Preventing Digital Gatekeepers' Monopoly: A Dynamic Field Needs Dynamic Responses From The State

Preventing Digital Gatekeepers' Monopoly: A Dynamic Field Needs Dynamic Responses From The StateGAFA, the digital gatekeepers.
Snapshot
  • Though digital gatekeepers have brought about tremendous consumer welfare, they tend to abuse this position to the disadvantage of individual sellers, when they reach a dominant position.

    It is important to reinvent regulation to maintain competition.

The Internet was conceived to be a tool that was supposed to decentralise and democratise information and break the monopoly of knowledge. Today, far from being a democratic utopia, it is marked by a number of ‘kingdoms’ who have, over the years slowly accumulated more and more functionalities, turning them into ‘empires’.

Democratic nation states around the world including Japan, the US and several European countries are raising alarm to the threat of market concentration and monopolisation of digital platforms. A coalition of nation states is being formed, not to fight aliens, but the menace of monopoly. There has been a flurry of activity in the past couple of years to rein in tech platforms with competition regulators in several jurisdictions pulling up GAFA (Google, Apple, Facebook and Amazon) for multiple alleged violations of competition acts.

The significance of the fight can be best gauged from the statement made by US President Joe Biden. Earlier this year, before signing an executive order targeted towards monopolies, Biden claimed that “capitalism without competition is not capitalism, but exploitation”. Competition regulators in Germany, Japan, the US, the UK and even India have opened investigations into anti-competitive practices by digital platforms.

Most recently, South Korea amended a law forcing Apple and Google to allow app developers to use alternate payment systems other than the built-in payment system. Earlier this year, the Epic Games versus Apple trial in the US was based on this issue. The verdict for the case is awaited. The main bone of contention for Epic Games was the fact that Apple was using its status as gatekeeper to impose arbitrary terms, failing which Apple removed it from its app store.

In the simplest terms, Digital Gatekeepers are platforms that offer intermediary services which connect consumers to service providers. Essentially, they control ‘access’ to a large number of consumers, important for businesses. Apart from controlling access to a large number of market participants, another characteristic of gatekeepers is lack of other viable alternatives to reach these participants. The Stigler Report terms such gatekeepers as “bottleneck powers”.

An illustrative example of such gatekeepers is Apple’s app store, which is the only avenue for customers to access and download apps, and likewise for app developers, it is the only way they can reach out to iPhone users. Even Swiggy and Zomato can be considered gatekeepers. But in this case, alternate routes exist for restaurants to reach out to customers but, nevertheless, they have access to a large number of customers and restaurants, which is hard to access through alternate routes.

The nature of market of digital platforms makes it easier to foster monopolies. It is characterised by a winner takes it all situation due to extreme first mover advantages and subsequently, high barriers to entry. First movers have leverage over subsequent new entrants due to network effects which set in once a platform attains a particular level of critical mass of users.

Network effect is a phenomenon when more users make the platform more attractive for users. For example, more reviews of restaurants in Zomato help other users as well as encourage more users to use Zomato. Add to this advantage, the massive amounts of market specific data collected by these platforms create high entry barriers.

Once network effects kick in, it takes no additional cost for platforms to acquire customers. Therefore, economies of scale are achieved easily, tipping the market towards a natural monopoly.

These markets are also characterised by leapfrog innovations which make them extremely competitive, which is the reason why platforms are always on the lookout for newer innovations and try to replicate them (Twitter copying ‘spaces’ feature from Clubhouse).

Digital gatekeepers have brought about tremendous consumer welfare. They help increase market participation by connecting more consumers to variety sellers. Ola, Uber, Swiggy, Zomato, Amazon and Facebook are all gatekeepers, which have helped more sellers reach out to their target audience. They have increased market efficiencies and brought about innovations from which consumers have benefitted the most.

Despite having brought increased consumer welfare, when these gatekeepers reach a dominant position, they tend to abuse this position to the disadvantage of individual sellers. The availability of critical data of clients helps these platforms understand the types of consumer goods which are popular and enable these platforms enter the market by selling a similar product at a cheaper price. Amazon basics and cloud kitchens are examples of this.

There are instances where platforms have delisted sellers or products without giving appropriate reasons. Some gatekeepers compulsorily bundle services and refuse to provide essential data to their clients about customers.

In the e-commerce marketplace, a study commissioned by the Competition Commission of India (CCI), sellers found search rankings to be opaque and a majority of them were concerned about platform neutrality. Sellers also complained about the arbitrary manner in which platforms changed terms of services and also questioned preferential treatment to certain sellers.

In the long run, these practices result in heavy concentration to a point where these platforms can dictate terms for their clients as well as customers, undermining competition. Long story short, monopolies reduce competition, increase prices and reduce choice in the long term.

The socialist policies followed by India which birthed a number of public sector undertakings (PSU), devoid of competition corroborate this. In our experience, monopolist PSUs also resulted in corruption.

Regulation

The main tool that is used in India to ensure competition and prevention of monopolies is the Competition Act, 2002. Ex-post regulation such as the Competition Act is proving to be insufficient and slow. Investigations in Europe have taken seven to eight years before fines are imposed. By the time investigations end, monopolistic companies become more entrenched, making it harder to regulate them. Although some direction is being taken towards ending monopolies, such as US’s Ending Monopolies Act, which wants to break up platforms, it still remains to be seen how such regulation will work.

Competition Acts, which assume innocence until proven guilty in various jurisdictions have failed to contain today’s monopolistic digital platforms. The world is therefore looking at preventive measures or ex-ante regulations. Ex-ante regulations tend to assume guilt until proven innocent.

The European Digital Markets Act (DMA) is an example of ex-ante regulation which imposes certain restrictions and obligations on digital ‘gatekeepers’. The chairperson of CCI also observed the need for ex-ante regulations in a speech in 2020.

But blanket ex-ante regulations may not be the best solution as they stifle innovation and reduce investments in the sector.

In India, specific problems attributable to monopolistic companies such as data portability and inter-operability can be solved through the Personal Data Protection bill, which mandates right to portability.

In other jurisdictions such as the US, the ACCESS Act, currently under discussion aims at data portability and inter-operability, and the American Choice and Innovation Online Act aims to prevent platforms from favouring their own products and services on the platform. The EU General Data Protection Regulation (GDPR) is another legislation which mandates data portability.

In Australia, the government forced Facebook to enter into agreements with digital new media to publish their stories.

Another unique solution that India is trying is the Open Network for Digital Commerce (ONDC) which wants to end the dominance of the incumbent e-commerce giants – Amazon and Flipkart. Although ONDC is currently in the works, it is safe to assume that it would be unrealistic for the government to step into every sector in the future to maintain competition.

The market of digital gatekeeping platforms is marked by a high level of dynamism. With shifts to newer technologies, innovations and algorithms happening at a breakneck speed, disruption has become a characteristic. It is almost impossible to predict the future market scenario. Ex-post regulation will always stay behind the curve and ex-ante regulations would prevent innovation. Therefore, regulation in such a dynamic sector must be dynamic.

Currently, the CCI can take up investigation suo-moto or on reference made to it by the industry or the government.

Another approach that the government can take towards understanding and regulating digital gatekeeper platforms is by forming a permanent committee in the CCI consisting of government representatives of different ministries such as Ministry of Commerce and the Ministry of Electronics and Information Technology (MeitY), representatives from industry and academics, who meet regularly to discuss and report to the government on the present market dynamics. The meetings and discussions should be made transparent as in the Monetary Policy Committee (MPC) and they must happen at regular intervals such as bi-annually. It should also have the flexibility to discuss on competition issues outside of digital platform markets.

A permanent committee in the CCI with a wide representation, always on the lookout for anti-competitive practices in the market, examining such issues and recommending measures would ensure dynamism in competition governance.

India chose liberalisation and privatisation at the close of the last century to shift away from government-controlled monopolies to usher in a new era of competition, marked by market efficiencies. Today, we must continue to embrace it by reinventing regulation to maintain competition.

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