Competition policy: Online Versus Offline

Governance

Topic: General Studies 2:

• Government policies and interventions for development in various sectors and issues arising out of their design and implementation

Competition policy: Online Versus Offline

Context: The online marketplace or the platform/intermediation service market is now largely characterised by duopolies where several of these companies have come under the scrutiny of the Competition Commission of India (CCI).

Some of the sectors where duopolies exist in online marketplace are:

• E-commerce: Amazon and Flipkart 
• Transport: Uber and Ola
• Food service: Zomato and Swiggy 
• Travel bookings: MakeMyTrip and Yatra

The emergence of duopolies does not bode well because:

• Possibility of collusion– It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.
• Increased Lobbying with Political Class to keep the regulatory framework in their favour. This is highly possible in societies where Democracies are not matured.
• As result innovation in the sector begins to decline, as both market players are assured of their position & revenues

The issues involved with duopoly online space have far reaching ramifications for both online and off-line market places, some of which are:

• Impact of such market structures on online competition – Duopolies be it any sector may create barriers for entry of new players
• Players engaging in predatory pricing through deep discounting & offers
• Impact on offline competition – as a result of predatory pricing offered by these online companies
• Impact on Consumer Welfare – 
  • They are able to access variety of goods at much cheaper cost (discounted by companies). 
  • Consumers do benefit in the short run but once the competition is driven out, the platform starts raising prices to recoup previous losses.
  • Also, their data is being mined without their explicit consent which is being used for behavioural manipulation regarding consumer spending

Assessing whether a platform is engaged in predatory pricing may not be a straightforward exercise. This is because of 

• The dynamics of online pricing (prices change over time), their unique cost structures as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
• Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories. 
• It is quite likely that once competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices. Thus, deep discounting strategies cannot be used for extended periods of time 

In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case due to reasons like:

• Mechanism of positive feedback loop: As these digital companies grow, more the users coming on board these platforms greater is the benefit due to positive feedback loop. This leads to market concentration. 
• Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.
• Another reason is that the online space is highly capital intensive. Deep pockets are required to fund the discounts to get customers on board initially. Duopoly incumbents having access to huge capital engage in various strategies (mergers & acquisitions) to restrict entry and thus competition. 

Therefore, it is presumed that competition in online space is likely to be restricted and new entrants in the will be rare, unless facilitated by:

• Technological changes i.e. innovation
• Regulatory intervention 
• Through deep discount pricing backed by deep pocketed firm

Way Forward:

• If regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established. A
• Alternatively, the definition of market dominance could be expanded to take into account deep pockets.
• Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.

Connecting the Dots

• Net Neutrality
• Duopoly in Beverages – Pepsi and Coca-Cola- Has it led to collusion?