Regulating Competition in Digital Markets: Proposing a Mixed Approach for India

[By Ridhi Gupta]

The author is a student of Rajiv Gandhi National University of Law (RGNUL), Punjab.

 

Introduction

The Ministry of Corporate Affairs in February this year, passed an order to create a Committee on Digital Competition Law (CDCL) to examine whether there is a need to have a separate legislation to regulate competition in digital markets. The report of CDCL is still awaited. The establishment of CDCL is not the first step taken by the Indian Government towards realising the need to regulate the digital space in order to ensure fair, free and healthy competition over the digital landscape. In December, 2022 the Standing Committee on Finance had suggested the need of enacting a Digital Competition Act and the revamping of the competition law regulator, by creating a unit specialised in digital markets, to monitor and deal with the issues involving Systemically Important Digital Intermediaries (SIDIs). Not only this, very recently in March this year, the Government introduced a Draft Digital India Act 2023 with an aim to replace the existing Information Technology Act 2000. This Draft Act also touches upon firstly, the need of ensuring an “open internet” where there is choice, competition, online diversity, fair market access and ease of doing business for startups and secondly, the need for amending the Competition Act 2002.

This article shall first delve into the observations made by the Standing Committee in brief, followed by an analysis of the methods adopted by different jurisdictions to regulate competition in digital markets and be concluded with suggestions and recommendations regarding the method India can adopt in this direction.

Suggestions of the 2022 Standing Committee Report

In its Report, the Standing Committee made a number of recommendations for regulation of the anti-competitive behaviour over digital space. These suggestions can be classified into three major categories:

  • A Digital Competition Act with Ex-ante regulations

The most significant recommendation made by the Standing Committee is the enactment of a separate legislation in the form of a Digital Competition Act to deal with competition law issues among digital markets. The Report distinguishes between traditional and digital marketplace by laying down special characteristics of a digital market including the prevalence of network effects, increasing returns to scale and the existence of only a few dominant players. A few dominant players utilising the network effects to maintain their dominance leads to what has been referred to in the Report as the ‘winners-take-all-markets’ phenomenon, wherein these players use their position to make it difficult for other players to enter the market, they stifle innovation and influence the behaviour of the non-dominant players, ultimately emerging as ‘winners’ having conquered the entire digital market. Giving consideration to these characteristics the Report emphasised the need to enact a separate legislation with ex-ante regulations for SIDIs, as opposed to the present regime of majorly ex-post regulations under the Competition Act, in order to prevent dominant players who are likely to abuse their dominant positions or indulge in anti-competitive conduct, before the digital market gets monopolized or conquered by such players.

  • Revamping the Competition Commission of India (CCI)

Another recommendation is the creation of a specialised Digital Markets Unit within the CCI to monitor and deal with the matters pertaining to digital markets. This unit would constitute of experts, attorneys and academicians skilled to deal with matters relating to SIDIs.

  • Regulation of SIDIs

Further, the Report opines the need for defining and determining the number of SIDIs in the digital market based on their revenues, market specialisations and number of active users. It suggests a number of regulations for SIDIs including regulations to control the usage of data by SIDIs and to ensure fair access to digital markets for all the market participants.

Methods Adopted by Other Jurisdictions: The Soft or The Hard Approach?

The disruptions to competition being caused by dominant digital players is not a new occurrence and it has been a while since the world has been facing this issue. Different jurisdictions have decided to tackle this issue differently. While some have opted for the soft approach, by making use of guidelines, reports and market studies, others have chosen the hard approach, by making amendments to existing laws or enacting laws. What is important is that each jurisdiction has made an attempt to choose the approach which helps it in tailor making a regulatory mechanism for the digital markets in their own countries. A brief analysis of the countries falling under these two approaches has been made as follows:

  • The Soft Approach

Jurisdictions like China, Japan, Brazil and Australia fall under this category. China introduced the Platform Guidelines in 2021, to regulate the competition issues over the digital space. These guidelines cover several significant aspects including what could constitute anti-competitive agreements or what could be an abusive conduct, when dealing in digital markets. Further, the guidelines also provide remedies in the nature of divestiture of data or modification of platform rules. Though Japan and Russia have amended their laws to regulate the digital markets, they have also been active in constantly publishing reports and guidelines to bolster their regulatory mechanism. Some jurisdictions like Brazil and Australia have conducted market studies and published working papers. Brazil, for instance, released two working papers, one of them being a summary of how other jurisdictions were dealing with digital markets, while the other summarizing the rulings of its competition regulator, the Administrative Council for Economic Defense (CADE) over digital platforms. Australia’s competition regulator Australian Competition & Consumer Commission (ACCC), on the other hand, has been taking out interim inquiry reports biannually, to support reforms and protect both consumers and businesses.

  • The Hard Approach

Jurisdictions like European Union (EU), Italy and Japan fall under this category. EU enacted the Digital Markets Act, 2022 to regulate the ‘gatekeepers’ acting as intermediaries between businesses and end consumers, to ensure fair and healthy competition in digital markets. Earlier in 2019, EU introduced a regulation to provide and promote a fair and predictable business environment for players over the digital space. Germany introduced the tenth-amendment to its existing law. This amendment introduces a new category of entities, namely, ‘undertakings of paramount significance for competition across markets’ and a set of new factors to assess the market power of players, such as access to data relevant to competition and intermediation power. Italy adopted the 2021 Annual law for Market and Competition, not dealing with digital markets in its entirety but introducing a presumption of economic dependence of business users on digital platforms and prescribing abusive conduct specially attributable to digital platforms. Japan enacted an Act in 2020, requiring platforms to maintain fairness and submit yearly reports to the regulator.

In an article titled, China and EU’s wisdom in choosing competition soft law or hard law in the digital era: a perfect match? the authors have enumerated how China and EU have adopted methods that suit their markets. While doing so, the article pinpoints two factors that lead to this distinguishing choice made by both these jurisdictions:

  • Characteristics of their digital markets

The article provides that EU’s digital market has a cross-border nature with 24 per cent of trade being cross-border and American tech firms like Google and Facebook holding majority of the market share. This makes the survival of local players in EU difficult. Further, since EU comprises of several states, some of which have started enacting regulations to regulate digital markets, absence of a national framework would result in legal uncertainty. China’s digital market, on the other hand, is a state with a unified market, dominated by its native players like Alibaba and Tencent.

  • Power vested in the competition regulators

In EU the treaties entered into with the states vest power in the EU, which is limited as the recommendations/opinions of EU have no binding force on the states. In China, the competition regulator i.e. the State Administration for Market Regulation (SAMR) derives its power from the Constitution and being accompanied by a highly centralised Government, SAMR is less likely to face issues of non-compliance despite adoption of soft laws.

Suggesting a Mixed Approach for India

With legislative steps being taken all around the world, Indian law makers must prioritise deliberating upon the manner in which India can regulate the competition issues in digital markets. After undertaking the aforesaid analysis, the author finds a mixed approach to be best suited for India – with the enactment of a central legislation, to specifically regulate digital markets supported by the publication of market studies and guidelines from time to time. This is primarily due to two-fold reasons:

  • Special features of digital markets

As noted above, digital markets are very distinct from the brick-and-mortar markets. A comprehensive law is required which defines important aspects from the specific point of view of digital marketplace. Some of these would include-

  • redefining the scope of anti-competitive agreements, and analysing whether agreements could still be segregated into horizontal and vertical ones given the existence of platform-based players. For this reliance can be placed on laws of other jurisdictions, like China’s guidelines.
  • defining a relevant market, and discussing whether a relevant market over the digital space could also be segregated into the product and geographical market.
  • formulating a list of indices like access to data, intermediation power and market share to determine how the position of strength would be defined for digital players, and what conduct would fall under abuse.
  • laying down thresholds to decide what would constitute combinations and whether there is scope for certain special exceptions, like de-minimis, for digital players as well. Germany, as noted above, has classified some entities as ‘undertakings of paramount significance for competition across markets’, while EU has referred to them as ‘gatekeepers’. The need for a similar classification in India, like SIDIs suggested by the Standing Committee, must be deliberated and it must be discussed whether falling under this category can be the threshold for combinations over digital markets.

As suggested by the Standing Committee, the regulations under this new Act shall be ex-ante, in respect of the entities falling under the aforesaid category, to serve two-fold purposes of firstly, preventing the prevalence of the winners-take-all-market phenomenon and secondly, enabling local players to enter the market, grow and innovate. A discussion paper of the OECD has studied the need and rationale for ex-ante regulations in digital markets in detail by pointing out the special characteristics of these markets including the network effect and has discussed the need to develop qualitative and quantitative criteria to determine the firms which require imposition of ex-ante regulations.

Furthermore, as suggested by the Standing Committee, the need for a Digital Markets Unit is indispensable, given specialised issues of digital markets that would require experts with specific expertise to tackle with these issues.

  • Resemblance with problems faced in EU

Just like EU, India too faces the issue of dominant foreign entities having control over majority of the market space, making it almost impossible for the local players to survive or even enter the market. In order to effectively promote and protect the local players, the Government will have to adopt the hard approach as a soft approach would not be able to hinder abusive or anti-competitive behaviour by those in a position of strength.

To bolster the new Act and to address the constant developments in digital markets, publication of market studies and guidelines from time to time would be effective.

Back in 2018, when CCI had delineated the relevant market to hold that online and offline markets constitute separate relevant markets, it was a major step towards recognising the non-interchangeability of digital markets with the brick-and-mortar markets. Within 5 years since 2018 the digital space has developed so significantly, that now it is time to regulate this separate market with a separate comprehensive enactment.

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