Online versus offline

Context: Competition Commission of India has recently ordered an investigation against companies such as MakeMyTrip, Flipkart and Amazon.

Background:

• On 30 October 2019, CCI has ordered an investigation against MakeMyTrip. MakeMyTrip and Yatra are two companies dominating the travel bookings segment of the Indian market.
• On 14 January 2020, CCI has ordered an investigation against Amazon and Flipkart. Amazon and Flipkart dominate e-commerce in India.
• On 21 January 2020, UberEats India was acquired by Zomato. Zomato and Swiggy dominate the online food market in India.
• Uber and Ola are two companies dominating online ride providing business in the Indian market.

Domination of online marketplace by two companies: Most segments of India’s online marketplace are dominated by two companies. This condition is known as a duopoly. Under different provisions of Competition Law, the Competition Commission of India has ordered an investigation against some of these companies dominating the online marketplace. Some important issues arising out of the domination of the online marketplace by two companies are restricted competition and predatory pricing.

Competition: Online platforms or intermediaries in the market should increase more competition because online platforms lower entry barriers. But this is not the case. In India, most segments of the online marketplace are dominated by two companies. Other companies have been either acquired by dominating companies or stopped doing business. Factors for domination of India’s online marketplace by two companies and how they restrict competition are explained below.

• Positive feedback loop and network effect: Positive feedback loop and network effect means that an online platform having more users continues to attract more customers. Positive feedback loop and network effect cause concentration of digital customers on a platform in the market, and market share of the platform increases. This makes the entry of new companies in the online marketplace difficult.
• Capital intensive: Online platforms offer discounts to attract customers initially. This requires a large amount of funds. It is easier for companies to have large capital to dominate online marketplaces in countries like India, where there is a shortage of capital. Large capital requirement negatively affects competition.

Predatory pricing: Predatory pricing is defined as the practice of keeping sale prices below cost prices. Dominating companies in the online marketplace, keeping sale prices below cost prices by funding costs through the capital available with them or the producers. Predatory pricing eliminates online and offline competition. So, predatory pricing helps to dominate companies in eliminating certain competitors. It does not eliminate competition because when companies raise prices in the absence of no competitors, higher prices attract more companies in the market and increase competition. In order to survive, companies may enter into agreements as the strategy of lowering prices is not sustainable for a long time. In the short term, predatory pricing benefits consumers as consumers can buy products at cheaper rates.

Conclusion:

CCI has ordered an investigation against some companies dominant in the online marketplace as they restrict competition and indulge in predatory pricing. Such actions under a predetermined law give more importance to competitors or producers at the risk of benefits to consumers. Instead of a predetermined law, regulatory guidelines should be framed to bring transparency in pricing and safeguard competition, not competitors.