Before not after regulation for digital markets

By Swathi Girimaj and Sachit Ram, Bharucha & Partners

Sustained interest from private equity and venture capital investors has led India to become the third largest global startup ecosystem, with over 100 unicorns. Its digital economy is projected to reach USD1 trillion by 2030.

The proliferation of technology companies acting as both intermediary platforms and also providers of goods and services in digital markets poses unique competition issues. These involve factors such as strong economies of scale, network effects, winner-takes-all markets and easy access to and monetisation of market data. Globally, antitrust regulators are adopting before the event or ex-ante regulation of digital markets because legislating afterwards is complex, slow and at times too specific to produce effective competition.

Swathi Girimaji
Swathi Girimaji
Bharucha & Partners

Following the lead of the Organization for Economic Co-operation and Development (OECD), the Standing Committee on Finance issued a report in December 2022 on Anti-Competitive Practices by Big Tech Companies (report). This recommended the adoption of an ex-ante regulatory framework for digital markets, including anti-steering or restricting third-party applications, self-preferencing, including search and rank preferencing and advertising policies, and data usage.

Anti-steering policies are common in systemically important digital intermediaries (SIDI). Although there were nearly 72 billion digital payment transactions in 2022 due to both covid-19 and a strong incumbent push, market concentration remains high. Restrictions on anti-steering will create a more diverse market with greater competition and lower switching costs. Jurisdictions such as the EU, the USA, South Korea and Germany have banned certain practices to restrict anti-steering by SIDIs or gatekeepers.

SIDIs often use self-preferencing, whether in advertising, ranking on search engines or the terms and conditions for the use of their platforms by third party vendors. Recently, the Competition Commission of India imposed a penalty on Google for requiring third party applications on its Play Store to use its billing system while permitting its own application, YouTube, greater flexibility. Google has been frequently accused of using anticompetitive advertising technology. The US and EU models address such issues by restricting acts such as artificially preferencing on SIDIs’ platforms and selectively applying terms and conditions. The EU also requires disclosure of ad-pricing information. The France model, given the covert nature of preferencing, empowers public authorities to access the principles and methods of digital players’ preferencing algorithms.

As to network effects caused by the collection of consumer data by an SIDI in one market and its deployment in another, the report recommends following the EU model including banning SIDIs from processing data collected by third party platforms that use the SIDI as a core platform; combining different data collection streams; cross-using personal data in other services provided by the SIDI, and signing-in consumers to other SIDI services on the platform to combine their personal data. The EU is also considering directing gatekeepers to share anonymised ranking and query, click and viewing data with market participants on fair, reasonable and non-discriminatory terms. The UK has gone further by proposing to allow all market participants access to consumer data generated by a gatekeeper.

Although the aim of the recommendations is to reduce switching costs and promote competition while breaking the monopoly in data, this may be over-regulation. They may disincentivise product optimisation through data collection. Even if data collected by SIDIs is openly accessible, SIDIs will likely win the inevitable race for data analytical supremacy. Issues of data collection and analysis need further consideration, given their impact on the digital market monopoly.

The report has been criticised for following the OECD’s ex-ante regulations without considering India’s unique market factors. While such an approach is needed to keep up with global markets, it is unclear whether these regulations will solve the problems. In February 2023, the government set up a committee to evaluate antitrust legislation and draft a Digital Competition Act. This goes in the right direction and should result in antitrust legislation tailored to India’s digital market.

Swathi Girimaji is a partner and Sachit Ram is an associate at Bharucha & Partners.

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