Does the single policy framework work for online, offline, and hybrid businesses?
Technology is helping business models to converge, however, it is inconceivable that a single e-commerce policy framework is being considered for different sectors on the online platform such as retail, media, entertainment, food and travel. The expert market regulator, the CCI, should have carried out stronger and more sophisticated market analysis for policymakers to use as a basis for understanding market dynamics and competitive constraints. To be futuristic, e-commerce policy must be seen through the prism of competition and not designed around threats to old, inefficient business models.
The new online startup economy has attracted customers because of their effective technology solutions and unique business models. A major criterion of investment in the digital economy is due to its potential to disrupt the value chain in several ways like connection, organization, interaction between customers and service providers, at reduced costs and especially by bringing transparency to the transaction.
The online platform has raised issues that regulators like India’s Competition Commission (ICC) and Department of Industrial Policy and Promotion (DIPP) need to address urgently due to the huge investments involved. This article focuses on the range of opportunities that competition regulation opens up as well as the regulatory risks it poses to stakeholders.
Competition policy encourages innovation and the easy entry of new players. Thus, a disruptive business model, even if it suddenly gains in dominance, is not challenged by the regulator (CCI), unless it abuses its dominance to create barriers to entry.
However, how can competitors in the traditional market who must comply with laws and regulations allow new disruptive businesses to develop without questioning their legitimacy. Therefore, soon after the valuation of online markets started to rise, since 2014, there have been constant legal battles in ICC, DIPP and High Courts all over India.
The entry of Flipkart and other online retailers, ostensibly called marketplaces, has proven disruptive for brick-and-mortar businesses. Physical businesses have felt threatened by the pricing strategies of Flipkart and other e-tailers. The Confederation of All Indian Traders (CAIT) and other retailers have informed the CCI that brick-and-mortar stores are being driven out of the market due to “predatory pricing” by Flipkart and other similar online portals.
The ICC found that online stores and physical stores broadly constitute a single market and are only separate channels belonging to the same relevant market, although it noted that offline and online markets differ in terms of discounts and buying experience and that buyers evaluate the options available in both markets before making a decision.
Contrary to this view, in a similar allegation against Ola by its competitor (Fast Track) for “predatory pricing”, the ICC narrowly defined the market as “radio-taxi services”. , a market definition that did not include traditional taxis and found that Ola was predatory pricing and ordered the chief executive (CEO) to investigate in April 2015.
Usually, disruptive technology solutions offer cost and efficiency advantages, which is encouraged by competition law. CCI considered different parameters to assess the respective markets of Ola’s taxi aggregator service and other e-tailers. Any harm to competition is related to a particular product/area. Thus, a sophisticated market analysis involves precise economic parameters to decide on the abuse of a dominant position in a defined “relevant market”. The idea of creating a competition regulator is to make competitive markets work, not to stifle competition at the expense of inefficient competitors.
The ICC rulings leave open some pertinent questions, particularly on economic considerations, regarding the analysis of the impact of online versus offline businesses on the market. As an expert in market regulation, the ICC has not specified how market power is assessed or how markets are adversely affected. More and more, the challenges would increase due to different interpretations.
These antitrust cases against online market players such as Flipkart/Snapdeal and Ola/Uber provide two lessons for growing tech companies:
First, when disruptors enter the market and gain momentum, incumbents fight back and collude to find ways to prevent competition. Classic examples are Microsoft’s operating system dominance case, Apple’s e-book case, and Google’s AdWords case.
Secondly, the decisions of the Indian competition regulator – ICC, show how essential it is to define the market correctly to assess market power and how easy it is to confuse the notions of “competitor protection” with those of “ protection of competition”.
Apart from CCI, the retailers had filed parallel lawsuits in the Delhi High Court alleging violation of Foreign Direct Investment (FDI) policy standards by e-commerce portals. The FDI policy announcements in Press Note #3 (March 2016) do not fully validate the online business model used by major e-commerce entities in India. It imposes restrictions, including on sales through a single seller (or group companies), discounts/other types of pricing. So the devil is in the details.
Without clarity in FDI policy, there would be regulatory challenges with significant consequences on how e-commerce entities operate in India. Short-term regulatory changes are detrimental because they cannot cover long-term investments with piecemeal measures. More importantly, the regulator’s enormous discretionary powers to place adverse orders can erode brand value.
In the absence of reasoned and consistent conclusions from the ICC on the legitimacy of these online actors, they risk facing legal battles before the ICC and the courts. For example, the Karnataka High Court recently upheld the state’s right to set rules for ride-sharing apps. Maharashtra has set similar guidelines for taxi aggregators. Delhi and West Bengal are developing rules, as is the Union government. Although the taxi aggregator’s pricing is more transparent and beneficial to the customer, Ola/Uber would be forced to cancel the benefits.
The competitive environment has pushed online players to shape their strategies to gain momentum in terms of customer retention, sales, etc. They spend millions on marketing and branding. Regardless of valuation strategies, there is an apparent tension between regulation and market competition. Regulators are not equipped to deal with the disruptive entry of new business models, making it difficult to overcome regulatory challenges. If the legitimacy of their business models was unclear, investments would be risky. A complex question, for example, is whether online market players should be subject to the same regulatory regime as offline players or whether two separate regimes should be tailored to their unique characteristics. Another question is how online markets can coexist with traditional markets so that competition is not negatively affected.
While these “e-commerce businesses” face a variety of similar legal issues faced by traditional brick-and-mortar businesses, they are resisting regulations. However, they must manage their challenges with an awareness of divergent regulatory approaches. The range of legal issues to consider and manage continues to grow, and ignoring this reality could lead to financial liability, regulatory penalties, or unauthorized exploitation of a company’s intellectual property.
It is not possible to be a sustainable business in an unsustainable political environment. All business models depend on certain external conditions. The most important of these are the economic policy and regulatory framework of a country.
E-commerce businesses have two options. The first option is to face many years of litigation and regulatory risk, until they are able to operate legally. The second, and preferable, option is to proactively plan how to deal with areas of regulatory risk – starting with making it an important agenda item in board discussions as well as an important point of due diligence when seeking investment opportunities in India.
Today’s environment demands sustainable plans today that anticipate market changes in the future and can operate with minimal regulatory risk.
It is a conceptual strategy and policy document that was first published in 2016, firstpost.com. The author is an expert in competition, business and regulatory practices and is part of MiNDTeam– management consulting firm specializing in technology and business strategy, policy and compliance)
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