Amazon and Flipkart have become the latest casualties of the Indian government’s adventurism in regulating e-commerce in India.
Just a few days after a crucial rule came into effect, Morgan Stanley predicted that Walmart may divest its stake in Flipkart, while The New York Times has forecast “less consumer choice and higher costs” for Indian consumers.
Admittedly, the new rules are vague and imprecise, and the regulatory process through which they were enacted leaves much to be desired – leaving businesses uncertain about their obligations, and their consumers in a lurch.
However, the rules are also an acknowledgement of the growing need to reckon with regulatory concerns posed by economically powerful platforms. The principles informing these rules are worth a calm introspection, rather than hurried reprisal.
Platforms, power and politics
The offending piece of regulation, innocently named ‘Press Note 2’, lays down the obligations to be followed by e-commerce marketplaces like Amazon and Flipkart, which are defined as “platforms” that “facilitate interactions between buyers and sellers”.
Broadly, the new rules try to address the above problems by requiring two structural changes to how e-commerce marketplaces operate.
First, the rules seek to ensure a structural separation between the marketplace and the goods or services sold on it. Therefore, the platforms can no longer sell products produced by companies it is related to or has control over. This separation existed since 2016 under the extant FDI policy, but business models had been suitably adapted to find loopholes, which continued to allow marketplaces to sell their own inventories. These loopholes have now been closed, reducing the chance of a conflict of interest in a platform prioritising its own goods or services over those of a competitor.
Second, marketplaces are obliged to operate in a ‘fair and non-discriminatory manner’, with respect to their treatment of third-party vendors, as well as in the offering of discounts, which is defined as a requirement to provide similar terms of service to all their vendors.
This is a novel and radical requirement, similar to the requirement of network service providers that they ensure neutrality with regards to the data that flows through their infrastructure, a crucial requirement for an open internet which is presently in force in India. The new rules treat platforms as essential infrastructural utilities (like water or electricity), and recognise the importance of non-discriminatory access to such infrastructure as a systemic condition upon which a fair digital market must operate.
In and of themselves, these requirements are neither unprecedented, nor, contrary to reports, do they present radical threats to India’s e-commerce market. Instead, they extend existing concepts of market regulation to regulate the economic power of online platforms. Properly implemented, such requirements are crucial for the future of a fair and innovative digital market.
From ‘network’ to ‘platform’ neutrality?
Economic power tends to naturally concentrate in digital platforms because they exhibit ‘network effects’, where the platform’s value to its users increases in proportion to its use by others – more sellers attract more buyers, and vice versa.
Once such networks are established, often through the usage of heavy discounts on products in the early stages, they become difficult for users on either side of the market to exit, particularly where the platforms control crucial market information regarding consumer choices and purchasing patterns which can not be transferred by the seller or buyer to competing platforms.
The ability of online platforms to exercise a high degree of control over information and networks poses a significant concern to the structural integrity of the economy, and, in a broader sense, to the polity.
While Amazon and Flipkart may be able to exploit efficiencies in their business models to offer lower costs to consumers, this could come at the cost of granting significant political control over public facilities, like crucial market information and access to networks, to such private entities.
In the context of e-commerce, it could allow dominant entities to determine the success or failure of a product or company, stifle innovations which threaten to disrupt an incumbent business model and monopolise the gains and insights from information flows over the platforms.
These concerns are not merely theoretical – e-commerce marketplaces prioritise entities which they control or have a stake in. In India, Cloudtail and WS Retail are affiliated to Amazon and Flipkart respectively.
These type of entities routinely use information gathered from users and sellers to sell similar competing products in high-performing categories. And they leverage their gatekeeping power to impose unfair terms of service to sellers and users, such as arbitrary changes in return or exchange policies.
Unclear drafting, improper scope – the Pitfalls of the new FDI rules
Regardless of its intentions, the process, scope, and framing of these rules is highly problematic. To begin with, while the concerns posed by dominant platforms have been noted academic literature and by regulators in other countries, the present FDI policy does not appear to be informed by any evidence-based study.
Ex-ante market regulation, particularly in an area of rapid innovation, must have a sound empirical base and satisfy a clear (and high) threshold for intervention. Unfortunately, the policy does not offer any justification for the use of such blunt tools, nor does it explore alternatives for achieving competitive outcomes.
Further, while the present scope of the FDI rules intersects snugly with major online e-commerce platforms, the rules do not extend to similar platforms with only domestic capital, like Paytm Mall or Reliance’s upcoming e-commerce venture, which sits uncomfortably with the pro-competitive nature of the rules.
Finally, the conditions for the continued operation of e-commerce marketplaces, as well as the operational requirements to implement fairness and non-discrimination are incredibly broad and difficult to implement in practice. A similar proposal for platform neutrality in France, for example, was tempered by the condition that any discrimination must be justified by the ‘need to protect rights, ensure service quality or for other legitimate business reasons’, which provides a reasonable standard by which platforms can continue to model their business around.
While such concerns could be addressed within the sphere of competition law, the Competition Commission of India appears unprepared to deal with these concerns.
In November, last year, it washed its hands off a complaint by the All India Online Vendor’s Association against Flipkart, noting (without a detailed examination) that neither Flipkart nor Amazon met the required threshold of holding a ‘dominant position’ in e-commerce, to come under scrutiny of India’s competition law.
A previous finding of the commission, after a seven year investigation, held Google accountable for preferential treatment of its own services through its search engine platform, but failed to provide useful precedent to engage with the competitive concerns of online platforms. A thorough re-examination of the application of competition law to digital platforms will be necessary if the principles-based, ex-post regulatory option of competition regulation is to be considered viable and future-proof.
With the government looking to revamp India’s ‘e-commerce’ policy, it is high time that regulators and policy makers stop shooting in the dark and draw up a coherent plan for India’s digital market which tackles the complex issue of platform regulation with evidence and nuance.
Originally Published – https://thewire.in/business/india-amazon-flipkart-concerns-fdi-rules