Challenges to Competition in Digital Markets

Challenges to Competition in Digital Markets


The article ‘Challenges to Competition in Digital Markets’ by Sajal Soni is a profound study of the impact of technology on competition law and the various lacunas to be effaced to make it suffice for the contemporary advanced era.

Introduction

The Current Legal Position on combinations i.e mergers and acquisitions has been laid down in Section 5 of the Competition Act, of 2002. It provides for notification of combination to the Competition Commission of India(CCI) before its consummation if it comes under the threshold of the asset and turnover criteria as prescribed by the Ministry of Corporate Affairs on a time-to-time basis. In 2016, the figures were such that where a company has a Turnover of less than Rs. 1000 crores or assets of less than Rs. 350 crores, then a notification to CCI isn’t required.

Technology has significantly impacted the way we live and conduct business. This trend has also affected competition law. In contrast to traditional businesses, digital market entities often prioritize increasing their user/database and introducing innovative products over generating revenue.

Lacuna in the Current Legislation

In the digital market, acquisitions can bring value through acquiring innovative businesses or the data of target companies, which may not have significant assets. Additionally, technology companies often prioritize building a large user base rather than maximizing revenue, meaning that traditional measures like asset and turnover thresholds may not accurately reflect the potential impact of a merger on competition in the tech industry.

As data becomes the key factor for running every business, especially in the digital world, the need for regulating the same becomes more and more necessary with each passing day. This need has been recognised by the Indian government too, which led to the draft Data Protection bill, which is open for public comments and objections.

But companies having a large database of users can indirectly use it for further any business and hinder the competitiveness in the market by way of acquisition by an already existing company in the relevant market e.g Facebook acquired WhatsApp and Instagram, the other two big players in social media space to prevent competition, Similar was the case in the acquisition of Myntra by Flipkart. Though these two transactions may not have particularly raised competitive concerns at the time and surely are examples which explain the importance of data and user base apart from the revenue generation in the digital space.

Data and user base is supreme in the present world which is becoming digital, especially after the pandemic. The misuse of data and access to a large user base debilitate the ability of other companies or individuals in the marketplace to compete. The issues with misuse of data and user base access were highlighted by the Competition Commission of India’s Market Study on E-Commerce in India, some of the major issues highlighted in the report are:

1. Platform neutrality– The platforms which act as a marketplace for clothes, food items etc often promote their private brands or cloud kitchen products by twitching the Search results algorithms, giving more discounts on them, or making them more visible. Similar is the case with brands which exclusively sign with a particular marketplace. This is unfair to other companies. Thus, the intermediary platform indirectly controls the sale/revenue of companies which is a huge competitive concern as it acts as a barrier to new entrants in the market.

2. Dominance– When a player has a large active user base ex. Amazon become more and more pervasive in that particular space, and as a result, the third parties on the platform lose bargaining power and need to run at the behest of the Intermediary.

3. Misuse of data by companies was also highlighted when Google came under the fire as it had the largest search-related database and could manipulate the search results in any way it wanted and present it to the end-user.

The problem gets further aggravated when such big companies acquire smaller budding companies in the same space of data and user accumulation, but this acquisition goes unscrutinised because the target companies come within the limit of the threshold of revenue stipulated under the Competition Act. This is a major lacuna of the current legislation.

The Competition (Amendment) Bill proposes to incorporate the deal value of transaction criteria to bring under its ambit the combinations taking place in digital space. The limit for the deal value of the transaction stipulated by the bill is Rs. 2000 Crore, if some deal crosses this limit, CCI’s approval is necessary. But these criteria need to be more defined for it to be successful in achieving its purpose.

There are two key takeaways from this situation. First, the current merger regulations in India do not adequately address the unique characteristics of the digital sector and other industries where traditional measures like assets and turnover may not accurately reflect a company’s competitive strength. Second, the proposed amendment to the Competition Act offers a starting point for reforming the existing framework.

Practises elsewhere in the world:

Germany:

Germany has also used the deal value threshold (hereinafter referred to as DVT) as a yardstick of measure to increase the ambit of scrutinization by its competition commission. In 2017, Germany introduced DVT, the reason behind it was that, in the digital economy, some transactions may not involve large turnovers but could still be scrutinized due to the target company’s potential to impact competition in relevant markets. The DVT approach aims to prevent acquirers from expanding their portfolio, creating barriers to entry for competitors, or acquiring emerging competitors without facing an antitrust review.

Section 35(1a) requires that transactions, where an acquisition is valued at more than 400 Million euros and the target company, and where the target company has substantial operations in Germany, then such a transaction is subject to the review by the commission. The experience of Germany with this provision can act as a good head starts for India, as they also issued an explanatory note for factors involved in the computation of DVT which often remained unclear in the past, such factors also included that “In the digital sector, regard can be had to a number of daily/monthly active users and the number of frequent visitors to the website.”, thus providing for a more holistic review in line with the developing technological world. U.S., U.K and Singapore have used similar practices to regulate transactions in digital space.

European Union:

EU’s Digital Markets Act (DMA) entered into force on 1st November 2022 to regulate the digital market and bring under the purview of the European commission transactions which may disrupt competition in the digital economy. This is done by designating such companies as gatekeepers.

For designating an entity as ‘Gatekeeper’, both financial and user base criteria need to be fulfilled and the companies themselves have to report to get such status within 45 days of enforcement of the gatekeeping provision i.e from 1st May 2023.

This Act can act as a great example for others as well, it provides for a presumption of gatekeeper status too and a company falls under the gatekeeper status if-

1. It provides core platform services i.e a gateway/channel between business users and end users. These services include “online intermediation services, online search engines, online social networking services, video-sharing platform services etc.”

2. Impact on EU’s internal market- To meet the criteria for this company, the annual turnover within the EU must have been at least €7.5 billion in each of the past three financial years, or the average market valuation must have been at least €75 billion in the past year. Additionally, the company must offer the same core platform service in at least three member states.

3. To qualify for this criterion, the company must have a strong and lasting presence in the market. On average, it must have at least 45 million monthly end users based or located in the EU, and at least 10,000 yearly business users based in the EU in each of the previous three financial years.

Thus, the above provisions especially the userbase criteria provide a safeguard to ensure competitiveness within the digital market.

The act also provides for prohibitions and obligations of such gatekeepers, thus further securing the interests of the market’s competitiveness. Though implementation of this act remains to be seen the outlook appears to be positive as the provisions incorporated have been well thought out and inclusive of all the factors.

India: The Way Forward

India is already in the process of including the DVT criteria as seen from the amendment bill but to put this into operation, it requires careful perusal of many factors as highlighted in the explanatory note issued by Germany. Some of these factors are:

  • Deciding on the appropriate method for calculating the DVT and what should be included in the calculation;
  • Handling changes in the value of the transaction;
  • Considering which monetary and non-monetary local nexus criteria should be combined with the DVT.

These factors need to be clearly defined for successful implementation and achieving the objective of this amendment, only defining the limit of transaction value won’t suffice, as seen from the experience of other jurisdictions.

The approach taken by the EU by introducing the Digital Markets Act is plausible and may even lead to proper regulation of the space but proper examination of this scheme needs to be done in w.r.t Indian scenario as well and it needs to be ensured whether combinations which currently bypass the check will later on with such provisions come under the ambit of scrutiny. Thus, proper study needs to be undertaken beyond our study’s scope.

Another method to put a check on such combinations is by giving the CCI the discretionary power to undertake a review of a combination post its consummation even when it doesn’t come under the given limits/threshold but leads to anti-competitive practices. This approach, if incorporated, may be the best solution considering the changing nature of the digital markets but it is to be ensured that this power is not being used for any other purpose.

References

[1] The Gazette of India, Available Here

[2] Competition Act, Available Here

Important Links

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