Digital Competition Bill: Ex-Ante Framework

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Context

• In February 2023, the Ministry of Corporate Affairs (MCA) constituted a Committee on Digital Competition Law (CDCL) to examine the need for a separate law on competition in digital markets.
• After a year of deliberation, the CDCL concluded that the current ex-post framework under the Competition Act, 2002, should be supplemented with an ex-ante framework.
• This new framework was outlined in the draft Digital Competition Bill.

MUST READ ARTICLES FOR BACKGROUND:

https://www.iasgyan.in/daily-current-affairs/digital-competition-law-cdcl

https://www.iasgyan.in/daily-current-affairs/digital-competition-bill

Digital Competition Bill (DCB), 2024

• The aim of this Bill is to regulate Big Tech platforms of a prescribed size on an ex-antebasis, following a global trend.
• The Bill specifies quantitative (turnover, user base) and qualitative criteria for identifying Systemically Significant Digital Enterprises (SSDEs) and their Associate Digital Enterprises (ADEs).
• Enterprises exceeding these thresholds will be scrutinized by the Competition Commission of India (CCI).
• SSDEs are required to comply with stringent obligations outlined by the Committee for Digital Competition Law (CDCL).
• These obligations restrict practices such as self-preferencing, restricting third-party apps, imposing anti-steering policies, misusing business users' data, and bundling products and services.

What is an ex-ante framework?

• The Competition Act, 2002 is the primary legislation concerned for preventing practices that have an adverse effect on competition.
• It establishes the Competition Commission of India (CCI) as the national competition regulator.
• As with competition law in all other jurisdictions, the Competition Act, 2002 is based on an ex-post framework. This means that the CCI can use its powers of enforcement only after the anti-competitive conduct has occurred.
• In the case of digital markets, the CDCL has advocated for an ex-ante competition regulation. This means that they want the CCI’s enforcement powers to be supplemented such that it allows it to pre-empt and prevent digital enterprises from indulging in anti-competitive conduct in the first place.

Ex-ante Competition Regulation: An Unusual Approach

Global Perspective

• Limited Adoption: Ex-ante competition regulation is unusual globally. The European Union (EU) is the only jurisdiction where a comprehensive ex-ante competition framework, under the Digital Markets Act, is currently in force.

CDCL's Advocacy for Ex-ante Regulation

• Unique Characteristics of Digital Markets: The Committee on Digital Competition Law (CDCL) supports the EU's approach due to the unique characteristics of digital markets.

Key Characteristics of Digital Markets

1. Economies of Scale and Scope:
• Economies of Scale: Digital enterprises benefit from a reduction in cost of production per unit as the number of units produced increases.
• Economies of Scope: These enterprises also experience a reduction in total costs of production with an increase in the number of services offered.
• Rapid Growth: These factors enable digital enterprises to grow much faster compared to players in traditional markets.
2. Network Effects:
• Utility Increase: The utility of digital services increases as the number of users grows.
• Growth Acceleration: Network effects further accelerate the growth of digital enterprises.

Need for Ex-ante Regulation

• Market Tipping: Digital markets can quickly and irreversibly tip in favor of incumbents.
• Time-Consuming Ex-post Process: The existing framework is time-consuming, allowing offenders to escape timely scrutiny.
• Preventative Obligations: The CDCL has advocated for preventative obligations to supplement the ex-post facto enforcement framework.

Basic Framework of the Draft Bill

• Template: The draft Bill follows the EU’s Digital Markets Act.
• Targeted Regulation: It does not intend to regulate all digital enterprises, focusing only on those “dominant” in digital market segments.

Core Digital Services

• Identified Services: The draft Bill identifies ten core digital services, including online search engines, social networking services, and video sharing platform services.

Criteria for Dominance

1. Quantitative Standards:
• Significant Financial Strength Test: Assesses financial parameters to determine dominance.
• Significant Spread Test: Evaluates the number of users in India.
2. Qualitative Standards:
• Systemically Significant Digital Enterprise (SSDE): The CCI can designate an entity as an SSDE based on qualitative criteria, even if it does not meet the quantitative standards.

Obligations of Systemically Significant Digital Enterprises (SSDEs)

• Anti-competitive Practices: SSDEs are prohibited from engaging in anti-competitive practices.
• Fair Operation: SSDEs must operate in a fair, non-discriminatory, and transparent manner with users.

Prohibited Practices

1. Self-Preferencing: SSDEs cannot favor their own products over third-party products on their platforms.
2. Restricting Third-Party Applications: SSDEs cannot restrict the availability of third-party applications or prevent users from changing default settings.
3. Anti-Steering: SSDEs cannot restrict business users of their services from directly communicating with their end users.
4. Tying and Bundling: SSDEs cannot tie or bundle non-essential services with the primary service being demanded by the user.
5. Data Utilization: SSDEs cannot cross-utilize user data collected from the core digital service for another service.
6. Non-Public Data: SSDEs cannot use non-public data of users to give an unfair advantage to their own services.

Response to the Draft Bill

• Opposition: The overall response to the draft Bill has been one of opposition.

Concerns Raised

Effectiveness of Ex-ante Regulation:

• Transposition Issues: Skepticism exists on how well an ex-ante model will work, partly because it seems to be directly transposed from the EU without considering the differences between the jurisdictions.
• Lack of Evidence: There is little evidence of the ex-ante model working well in the EU.

Impact on Investments and Start-ups:

• Negative Effects on Investments: Concerns that the draft Bill may negatively impact investments for start-ups in India.
• Scaling Deterrent: Start-ups may be deterred from scaling up to avoid meeting the quantitative thresholds for regulation.

Impact on MSMEs:

• Operational Costs: Restrictions on tying, bundling, and data usage could negatively impact MSMEs that rely on big tech to reduce operational costs and enhance customer outreach.

Support from Indian Start-ups

• Addressing Monopolistic Practices: Some Indian start-ups support the draft Bill, arguing that it would address concerns against monopolistic practices by big tech.
• Threshold Revisions: These start-ups have called for a revision of the financial and user-based thresholds to prevent domestic start-ups from being unduly regulated.

Way Ahead

• To move forward, India should adapt the ex-ante framework for its unique digital market, engaging stakeholders to refine the draft, Bill.
• Revising thresholds is crucial to avoid hindering start-ups while capturing dominant entities.
• Impact assessments should gauge effects on investment and innovation.
• A phased implementation approach and continuous monitoring will ensure effective regulation as the digital landscape evolves, fostering fair competition and innovation-driven growth.

READ ABOUT CCI: https://www.iasgyan.in/daily-current-affairs/competition-commission-of-india-cci#:~:text=Functions%20of%20CCI%3A&text=Undertake%20competition%20advocacy%2C%20create%20public,by%20the%20country's%20competition%20laws.

SOURCE: THE HINDU