Seeds of Disruption: How India’s Proposed Digital Competition Act is Cultivating Innovation in the Startup Garden?

[By Vanshika Arora and Kritika Oberoi]

The authors are students of Army Institute of Law, Mohali.

 

Introduction

India is on the verge of formulating a Digital Competition Act (‘DCA’) however we are experiencing a divide in opinion with respect to the relevance of a special regulation, given the supposed sufficiency of the present regulatory framework.

On one end of the spectrum lie proponents of an ex-ante framework who are mulling around the enactment of an enabling, comprehensive regulation (DCA) that embodies the quick tip, fast-moving nature of the platform economy. On the other end of the spectrum, there is discourse regarding the redundancy of this exercise, and the adequacy of the current regulatory mechanism, in addressing issues arising out of the digital ecosystem. There is also debate on the probability of amendment in the current regulatory framework, inter-regulatory coordination, and the creation of a Digital Markets Division within the Competition Commission of India (‘CCI’), to affix accountability on a single identifiable body. We explore the polar ends and the grey areas of this spectrum through the lens of innovation in the start-up ecosystem. Ultimately, through this piece, the authors intend to shift the attention towards innovative competition with a special focus on the startup ecosystem hoping that a discourse to meet that end spurs in the antitrust community.

This article hinges on pertinent questions that address the relationship between competition and innovation. To what extent can antitrust intervention and regulation promote innovation in digital markets? Should this intervention necessarily come through a peculiar regulation? We start by assessing why digital competition should be understood from a lens of innovation, now more than ever. We next delve into the context of innovation in India and highlight gaps in the existing regime. Lastly, the authors propose a way forward.

Understanding Innovation: Why Bolster a Conversation about it?

Innovation is the focal determinant of progress and welfare. We believe that the core goal of competition law should remain consumer welfare, through innovation in the digital markets landscape. The relationship of innovation and competition was addressed first, by Schumpeter and Arrow. Schumpeter popularized creative destruction (disruption of the market through innovation). He was a proponent of monopolistic innovation and believed that monopolies and larger firms have more incentive and resources to innovate, hence are the face of an innovative, disruptive economy. While Arrow argued that competition between incumbents and entrants favors innovation. Beyond the Schumpeter-Arrow debate, proponents believe that antitrust intervention can promote innovation competition and pre-innovation competition in the product market, by targeting types of conduct across industries.

Hence, integrating innovation in the competition policy practice is important as innovation is the key engine of economic development and a major driver of growth, employment, and prosperity in a national economy. Promoting innovation is a central feature of the antitrust law, with antitrust practitioners in recent decades addressing pertinent issues such as: whether incentives and possibilities to innovate can be negatively influenced by changes in the market structure resulting in an entrenched position of an incumbent, in the market or whether an incumbent’s powerful market position can be challenged by innovative competitors.

Because of the significant adverse repercussions of the ‘innovation discouraging’ approach, any competition policy must be very cognisant of the role played by innovation in preserving the dynamism of markets. As innovation plays such a significant role in an economy, competition policy needs to be streamlined in order to promote innovation and ensure an atmosphere for innovators to generate faster and shared growth.

Innovation Competition in the Indian Context

The discourse regarding implications on innovation is relevant in the Indian context because of the backlash to the prevalent legislative deliberation regarding a prospective special regulation for platform economy. This article assesses the various avenues of antitrust enforcement and intervention in the Indian digital platform economy.

Inadequacy of existing regulatory framework

Maximizing innovation is possible by addressing not only the anti-competitive practices of the big tech platforms but also the entire competitive ecosystem, mindful of small-tech innovators such as startups and SMEs. There are certain regulatory gaps in the present scheme of available framework. While addressing anti-competitive conduct, specific to the digital economy, the market regulator has to account for the unique features of the digital platforms. CCI in a host of cases, traveling from Ashish Ahuja v Snapdeal to the recent MMT-Go case, has identified the peculiarity of these platforms which includes network externalities, economies of scale, etc. The Competition Act, 2002 is not adept in either establishing abuse or delineating relevant markets through Sections 19, 4, and 5, in this regard. The Competition Law Review Committee in its 2019 Report has suggested a re-look on factors enlisted under Section 19, to include accounting factors for digital platforms such as the creation of network externalities.

While Section 4 accounts for abuse through ‘Predatory Pricing’ and contains sufficient safeguards for the same, there is no regulatory framework to address ‘Predatory Innovation’ (a rising anti-competitive conduct). Therefore, in order to fill this regulatory void, a unique regulation is indeed a pressing priority. A word of caution however, is that such a regulation should not be a blanket, non-consultative copy-paste of the EU Digital Services Package, but should be remolded to the Indian fabric and local market conditions.

The present discourse regarding a prospective special regulation is heavily inspired by the Report of the Standing Committee on Finance. However, this report pivots on the EU standards of Digital Market regulation and is unfortunately not nuanced to the Indian market fabric.

A Digital Competition Act, dressed in the clothing of the EU Digital Markets Act, is inexpedient to the perspective of innovation in the Indian conditions, because of the foregoing reasons:

Overregulation

Ostensibly, if the antitrust regulator acts like an autocrat, large firms will be tempted to reach accommodations with the government in exchange for not being broken up. Those accommodations will usually include protections and guarantees that act as entry barriers against potential innovative challengers resulting in less competition, fewer innovations, and lower consumer welfare. “Excessive anticompetitive government regulations are like thousands of Lilliputian threads that tie down economies and stifle creativity. Entrepreneurs naturally will embrace warmer climates and avoid the islands of Lilliput that overflow with red tape.”

Ex-ante approach

The proposed one-size-fits-all approach (in the DCA) that presumes anticompetitive conduct based on the nature of the industry is criticized as there is a genuine risk of reaching the wrong conclusion by abandoning the approach of taking decision on a case-by-case basis. There is a high probability that such an approach will adversely affect the flow of goods, services, investment and technology within the country and deny consumers the benefits of competition and innovation.

Therefore, where there exists sufficient ex-post regulation, it can only come to fruition when coupled with ex-ante regulation, that could lay a ‘code of conduct’. There exists a regulatory vacuum in this regard. UK’s Ofcom has noted that in absence of ex-ante regulations earnest to digital platforms, gatekeepers platforms (or SIDIs) may escape scrutiny. Hence, a comprehensive and enabling regulation that integrates scattered fragments and is specifically designed to address the fast-tipping digital markets, consisting of gatekeeper platforms is the need of the hour. Innovation within the competitive fabric can best be propelled through a comprehensive regulation, such as the proposed DCA, mindful of the unique local conditions of the Indian market. With respect to innovation, the question of whether competitive policy can increase or regulate innovation hinges on evidence. The assessment of innovation and the effect of competitive policy rests on econometric studies and descriptive statistics. Apart from the re-examination of the current regulatory framework, the anti-trust regulator has to bolster its advocacy and market studies.

Overlapping

The CCI is an agnostic regulator, whose expertise spans across industries. However, the current regulatory mechanism is amorphous and fragmented with multiple regulators. The regulation of digital markets might become cumbersome because of possible overlaps between the 10 Anti-competitive practices (proposed to be included in DCA) and existing policy instruments, including the Consumer Protection Act, 2019 (CPA), upcoming digital laws like Digital Personal Data Protection Bill, 2022 (DPDP Bill) and the Proposed Amendments to Consumer Protection (E-commerce Rules) etc. These several instruments regulating e-marketplaces do not possess a stringent competitive lens. There exists a lack of interoperability and coordination between these regulators, which gives rise to prospective over-laps in regulation.

An example of this overlap is in the case of Data Usage which will be regulated by Draft E-Commerce (Amendment) Rules. Clause 6 (6) (a), (c) [overlaps with the recommendation regarding restriction on unfair advantages from data usage] and Clause 5 [DPDP Bill considers consent as a legitimate tool to determine reasonable processing but the Standing Committee’s recommendation restricts even some forms of consensual processing.]

Such overlapping will hamper innovation as entities may find it challenging to meet the compliance standards of these regulations. It will also lead to compliance uncertainty, regulatory arbitrage and the feeling of over-regulation.

Regulatory Costs

If the regulatory costs are significant (which can be the case in DCA), they may negatively impact firms’ expenditures on R&D and other innovative activities as firms may divert resources away from pursuing these innovative activities and towards meeting the regulatory standards. The multiplicity of regulations will also increase the compliance cost which in the case of start-ups, could cause an entry barrier.

Big Tech Acquisitions and Innovation

The Finance Committee report expressed concern over ‘killer acquisitions’ impacting innovation. However, the authors believe that mergers and acquisitions are not only ‘killer’ though the theory may seem intuitive. Evidence suggests that killer acquisitions are a rare phenomenon. While killer and reverse killer acquisitions threaten the innovative competitive landscape, acquisitions have several positive effects on the market as a whole. Acquisitions enable synergies between the incumbent and the entrant and act as a ‘push’ factor for faster and impactful innovation. The acquirer further develops on the entrant’s innovative model and delivers it to a larger target audience, hence setting in motion, consumer welfare. Assessment of acquisitions and merges can be most efficiently done through a dedicated digital markets unit, which can act as the ombudsman for monitoring conduct in digital markets.

Conclusion: A way forward

We understand that contestability in the market, which is marked by a regular threat of entry, is a natural incentive for firms to continuously innovate. Hence, the primary focus of the anti-trust regulator should be on the non-contestable markets, or markets where contestability is limited, so that innovation grows. In any case, pro-competitive regulations within the digital market should be subject to review at regular intervals. Secondly, the fair play regulator should undertake to understand the role of innovation in digital markets and develop tools to assess the impact of innovation. We believe that a brute merger regime would hamper innovation synergies, post-merger innovation and extinguish the possibility of acquisitions to promote innovative competition.  Any assessment of anti-competitive practices should be done on a case-to-case basis, without taking recourse to a preordained regulatory mechanism in digital marketspace, considering the repercussions of this stringent approach on innovation and ease of doing business. While the debate is spurring and the Internet and Mobile Association of India (IAMAI) has argued against the requirement of a Digital Competition Act, it will be interesting to note how the story unfolds in the coming months.

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