ONDC has made a promising start. But, it could learn from ‘Market Design’

ONDC is pitched as an open network, where buyers and sellers can transact digitally without being part of any platform.

The Open Network for Digital Commerce or ONDC has been making headlines. ONDC’s top management is regularly giving interviews on the utility of the network. India’s commerce minister Piyush Goyal recently commented that all ecommerce firms should join the ONDC platform. ONDC is a digital marketplace promoted by the Department for Promotion of Industry and Internal Trade (DPIIT), a department under the Ministry of Commerce.

Before getting into discussions around ONDC, we need to first understand digital marketplaces and how they are similar to or different from physical marketplaces. Physical markets have evolved historically where one sees a variety of shops which sell goods and services they manufacture or sell on behalf of other manufacturers. Digital marketplaces are replicating this experience in the digital space.

Digital marketplaces referred to as platforms are of different kinds. There are two-sided multiple product platforms such as Amazon and Paytm where buyers and sellers list to do transactions. There are two-sided multiple product platforms such as Tata Neu and Reliance JioMart which list products from Tata and Reliance Group along with other products. There are two-sided single-product platforms such as Zomato and Netflix which deal in food delivery and video content. Different food providers and movie producers list on the two platforms and buyers choose their food and movies.

One key aspect of all these platforms is that they are based on a closed system that is limited to its registered buyers and sellers. In contrast, ONDC is built as an open digital marketplace.

During the Covid-19 pandemic, businesses that were either digital or could adopt digitalisation managed to survive. Most of these were large businesses. Even if they wanted to, small businesses could not adapt to digitalisation. There were all kinds of challenges: little awareness, few resources, prohibitive entry barriers and so on. As per the ONDC website, there are more than 12 million sellers who earn their livelihood by selling or reselling products and services. However, only 15,000 of these sellers (or a mere 0.125 percent of the total) have enabled e-commerce. E‑retail was beyond the reach of a majority of sellers, especially those from small towns and rural areas.

These gaps led to the germination of the ONDC concept. Unlike large platforms and networks, ONDC is pitched as an open network, where buyers and sellers can transact digitally without being part of any platform. The open network is premised upon three core concepts - decentralisation, openness, and greater user utility. Decentralisation means no central entity owns the network. Openness means it will be based upon open protocol which means using open-source applications, public digital infrastructure and an open ecosystem of innovation. Greater user utility implies both buyers and sellers benefit from the network. ONDC has listed supporting institutions such as banks and technology companies on its network to enable digital commerce.

In many ways, ONDC is an extension of India’s highly successful public digital infrastructure programme which has enabled identities (Aadhaar), payments (UPI) and is gearing up to provide healthcare, education, etc. ONDC is an addition to the list which provides digital commerce to a wide section of the population.  Just like we can use UPI on any of the payment apps, we can use ONDC on multiple apps such as Paytm, Meesho and so on. The sellers can list on the ONDC and the buyers can come and buy goods and services using the platform.

ONDC was launched in the tech capital Bengaluru in 2022. Since then, it has expanded its presence to 236 cities and has around 35,000 sellers. Recently people have tweeted about ordering food successfully from ONDC and at much cheaper prices than Zomato and Swiggy. This is the advantage of an open platform where charges are much lower whereas closed platforms charge for running their systems. Closed systems are like the physical market complexes where only those who have bought space in the market can sell their goods and they have to pay monthly or annually to maintain the space. Open systems are like bazaars and melas where buyers and sellers come together at much lower charges.

One question that comes to mind and is of high importance is how to make ONDC successful. In economics, there is a sub-field named Market Design which lays the principles of designing vibrant markets. Economists Lloyd Shapley and AL Roth are pioneers of market design. They were jointly awarded the Nobel Prize in Economics in 2012  “for the theory of stable allocations and the practice of market design”.

Roth in an article wrote that for markets to function, they need to have three things.  First, markets should be thick, which means there should be enough buyers and sellers for meaningful transactions. Second, with thickness comes congestion and markets have to figure out ways to avoid congestion. The market participants should be either given enough time or the means to conduct transactions fast enough. Third, markets should be safe as people disclose information which could be confidential. Roth went on to explain how he designed markets in different domains. He built thickness in a US-based kidney exchange, safety in a radio spectrum auction and avoided congestion in the school choice system.

The ONDC needs to work on the three principles starting with thickness and safety. Congestion will become a problem eventually but is not a problem as of now. The other platforms are working around a mix of these three problems. Platforms such as Amazon and Netflix have to deal with congestion and safety issues. Zomato and Swiggy are competing for thickness but we do see congestion hitting these platforms quite regularly. Paytm has to focus extensively on safety and so do banks which are building their own platforms.

Apart from analysing ONDC through prisms of market design, it is interesting to note another thing about the ecommerce network. One of the key debates in economics is whether the state or markets should lead economic development. Here we are seeing the state developing the market! The state is also seen as a laggard in terms of economic innovation but the state is building an innovation ecosystem for promoting digital commerce. One way to see this development is to say that it is not about the state or markets but the state and markets. Rohini Nilekani argues in her book ‘Samaaj, Sarkaar, Bazaar’ for the need to restore the balance between the state and markets, by positioning society as the foundational sector. ONDC is built on similar thoughts and has made a promising start. We have to wait and see whether it achieves similar heights as Aadhaar and UPI.