Shaping the future of digital markets: The importance of ex-ante regulations

Implementing ex-ante regulations in India serves multiple purposes, including ensuring fairness, contestability and innovation in digital markets. It addresses concerns about market power, exploitative practices, and imbalances of bargaining power, while also fostering transparency and encouraging disruptive innovation.

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What are ex-ante regulations?

A recent Parliamentary Panel of India has recommended the adoption of ex-ante regulations in digital markets through the introduction of a Digital Competition Act. The purpose of these regulations is to tackle anti-competitive practices.

Ex-ante regulations are designed to proactively identify and address issues in advance, influencing the behaviour of stakeholders through regulatory intervention. This approach differs from the current ex-post regulations followed in India, where regulatory action is taken after market failure or distortion has already occurred.

Ex-ante regulations have been implemented in various legislations worldwide, notably in the European Union (EU) with the proposed Digital Markets Act (DMA), which is accompanied by the Digital Services Act. These regulations aim to address concerns regarding the potential abuse of digital platforms' of market power to engage in exclusionary or exploitative behaviour, with American multinational technology company Google's anti-competitive conduct serving as a notable example.

Below, I explore the purpose and significance of ex-ante regulations, the need for their adoption in digital markets, the possible hurdles that might be faced, and solutions to such issues.

Also read: Does India Need Just One Regulator to Protect All Investors?

What are the objectives of the regulatory intervention?

The primary purposes of implementing ex-ante regulation in the Indian context, as imported from current legislation, would include ensuring fairness, contestability and innovation in digital markets.

The concept of fairness and fair competition is a recurring theme in regulatory initiatives. Imposing fairness conditions on digital platforms is a means to address concerns regarding their market power and potential exploitative or abusive behaviour when they hold dominant positions. For instance, the DMA specifically emphasises fair competition and references it throughout, acknowledging imbalances of bargaining power and unfair practices faced by business users.

Similarly, in the Indian context, the Competition Act, 2002 and the Competition Commission of India have a central objective of maintaining a healthy and fair competitive environment. They are empowered to ensure such an environment and penalise any actions that negatively affect fair competition.

Contestability or 'open choice principles' aim to address the potential for exclusionary behaviour in markets. Access to data, which is increasingly valuable and drives innovation and economic benefits, plays a crucial role. Enhancing data access and sharing is a significant policy concern in the digital age, as it makes markets more contestable. While the Indian competition law alone is insufficient to ensure contestability in digital markets, ex-ante regulation can help correct market failures that traditional remedies may struggle to address effectively.

Another objective of ex-ante regulation, as also observed in the DMA, is to foster innovation and promote transparency. Encouraging innovation and providing transparency regarding terms, conditions and other relevant information related to services offered by designated firms benefit both competing businesses and consumers.

Recent cases in India, such as the Ola–Uber case and the WhatsApp case, highlight the Competition Commission of India's cognisance of disruptive innovation in markets. The commission has shifted from a narrow focus on price and tangible goods to address broader anti-trust issues arising from intangible assets and non-price factors. Disruptive innovation is seen as removing inefficiencies in traditional markets and may cause significant shifts in established market dynamics.

Also read: WhatsApp Privacy Policy applies only to India due to weak data regulations

Therefore, implementing ex-ante regulations in India serves multiple purposes, including ensuring fairness, contestability and innovation in digital markets. It addresses concerns about market power, exploitative practices and imbalances of bargaining power, while also fostering transparency and encouraging disruptive innovation.

What are the concerns regarding ex-ante regulations?

There are concerns among analysts that the ex-ante regulatory proposals may have negative consequences on innovation and incentives for large online platforms. These proposals, for example, in the DMA, including restrictions on gatekeepers and prohibitions on bundling and adjacent market entry, could limit the ability of platforms to develop new and innovative products and services for businesses and consumers. Articles 5 and 6 of the DMA are seen as overlooking the innovation dynamics that result from the creation and subsequent advancements of a service.

Companies approaching the threshold for gatekeeper status may be discouraged from introducing new services that could attract more users due to the constraints imposed by the DMA. These restrictions in the DMA could also hinder existing gatekeepers from competitively constraining each other, especially in areas beyond their primary focus.

Similarly, the Indian Parliamentary panel has called for classifying leading entities that can negatively influence competitive conduct in the digital ecosystem as 'Systemically Important Digital Intermediaries' based on their revenue, market capitalisation and number of active business and end users. In other words, a company's size will determine whether the new set of ex-ante competition rules apply to it. This approach disregards the dynamic competition brought by gatekeepers, the consumer welfare generated by the existing framework, and the incentives for innovation and investment needed to drive future technological advancements.

These concerns reflect the apprehensions regarding the potential impact of the DMA's ex-ante regulations on innovation, competition, and the overall ecosystem of digital platforms. It highlights the need for a balanced approach that considers both the goals of promoting competition and innovation while safeguarding consumer welfare, and ensuring a thriving digital market.

Further, it must be noted that the draft proposal of the Digital Markets Act of India raises questions about how to determine whether a company is considered digital or non-digital. It remains unclear what criteria, such as the ratio of physical to digital sales, would be used to classify a company as digital. This ambiguity poses challenges in defining the scope of the DMA and determining which companies would fall under its regulatory framework. This is because firms today employ multiple channels to reach consumers, and these channels often overlap and intertwine.

In this context, it becomes essential to recognise that digital is not merely a separate market, but a business model and distribution mechanism. The distinction between digital and non-digital companies may not accurately capture the complex nature of competition, as competition occurs within the product market rather than being limited to a specific distribution channel. The rapid pace of technological advancements has led to the digitalisation of various sectors, such as banking, entertainment, real estate and more. A more comprehensive understanding of competition in the digital era should, therefore, focus on the product market and the overall competitive landscape, rather than solely relying on distinctions based on digital or non-digital channels.

Also read: Why Adani's buying spree merits a rethink in India's competition law framework

Is it a poor fit for a dynamic industry?

According to a study conducted in 2020, when markets are bound by predetermined operating procedures and standards through ex-ante regulations, there tends to be a reduction in efforts and investments in innovation. The study examined previous cases of ex-ante regulations in the telecommunications industry, where ex-post antitrust requirements were recently codified into ex-ante hard law. Based on this analysis, the study estimated that such regulations result in productivity losses for the economy.

The study also emphasised the importance of regulators formulating precise and specific ex-ante regulations that target specific problems to avoid unnecessary societal costs. Additionally, regulators need to be prepared to continuously reassess and update these regulations to keep pace with new market developments, prevent efficiency losses, and address unforeseen types of failures that may arise after the legislation is enacted. However, both the EU and India lack a well-established framework for such dynamic and constantly evolving law-making.

It is crucial to consider that outdated ex-ante regulations themselves can lead to market failures. If these regulations are poorly designed and implemented, they have been proven to stifle innovation within an economy, limiting its ability to compete globally and impeding its progress.

What are the possible regulatory confusions?

Ex-ante regulation may come in conflict with other legal areas, like data protection regulation, leading to overlapping competencies. The new digital markets act could add to the already complicated regulatory framework, causing further chaos. These regulatory overlaps may be seen in the areas of privacy and competition law.

Data Privacy

One area of concern for consumers is data privacy, which could be compromised by increased transparency and data sharing. In the United Kingdom and Australia, initiatives such as Open Banking and consumer data rights have encouraged innovation and clarity for consumers. Such initiatives could serve as examples for platform regulation. However, data sharing could also conflict with the Digital Personal Data Protection Bill's conditions for end-user consent to data processing, as users may not fully realise that their data could be possessed by numerous business users.

For instance, Clause 5 of the Data Protection Bill, 2022 says that "A person may process the personal data of a data principal only in accordance with the provisions of this Act and Rules made thereunder, for a lawful purpose for which the data principal has given or is deemed to have given her consent in accordance with the provisions of this Act." Such provisions are bound to conflict with the idea of data processing that would be imagined under the new Digital Markets Act.

Also read: A Sound Data Protection Authority is the Need of the Hour

Competition law

Some provisions within ex-ante Rules aim to enhance contestability by providing access to gatekeepers' competitors, which goes beyond previous competition cases and aims to address structural barriers to entry. These provisions, such as those concerning access to data, introduce new elements beyond traditional competition law. However, other provisions within ex-ante Rules draw on past competition cases, incorporating lessons learned from antitrust enforcement.

Given that certain prohibited behaviours and obligations in ex-ante Rules relate to past antitrust cases, there is a possibility of overlap with competition law. It is plausible that some conduct, such as self-preferencing or 'most-favoured nation' clauses, may be implemented by a dominant firm that is also designated as a gatekeeper or falls under other classifications like a structuring firm or a firm with paramount cross-market significance.

In such cases, it would be beneficial for legislators to provide guidance to regulatory authorities regarding the approach to be taken. This guidance could address questions such as whether a firm would be penalised twice for engaging in conduct that falls under both competition law and ex-ante Rules. Clear direction from legislators would help authorities navigate these potential overlaps and avoid duplicative penalties or conflicting enforcement actions.

What is the way forward?

The rationale behind new regulatory initiatives is rooted in the need to effectively address competition concerns arising from the economic structure of digital platform ecosystems. These initiatives aim to supplement traditional competition law with new tools. Promoting competition within the design of ex-ante regulations is becoming increasingly important for the competition policy community. These measures contribute to the broader discussion about government policies that foster innovation, address market access concerns and protect consumer welfare.

Regulators must be prepared to continually reassess and update ex-ante rules to adapt to evolving market developments, prevent efficiency losses, and address unforeseen issues that may arise after the legislation is enacted. Outdated ex-ante regulations can themselves lead to market failures, highlighting the importance of regular evaluation and revision.

In the realm of privacy law, it is essential to avoid legal overlaps to reduce regulatory uncertainties. Similarly, in the realm of competition law, both ex-ante regulation and traditional competition law play essential roles in digital markets. They are complementary tools rather than substitutes, as has been demonstrated in other sectors. These tools should be understood as different arrows in a quiver, each serving distinct but not conflicting purposes, leveraging their respective strengths. Ultimately, their combined efforts benefit consumers and society as a whole.

Currently, there is an opportunity for jurisdictions worldwide to share experiences and learn from one another while crafting rules to address conduct and structures in digital platform markets that distort competition and undermine economic well-being. It is crucial to minimise legal overlaps between data protection law and ex-ante regulations to reduce regulatory uncertainty for market participants and consumers.