Platform Markets and Regulation: The Case of E-Commerce In India
Posted on : May 5, 2020Author : AGA Admin
As of 2019, Facebook had 2.5 billion monthly active subscribers who logged in regularly to check updates in the form of photos, videos, music etc. Facebook’s annual revenue from advertising was $69 billion, which can easily be attributed to the large subscriber base that it has. The turnover that the social media giant generates from advertising makes it one of the biggest media houses, all without producing a single piece of original content.
The case of Facebook clearly shows the clout of the platform revolution. The platform model underlies the success of many of today’s biggest, fastest-growing, and most powerfully disruptive companies, from Google, Amazon, and Microsoft to Uber, Airbnb, and eBay. Moreover, platforms are beginning to transform a range of other economic and social arenas, from health care and education to energy and government. [i]
A platform is essentially a business, the basis of which exists in facilitating transactional interactions between consumers and producers external to it. The conditions for such an interaction are established by the platform itself so as to ensure that transactions take place in an open and transparent manner. The primary purpose of a platform is to enable the existence of goods, services and social interactions which ultimately lead to value creation for all the participants in the process.
In general, sharing economy platforms provide users with a forum for interaction, a standard set of contractual terms, and a secure method of payment. They do not themselves own the physical capital, nor do they directly employ the labour required to provide the services in question. They typically provide a platform to facilitate exchanges and charge a commission on each transaction in return.
The main difference between new emerging platform businesses and the traditional businesses is that, the traditional businesses exist as a linear value creation chain, a pipeline. The pipeline as opposed to a platform is a straight assembly line method, where the product is ideated, designed, manufactured, advertised, distributed and sold in a linear manner and none of stages overlap with the other. The platform on the other hand comprises of a complex arrangement, where the producers, consumers and platform itself, are engaged in relationships which constantly undergo changes. In the platform model, value does not flow in a single straight line with producers on one end and the consumers on the other. The platform exists in order to provide for co-creation and exchange of value in a multiplicity of methods and locations.
It has been observed in a number of cases that when a platform model is introduced in a sector it generally always takes over the traditional pipelines, this can be exemplified in the case of Google and Apple, which are platform businesses, taking over Nokia and Blackberry which were pipeline businesses. Uber has emerged as an extremely strong player in the local transport industry and has put the very existence of conventional taxis at risk.
In case of e-commerce giants in India, close to 80% of the products sold by them are not manufactured by the company itself, in a number of cases, the delivery services are also contracted out. Even though the company lies in the centre of all the activities, the entire process has a number of players who do not actually belong to the company. This feature also displays a stark contrast to the traditional businesses.
Since the early 2000s, e-commerce platforms have seen a worldwide growth and India has been no exception to it. However, it is not possible that such a drastic change could be brought to the markets without any disruption. As we know, in essence, every new technology which makes it to the markets is disruptive and “platforms” did not just reach the markets, they formed the crux if the “shared economy”. Therefore e-commerce platforms platforms also have the potential [ii] to greatly disrupt the traditional retail industry.
The ability of the platform businesses to reconfigure value creation, value consumption and quality control is central to their ability of disrupting the markets. By the power of their networks, the geographical barriers have almost become non existent, creating ever increasing sources of supply from any part of the world. The platforms also consciously act to reduce the barriers and encourage more suppliers to join them, as newer technologies are coming up, new group of suppliers are also emerging which helps platforms reconfigure value creation. With regards to reconfiguring value consumption, platforms engage in intensive marketing and public relations encouraging consumers to use products that they would not have even imagined using a few years ago. While dealing with quality control, it is difficult for e-commerce platforms to ensure quality when they start off, however, once they start scaling up, better quality suppliers are attracted to them for increasing their sales.
E-commerce platforms also have the potential to disrupt the market by changing the nature of the market itself by means of re-intermediation and market aggregation. When the e-commerce platforms first started off, it was felt that there would be a “de-intermediation” in the retail industry, that is, middlemen like wholesalers and retailers would wither away from the market with time. However, with time it was seen that the e-commerce platforms introduced middlemen in order to improve their scales, that is, there was a re-intermediation. Sometimes, these middlemen were efficient online, automated tools which would provide suggestions of what to buy to the customers. E-commerce platforms, to a large extent have aggregated unorganised markets where widely dispersed individuals and organisations engage with each other in an organised manner. Even though the market share of e-commerce in the retail industry is not significant it has been steadily increasing.
However, this growth of e-commerce cannot solely be attributed to the business strategies of the platform entities. The larger political economy has also worked in their favour with internet connectivity reaching the roots of the country and government initiatives being taken up to digitalise the economy.
The e-commerce market is predicted to increase exponentially by 2022. A major cause of concern is the threat that growth poses to the traditional retail industry. The wholesale and brick and mortar retailers have since 2014-2015 expressed their concerns about the anti competitive strategies that have been resorted to by the e-commerce platforms. Attractive discounts, loyalty programs, cashbacks have all been a part of the strategy that e-commerce companies have taken. Despite their increasing revenue, most e-commerce platforms have yet not incurred profits.
In addition, exclusive seller deals are entered into by the e-commerce companies like Amazon and Flipkart and the manufacturing companies. Such associations are a very common sight in the sale of smart phones and other electronic items where the new electronic item is launched exclusively on an e-commerce platform. Though these practices are not entirely illegal, they can hamper the competitive space easily as the retailers will have no access to the product. Coupon discounts which almost all e-commerce companies offer throughout the year, that is, discounts on purchase of items above Rs.1500-Rs.2000 are also deemed to be anti competitive by many.
E-commerce giants also have access to foreign capital in the form FDI’s which provides them with easy funding to increase their logistical operations. As the costs incurred by the e-commerce platforms are generally less than the physical retailers because they avoid the cost of the showrooms, the foreign investments can help them grow their market share aggressively. Over the years it has been observed that the brick and mortar retailers, are putting pressure on brands to help them compete more effectively with e-commerce websites.[iii]
It has been reported that for the small, regional offline retailers, the profit margins have reduced since people are shifting to online use and many retailers have been forced to shut shop because of this situation.
Regulations play an important role in ensuring that market failures(externalities, information asymmetry, public goods, monopoly, productive and allocative inefficiencies, missing markets etc) are dealt with. In case of the e-commerce platforms, it is important for the regulators to oversee the activities of the sector because of the prevailing information asymmetry between the sellers, the platform and the customer as well as the predatory pricing measures along with other anti competitive strategies that are being taken up.
The tradeoff between the benefits and costs of regulation needs to be assessed before determining how exactly the platform businesses should be covered by regulatory regimes. Typically the regulation of e-commerce platforms can be done by the independent regulatory authorities that exist in the economy. In India, the Competition Commission of India along with the Department of Consumer Affairs can take up the regulation of the e-commerce platforms. Judicial oversight is also necessary to maintain accountability amongst the e-commerce platforms.
E-commerce platforms have been subject to certain overarching regulations, such as a maximum of fourteen days have been given to the e-commerce platforms for initiating the refund process to the customers. As the Information Technology Rules of 2011 are in place, the e-commerce platforms like all other internet and technology based businesses have to follow these norms. Any of the promoters of the firm or the central management personnel should not have been convicted if any criminal offence punishable with five years or more of imprisonment.
The potential manipulation of consumers and markets by the e-commerce platforms has been an aspect that has required regulation. As the platforms grow in size and popularity they can very easily manipulate the consumers as well as the markets. In order to deal with such a situation, it has been stated in the e-commerce draft guidelines that the companies are prohibited from representing themselves falsely and posting reviews about goods and services in their own names. They also should not exaggerate the quality of the goods and services that they are providing. E-commerce platforms have also been directed to share the safety and health care information of the goods and services. Clear information of the payment methods and charges associated with them also have to be provided.
Data Privacy and security have emerged as an important field that can have negative connotations for the e-commerce platforms. The firms have access to a lot of private information of the customers, from credit card information to addresses. Any leakage of this data into the wrong hands can put a number of customers at risk. Therefore, the guidelines have also stated that protection of all the personally identifiable information of the customers is a must for all e-commerce platforms.
Fair market practices and access is also an issue which has needed regulatory oversight. Keeping these in mind, the foreign direct investments into e-commerce has been heavily regulated, and has been a source of turmoil in the e-commerce industry, especially for the giants such as Flipkart and Amazon which have drawn attractive investments from the rest of the world. Rules have also stated that any entity related to the e-commerce platform cannot sell on the platform, it implied that Walmart itself could not sell on Flipkart even though it had acquired the e-commerce platform. A single supplier could not sell more than 25% of his products exclusively on an e-commerce platform. Therefore preferential treatment was curbed by the regulations to a great degree, access to the e-commerce platforms by the supplier has also been made easier than before. With preferential treatment being curbed, selective promotional schemes such as cashbacks or faster delivery could also be put to an end. [iv]
In order to regulate e-commerce platforms or any of the shared economy platforms through competition law it is necessary to understand the relevant market and the aspects associated with it thoroughly. Apart from understanding the market, the site of regulation also has to be chosen, e-commerce unlike most traditional retail businesses is affected very easily by the international markets. Therefore, the connection between the global and the local has to be well understood before deciding on the exact site of regulations. A synthesis between the international norms for e-commerce and the domestic regulations need to be reached. Another aspect that has not been sufficiently dealt with by the Indian government is regulating technology. Since technology plays an intrinsic role in the e-commerce platforms, it becomes necessary to have constant vigilance over the technology that is being used by the platforms especially in the case of data protection and privacy.
On a concluding note, it has to be said that e-commerce has been providing ease and comfort to the customers and has also been expanding its revenues greatly. The downfall of e-commerce is not in sight and instead of taking up regulations which only deal with the negative activities of the e-commerce platforms, it is important to note that a positive and conducive environment should also be created which can help ensure a competitive market in the retail sector. An enabling environment will also help e-commerce grow, since e-commerce provides employment to both skilled as well as unskilled labour, it will prove to be a useful sector to the Indian Economy.
Changes in FDI, consumer protection, anti-competitive behaviour, payments, taxation, telecommunications and data privacy[v] will be have to be brought about. Even as these changes are made, there has to be a thrust on encouraging the Make In India Initiative, which would help boost not only e-commerce but also the domestic industries.
Megha Singh
(Megha is a former research and coordination intern for Asia in Global Affairs. She has a Bachelor’s Degree in Political Science from Loreto College, Kolkata. She is currently pursuing Masters in Regulatory Governance from TISS, Mumbai. Previously she has also interned with the Government of West Bengal and has a keen interest in policy, strategy and communications)
Disclaimer: This document was originally submitted to Dr. Ganesh Munnorcode at Tata Institute of Social Sciences, Mumbai.
References:
[i] Parker, G., Alstyne, Marshall, & Choudhary, S. (n.d.). Preface. In Platform Revolution (2nd ed.). New York: W.W. Norton and Company. [ii] Parker, G., Alstyne, M., & Choudhary, S. (n.d.). How Platforms Conquer and Transform Traditional Industries In Platform Revolution (2nd ed.). W.W. Norton and Company. [iii] Dalal, M., & Tandon, S. (2014, March 17). E-commerce boom hurts brick-and-mortar retailers. Livemint. Retrieved from https://www.livemint.com/Industry/f6eARBcJOWrTZTzuDcZZzI/Ecommerce-boom-hurts-brickandmortar-retailers.html [iv] Bureau, E. T. (n.d.). Govt tightens norms for etailers, bars exclusive deals . Retrieved from https://bit.ly/3dBCbd0 [v] PWC and NASSCOM October 2018) Report: Propelling India towards global leadership in e-commerce
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