On November 10, 2020, there were two landmark events in the universe of antitrust law – China drew up its first set of antitrust laws to address anti-competitive practices in tech firms, and Europe laid out its first charges against Amazon for abusing its position as an e-commerce giant. Just last month, the United States filed a case against Google, alleging that it abused and furthered its position as the dominant search engine by unlawfully impeding its competitors. Google has also faced similar charges in India over the past three years. These include abuse of dominance across the search engine market, Android smartphone market as well as the Google Flights service.
These cases bring to the forefront a larger structural problem at the intersection of technology, economics and the law: how can traditional competition law, which was designed to ensure free markets for brick-and-mortar stores, be reformed to include firms in the digital economy?
Firms in the digital economy here refer to tech platforms like Google, Amazon, Facebook, ride-hailing apps such as Uber and Ola, and food-delivery apps like Swiggy and Zomato. They have gained an increasingly larger market share in recent years, and have faced few to no competitors. Here’s where regulating competition among them becomes tricky: these firms rely on the principle of network externalities, where an increase in the people using the service improves its quality. One can argue then, that the firm can only succeed when the number of people using it increases. So then, is regulating competition and ensuring the reduced market share of a firm really the best move, especially when these firms have provided services to customers at low rates? A counter-argument to this can be made regarding predatory pricing, which refers to cutting prices below cost in order to increase market share. This is considered to be anti-competitive as it drives competitors out of the market since they cannot keep up with such low prices.
Concerns such as predatory pricing are similar across firms in the digital economy as well as regular brick-and-mortar stores. However, the unique features of the digital economy, such as network externalities, consumer lock-in effects, and usage of collected consumer data for targeted marketing are new problems that haven’t impacted businesses in the past. This calls for countries to update their antitrust laws, in order to sufficiently address anticompetitive practices among firms of the digital economy.
One way to contextualise this issue is to look at the history of American antitrust law framework, as done by Lina Khan in her seminal paper Amazon’s Antitrust Paradox. She explains how the current laws focus on regulating competition through a consumer welfare perspective which primarily looks at keeping consumer prices down. She stresses the need for restoring traditional antitrust laws that looked to preventing companies with large market shares from exploiting their dominance.
To do this she suggests two approaches: First, to reform antitrust law in a way that it preemptively prevents a firm from becoming the dominant player in the market. This means making laws against predatory pricing more robust and scrutinising mergers that allow firms to acquire valuable data and leverage it, i.e. introducing a component of data threshold to mergers, apart from existing laws on monetary thresholds. Second, is to accept that online platforms are inherently monopolistic or oligopolistic and regulate them accordingly. This reforms antitrust law such that it allows a firm to become dominant and take advantage of the economies of scale, but neuters its ability to exploit its dominance. This includes ‘public utility regulations’, which allow a firm to maintain business across multiple lines of business while ensuring that it does not unfairly advantage its own business or unfairly gain market power. Another reform is ‘common carrier duties’ which require platforms to ensure open and fair access to other businesses, similar to the argument made regarding net neutrality.
Although Khan’s paper was primarily written in the context of American antitrust law, the arguments made can be applied to Indian competition law as well. To implement such reforms in an Indian context, Shah, Parsheera and Bose look at the Competition Act 2002 and propose certain changes to make it suitable for the digital economy age.
They propose that the CCI use a “recoupment test” to differentiate between firms that have slashed prices competitively versus those who have done so in an anti-competitive manner (such as predatory pricing). This test checks whether a firm that currently has low prices can sustain these prices in the future and still remain solvent, or whether they would need to increase prices in the future (after having gained significant market share and kicked their competitors out of the market.) This would mean an amendment to the current definition of predatory pricing from being about merely cutting prices below cost to include the recoupment test too.
Parsheera et al. also suggest that the CCI examine the role of investors, in cases where the same Private Equity fund has invested in the leading firms in a market. Examples of this include Tiger Global investing in Flipkart and Shopclues, ShopBank in Flipkart and Snapdeal, and so on. In such situations, the common investor could determine the level of competition in the market. This could lead to harmful outcomes such as high prices for consumers, as well as reduced quality and types of products.
There have been other reforms suggested by politicians such as Elizabeth Warren, who called for “Breaking up Big Tech.” However, experts like Charlotte Slaiman, a former antitrust lawyer in the US Federal Trade Commission, says that such solutions are unfeasible as it is difficult to determine which parts of a firm belong to which broken off entity. Nevertheless, regulators can take a retrospective look at mergers that they may have given a green light to in the past. In the Indian context, the CCI can reassess previous mergers and antitrust cases with respect to current situations of the market. This can allow for an ex post facto correction of possible anti-competitive mergers.
As Big Tech becomes increasingly intertwined with our everyday lives, it’s important now more than ever, to consider the tradeoffs of its current benefits to future disbenefits. Whether it’s trading data for the ‘free’ service of social media, or getting deep discounts on your Amazon purchases, there are significant downsides. By amending our laws to consider the economics of the digital economy, we can continue to reap the benefits of technology while sheltering ourselves from its potential pitfalls.
Samyukta is a student of Economics, Finance and Media Studies at Ashoka University. In her free time, she enjoys discovering interesting long-form reads and exploring new board games.