Redefining CCI's Role in the Digital World: Policy Analysis and Proposals
[Aakash and Ahaan are students at Symbiosis Law School, Pune. The following post was awarded the sixth-best entry in the IRCCL Blog Writing Competition 2020.]
Much of the economic growth in today’s digitalized and hyperglobal environment has been driven by the emergence and flourishing of platform business models, which have completely transformed contemporary markets into a more complex and multi-sided structure. Owing to the use of platforms in different industries and their dynamic nature, they have no widely accepted definition. However, in layman terms, a platform can be understood as a system or an intermediary, characterized by network effects, which enables interaction between two or more distinct groups of users and facilitates an exchange that results in value creation for all interacting parties. Platforms are multifarious and are continuously impacting sellers, buyers, producers, advertisers and other relevant market participants.
To elucidate, platforms are broadly classified on the basis of their functionality and inter alia include specialized search tools, online marketplaces, payment systems, collaborative economy platforms, social networks. Some of the widely recognized platforms are Amazon, Flipkart, eBay, Airbnb, Uber, Zomato, Swiggy, Facebook, Google, Alibaba, Baidu, Oyo etc. This list is bottomless, and due to the extensive diversity, it is not practical to draw strict lines of classification, for which we have studied and analyzed the platform market in its entirety.
Platform Markets and Competition Law
Competition laws are intended to regulate businesses for the purpose of creating a level playing field by ensuring effective competition. The primary objectives are sustaining competition in markets and protecting the interests of consumers. In India, the Competition Act 2002 (“Act”) aims at preventing conduct which has an appreciable adverse effect on competition (“AAEC”), safeguarding the consumers, ensuring freedom of trade and encouraging competition. The authority which is responsible for achieving the objectives of the Act is the Competition Commission of India (“CCI”). Therefore, the CCI is tasked with ensuring the sustenance of competition in all markets, whether multi-sided or otherwise. In today’s digital economy, competition concerns are becoming increasingly complex. Competition authorities all over the world are trying to adapt and design frameworks to tackle the competition problems associated with platforms. Thus, in order to identify and analyze the challenges and shortcomings in this regard and to understand the CCI’s role concerning the same, we have reviewed and analyzed the information which is already available in the following section.
Literature Review: Challenges Identified and Proposals Made
Market Study on E-Commerce in India, Key Findings and Observations, 8 January 2020, by CCI ("Report")
The CCI has, through its detailed market study, aimed to identify issues faced by the e-commerce industry, the developing market trends and the potential enforcement and advocacy strategies that it could adopt for addressing the same. The Report is a culmination of stakeholder consultations, various surveys, deliberations, meetings, etc.
The competition issues have been addressed in Chapters 3 and 4 of the Report. These chapters have been divided into findings, observations, a section talking about CCI’s priorities and the way forward, all further divided into various sub-points for consideration. However, we believe that these sub-points can be better understood when looked at together. Hence, we have reviewed both these chapters conjointly through 5 pointers, while also commenting on CCI’s observations point-wise. The following are the issues recognized and discussed in the aforementioned chapters (even though these issues are co-existing, it is prudent to look at them independently for a better understanding).
[A] When the platforms serve both functions of a marketplace i.e. the intermediary, as well as of a competitor on that marketplace, the issue of platform neutrality (or lack thereof) arises. This dual role allows the platform to leverage its controlling position to its advantage. For example, the platform’s access to data and information, which is competitively relevant such as sensitive price information, search rankings, etc., enables it to act on this incentive. CCI observed that the question of preferential treatment by unreasonably manipulating and using data in such cases is a matter of case-to-case determination; however, we believe that for reducing the information asymmetry, CCI could have provided for a transparency framework for the use of such data.
[B] Another competition issue which has arisen because of the exploitation of superior bargaining positions that the platforms enjoy is with respect to platform-to-business contract terms. There is no standard form of contract, and the terms are mostly decided unilaterally by platforms, which terms are often arbitrary and unfair. In this regard, CCI observed that the platforms may come up with frameworks to govern, inter alia, a negotiation framework for basic contract terms, discount policy, penalties, and conflict resolution. Although this has been recognized as an enforcement priority and is a step in the right direction, we would slightly differ from CCI’s observation insofar as replacing ‘may’ with a positive mandate for creating a negotiation framework.
[C] Diving deeper into the contractual impositions, another issue that arises is the platform price parity clause. This stipulates that retailers must not offer better prices on other marketplaces or on their own websites. Although these clauses may be anti-competitive in certain circumstances, their absence will lead to free riding, therefore we agree with the CCI’s approach by observing that these clauses can be examined under Sec. 3(4) and also under Sec. 4 of the Act.
[D] Instances of exclusive agreements between platforms and service providers have been reported, in which a certain product is compelled to be launched on a single platform only (smartphones being the most common example) and also in which the platform lists only one brand in a certain product category. Prima facie these agreements are not anti-competitive, but the dominant platforms might use this as a tool to prevent the market from being pro-competitive. Thus, CCI rightfully observed that these agreements will have to be investigated on a case to case basis and could be examined under Sections 3(4) and 4 of the Act.
[E] The discounting policy and the deep discounts offered by the platforms have also been identified as an anti-competitive factor. Discounting gives significant control over pricing which can be used to increase the consumer base. There was disagreement amongst the opinions of the stakeholders consulted for the report, as the service providers are of the view that the platforms fund discounts in many categories whereas platforms deny having a direct role in pricing or discounts. For this, the CCI again observed that the competitive assessment in this regard should be fact-intensive and that this issue could be examined under Section 3(4) as well as Section 4(2) of the Act. CCI also proposed for adoption of self-regulatory measures for bringing out clear and transparent discounting policies.
Issues Not Recognised by CCI
Though the CCI in its Report has covered pertinent issues relating to platforms, there are certain issues and potential tools that have remained unidentified.
The Report briefly touches upon algorithms albeit only in the context of search rankings. It fails to consider the emerging challenges posed by algorithmic collusion. Collusion is defined as any form of co-ordination or agreement among competing firms to raise or maximize profits (essentially price-fixing). It is covered under Section 3 of the Act, which prohibits any agreement having an AAEC in India, including such agreements directly or indirectly determining purchase or sale prices. Therefore, the presence of an agreement is a necessary precondition for Section 3 to be attracted. The Poster Cartel case elucidates the nature of algorithmic collusion. In this case, a dynamic pricing algorithm, which tracked the prices of posters, was shared between the seller and conspirators and was programmed in consonance with the underlying agreement between them. However, when tacit collusion is facilitated through means of automated systems in the absence of an explicit or, in some cases, even an intended agreement (where algorithms co-ordinate prices independent of developers), it becomes difficult to identify anti-competitive activity. The present definition of ‘agreement’ under Section 2(b) is wide enough to include even actions and arrangements that may be informal and not even in writing, however, that is still not a solution for the problem of identifying algorithmic collusion.
Gatekeeping and Pro-Competitive Tools
The European Union (‘EU’), has been working on tools for defining, developing and regulating platforms. The EU, in its ongoing work on the e-commerce directive and Digital Service Act for platform regulation, has propounded some standards and pro-competitive tools, which would facilitate positive competition. One of these tools which we think can be applied in India is interoperability. Interoperability is a computing mechanism which enables computing systems to work together. For example, with regard to emails, notwithstanding whether someone is using the e-mail service of one particular platform, they are able to exchange emails to another. The same interoperability is seen in our mobile carriers. Platforms negate interoperability by practising gatekeeping; controlling the arrangements between businesses and consumers, which results in the aforementioned issue of platform neutrality. Thus, if platform markets adopt interoperability, it would be an effective tool. The EU has proposed interoperability obligation, requiring the platforms to compulsorily enable up-front interoperability in their services.
Proposal for Regulation and Role of CCI
Need for Reform
Even though CCI has successfully identified the competition concerns and has also recognized its advocacy priorities, we are of the view that it has failed to provide concrete solutions and approaches to deal with the challenges as previously discussed. The only conclusive observation made in the Report is a proposal for the platforms to adopt self-regulation which, in our opinion, is vague and demonstrates a laxity by the CCI.
Moreover, the CCI has disclaimed in the Report that these findings cannot be considered to be a legal document and cannot be used for any legal proceedings, thereby inspiring a lack of confidence. Thus, we explore a mix of the tools used by foreign jurisdictions coupled with novel suggestions to tackle the challenges associated with platforms.
Establishment of a Digital Market Wing
The Competition Law Review Committee (“CLRC”) made recommendations that inter alia called for the CCI establishing more offices for performing specific functions such as facilitating advocacy, awareness, accessibility etc. of competition law and issues thereunder. Thus, as an extension of that, we believe the CCI can, using its rule and regulation-making power under Sections 63 and 64 (“legislative powers”), establish a specialized organ i.e., a digital market wing (“DMW”) to deal specifically with competition issues in digital markets. This body would inter alia be responsible for developing a code of competitive conduct (“CCC”) i.e. a general set of rules that would govern platform markets broadly. This code can be made in consultation with industry stakeholders and the general public to enhance transparency. The Furman Review Report of the EU also further a similar proposal for creating a pro-competition digital markets unit. Thus, we believe that establishing a separate specialized oversight body would be an effective measure.
Setting Up an Observatory
CCI’s European counterpart, the European Commission (“EC”) has commissioned the setting up of an Observatory on the Online Platform Economy (“Observatory”) to monitor and analyze the latest trends in data and the online platform economy, produce insights and help the EC frame policies for the online platform economy. The Observatory comprises a diverse collective of independent experts that have thus far curated several research reports on issues concerning platform markets. Furthermore, it has an open-consultation mechanism wherein platforms and their users can consult with the Observatory and further submit any issues they may have to add to the information collected by the Observatory. Therefore, the CCI can adopt a similar tool that enables it to track the dynamic and fast-changing nature of the online platform economy, thereby enabling itself to be in a position where it can make ex ante rules, regulations and enforcements as opposed to a post facto approach.
CCI can, either as a function of its DMW (if established) or of itself, call for a periodic report to be submitted by digital market players it deems to be in a dominant position. The report would require such identified players to submit any information relevant to determining any AAEC. Such information could include details on search ranking algorithms used for listing sellers, the number of new sellers added every month, the number of complaints received by the platforms, the percentage of indigenous and non-indigenous products sold etc. A periodic submission of such data would allow CCI to track the market behavior and automatically ensure platform markets adhering to a stricter compliance standard. This would increase the transparency behind the algorithms used thereby mitigating, if not eliminating, anti-competitive practices e.g. algorithmic collusion and instances of possible abuse of dominance. Furthermore, such data submitted would potentially come under the ambit of community non-personal data as per the proposed non-personal data framework and could be thus required by CCI to be publicly shared. This would reduce the data dominance advantage enjoyed by marketplaces thereby lowering the barriers to entry for potential entrants and furthering healthy competition.
The Settlement, Commitment and Negotiation Mechanisms
The USA, EU and the UK all have what are known as settlement or commitment mechanisms, which are nothing but remedies proposed by parties to competition authorities for settling the case. It allows for speedy disposal, increased efficiency and saving of resources. In India, the Madras High Court in Tamil Nadu Film Exhibitors Association v. CCI held that Section 27 of the Act is broad enough to encompass settlement or compromise arrangements within it. However, there is no specific existing provision governing settlements. Thus, we recommend that CCI, via its legislative powers, formulate a framework for institutionalizing settlement mechanisms. Furthermore, as discussed, the CCI hinted towards the adoption of a negotiation framework for mutually deciding the basic contract terms such as commission rates, services, revision terms etc. but has failed in providing a mandate for the same. Thus, we recommend that CCI either incorporate the same within the CCC or alternatively formulate such a negotiation framework and make it binding for those platforms it identifies as dominant.
Platform markets bring with them a new paradigm of competition issues. It is, thus, imperative that CCI plays a proactive role in addressing the emerging challenges. The Indian competition jurisprudence is nascent but can learn from its foreign counterparts and foreign jurisprudence in order to effectively regulate the dynamic nature of platforms. CCI should change its approach by not relying on and waiting for platforms to self-regulate but by adopting a positive and ex ante action approach. The report is a positive step in the right direction; however, it must be met with by developing corresponding norms and frameworks, a few of which have been suggested by us.