India's Tussle with Digital Gatekeepers
[Mili is a student at Faculty of Law, University of Delhi.]
About 150 years ago, the United States witnessed the origin of the gilded-age economy, where it saw the rise of business gatekeepers who indulged in unfair trade practices. They greatly justified this model on the theory of Social Darwinism. Though these true economies, which were characterized by price-fixing systems, were outlawed by the Sherman Antitrust Act, the existence of the near-monopolies is extant to this day. In this internet age, a rather shadowy class of monopolies has emerged. Large tech companies are at the helm of the vessel of hegemony. It is due to the fact that digital products have taken the centre stage in today’s modern economy. Since the gatekeeping tendency of these companies can be witnessed to be manifesting itself, the competition framework should remain untouched of unfair practices which may harm consumer welfare eventually.
The antitrust regulations across the globe are struggling to keep up their goals in line with the rapid rise of tech-monopolies such as Microsoft, Google, Facebook, etc. In December 2020, the European Commission (EC) presented a comprehensive legislative package consisting of the Digital Services Act (DSA) and Digital Markets Act (DMA). The aim behind these legislative proposals is to protect the rights of the consumers in the online ecosystem while ensuring healthier competition. It comes in the wake of the emergence of digital gatekeepers which pose as a hindrance for new players to enter the market. The digital products run on self-learning algorithms that use the modality of big data. Big data helps companies to harness their data and discern new opportunities for shaping profitable business moves. Resultantly, these markets require a very large investment and are pushed into the gamut of monopoly. Due to difficult entry, the competition is often at a very small-scale which is almost close to negligible when compared to the scale of economies of the large companies. Through this piece, the author seeks to analyze if India also needs to enact such legislation to control the gatekeeping practices.
Instance of Google’s Gatekeeping Tendency in the Indian Scenario
In India, the first version of the competition laws was brought in through the legislation of Monopolistic and Restrictive Trade Practices Act 1969. It was based on the theory of “Command and Control Economy”. However, post the liberalization era, a regime was required which was more responsive to the economic realities of the country and consistent with the international practices in relation to competition laws. Thereafter, the Competition Act 2002 (Act) came into force replacing the earlier legislation.
In November 2020, when the Indian antitrust watchdog, Competition Commission of India (CCI), opened an investigation on Google for abusing its dominant position to promote its payment services application – Google Pay, the issue of digital gatekeepers again saw the light of the day. An anonymous complaint was filed which alleged that Google has unfairly privileged Google Pay by using the modality of prominent placement and search manipulations, thereby, creating a clear bias in favor of its own app. It was further alleged that it mandates third-party apps to use Play Store’s payment system, and ensures that it gets 30% commission per transaction. The CCI was of the prima facie view that Google has contravened various provisions of Section 4 of the Act in relation to abuse of dominant position, and ordered a detailed investigation under Section 26(1) of the Act.
The 30% commission is an arbitrary prerequisite as it is not for the listing of apps. It cuts at the investment chunk of a developer and reduces resources for subsequent innovation. This is a characteristic gatekeeping revenue model. It essentially facilitates the gatekeepers to squeeze competitors in verticals. It is a long-established raising rivals cost scenario as the cost for the apps in verticals would be significantly higher as opposed to Google’s own apps.
There also arises the issue of the infamous parity clauses. While the wide parity clauses are largely considered illegal, narrow parity clauses are also restrictive in their nature. They restrict the seller from offering favorable prices at their website and oblige them to comply with the e-commerce platforms’ prescriptions. As a result, there is an inherent price controlling tendency in the hands of the gatekeepers where, in the name of uniformity, they restrict fair play in the market. In the present case of Google Pay, the unfair commission rate and the obligation of payment modalities are indicative of the parity clause issue wherein, through the means of excessive service providing charge, price is being controlled.
Rising Gatekeeping Tendency and the Need for Ex-ante Regulations
The big-tech firms have been acquiring the role of digital gatekeepers, and it seems obvious that there can be more cases like such in the future. The issue that entails is that the tech-market is fast-paced and the market tips before it can be subjected to any antitrust enforcement. Therefore, the need for “ex-ante regulations” is undeniable. The extant norm is to take regulatory action once any distortion arises, i.e., ex-post. Ex-ante regulations aim to discern the problems beforehand and prevent its taking place through regulatory intervention. While Ex-ante corresponds to the apprehension of a situation before it is constituted, ex-post refers to the reaction to a situation. Ex-ante regulations are preferable because they are forward-looking and provide a broader ambit of consideration. They are focused on addressing market failures that are likely to occur owing to the market dynamic which has the potential to affect relationships between competitors.
The Furman Report advocates bringing into effect the ex-ante regulations for firms enjoying a ‘strategic market status’. The Stigler Report explains that the strategic status enjoyed by them would bestow on them control over the bottleneck of the market, thereby filtering the access of emerging players. Here ex-ante regulations would provide a check on the gatekeeping activity of restricting new players in the market ecosystem. There is also the existence of platforms that not only facilitate other businesses but also compete with those businesses. This naturally brings in the scope of self-preferencing, what has happened in the case of Google Pay. These platforms can also be brought under the radar of ex-ante regulations to ensure that other businesses using these platforms are not disfavoured at the hands of self-preferencing modalities.
The CCI in its E-Commerce Market Study recognized various issues that have emerged in the Indian competition space, such as unfair agreements, parity clause issue, deep discounts, etc. The CCI has stated that there is a need for self-regulation to eliminate opacity in the use of the collected data. However, there is a dire requirement of ex-ante regulations so that the companies conduct their business in line beforehand and not wait for the regulators to call out on them.
Analysis of European Union’s DMA and DSA
The European Union has brought in the draft DMA and DSA to tackle this menace. The DMA extensively deals with digital gatekeepers. A gatekeeper can be defined as an entity that controls access to online services which are critical to reaching a large user base. It aims to prevent unfair practices and imposes sanctions upon its non-compliance. As per the DMA, a firm will be a designated gatekeeper if it has:
1. a strong economic position, significant impact on the internal market and is active in multiple EU countries;
2. a strong intermediary position (it links a large user base to a large number of businesses);
3. an entrenched and durable position in the market.
If a company is categorized as a gatekeeper under DMA, it will face a larger burden to conduct its business with fairness. It has laid down various rules such as the gatekeeper must allow third parties to inter-operate with its services; it must allow business users to promote offers and conclude contracts with their customers outside the gatekeeper’s platform; it must not prevent consumers from linking up to businesses outside its platform, etc. The proposal under the DMA seeks to impose a fine of up to 10% of the worldwide turnover upon the breach of the rules.
While the focus of DMA is on preventing gatekeeping and promoting fairness in the competitive business environment, DSA lays down rules for stimulating the growth of small online service providers. Majorly, it seeks to protect fundamental consumer rights. The scale of obligations under DSA is proportional to the scale of business operations of the company.
Both these legislations are extremely pertinent in the present business ecosystem where big tech companies have implicitly created a demarcation and inherently eliminate new businesses to take over the scene by vertically integrating them. Although the legislative process may take several years for it to finally culminate into an active legal framework, it can prod the companies to come in line with the regulations to save them from future scrutiny.
These legislative proposals also seek to address the parity clause predicament. They prohibit ‘wide parity clause’. This gives the freedom to online businesses to offer prices at third-party service platforms which differ from the price offered at the platform service of the digital gatekeeper.
It also encourages business developers to provide their applications independently rather than using the platform of the gatekeeper. The proposals expressly prohibit self-preferencing. This is extremely relevant in reference to the Google Pay scenario as applications can be saved from the self-preferencing modality and rival cost techniques of the gatekeeper. In a study conducted in the 1980s, it was argued that a dominant firm could profit from rising rivals’ variable cost if the increase in cost led to a sufficient increase in the dominant firm’s demand which is used as a market gaining technique. Therefore, the provision of providing services independent of the gatekeeper’s platform would save the businesses from the market share gaining tendency of the platform providers.
It is time India woke up to the issues relating to digital gatekeeping. India is a developing country and the policies of the government promote entrepreneurship. Amazon has 100 million users in India, while 241 million Indians are on Facebook. India is a very lucrative and prominent market for foreign players and against this backdrop, it becomes pertinent for the government to bring in such legislative reforms which promote a level playing field and fairness in the market ecosystem. The current antitrust framework uses the modality of ex-post regulations and is restrictive in its ambit to address the growing menace of digital gatekeeping. India should follow suit and bring into effect statutory regulations to cater to the issue before more disputes come to light.