The peculiar technological and corresponding economic features of digital markets have rendered the ‘soft touch’ regulation largely insufficient.
Digital products and services are ubiquitous and have become more prominent due to the on-going pandemic that has restrained user mobility. While digital markets are at the core of the modern economy, it is by now evident that some form of intervention, in addition to antitrust, is needed to make them more responsive to consumer welfare. In usual market conditions, competition among players ensures low prices and innovation. As a result, consumers and the economy both benefit from this rivalry. To ensure that the process of competition is fair and robust, free markets choose a ‘soft touch’ regulation in the form of competition law. The peculiar technological and corresponding economic features of digital markets, however, have rendered this ‘soft touch’ regulation largely insufficient. As witnessed in a series of antitrust cases against big tech firms such as Microsoft, Google and Facebook, the antitrust enterprise was found struggling for various reasons.
Products in digital markets are often built on self-learning algorithms that feed on big data. In the Artificial Intelligence (AI) ecosystem, big data is considered the most vital input and, therefore, players compete to have access to the same. Multi-sided business models facilitate access to user data by offering services for free to users while charging the other side (mostly advertisers). These markets often experience high entry barriers in the form of network effects (both direct and indirect), economies of scope and massive investment requirements. Resultantly, such markets quickly shift to the monopolistic structure. Even if there are competitors, they are largely insignificant. It is, therefore, no surprise that most of us are regular users of Google (Internet search), Facebook (social media), and Amazon (online shopping).
A dominant market position, in itself, is not a problem. Should a firm abuse its dominant position, for instance, by excluding its rival, competition law may step in and prohibit such conduct. However, as experience suggests, the competition enforcement machinery is too slow in such complex technological sectors and by the time effective orders are passed, the market may already ‘tip’ in favour of the delinquent firm. For instance, the European Commission’s (EC) investigation into Google’s anti-competitive practices in online shopping took seven years to produce an order.
Further, the importance of some platforms has made them de facto ‘gatekeepers’ to certain online markets, in that they determine the terms of access to users. Interestingly, in digital markets, a firm may adversely affect competition even below the dominant position. The Furman report in the UK identifies a platform having a Strategic Market Status (SMS), which is below the dominant position, as the right candidate for ex-ante regulation. In addition, certain platforms act in a dual capacity — not only do they act as facilitators, but they also compete with the other businesses in the verticals they facilitate. Google and Amazon both provide platforms to businesses, but have their own competing businesses in the downstream— a ready recipe for self-preferencing.
After much debate, some jurisdictions have started moving towards regulating big tech firms. The UK is establishing the Digital Markets Unit to this end. More concrete steps have been proposed in the EU, where the European Commission has come up with a proposal for a Digital Markets Act, which intends to ensure contestable and fair digital markets through a set of ex-ante regulations for digital gatekeepers. Under the Act, a firm will be designated a ‘gatekeeper’ if it:
• has a strong economic position, significant impact on the internal market and is active in multiple EU countries
• has a strong intermediation position, meaning that it links a large user base to a large number of businesses
Some of the salient obligations with which a ‘gatekeeper’ will have to comply are:
• A prohibition on combining personal data of users sourced from different services provided by a gatekeeper unless the user consents to the same.
• A prohibition on ‘wide’ price parity clauses or Most Favoured Nation (MFN) clauses. This means that online businesses can offer prices or conditions through third party online intermediation services that are different from those offered through the online intermediation services of the gatekeeper. In the recent past MFN clauses (both ‘wide’ and ‘narrow’) have been a cause of massive legal uncertainty.
• Allow business users (for instance app developers) to independently provide services to users that have been acquired through the services provided by a gatekeeper (for instance Operating Systems). The Competition Commission of India (CCI) has ordered an investigation against Google on similar facts.
• Prohibition on bundling core services of a platform.
• A prohibition on using non-public data of a business user or end-users. This implies that platforms such as Amazon can no longer use the commercially sensitive non-public data of manufacturers and users that can give competitive edge to Amazon’s own brands.
• A prohibition on preferring a gatekeeper’s own services over that of competitors.
• Provide effective data portability facility to end-users.
• Prohibition on preventing users from un-installing any pre-installed software or app.
Efforts to reign in digital gatekeepers are underway in the United States (US) as well. While once at the forefront of antitrust enforcement, the US witnessed a decline in monopolisation cases over the past few years. This, however, seems to be slowly changing. A report by the US House Subcommittee on Antitrust makes certain progressive recommendations to ensure that digital markets remain contestable. After a long lull of almost two decades, two monopolisation cases have been brought against Google and Facebook in the US. Notably, these are antitrust cases and the road to ex-ante regulation appears long.
India is a prominent market where tech firms, both domestic and foreign, are jostling for space. The antitrust issues that have arisen elsewhere have resonated in India as well. There have been five cases against Google before the Competition Commission of India (CCI) ning search, Android OS and Play Store. Indian antitrust authorities are also investigating Amazon and Flipkart for exclusive sale of certain smartphones. The E-commerce market study by the CCI also flagged several concerns of Indian stakeholders in the e-commerce market, such as platforms not acting in a neutral way, unfair contract terms, use of price parity clauses, exclusive agreements, and deep discounts.
While the CCI is doing its bit to ensure fairness in digital markets, a need for some form of regulation is already felt. In its e-commerce market study, the CCI has mentioned the need for marketplace platforms adopting self-regulation to ensure transparency concerning search ranking; collection, use and sharing of data; user review and rating mechanism; revision in contract terms; and discount policy. This form of regulation, however, falls far short of preemptive ex-ante regulation that the EU has suggested in the proposed Digital Markets Act for ‘gatekeeper’ platforms. Consequently, India should adopt binding ex-ante regulations for digital ‘gatekeepers’ to ensure market contestability for businesses including start-ups and fairness for users.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Vikas Kathuria was Fellow at ORF. He researches and writes on tech policy and competition law.
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