Reforming competition law for the digital age

It’s important to address the issue of data dominance that an acquisition in the tech industry could throw up.

At a recent event, the chairperson of the Competition Commission of India (CCI) cautioned against the creation of large digital platforms and the agglomeration of data in the hands of a few entities. However, the extent to which this is a policy concern merits careful evaluation, keeping in mind the fact that political considerations have long dictated the government’s response to e-commerce players and other digital platforms. Any attempt to reform competition law for the digital age must instead focus on the actual cause for harm and then tailor remedies that address this cause.

Amazon’s brick-and-mortar competitors, politically relevant and well-organised through associations such as the Confederation of All India Traders, have for long complained about deep discounting practices. The technology behemoth has also been accused of using its vast data insights to directly compete with sellers while distributing their products on its platform. This erosion of platform neutrality had earlier influenced key choices in India’s Foreign Direct Investment policy, including a clear preference for marketplace models over inventory-based models. Subsequently, in February 2019, the Department for Promotion of Industry and Internal Trade published a draft national e-commerce policy advocating drastic measures such as restrictions on cross-border data flows and mandating big tech companies to open their data for the benefit of Indian startups.

These responses have invited criticism on the basis that they are more about knee-jerk politics than well-informed policy. The recent call for reform of antitrust law and competition policy must be appreciated with these developments and criticisms in the background.

The Indian Competition Act 2002 has broadly operated along the lines of antitrust law in the United States, which is to say that its foundations have been rooted in arguments of economic efficiency. These arguments that trace their origins to Robert Bork’s The Antitrust Paradox (1978) did not factor in the evolution of data as an economic asset. For Bork, anti-competitive behaviour meant practices that resulted in price distortion.

Data-driven innovation, on the other hand, is centred on identifying efficiency gaps in traditional business models and fixing them using an assortment of data mining and predictive analytics. In the course of advancing efficiency, digital platforms also gain from network effects. In simple terms, the more the number of consumers and sellers transacting over a platform, the more essential and indispensable the platform becomes to both sides. Apparently, consumers benefit from this phenomenon as platforms vie to get them on board. However, existing sellers would stand to be in an unequal bargaining position with the digital platform. Moreover, startups would find it difficult to compete with dominant technology platforms because the latter already control vast amounts of data. Competition law has been struggling for a while to capture this.

Before the present competition law came to be, the practice was to clamp down on businesses that expanded in size and scale. This was motivated by the philosophy that big is evil. The Competition Law Review Committee, chaired by Injeti Srinivas, submitted a report to the ministry of corporate affairs in July 2019, which echoes this philosophy. In order to tackle big ticket digital platform acquisitions, the report advocates scrutiny of mergers above a certain deal value over the existing practice of scrutinising mergers based on asset value. This is on account of many digital platforms falling short on assets and being valued instead for their network and data wealth.

It is true that many of the bigger digital platforms have wiped out competition by simply acquiring smaller platforms. Yet, experience suggests that many of these acquisitions eventually fail, leading to heavy losses for the acquirer. For example, Flipkart recently shut down the online retail platform Jabong that it had earlier acquired for $70 million.

Decisions on firm acquisitions should be left to the acquirer and any ex ante competition scrutiny based on deal value must be avoided. Instead, real reform should address the truly worrisome cause — the data dominance that any acquisition in the tech industry could potentially result in. Even this idea of data dominance is too broad, with room for further refinement and granularity in competition oversight through merger control. Big data analytics is usually thought of as deriving value from four Vs; veracity, velocity, volume and variety of data. Of these, the enhancement of data variety on account of an acquisition is probably most harmful, as it permits technology platforms to extend their dominance to other sectors.

CCI must, therefore, benchmark the variety of data in the hands of the acquirer, compare that with the variety of data in the possession of the acquired, and then evaluate whether post-acquisition, the variety of data in the control of the merged entity or acquirer firm would be such that it can result in long-term undesirable consequences on data-driven innovation, including excessive centralisation of power. This is just one instance of fitting the remedy to the cause, and similar mindfulness to the actual harm must dictate any future reform of competition law to suit the digital age.

Ananth Padmanabhan is dean, Academic Affairs, Sai University and visiting fellow, Centre for Policy Research