competition Act of 2002 requires the CCI to define a ‘relevant market’ based on what is regarded as interchangeable or substitutable by a consumer (“Relevant Market Test”).

The factors required for consideration by the CCI while defining a ‘relevant market’ include

– the physical characteristics or end use of goods

– prices of goods or services

– consumer preferences

– Regulatory trade barriers

– Local specification requirements

What has been the CCI’s approach so far?

Until 2016, while defining a ‘relevant market’ for e-commerce companies and marketplaces (such as Snapdeal, Ebay, Yepme, Cloudtail, etc), the CCI viewed online and offline segments as different channels of distribution and not different relevant markets.

In 2018, when examining a complaint filed against e-commerce companies that alleged ‘abuse of dominance’ by way of predatory pricing and preferential treatment to certain sellers, the CCI diverged from its initial view and recognized the possibility of a distinction between online and offline segments.

In October 2019, the CCI drew a defined distinction in its prima facie order initiating a probe against MakeMyTrip by defining the ‘relevant market’ in its case as “the market for online intermediation services for booking of hotels in India“. This case is still under consideration.

What needs to be done?

Given the pace at which the digital sector is expanding in India, and the emergence of several issues prompted by this growth, it is essential that the CCI carefully consider the question of ‘relevant market’, and more particularly, the question of whether the online and offline distribution segments of such a market are substitutable in each case and industry.

A ‘one-size-fits-all’ approach to this question will prove unsatisfactory, given the large variation in business models today and the significant number of businesses that have add-on ‘online’ delivery channels.

Accordingly, the CCI should define a ‘relevant market’ in the digital sector by taking into consideration all substitutable and interchangeable products or services for each industry, including what’s available offline.

CCI should conduct market surveys to explore consumer preferences, habits and dependence on digital platforms, on a case-to-case basis. It needs to reach out to consumers on a wider scale and not limit its analysis to secondary studies or surveys.

Way forward

It is critical that the CCI’s approach in digital markets is well considered, consistent and proportionate, so that the digital sector gets space for growth while safeguarding the interests of competition and consumers.

Source: This post is based on the article “Digital markets must be defined well for competition regulation” published in Livemint on 16th May 22.