Competition Law in Digital Platform Era

Are we running a cricket match using football rules, asks Ajit Balakrishnan.

The rules of football are clear even to schoolboys: Only the goalkeeper can handle the ball and that too only within the penalty area.

But the goalkeeper can't handle the ball if it comes to him directly from a team mate's throw-in.

If a foul is committed within 12 yards of the goal, a penalty kick is given, and so on.

Then, cricket suddenly becomes the fad game. In this new game, the school kids are warned that the ball can be dealt with only with their hands -- anyone found kicking a cricket ball around will be fined!

India's competition laws may find themselves soon in a situation not much different than this football-cricket example as digital platforms work their way through the economy.

As that happens, our current definition, of which business actions call for enthusiastic cheering and which require a penalty being imposed, may change.

In the past half a century or so of the industrial economy, we have learnt to swear by 'competition' as the main driver of 'efficiency'.

For all of us folks steeped in management science and economics, a strongly held belief in 'competition' is the equivalent of believing in the church for a Christian, the gurdwara for a Sikh, or the temple for a Hindu. This is the cornerstone of being a 'modern' man, a contemporary thinker.

The exalted ideas that all of us hold about competition and its sacrosanct role in the economy can in some ways be traced back to the work of people like Richard Posner, the eminent American jurist, who, for example, argues in his seminal treatise on US competition law (they call it 'antitrust law' there) that the 'fundamental objective' of such law is 'the protection of competition and efficiency'.

In the industrial economy the most foul-worthy action for a business (the equivalent of a non-goalkeeper in football touching a ball with his hands) is to be caught being part of a 'cartel'; cartels being defined as a collection of sellers who conspire to jointly charge higher than normal prices.

This is taken so seriously that in the United States and Europe, for example, creating and operating cartels can attract criminal prosecution and often very heavy fines.

Some examples of such fines are the $2.5 billion imposed in the US on four banks that operated a foreign exchange rate manipulation cartel, and the European Council fine of E953 million imposed on an automotive bearings cartel.

In India there have been some big cases on this ground against companies making dry-cells, companies in healthcare, and so on.

Another action widely believed to be foul play in the industrial era is 'predatory pricing'.

As Wikipedia succinctly says: 'Predatory pricing is a pricing strategy, using the method of undercutting on a larger scale, where a dominant firm in an industry will deliberately reduce its prices of a product or service to loss-making levels in the short-term.'

With the advent of digital platforms, things like 'cartelisation' and 'predatory pricing' are no longer as simple as they have seemed so far.

With digital platforms three new processes get underway (thanks McKinsey for pointing this out): Digitisation, disintermediation, and disaggregation.

An early example is the printed newspaper industry.

With digitisation, readers switched to reading news that was posted online.

With disintermediation, the chain of newspaper distributors, dealers, and streetside newspaper vendors were drastically reduced with readers reading from the Web directly.

With disaggregation, what was once an integrated print newspaper with matrimonial ads, real estate ads, and jobs ads got disaggregated in a way that stand-alone matrimonial Web sites, real estate Web sites, and job Web sites emerged, pulling away advertising revenue away from print newspapers.

This kind of digitisation-disintermediation-disaggregation has worked its way through many other parts of the media industry like the movie industry and radio broadcast industry.

A similar process is under way in the financial services industry with composite banks being dis-aggregated to payments service players, lending service players, and share trading players.

And, of course, as is well known in e-commerce, multiple chains of wholesalers, regional distributors, and local retailers are being eliminated through this disintermediation.

Is all that is going on 'fair' competition? Can the current competition laws deal with them?

And while prices that these new digital players charge are very much lower than the brick-and-mortar players, the charge of 'predatory pricing' as currently defined doesn't appear to be a weapon precise enough to fight these low-price players and discounters.

In the industrial era, increased sales often are a challenge to the quality of products. On digital platforms the opposite is true.

For example, if there are many developers producing great apps on a given platform -- say, the Android mobile platform -- even more consumers will be drawn to that platform.

When this happens, even more app developers will be drawn to it.

This 'positive feedback loop' is what is behind the oft talked about 'network effects' on successful digital platforms.

Unfortunately, in seeking such positive feedback loops, many platforms with help from venture capital and private equity investors subsidise the initial flow of users to achieve the scale needed for such network effects (for example, in e-commerce by offering free shipping).

How and whether competition law needs to view this positively or punitively is something thoughtful people worldwide are still grappling with.

The game in digital platforms is thus probably different than in the industrial.

And just as cricket can't be played using the rules of football, does a new competition law not need to be drafted?

Ajit Balakrishnan (ajitb@rediffmail.com), founder and CEO, Rediff.com, is an Internet entrepreneur and as a member of the committee that updated the Indian IT Act 2008 personally wrote Section 79 which introduced the concept of 'Intermediaries' and governs Internet platforms.