Authors: Nirih Kamplimath & Anirudh H
Third-year law students at School of Law, Christ (Deemed to Be University), Bangalore
I. Introduction
The changing nature of competition in contemporary digital markets has prompted governments across the world to introduce revamped market regulations to ensure fair competition. It is widely recognised that the key features of digital markets present hallmarks of market failure by virtue of information asymmetry, network externalities and increasing returns to scale. Therefore, ex-ante regulations that ensure timely and accurate identification of enterprises likely to cause irreparable harm are essential. Following the global trend, India is on the brink of establishing a de novo regulatory framework for digital markets. While ex-ante regulatory mechanisms are desirable, a balance must be struck so as to ensure overregulation does not stifle growing companies, thereby ensuring a healthy competitive environment.
In an attempt to strike this balance, the Committee on Digital Competition Law (“CDCL”) was constituted to examine competition regulations in digital markets. Subsequently, the CDCL proposed the Draft Digital Competition Bill (“DCB”), which provides an ex-ante mechanism for the designation of enterprises as Systematically Significant Digital Enterprises (“SSDEs”). These SSDEs are enterprises that occupy a significant presence in certain ‘core digital services’ (enumerated under Schedule I of the Bill) and, therefore, pose anti-competitive risks. Jurisdictions across the world have adopted similar ex-ante mechanisms. However, there arises a variance in the thresholds applicable in determining which enterprises are likely to cause irreparable harm.
II. Quantitative Thresholds vs. Qualitative Thresholds
There are two primary methods adopted by countries: (i) a quantitative approach and (ii) a qualitative approach. The European Union (“EU”), which is the forerunner in the implementation of ex-ante legislation surrounding digital markets, has adopted a quantitative approach to designate ‘Gatekeepers’ in its Digital Markets Act (“DMA”). These quantitative thresholds serve as objective markers for the identification of enterprises which are likely to engage in anti-competitive practices. Similarly, Japan’s Act on Improving Transparency and Fairness of Digital Platforms (“TFDP Act”), Australia’s proposed mechanisms in the 5th Digital Platform Services Inquiry (“DPSI”) Interim Report, and China’s draft classification guidelines all adopt similar quantitative thresholds for identifying anti-competitive enterprises. While these thresholds aid in the quicker identification of potentially anti-competitive enterprises, there is a lack of nuanced designations. The rigid nature of quantitative thresholds fails to take into account the variance of those very thresholds across different digital sectors.
By virtue of a rigid quantitative threshold, this threshold would be uniformly applied to all digital sectors. However, in the Indian context, quantitative variables such as user penetration vary significantly between sectors. Reports indicate that social media records a user penetration of 60.72% as opposed to online delivery apps, which record a mere 16.2%. In such a situation, utilisation of user penetration as a common threshold to designate SSDEs under both industries would result in an overregulation of online delivery services. Therefore, a quantitative threshold to determine the status of enterprises is detrimental to the pro-competitive objectives of ex-ante legislation.
To remedy such flaws, jurisdictions such as Germany, in its Tenth Amendment to the Act against Restraints of Competition (“ARC Act”), have adopted qualitative approaches for the determination of enterprises as ‘undertakings with Paramount Cross-Market Significance’ (“PCMS”). The CDCL claims to have adopted a hybrid approach that incorporates both quantitative and qualitative thresholds in determining SSDEs. The following section will analyse the veracity of these claims and shed some light on how “hybrid” this approach truly is.
III. The Draft DCB: A Hybrid Approach?
The CDCL, in its report, claims to have drawn inspiration from the EU model of identifying potential Gatekeepers. Chapter II of the DCB lays out the process of designation of SSDEs. The ‘hybrid’ approach adopted by the DCB is displayed in the following features:
Under Section 3(2), any enterprise operating a Core Digital Service (“CDS”) would be deemed an SSDE if it met the quantitative thresholds prescribed under the ‘significant financial strength test’ and the ‘significant spread test’.
Only if an enterprise fails to fall under the quantitative thresholds provided for under Section 3(2), the Competition Commission of India (“CCI”) may designate an enterprise as an SSDE based on a variety of qualitative factors enumerated under Section 3(3).
Therefore, the qualitative approach to designate an SSDE is attracted only when it fails to meet the prescribed quantitative thresholds. There arises no qualitative assessment at the first instance when designating an enterprise as an SSDE.
This is contrary to hybrid approaches adopted by ex-ante regulatory frameworks across the world, where post satisfaction of quantitative thresholds, an enterprise must also satisfy qualitative thresholds to be designated as a potentially anti-competitive entity. The UK model adopts this approach, wherein the Digital Markets, Competition and Consumers Act, 2024 (“DMCC”) accords strategic market status (“SMS”) to enterprises which meet certain qualitative criteria, post satisfaction of the quantitative ‘turnover’ condition. The DCB’s approach of using qualitative criteria as a last resort, as opposed to the standard in the determination of SSDEs, has been heavily criticised.
While ex-ante regulation is essential in maintaining competitiveness in digital markets, it borders a thin line with overregulation. The DCB, in establishing quantitative thresholds as a sufficient criterion to designate an enterprise as an SSDE, may lead to untimely and excessive regulation of digital markets. This excessive regulation arises due to the following reasons:
It is futile to determine a single quantitative threshold that can uniformly apply across various CDS characterised by different user networks, network externalities and business models.
An overregulation of smaller market participants who fall under the minimum quantitative thresholds but do not occupy a dominant market position requisite for anti-competitive behaviour.
Conversely, these minimum quantitative thresholds may fail to catch enterprises that occupy a significant market position.
Therefore, while the CDCL report claims that the draft DCB adopts a hybrid approach in incorporating both quantitative and qualitative thresholds in the determination of SSDEs, in actuality, the qualitative assessment under the DCB does not serve as the most efficient way to regulate digital markets.
IV. The Way Forward
The examination of digital competition regulations across the globe and the analysis of rationale for adopting such models outlines the need to consider both quantitative and qualitative thresholds. As illustrated above, the discharge of the need for fulfilment of qualitative conditions, at the first instance, can lead to ineffective digital competition regulations that fail to capture the dominant players in the market while penalising smaller players in the market and stifling competition instead of fostering the same. Additionally, the “uniform set of thresholds to identify and designate SSDEs, irrespective of the Core Digital Service they provide” recommended by the CDCL overlooks the various factors that vary from one market to another, such as scale, user networks and business models.
Therefore, a model similar to the regulation regime of the DMCC that accommodates both qualitative and quantitative thresholds must be considered. The Draft DCB already provides for qualitative indicators that the Commission can rely upon to designate dominant market players who do not fulfil the quantitative threshold provided. Instead, a regulatory framework comprising qualitative conditions that must be mandatorily met before the designation of the enterprise as an SSDE may be employed. Some indicative conditions for the same can be drawn from the legislations discussed above to include a substantial and entrenched market power, a position of strategic significance such as providing a core platform service important for business users and access to data relevant for competition.
However, these conditions will have to be subject to quantitative thresholds, as quantitative thresholds provide certainty and effectiveness in implementing competition regulations and nurturing competition. The approach of a uniform set of thresholds for all core digital services can also be replaced with an approach of employing different quantitative thresholds for different core digital services based on data relevant to size, scale, user network, network externalities and business models of the specific market. Incorporating a fair and effective regulatory regime will curb anti-competitive behaviour that characterises the digital market, ensuring fair competition necessary for equitable conditions and growth within the market.
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