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Deep Dive: Will ONDC actually address competition concerns in e-commerce?

ONDC is being pitched to break the stranglehold of Amazon and Flipkart in e-commerce, but will it actually address the competition concerns?

“I think that ONDC is the best way to address the perceived competition problems around e-commerce platforms” and “there are obvious limitations with ONDC, it is not going to be a silver bullet that many might hope for” were the two opposing views expressed by experts whom MediaNama spoke to, on being asked whether or not ONDC will solve the competition concerns plaguing India’s e-commerce sector.

The Open Network for Digital Commerce (ONDC) is a project supported by the Indian government to promote an open UPI-like architecture for the e-commerce industry. Think of it like this: What if there’s a shopping app that shows you products not just from sellers on the app itself but also from sellers on other platforms. And as a seller, what if there’s an app that allows you to list your products on multiple platforms rather than just the one you onboarded with. This is the system that ONDC wants to facilitate by creating protocols and network policies.

Why does this matter: The government believes that e-commerce in India is dominated by a few foreign-funded players (read: Amazon and Flipkart) to the detriment of sellers, and it wants ONDC to break this stranglehold. But will ONDC addresses these competition concerns is a question that hasn’t been explored in detail.

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What are the key competition concerns in e-commerce in India?

Here’s a round-up of the major antitrust allegations against Amazon and Flipkart, many of which are currently under investigation by the Competition Commission of India (CCI):

  1. Self-preferencing: The allegation that Amazon and Flipkart give preference to their own private label products and to certain preferred sellers (in which the platforms might have a stake) over third-party sellers in search rankings and other forms of promotions. This also ties in with another competition concern: lack of transparency in how products are ranked in search.
  2. Improper use of data: “Outside India, the key allegations against Amazon stem from the dual role that it plays- one as a marketplace operator and other as an online retailer. Resellers using Amazon operated marketplace allege that Amazon tracks their sales data across various points- price, margins, target customers etc. and when it spots the hot selling products, it copies them to introduce Amazon label products at lower prices and better placement on the marketplace, eventually squeezing out the initial sellers,” Rahul Rai, Independent competition lawyer, explained to MediaNama.
  3. Predatory pricing: “Second, as a retailer, the low prices charged by Amazon have attracted allegations of predatory pricing. Small retailers—be it traditional brick and mortar retailers or resellers selling their wares on Amazon’s market place find it difficult to compete with Amazon on prices,” Rai explained.  This is a problem despite the consumer benefits in the short run because, in the long run, Amazon and Flipkart will be able to charge high prices without any competitors left in the market.
  4. Exclusive agreements: “There are also these exclusive arrangements with leading manufacturers. For example, handset manufacturers like Xiaomi and Oppo have often bypassed the traditional brick-and-mortar retail channels to launch and sell their sets exclusively through e-commerce platforms like Amazon or Flipkart. Consequently, brick and mortar retailers of handsets, who have been doing brisk business so far are deprived of the opportunity to sell a model which could be a runaway success, often accounting for 30-40% of the sales in the specific category,” Rai explained.

Why ONDC might not address these competition concerns

ONDC does not have any mechanism to prevent anticompetitive conduct: “The expected outcome obviously, is that disaggregating network effects will revive and catalyse competition on merits, i.e., on factors such as prices charged for e-commerce services, or the quality of experience offered. But the impact would for the most part be limited to ONDC participants. How this will spill over to the wider e-commerce ecosystem is unclear,” Indrajeet Sircar, Leader, Public Policy and Regulatory, Nishith Desai Associates, explained to MediaNama. “Further, it’s not clear whether the network design in itself would be sufficient in preventing all potential anti-competitive practices, and whether it would be appropriate for ONDC’s network policies to address such issues in an ex-ante manner,” Sircar argued. “Based on what we can gauge from ONDC’s framework document, network policies will try to hard-code compliances for all participants. So, for instance, if a seller’s catalogue does not make mandatory declarations under the Legal Metrology Act or under applicable FSSAI regulations, the seller will not be able to push it through as a valid catalogue entry. Resultantly, when a request is broadcasted to the entire network, a non-compliant product listing will not show up on the results.” Sircar explained “However, it is not abundantly clear whether the network policies would also put in place guardrails to prevent potential anti-competitive practices which may occur despite the network design. For example, it is not clear whether and how the network policies will address issues such as anti-competitive self-preferencing between buyer and seller side applications provided by the same entity, or collusion amongst application/service providers” Sircar maintains.

ONDC might suffer from the same pitfalls as NPCI: The government keeps drawing parallels between what NPCI did with UPI and how ONDC can achieve the same for e-commerce, but NPCI has a lot of issues, including competition related, that could carry on to ONDC if we apply this analogy. For example:

  • UPI is dominated by two players: Despite NPCI instituting a cap on the maximum market share a single UPI app can hold, Google Pay and PhonePe dominate the market with over 80 percent market share. And NPCI is not able to do anything about it except shift the deadline for when the cap will go into effect. In fact, the Reserve Bank of India (RBI), which together with the Indian Banks’ Association created NPCI, itself pointed out that NPCI as a single operator for multiple critical retail payments systems poses concentration risks. For this reason, the central bank proposed creating multiple entities like the NPCI. What if ONDC results in a similar concentration in e-commerce? How will that be any different from Amazon and Flipkart dominating the space?
  • Too much power in the hands of a private entity: UPI has grown to become the largest form of digital payment in the country, overtaking traditional instruments like debit and credit cards. And the power to control what happens with UPI rests with NPCI, a private entity. For example, NPCI instituted the market share cap and recently also came out with a notice that effectively stopped UPI players from working with crypto companies. ONDC, which is also a private entity, might end up becoming like NPCI by becoming a quasi-regulatory of the e-commerce sector. “Currently, the ONDC doesn’t intend to set policies beyond what is required to facilitate transactions and facilitate online dispute resolution. However, if the intent is to control for anti-competitive practices, ONDC will have to step in and put in place policies to that effect. Given ONDCs legal structure, a quasi-regulatory role will be ill-suited especially when there is a lack of clarity around how network policies will be created, and which participants will contribute to their creation. There is therefore a need for a bright line as to the subjects sought to be addressed through network policies,” Sircar explained.
  • No financially viable model in UPI: UPI attracts zero percent Merchant Discount Rate (MDR) charges due to government regulations, which is what makes it popular among merchants. But this also means that those operating in the space have little to no financial incentive. For example, apps like Google Pay don’t stand to gain much financially. This has destabilised a well-established market norm of incentives in digital payments. What if ONDC similarly perverts incentives in e-commerce?

Local businesses might get squeezed in the long run: “Another issue is that the local business will find it extremely challenging to compete with the discounts, sales and other lucrative offers, being offered by prominent e-commerce players which may result in local business being squeezed out of the network in the long run,” the Parliamentary Standing Committee on Commerce said in its report on Promotion and Regulation of E-Commerce in India presented to the Rajya Sabha on June 16. The Committee further pointed out that there is no road map or strategy for some key aspects. “On perusal of the strategy paper, it is found that the success of the ONDC is contingent upon certain factors, such as the successful onboarding of the existing digital commerce apps and platforms, the compatibility and interoperability of the existing platforms/applications of the buyers and seller and the technical capability of small and medium enterprises to be onboarded on the digital network. However, the strategy paper is silent on these issues and does not lay out a road map/strategy for addressing these issues,” the Committee noted.

Competition issues are better addressed with regulations: “If monopolistic tendencies are discernible, the government has to tame them with regulations. We have the Competition Commission of India (CCI) in place. Instead, the government seems to have jumped into the business in the illusory belief that competing is better and more effective than regulating. In support of ONDC, the examples of UPI and Rupay are cited. UPI was necessary to wean people away from cash and private mobile wallet apps. When money is involved, the government’s looming presence becomes necessary. Ditto for Rupay to break the monopoly of Visa and MasterCard that in addition entailed considerable foreign exchange outgo by way of service charges. So, ONDC has no overarching national objective and hence the parallel drawn with UPI and Rupay is not on all fours,” S Murlidharan wrote in an opinion piece for Free Press Journal.

E-commerce competition concerns can only be solved on a case-by-case basis: “ONDC is an excellent example of technology attempting to enable competitive ecosystems. However, for the ONDC to step in to enforce structural or ex-ante regulatory solutions will not work. Structural solutions have inherent limitations, due to their “one-size fits all approach” which does not account for the variety of business models seen in today’s e-commerce milieu. Regulatory agility is usually the casualty in such situations.” Sircar remarked. “Ultimately, we will still have the CCI as an independent competition regulator to determine things on a case-by-case basis and intervene appropriately after investing due resources into investigating and evaluating anti-competitive effects,” Sircar emphasized.

How ONDC might address these competition concerns

Will increase competition by reducing barriers to entry: “There are multiple challenges in bringing sellers onto an online platform. Any e-commerce platform must first convince an offline retailer that e-commerce is good, then make them set up a technical system at their end, and then have that system interact with the platform’s backend. This is where interoperability is a problem. Each e-commerce platform would have its own set of protocols and APIs to onboard sellers. The platforms compete and work hard to onboard as many sellers as possible, often helping them digitise their business for plug-on with their platforms. Once plugged into one platform, smaller sellers may lose the incentive to rework their digital nodes for plug-ins to competing platforms. Larger sellers can possibly choose to develop separate channels for getting plugged into, for example, both Amazon and Flipkart, but small sellers won’t,” Rahul Rai explained. “This is one of the problems that ONDC could solve. It seeks to create a set of protocols that can be used by sellers to digitise their world regardless of platforms. If ONDC creates this technology stack, then I don’t need to spend the time, money, and effort in R&D to figure out how to build my own e-commerce platform. Or, as a seller, you don’t really need to worry that it costs 50 lakhs to basically digitise to get plugged into an e-commerce platform,” Rai added. Ultimately this would reduce barriers to entry and increases competition, Rai remarked.

“India is a country where e-commerce is still at about 1 or 2% of the total retail market. Most of the retail commerce is yet to move to digital. The government has realised that the shift from brick and mortar to digital is inevitable. Now that shift could get cornered by Flipkart, Amazon, Reliance or Tata or we create a system where instead of four there could be 40 platforms. Through ONDC, India is giving the country a shot at creating those 40 platforms as opposed to an America where you have largely eBay and Amazon.” — Rahul Rai

Will reduce the value proposition of incumbents: “The hope is that as more and more people move towards using ONDC stack to set up their own platforms or to digitize their own world so that they can get plugged into the platforms, the reliance on an Amazon or a Flipkart or a Reliance or a Tata will reduce. And if there are many more, then antitrust concerns will get dissipated. We talked about exclusive sales when Xiaomi chooses to sell only through Amazon. Why do they choose to sell only through Amazon today? They choose to do so because they think that Amazon has the maximum reach. Amazon, in some sense, has become a great value proposition for people to launch their products exclusively. And likewise Flipkart. That value proposition will reduce because Xiaomi might realize that, you know what, there is Amazon, but there are also three other really nice platforms just for phones, just like how we have Nykaa as an alternative for Amazon or Flipkart when it comes to cosmetics,” Rai explained.

Will break down network effects: “One of the key motivations behind the design of ONDC is disaggregating network effects currently associated with two-sided platforms and expanding discoverability. For an e-Commerce seller, this would enable them to onboard with any amongst a multitude of seller-side applications and be discoverable on all buyer-side applications on the network. Unlike the current scenario, where sellers would tend to prefer larger marketplaces with a larger base of sellers, and repeat buyers – ONDC promises the same level of discoverability for sellers on all marketplaces, irrespective of their scale,” Sircar explained.

Will allow platforms to compete on merits: “You’re trying to create a system whereby more platforms compete on merits as opposed to the government using regulatory trickery to punish platforms. Because the current business models don’t appear to be bad business models, there’s nothing economically abhorrent in self-preferencing, physical retail stores have always engaged in self-preferencing—all to the benefit of consumers,” Rai opined.

This post is released under a CC-BY-SA 4.0 license. Please feel free to republish on your site, with attribution and a link. Adaptation and rewriting, though allowed, should be true to the original.

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