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Saturday, June 06, 2020

Competition policy should be driven by safeguarding competition, not competitors

Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.

Written by Ishan Bakshi | Updated: March 6, 2020 11:07:52 am
Competition policy should be driven by safeguarding competition, not competitors By and large, the online market has been carved up by large players. (File Photo)

The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments: Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings. Some niche players do exist in these segments, but by and large the market has been carved up by large players.

Of late, several of these companies have come under the scrutiny of the Competition Commission of India (CCI). The issues involved here have far reaching ramifications for both online and off-line market places. Some of the more contentious issues are: Do such market structures restrict online competition? Are the players engaging in predatory pricing? If so, is it driving out both online and offline competition and does this adversely impact consumer welfare? Is there need for policy intervention, and, if so, what should be the underlying framework?

In theory, the online market structure should facilitate greater competition given the lower barriers to entry. But this may not be the case. Most other firms in the segments mentioned above have either been taken over or have folded up.

One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop. This leads to market concentration. Given the network effects, which are common in digital spaces, it becomes difficult for new players to enter these spaces, and gain market share as there isn’t much space for many such networks.

Another possible explanation is that, contrary to perception, the online space is highly capital intensive. Deep pockets are required to fund the discounts to get customers on board initially. Such market structures are more likely in capital deficit countries like India. Incumbents, as in other sectors, may also engage in various strategies to restrict entry and thus competition. Even small actions by these platforms coupled with the network effects can adversely impact competition.

This would suggest that competition is likely to be restricted and new entrants in the online space will be rare, unless facilitated by technological changes, regulatory intervention or through deep discount pricing backed by deep pocketed firms. The question is: Do such online market structures also adversely impact offline competition and thus consumer welfare?

Many allege that these two-sided online platforms engage in predatory pricing or below cost pricing either by funding it themselves (deep pockets) or by squeezing producers. This drives out competition — both online as well as offline. Predatory pricing is anti-competition to begin with. While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses. But is it that straightforward?

First, assessing whether a platform is engaged in predatory pricing — in India, it is defined as price falling below average variable cost — may not be a straightforward exercise. The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in. Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories. As do both online and offline firms to acquire customers in the early stages of their business.

Second, the impact of such pricing strategies on competition and on consumer welfare must be carefully assessed. It is quite likely that once competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices. Driving out competitors may not be the same as driving out competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist. Platforms will be mindful that losses will be hard to recover, and may not engage in below cost pricing to drive out competitors for extended periods. Consumers are unlikely to loose out as prices are likely to remain low.

But, on the other hand, there is also an argument for closer examination of such market structures because of the possibility of collusion. In most such markets, as the consumer has little to differentiate between the two platforms, it is price that sets them apart. Consumers tend to gravitate towards the cheaper option. This ensures continuous competition between the major players to offer low prices. But there are limits to this strategy. It is possible that at some point, the players will find it in their interest to venture into some sort of agreement that allows both of them to survive, rather than be engaged in a race to the bottom — as has seemingly happened in the telecom sector.

Further, linking predatory pricing with an abuse of dominant market position must be reexamined. As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing. Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established. Alternatively, the definition of market dominance could be expanded to take into account deep pockets.

Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise. Having a fixed predetermined framework is unlikely to be helpful. Instead it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.

Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.

This article appeared in the print edition on March 6, 2020 under the title ‘Online versus offline’. Write to the author at ishan.bakshi@expressindia.com.

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