Avoiding unintended consequences of ex-ante regulation of digital markets

The government-appointed panel discussing the need and mechanics of this law is due to give its recommendations by July 6, 2023. This issue requires thorough thought to avoid unintended consequences.

The primary concern with Big Tech companies is their potential for rapid increase in their market power, resulting in reduced competition for smaller players. Given the unique features of digital markets i.e. network effects, multi-sided nature, unpredictable pricing and costing strategies, several jurisdictions are considering implementing such preventive ex-ante regulations in addition to the existing ex-post enforcement framework.

That said, finding a balance to ensure overregulation does not stifle growing companies while maintaining a healthy competitive environment, remains a challenge.

Gatekeeper designation in India

Surely, the intent and effect of regulation cannot be to stifle growth, innovation, and consumer benefits. India is at a cusp of digital growth, with tremendous potential for growth of domestic companies in sectors like Ed-tech, Health-tech, Agri-tech, etc. Therefore, the regulations should be focussed. To help businesses, the qualifying criteria for these companies should be objective, transparent and unambiguous.

A Standing Committee on Finance’s recent report on “Anti-competitive Practices by Big Tech Companies” (Big Tech Report) proposed specific ex-ante provisions for “Systemically Important Digital Intermediaries” (SIDI). The Big Tech Report doesn’t provide definitive parameters for the classification of a SIDI; it (a) recommends prescribing a “reasonable definition” of SIDIs; (b) provides factors like revenue, market capitalization and number of active business and end-users that should be considered while prescribing said definition; and (c) provides a list of activities that SIDIs will be prohibited from (e.g. imposing anti-steering provisions or self-preferencing).

Learnings from other regulators

Countries working on implementing ex-ante rules are trying to avoid the problem of over-regulation through different ways to identify the so-called “gatekeepers”. They don't follow a broad-brush approach. Most jurisdictions have (a) objective thresholds based on turnover, (b) entrenchment and local nexus parameters, and (c) bespoke requirements to identify the services to be regulated based on the country/jurisdiction’s market.

The European Union’s Digital Markets Act only regulates a pre-identified “Core Platform Service” (online intermediation services, online search engines etc.). Similarly, the United Kingdom in a consultation paper clarifies that ex-ante legislation will include clear criteria to assess whether a firm has a “Strategic Market Status” and cover only those firms that have a substantial and entrenched market power in at least one digital activity.

Australia’s proposed framework includes qualitative criteria to assess whether the digital platform holds an important intermediary position in Australia based on the “ability and incentive to harm competition”.

Germany’s approach is subjective, dominant position, financial strength, vertical integration of an entity, alongside factors like its access to data relevant for competition and the relevance of its activities for third parties to operate efficiently are relevant to be subjected to ex-ante regulation.

A broad definition that covers efficient players providing digital services risks over-regulating them without actual or potential harm to competition.

Balancing twin objectives

Consistent with global practices, before coming up with criteria to identify gatekeepers, there is a need to study the Indian digital markets. If strict intervention is needed, there can be clear parameters that include (a) quantifiable factors like entrenchment and the number of business or end users impacted; and (b) Indian specificities like nascency of that digital service, level of concentration, etc. This will meet the objective of ensuring fair competition in digital markets with space to innovate.

The need and implementation of ex-ante rules for the Indian digital markets are not concretised. Consultations with experts and stakeholders will be important to bring forth the challenges such as those identified above. It is crucial to be cautious and ensure that if implemented, the ex-ante regime is efficacious and pragmatic and balances the twin objectives i.e. maintaining competition in the digital markets while fostering innovation and growth in India’s nascent digital space.

Toshit Shandilya is a partner; Atish Ghoshal and Malhar Desai are associates in the competition law team at AZB & Partners. The views expressed are personal and should not be attributed to the firm.