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  • Muskaan Punia

The role of competition law in promoting innovation and technological progress

Written By- Muskaan Punia, Symbiosis Law School, Noida, BBA.LLB

Introduction

The promotion of innovation is a significant and valid objective of enforcing competition laws. Innovation serves as a fundamental driver of economic growth, technological progress, and societal advancement. Although competition agencies are not tasked with directly promoting innovation, they hold a crucial responsibility in preventing companies, whether independently or collaboratively, from impeding or hindering innovation opportunities. A strong competitive environment not only fosters research and development investments but also propels breakthroughs in technology, stimulates economic growth, and enhances consumer well-being.[1]Recent decades have witnessed global prosperity driven by technological advancements. Emerging economies have experienced rapid economic growth, contributing to an elevation of the global standard of living. The twenty-first century has seen the emergence of various ventures by technology companies, aimed at nurturing innovative ideas and facilitating their transition from conception to commercialization. India, in particular, has made strides in the Global Innovation Index, advancing from the 48th position in 2020 to the 46th position in 2021. Gartner predicts a substantial expansion of IT services by 10.7%, reaching $18.103 billion in 2021, a significant leap from the 3% growth observed in 2020 (Talgeri 2021). Digital platforms are continually reshaping interactions among employees, employers, and customers, while the influence of the silicon chip permeates nearly every aspect of our daily activities, from online grocery shopping to finding companions through dating sites.

 

The Dynamic Nature of Competition in the Digital Economy

Competition within the digital market economy follows a cyclical pattern. Successful enterprises achieve a dominant market position, only to be potentially replaced by other companies in the subsequent wave of innovations, rendering dominance temporary. In the realm of digital marketplaces, the widespread practice of large-scale data collection and analysis has become commonplace, with the potential to influence outcomes that may be anti-competitive. The impact of big data on market power is determined on a case-by-case basis and varies according to the specific product or service. Moreover, the established principle in competition policy that "big is not bad" holds particularly true in the digital domain, as genuine and successful competition in this sphere tends to result in monopolies more frequently than in other industries. In two-sided marketplaces, the concept of network effects pertains to the expansion of users on one side of the market, leading to advantages for customers on the opposite side. Take, for instance, ride-hailing platforms like Uber and Ola, where a substantial user base results in reduced waiting times for customers, concurrently benefiting the drivers. Following the fundamental principles of network effects, the entity, website, or interface commanding the largest market share is poised for long-term success. Consequently, the company's market share is destined to see significant growth. Hence, markets characterized by robust network effects are often referred to as winner-take-all markets. [2]

 

Digital Market Dynamics

The behavior of consumers in digital markets significantly deviates from that observed in traditional markets, a realization imperative for any competition law authority or legal expert. Unlike traditional markets, the digital economy empowers market participants to allocate substantial resources toward remarkable innovation and technical advancements. Consequently, delineating the market emerges as a pivotal initial step in shaping discussions on competition and regulatory challenges. It becomes crucial to ascertain whether a business holds market dominance or possesses significant market power. Establishing frameworks for merger control and post-analysis of competition, and determining the necessity for preemptive regulatory measures, constitute essential tasks. The parameters derived from an apt market definition frequently serve as the foundation for conducting competitive impact assessments.

 

Consumers are attracted to e-commerce platforms primarily due to the availability of free services, creating a challenge as the traditional basis of competitiveness disappears. Standard pricing-focused SSNIP tests prove insufficient as they overlook the intricate connections between product prices within multi-sided platforms. Numerous experts in competition law contend that in instances where certain items lack a direct cost, customers inevitably bear the expense through alternative means, such as intrusive ads, compromised privacy, or the monetization of their data.

 

Consider WhatsApp and Twitter, viewed by end consumers as distinct services. While WhatsApp functions as a private one-to-one messaging platform, Twitter operates as a one-to-many (often public) messaging platform. Interestingly, Twitter users often opt for one-on-one communication via WhatsApp instead of the one-to-many approach on Twitter, causing a substantial loss in both audience and revenue for Twitter. Consequently, despite WhatsApp maintaining slim profit margins, it effectively controls Twitter's income. This highlights the limitation of relying solely on demand-side substitutability to assess the competitive nature of digital services.

 

Evaluation of Dominance Misuse in the Digital Sphere

Competition authorities face challenges in accurately assessing market power when the market lacks proper characterization. Even when these authorities correctly identify the relevant marketplace, establishing a dominant position in digital markets proves challenging. Holding a dominant position necessitates market strength, a factor difficult to demonstrate conclusively.

 

Quantitative metrics like concentration ratios, market shares, pricing levels, and profit margins are typically employed by competition authorities to ascertain market dominance. However, in digital markets where certain services are offered for free, and some business models generate minimal or no profits, relying solely on these static metrics becomes impractical. It's crucial to note that the absence of apparent market strength, as indicated by these metrics, does not negate the potential for significant future profits, as evidenced by the companies' stock levels and takeover prices.

 

Similar to delineating the relevant marketplace, the concept of dominance in digital marketplaces is subject to dynamic evolution. Zoom, a video conferencing service, serves as an illustration of how rapidly a market position can change. The existing approach to determining dominance relies on the consumer welfare standard, which evaluates whether consumers experience benefits or harm arising from pricing fluctuations. However, in the digital economy, the challenge lies in the inability to conduct accurate price assessments due to swift price fluctuations and algorithm-enabled personalized pricing. Moreover, in comprehensive competition analyses involving digital channels, prices may not be the most pivotal factor. Numerous services are offered free of charge, with consumers essentially paying through the provision of personal information. Truly gaining dominance in digital markets necessitates a profound and nuanced understanding of operating independently in this domain.[3]

 

Actions Contrary to Competition Principles

Once the dominant position of a digital company is established, the subsequent step involves scrutinizing whether its actions exhibit anti-competitive traits. In the fast-paced realm of digital markets, distinguishing between anti-competitive behavior and conventional business strategies can be challenging. For instance, Google, holding a significant portion of the Internet, may appear as a monopoly. However, Google's dominance is not a result of coercion or anti-competitive practices; rather, it stems from providing a high-quality service. Given the low entry barriers of the Internet, anyone can initiate a business with minimal investment. Numerous well-funded competitors have attempted to challenge Google's market share, emphasizing that Google itself was once a small startup contending against multibillion-dollar giants like Yahoo and Microsoft in the battle for online search dominance. The assessment of a dominant firm's anti-competitive conduct revolves around evaluating whether rival relationships are built on foreclosure or leverage rather than merit, leading to harm for both competitors and customers. The examination also considers whether a rival with a comparable cost structure could compete on the basis of identical end-user pricing.[4]

 

Conclusion

Considering all the attributes of online marketplaces and the ramifications for the competition framework, it is reasonable to conclude that the current extent of competition laws is inadequate in confronting the evolving challenges brought about by digitization. The role of competition law in promoting innovation and technological progress is indispensable. By fostering competitive markets, preventing anti-competitive practices, scrutinizing mergers, addressing abuse of dominance, and facilitating global collaboration, competition law creates an environment where businesses are incentivized to innovate. As we navigate the ever-evolving landscape of technology, the careful application and evolution of competition law will continue to be crucial in shaping a future driven by innovation and progress.


[1] "The Role of Innovation in Enforcement Cases - OECD." 29 Nov. 2023, https://one.oecd.org/document/DAF/COMP/WD(2023)113/en/pdf. Accessed 28 Jan. 2024.

[2] "The Digital Economy 2012 | OECD." 7 Feb. 2013, https://www.oecd.org/daf/competition/The-Digital-Economy-2012.pdf. Accessed 28 Jan. 2024.

[3] "The pandemic was great for Zoom. What happens when ... - Vox." 4 Dec. 2020, https://www.vox.com/recode/21726260/zoom-microsoft-teams-video-conferencing-post-pandemic-coronavirus. Accessed 28 Jan. 2024.

[4] "A Study of Technological Advent and its Impact on Competition In India." 6 Jan. 2023, https://www.epw.in/engage/article/study-technological-advent-and-its-impact. Accessed 28 Jan. 2024.

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