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Why the Indian government is exploring ex-ante regulations for digital markets

A recent report by CDCL presents ex-ante rules as existing in a complementary relationship with ex-post rules, where sectoral authorities would “set the rules of the games” while competition authorities would act as “umpires”.

The Committee on Digital Competition Law (CDCL), set up by the Ministry of Corporate Affairs, has released a draft Digital Competition Bill along with its report discussing the need for ex-ante regulations in digital markets in India.

Ex-ante regulations are preemptive measures that aim to disallow or discourage certain practices. The current competition law, the Competition Act (2002), works on an ex-post framework where the Competition Commission of India (CCI) intervenes after an anti-competitive act has occurred. The committee found that the ex-post model of regulation is time-consuming, especially for digital markets.

The report presents ex-ante rules as existing in a complementary relationship with ex-post rules, where sectoral authorities would “set the rules of the games” while competition authorities would act as “umpires”. However, the committee felt that amending the existing Competition Act to include ex-ante regulations specifically for the digital sector would cause uncertainty and therefore presented a separate Digital Competition Bill.

So Why Do We Need Ex-Ante regulations?

  • Ex-post investigations are time-consuming: The digital market is fast-paced and evolves very quickly. Investigations conducted under the Competition Act are time-consuming and resource-intensive to resolve and begin only after a violation has occurred, meaning that by the time a case is resolved, the market may have tipped irrevocably in favour of a dominant market player.
  • Ex-post investigations have a very narrow scope: Ex-post investigations made under existing regulations are limited to the narrow and specific claims made in each case. As such, consistent and recurring violations of competitive practices may not be effectively addressed in such a framework.
  • They complement ex-post regulations: According to the committee, ex-ante regulations work in conjunction with ex-post regulations to enhance consumer welfare. In India, digital enterprises do not fall under a specific statute but parts of their industry are regulated by different ministries and departments.

The committee also elaborated upon the unique features of the digital market, which require a separate and specific statute to regulate effectively.

  • Data as a resource: The report emphasised the role that data plays in the modern digital economy. Market players regularly collect, store and use large quantities of data derived from users as an invaluable strategic resource. According to the committee, large volumes of data form a distinct competitive advantage where a player is able to maintain its position through the use of data ‘feedback loops’. These feedback loops are of two types – ‘user feedback loops’, where a player is able to use aggregated data to improve its service and thereby acquire new customers and ‘monetisation loops’, where an intermediary is able to use collected data to improve targeted advertisements and increase revenue. ‘Big Data’ thus acts as a significant resource as well as a competitive advantage for large players in the market, enabling them to study large-scale population trends much better than smaller players, use aggregated data to increase revenue and enter into new markets. The report mentioned Google’s entry into comparison shopping and Amazon’s entry into retail through Amazon Basics as examples of the above. Data is also a medium of transaction in digital markets, setting them apart from conventional markets, where money is the sole medium.
  • Network effect: ‘Network effect’ refers to the increase in utility derived by a consumer from a digital service from an increase in customers. For example, customers may prefer social media platforms or digital marketplaces that have a large number of users as opposed to a smaller number. This grants an advantage to a dominant market player and makes competition from smaller players more difficult.
  • Economies of scale: Economy of scale indicates that as a company’s volume of production increases, the per unit cost of production decreases. Economy of scope refers to the fact that as the number of goods/services made by a company increases, the total cost of production decreases. Both of these trends enable large organisations to maintain market dominance. The report noted that while such trends are present in every industry, they are much more extreme in digital markets. The cost increase for accommodating new customers is negligible or even zero and services may even be offered for free in return for monetisable data. This allows large digital enterprises to offer their services at a much lower cost than smaller ones.

The committee determined that the peculiarities of digital markets such as data collection, network effect and economies of scale afford an enormous competitive advantage to incumbent enterprises, tilting them towards concentration. This makes it difficult for smaller enterprises to compete against larger ones and newer players to enter the market. Buyers and sellers are also dependent upon digital enterprises and intermediaries to conduct business and reach customers, making such enterprises gatekeepers. The report characterises the digital industry as a “Schumpeterian market”, which operates on a winner-takes-most logic.

The committee argues that the specific peculiarities of the digital market, combined with the existing gaps in present ex-post antitrust legislation may allow large market players to escape timely scrutiny. Thus, the committee presents a draft ‘Digital Competition Act’, which will introduce ex-ante regulations specifically for the digital market. At the same time, the CDCL also asked for “fine balance” between regulation and innovation, in order to avoid stifling the latter. It urged that the proposed act would only regulate large enterprises with the power to influence the market.

Stakeholders in the Indian digital market have been debating the merits of ex-ante regulations for several years now. While Big Tech companies have lobbied against ex-ante rules around the world and some stakeholders have pointed out how such regulations may stifle innovation and discourage foreign investment in India, many startups in India are advocating for ex-ante rules. However, as experts told MediaNama last year, ex-ante rules may harm the innovation of large Indian companies as well. Smartphone giant Apple also voiced its criticism.

Meanwhile, the Parliamentary Standing Committee on Commerce urged the government to enact ex-ante rules in June 2022. The committee stated that “The Committee is of the opinion that it is high time India revamps and strengthens its ex-ante regulatory framework and takes steps to identify entities that act as gatekeeper platforms and set a threshold for qualifying as gatekeeper”. A similar opinion was expressed by the Parliamentary Standing Committee on Finance in December 2022, proposing that leading market players be designated as Systemically Significant Digital Intermediaries (SSDIs) and be subject to ex-ante regulations.

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