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#NAMApolicy on the E-Commerce Policy: should network effects be regulated?

“So they’ve they’ve assumed that everybody is an Amazon or Flipkart and they’ve come up with a policy trying to curtail and regulate that and they want to try and apply it across the board. This is just a vision, so to say, but this vision doesn’t make distinctions based on the actual harm that an entity could cause because of their size.”

The #NAMApolicy discussion on the draft E-Commerce Policy released by DPIIT got into exactly how the Policy intends to regulate e-commerce entities, and brought up Policy’s has repeated mentions the phenomenon of network effect, and the need to regulate for it, while failing to even define the term, or explain what this entails. The panelists and audience at the discussion helped shed some light on what outcomes the Policy might have been trying to achieve in this regard. The discussion was supported by Amazon.

Definition and Impact of Network Effect

Smriti Parsheera of NIPFP explains that the Policy has not taken the necessary time and space to explain what exactly it entails and and the problems it brings to the Indian e-commerce market. “Network effects are basically a market or a situation where my value of utilising a particular product or service increases with the number of of other users of that service. So this could be direct like in the case of social media, Facebook, telecom networks etc, where more and more users similar to me are using the service, I can call more people, contact more people, this increases the value for me. Or it could be indirect. Which is more relevant in the case of platforms or the online economy, where you have models such as marketplaces or Uber and Ola where there is an intermediary and while it’s not that the number of riders increases and my value of using it increases, but the number of drivers — when the opposite side of the platform increases in size, that increases my value.”

Data Network Effect

“What this policy however is also talking about is data network effects. Many businesses that have a lot of data, and this data compounds the value of these businesses and that data has become ‘capital’ in that sense. And you see that in something like Google search. Lots of other people using Google search doesn’t directly benefit me, I’m just satisfied with my own search. But the fact that a lot of other people are doing search and are generating data and feeding into the search algorithm means that when I do my search, search results will come much faster. And this is I think one of the basic features of the new economy. So to call it is the fact that it does have network effect. And it isn’t something per se wrong or something that needs to be curtailed through policy or controlled. Having said that, there could be cases where these network effects amount to such a scale where it could amount to conditions of abuse of dominance coming into the market and that brings us to the point of ex-ante controls versus ex-post controls.”

Ex-Ante and Ex-Post Regulation

“Ex-ante is when you try to make rules and regulations before an act has occurred. You preempt that something is going to go wrong or some kind of bad conduct is going to happen and you make regulations around it. Ex-post is when the conduct has taken place and you have an authority like the Competition Commission which says that there has been an abuse of dominance in this particular market, now let me investigate, was Amazon a dominant player in this market, did it do something which abused its dominance, and now what kind of action do I want to take to fix that.”

One of the main problems for me from this policy is the fact that if you try to do over regulation ex-ante what is going to happen is people who have already taken a lead will retain that lead because an Amazon, a Flipkart, a Facebook is always going to be able to comply with whatever policies are going to come up. Now it’s a new player who wants to come in today who will have the same kind of regulation, which is at par, because this policy is not making a discrimination based on your size, your resources, it’s not trying to say, you know, it’s a risk based regulation of some sort.

Arjun Sinha of Cantor Associates agrees on this point, adding: “What are the harms that you’re perceiving out of this data? I think they need to be articulated a little bit more into exactly what situations you’re talking about. [The Policy says] that few companies may have ability to access products on the internet. So we will regulate the fees that they will charge to access that product. It is assuming that some people have the monopoly, that nobody else will be able to grow.”

It would be better — at least I mean, it will be an easier process to actually study what is the harm that has been created, create a principle to regulate against it, and then regulated ex post, which is after the harm has happened, try to create a penalty credit rating system of policy around it.

Measuring Market Power and Relevant Markets, Role of Competition Law

On a related note, audience members brought up questions on how to evaluate market power for the purpose of enforcement of competition law. Kalyani Singh from Chandiok and Mahajan points out: “The Policy starts alluding to the fact that data is something which is an essential facility for someone to operate in a market. Now exactly where you want to define this market? What is the kind of market that you’re talking about? Because the Competition Commission of India has looked at Facebook, Amazon, Google, Snapdeal, Uber, Ola, all of them, in different markets, has looked at it in terms of whether they have market power in those markets or no. This policy at this point of time seems to put all of them in one single consolidated market where they’re not competitors with each other. Facebook arguably does not compete with Amazon and vice versa. How are you going to deal with any competitive issues if you don’t define the starting point of that?”

Parsheera draws a distinction between regulation of e-commerce and of competition issues here, going on to explain, “I agree with you completely, that you cannot call all of e-commerce one market, because there are horizontal players and vertical players within the market. And they are all competing with different sets of players, because the benchmark is substitutability from the consumer’s perspective. And that’s not the same across all of these products. But all of this thinking we’re doing here is from a competition context. The legislature would still be completely free to think about e-commerce and define e-commerce in a certain way and say that for the purposes of this law, I’m defining e-commerce in this way. And it’s not bound by the way competition law thinks about markets.”

Portability and Interoperability as the possible solution

In response to a question from Rajan Mathews of COAI on the need for regulatory intervention when consumers and companies are both benefitting, Parsheera offers an alternative path of data portability which would not entail an obligation on entities to share their datasets. “It would be interoperation and interconnectivity like we see in Telecom, where you say that someone is operating this platform, which is an essential facility. You allow people to interoperate like wallets are doing. By asking them to interoperate, you take away that network effect and diversify for the sector as a whole, who then enjoy the network effect as is seen in Telecom… It cannot be just asking a big player to give away data, it has to happen in a regulated environment, And with some sort of exchange of payment. It comes with its own set of challenges, because you will then have someone to regulate all of this, you can’t just let the market have, you know, this coercive data sharing.


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