By Vinod Dhall

The issue of enforcement of competition law in digital markets has been engaging the attention of several competition authorities and lawmakers for some time. A committee of the United States Congress came out with a report suggesting new laws to regulate the biggest players in these markets such as Amazon, Meta, Alphabet, and Apple; but these laws have not been enforced yet. In Europe, a new law has been enacted and is to be enforced shortly. The Digital Markets Act (DMA) seeks to identify the biggest players, to be termed gatekeepers, basis certain criteria, and impose, ex ante, various obligations on them, such as preventing them from imposing exclusivity on business customers, mandating transparency in services to advertisers, allowing third party apps/ stores to be installed, forbidding the use of data acquired from business users to compete with them, and so on.

In India, the Parliamentary Standing Committee’s report on competition in digital markets includes analysis of these markets and observations on their distinctive characteristics that enable major players to acquire dominance and subsequently abuse it to unfairly compete. It noted that such large players are able to capture the markets, prevent new entry, misuse their vast store of data, and resort to ‘killer acquisitions’ of budding competitors. The Committee has recommended a new law for ex ante regulation of leading digital players. Following on this report, the ministry of corporate affairs has set up a technical committee to prepare a draft of the proposed law. We are thus proceeding on a similar road to the European Commission.

It is a given that digital markets are different. With respect to economies of scale, a digital enterprise may be able to continuously upscale its operations at minimal marginal cost. It may be able to provide a range of services on a single platform, thereby developing its own ecosystem, bringing many benefits to the users and leading to a situation where essentially ecosystems are competing with each other. In their multifaceted activities, they simultaneously service different customers, with markets on all sides interacting with each other in real time. It is often the case that on one side, the service is free and therefore, price comparisons, typical in competition analysis, are not possible. The competition within and between ecosystems may be based predominantly on quality and innovation.

There is a strong school of thought that questions the wisdom of ex ante regulation as visualised by the European DMA. Notably, the example of the DMA has not been followed by many countries which continue to rely on competition law to address the alleged anti-competitive abuses of major digital players. The practices of gatekeepers that the DMA seeks to prohibit are those that the competition authorities have confronted in cases before them under competition law. However, while under the competition law, any allegation of violating the law by an enterprise calls for a careful analysis case by case, the DMA seeks to prohibit these upfront without the benefit of in-depth analysis and without affording the enterprise to present justifications or defend itself.

However, the interplay between competition, innovation, and quality is not fully understood by competition authorities and this does not lend itself to the same kind of analysis as the more prevalent competition on prices. Further, often, the complexity of business models in digital markets is also not fully grasped by competition authorities. For example, one digital ecosystem may be based on revenues from subscription, while another’s revenues may be based on advertising. Yet, the two may be competing against each other. It is worth heeding the cautionary views of former French Supreme Court justice Frederic Jenny. He is an eminent expert in competition law and he details his views in the paper Competition Law and Digital Enterprises: Learning to Walk Before we Run.

Some of the common alleged anti-competitive practices by digital behemoths are self-preferencing, exclusivity, denying access to applications that compete with the ecosystem’s own app, and using data from competitors to compete with them. In the case of mergers, it is alleged that digital giants undertake the acquisition of startups to kill potential competitors. Many of these practices would not appear so dreadful if the business model of the digital major were properly appreciated and if markets were not viewed only narrowly. However, it is understood that there is competition not just between apps but also between ecosystems.

An ecosystem may be offering a combination of services and the consumer preference for it may arise from the particular combination and the ease the user experiences in moving seamlessly from one service to the other. This may explain the insistence that a whole suite of apps should accompany the platform. Self-preferencing may arise not just to gain market share over a competitor but because of the higher quality of the ecosystem’s own app. Accumulation of more data may be sought for continuous improvement in the quality of the service provided by the ecosystem as well as making it more attractive for advertisers.

In the case of alleged ‘killer acquisitions’, it needs to be asked how the acquisition enhances the quality and consumer experience of the acquiring ecosystem; and without the acquisition, what would have been the fate of the acquired startup. Would its innovative product ever reached consumers on the scale it would gain in the hands of the acquirer? Is there not an incentive to innovation when the startup itself aims to develop to the extent to which it is an attractive target for the acquirer?

Size and technology by themselves should not become an obsession for regulators and lawmakers. Besides, politics should not be allowed to trump economics in the search to curb the power of large digital players. According to some, the European DMA represents an overkill and it might result in stalling innovation and competition and consumer welfare.

This points to the need for caution in the pursuit of large tech firms. Ex ante imposition of considerable restraints on digital majors without the benefit of case-by-case analysis may destroy the incentives for growth, investment and innovation, as well as erode the vast benefits for consumers. Competition law itself must evolve and become more sophisticated to better appreciate the business models of digital giants. It must accommodate existing principles, market definitions, and analytical tools of competition law. This way, it should be able to curb anti-competitive practices without adversely affecting efficiency and innovation.

The writer is former head, Competition Commission of India