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THE GIST of Editorial for UPSC Exams : 07 February 2020 (Online versus offline (Indian Express))

Online versus offline (Indian Express)

Mains Paper 3:Economy
Prelims level:Competition Commission of India
Mains level: Challenges in between e-commerce and open market

Context:

The online marketplace or the platform/intermediation service market is now largely characterised by duopolies in most segments.
Amazon and Flipkart in e-commerce, Uber and Ola in transport, Zomato and Swiggy in food service, MakeMyTrip and Yatra in travel bookings. Some niche players do exist in these segments, but by and large the market has been carved up by large players.
Several of these companies have come under the scrutiny of the Competition Commission of India (CCI).
The issues involved here have far reaching ramifications for both online and off-line market places.

Some of the more contentious issues are:

The online market structure should facilitate greater competition given the lower barriers to entry.
Most other firms in the segments mentioned above have either been taken over or have folded up.

Reasons behind emergence of online market structures:

One explanation for the emergence of these market structures is that as companies grow, with more users coming on board these platforms, they benefit from what CCI calls positive feedback loop. .....................................

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Impact of online market structures in offline competition:

Many allege that these two-sided online platforms engage in predatory pricing or below cost pricing either by funding it themselves (deep pockets) or by squeezing producers.
This drives out competition — both online as well as offline. Predatory pricing is anti-competition to begin with.
While consumers do benefit in the short run, once the competition is driven out, the platform starts raising prices to recoup previous losses.

Assessing a platform is engaged in predatory pricing:

In India, it is defined as price falling below average variable cost — may not be a straightforward exercise.
The dynamics of online pricing (prices change over time), their unique cost structures — in such two-sided platforms, prices/costs on both sides should be seen in conjunction — as well as the impact of economies of scale and organisational efficiency in lowering costs, all need to be factored in.
Besides, one would also have to take into account that even offline firms engage in deep discounting to clear inventories.
As do both online and offline firms to acquire customers in the early stages of their business.

Carefully assess the pricing strategies and consumer welfare:

The impact of such pricing strategies on competition and on consumer welfare must be carefully assessed.
It is quite likely that once competition is eliminated and the platform starts to raise prices, new players will enter the market, attracted by higher prices.
Driving out competitors may not be the same as driving out competition — though the extent to which new firms are able to enter the market will depend on the degree to which barriers to entry exist.
Platforms will be mindful that losses will be hard to recover, and may not engage in below cost pricing to drive out competitors for extended periods.
Consumers are unlikely to loose out as prices are likely to remain low.

Possibility of collusion:

There is also an argument for closer examination of such market structures because of the possibility of collusion.
In most such markets, ........................................

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Examine to linking predatory pricing:

Further, linking predatory pricing with an abuse of dominant market position must be reexamined.
As the experience of the telecom sector shows, a dominant position may not be a prerequisite for predatory pricing.
Accepting this argument would imply that if regulatory intervention is required to check predatory pricing, it could kick in before market power or dominance is established.
Alternatively, the definition of market dominance could be expanded to take into account deep pockets.

Way forward:

Any intervention to “correct” pricing essentially involves placing a higher weightage on the assumed losses of competitors/producers than on the consumer’s apparent gains. This is not a straightforward exercise.
Having a fixed predetermined framework is unlikely to be helpful. Instead it would be more useful to have a set of guiding principles based on which regulatory intervention, if required, can be undertaken.
Competition policy should be driven by safeguarding competition, not competitors. It should seek to bring about greater transparency in pricing and reduce information asymmetry.
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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1)With reference to the centrally protected monuments, consider the following statements:
1. There is ban on construction within 1000 metres of a centrally protected monument and regulated construction within 1000-2000 metres under the Ancient Monuments and Archaeological Sites and Remains Act, 1958.
2. The Act protects monuments and sites that are over 100 years old.

Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2