Competition in Digital Economy

Can existing rules that govern competition and fair-play in the traditional economy also apply to the digital economy? With a growing digital economy in Pakistan, this question should concern policymakers, in order to support pro-consumer and sustainable growth in this area. A recent World Bank report, titled “Antitrust and Digital Platforms: An analysis of global patterns and approaches by competition authorities,” provides some food for thought.

The study has analyzed recent anti-trust cases (e.g. abuse of market power, anti-competitive agreements and mergers) concerning digital economy in different countries. The main insight is that the Covid-19 pandemic, which inadvertently stimulated digital economies the world over, has helped large digital platforms in e-commerce, social media and cloud services to further strengthen their market position. And this situation leaves open a lot of scope for unfair play on their part, something that has to be monitored.

With humanity constrained by the need to socially-distance during the pandemic, digital platforms and services have been a blessing, and prominent firms (local or foreign) deserve credit for their positive role during the crisis. However, large platforms getting even bigger during the pandemic has implications for competition, in that they now have access to even larger amounts of user data. And data is a major “factor of production” for digital businesses. Smaller firms will have a harder time competing.

Noting that market behavior that negatively impacts data protection and privacy is anti-competitive in nature, the report finds that competition-related cases in developing markets are less likely (than developed jurisdictions) to have been framed around those critical themes. Part of the problem is that digital platforms are yet to gain dominance in many countries, hence the loose approach towards data protection. Also, it will help competition bodies if their governments are able to legislate on those issues.

The report finds low-income countries to be rather reactive in pursuing competition-related cases in the digital economy, as compared with developed world. Competition bodies in developing countries are often found to be restricted to analyzing mergers, instead of actively looking at anti-competitive practices and transactions. A more proactive approach will require investment in internal human resource and technological capacity at the watchdogs.

A key insight linked with capacity building is that competition bodies ought to develop a high level of understanding of different sectors within the digital economy and how their business models differ, for the nature of anti-consumer behavior tends to differ across sectors. The need is to go deeper into the workings of digital platforms by more routinely analyzing characteristics like “multi-homing, winner-takes-most dynamics, zero-price behavior, and the use of algorithms” to spot activities that harm competition.

Another issue is selective focus. The report notes that competition watchdogs in developing countries may inadvertently be paying more attention to digital sectors that cause hue and cry among established businesses. The case of online ride-hailing/taxis immediately comes to mind. Pursuing such cases is fine, but there is also a need to actively pursue warning-signs in rather-ignored sectors – e.g. social media/digital marketing, online bookings, delivery services – where significant user engagement exists.

Then there is the need for a stronger deterrence, as the report’s analysis shows that just a third of cases where competitive harm from digital firms was proven had resulted in any fines. The fines imposed on large digital firms were found to be miniscule relative to their revenues. There is also a need for more collaboration with developed-country counterparts – when anti-competitive behavior from advanced markets seeps into emerging digital markets, the regulators must have the knowledge and tools to act.

One hopes that the local competition authority – the Competition Commission of Pakistan – will consider these findings useful. In recent years, the Commission has delivered orders on just two cases concerning digital economy. One of them related to deceptive marketing practices by Kaymu.pk (2018) and the other one was linked with Uber’s acquisition of Careem (2020). It appears there is a need to step up competition enforcement in digital economy, considering rising transaction volumes in multiple segments.