Digital marketing

This article is written by Shaunak Choudhury pursuing a M & A Diploma Course. This article has been edited by Ojuswi (Associate, Lawsikho). 

This article has been published by Sneha Mahawar.

Introduction

Regulation of the competition in a country’s market is one of the intrinsic methods of ensuring that the price of goods does not skyrocket and that consumers get what they pay for. If competition is not supervised, a large market player can easily abuse their dominant position to either carve out a greater piece of the market share or corner consumers. But this regulation cannot be based on a stagnant dimension that does not properly represent the market situation. As the market grows not only in size but in characteristics as well, this regulation would have to adapt. One such adaptation needs to be made to reign in the fast-growing digital market. This article shall hence focus on the regulation of competition in a digital market space, with a specific focus on the rubrics that would govern such competition.

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Competition in India 

Currently, the Indian market’s competition is regulated by the Competition Commission under the Competition Act, 2002. There are no special provisions to deal with the competition in digital markets and the first impulse that one would have in that situation is to suggest that there be new legislation that specifically deals with it. For example in Germany, amendments were recently made to its competition law to address the growing concern surrounding big tech in the digital market. Certain companies that have an almost ubiquitous presence on the internet like Google have been given the status of a digital gatekeepers. Google, having as many digital services as it does, and virtually being a monopolist in certain fields, would be handled differently by the German competition authority (Federal Cartel Office) as compared to other internet-based companies. 

New regulations don’t need to be introduced to deal with the digital market competition; firstly, because CCI can interpret the law in India in such a manner that it encapsulates the digital market as well, and secondly because introducing legislation, especially on the central level takes experimentation, research, and debate which may take the time that the market does not have. It is certainly possible for the CCI to manage to regulate the digital market in the current working framework. And certain rubrics for monitoring digital competition that have been mentioned in this article are already matters that the CCI is equipped to deal with, such as determining the relevant market. But the issues come up in the more specific areas of regulating the digital marketplace. And the gap in the current era of competition regulation and the current marketplace is evident from the fact that the Competition Act was itself a law passed in a time when digital marketplace competition was not on the priority list, or even on the list of possible concerns. Hence at this juncture, it would be helpful to go through a few of the rubrics that need to be considered when specifically looking at digital marketplace mergers. 

Rubrics for monitoring digital competition

Trying to solve the issue of digital market mergers, the first hot button issue is generally the aspect of the monopolization of user data, which can be collected, analyzed, and utilized for further capturing the market. The better the companies know their customers, the better their operations generally get. But that is not the sole ground on which competition is to be monitored. The second rubric for monitoring the digital market is how a company gains a portion of the market, that is, by capturing a user base, and that can only take place through a good product, effective marketing, and attractive prices. Flipkart and Amazon have been able to gain market space in their fields primarily due to the highly discounted prices of the products on their platforms. 

The third rubric is the interrelationship between digital and brick-and-mortar businesses. When we look at the market space as a whole, we cannot ignore offline businesses and the competition between them and online stores. Because of online stores, there are already plenty of brick-and-mortar businesses, especially smaller ones, that have felt the heat of their competition with online stores (particularly during the pandemic). This brings up the issue of substitutes in the market. The products that are offered online are also generally available offline, the difference being in the convenience of buying something online, and the reliability of buying something offline. Moreover, the interrelation between online and offline doesn’t end there, as online stores have their offline branches as well. 

The second rubric should have a moderating effect upon any merger regulation, as ultimately competition law is meant for boosting innovation for the benefit of the consumers. The third rubric is more complicated, in that, it lays down how one is to perceive the definition of “relevant market” when deciding on competition violations. The reason why “relevant market” is very important is that it fundamentally decides whether a business has violated competition laws or not. If the definition of the relevant market is too narrow, the market share of the business can be high, but because the market is so narrow, it does not have enough of an impact on the general populous; hence even though a merger may be considered as a competition violation, it would be a pedantic conclusion. If we have a very wide definition of the relevant market for any case, then a competition violation may not be caught. 

Targeting younger firms

The fourth rubric to consider is the difference in strategy concerning the mergers and acquisitions undertaken by digital players. Larger companies such as Amazon, Google and Facebook tend to acquire young targets that are yet to be well established in the market and have very low turnovers. The reason why the big companies buy out the smaller ones is to either exploit future potential or kill future competition. But because at the time of acquisition competition authorities are unable to identify the opportunity or threat for the acquiring company, and the combination goes under the radar until it’s too late. The competition authority would have to project the development of a nascent start-up to determine the success that it would achieve in the future; the future success based on which the large acquiring company is entering into such an arrangement. 

It would be impossible to predict such a thing as the market is not as conventional and formulaic, because if it was then we would be able to mark out the progress of any business, which we obviously can’t. It is only after the fact that we can trace the reasons for the success of a business and create a case study of it. But the benefit of hindsight would not aid in the monitoring of competition as it would mean that we would have to engage in ex-ante regulation, that is, retrospective action, which is generally not preferred in law; especially for two reasons in this case – mergers and acquisitions are expensive and more expensive to undo. It would also not be feasible to examine every single acquisition that digital players make. We must also consider that as per general principles of competition law, companies are not to be penalised for potential competition violations, but for real ones. This rubric is a complicated one to deal with and a middle ground would be most appropriate. 

Conclusion

This article has listed four rubrics to specifically consider in the case of digital market mergers.

  1. Collection of Data
  2. Capturing User Base
  3. Relationship between online and offline business
  4. Targeting young firms

Data certainly needs to be one of the considerations when the Competition Commission is reviewing any combination that involves tech companies. Not just the collection and concentration of data but the analysis and utilisation of it in a manner that would capture greater chunks of the market. 

But more importantly, to set the entire investigation straight right from the get-go, it is vital that the “relevant market” be defined in a manner that not only encompasses the digital space but also the brick-and-mortar space to have a more nuanced approach towards competition regulation. And this regulation needs to be such that it does not stifle innovation but bolter it, as it is very much possible that a company introduces such a product that completely takes the market by storm and starts to create a monopoly; at which point it is not to be punished for innovating. 

Lastly, since ex-ante regulation of acquisitions of younger firms is not fair to the companies, and regulating every merger or acquisition is not feasible, it would be best for the competition authorities to conduct an annual survey of the digital market space independently and in relation with the offline market to better understand the status digital stores and big tech. And based on such a survey, the CCI can suggest policy changes to curb any antitrust violations or abuses of powerful positions. And like Germany treating Google in a manner different from other tech companies due to its ubiquitous presence on the internet, India should also not shy away from treating different companies, differently based on their market share, data collection, effect on offline markets and pricing; as competition law is, in essence, the unfair treatment of businesses on the top, to create a more fair market.

References

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