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In any market, fair competition is encouraged to provide a level-playing field to all players, prevent undesirable practices namely deep discounting, predatory pricing, promotion of preferred sellers with a parent-subsidiary relation, and the establishment of price cartels. In India, the Competition Commission of India oversees these aspects. Recently the Govt of India announced certain proposed amendments to the Consumer Protection (E-Commerce) Rules, 2020. We shall look at the kinds of markets as per economic theory, the rise of e-commerce in India, and then delve into the provisions of the new draft e-commerce Rules.
Which market do you operate in?
With the buoyant growth of the online e-commerce markets, have you ever wondered what the different types of markets are? In simple terms, a market is a forum or platform where potential buyers and sellers come together to transact and undertake a sale or a purchase. Economic theory broadly categorizes the types of market systems as:
1. Monopolistic Competition: Comprises numerous competing firms, which have slight product differentiation and hence some degree of pricing power i.e. price setting. The products are similar but not exact substitutes. There are no barriers to entry and exit into the market. Demand for the product is highly sensitive to price changes. Firms rely heavily on marketing and advertising. In the short run, firms have the potential to earn economic profits. However, in the long run, due to increased competition, firms have to continuously innovate and launch new products. When we look around, we find that these characteristics are prevalent in the market for FMCG products of daily use.
2. Monopoly: Characterized by a high degree of pricing power with the presence of a single supplier, with significant barriers to prevent the entry of competition and no substitutes. The exact opposite of perfect competition. Revenue inflow is dependent upon consumer willingness to pay the price asked for. Generally, Governments implement several antitrust measures to protect the interests of the consumers and ensure a free, open market. Certain utility services provided by the Govt operate as a monopoly example: railways, postal services etc with the absence of a private sector player.
3. Perfect competition: A theoretical concept i.e. an ideal situation with a large number of buyers and suppliers with prices reflecting the supply-demand conditions. Each supplier has a low market share, homogenous products, and limited pricing power. There are no entry-exit barriers. An example would be farmers from the same area selling farm produce.
4. Oligopoly: Limited number of suppliers dominate the market and, in many cases, operate as a cartel i.e. collusion on setting a high price. An example is OPEC countries which jointly decide the pricing of oil for global markets. The decisions of one firm impact the business of others. High barriers to entry exist owing to the specialized nature of the products and services like high initial capital costs, legal privilege like access to certain rights like the wireless spectrum in case of telecom, etc.
5. Monopsony: Also called buyer’s monopoly. A single buyer with a high degree of purchasing power to determine pricing. An example is a market for defense goods with the Government as a single buyer. The lowest bidder wins the contract. Hence suppliers engage in price wars by reducing prices.
Markets are very useful to understand how pricing works and the dynamics of supply and demand. The highest bidder will be preferred by the seller. The buyer will prefer the lowest quote price.
E-commerce and digital payments on a roll
The pandemic was a watershed moment for e-commerce and the closely associated digital payments space, resulting in a steep jump in adoption levels of online shopping and touchless payments.
According to a report on Swarajya, the following stats indicate the meteoric performance of online shopping:
• Q4 of 2020 saw e-commerce grow by 36% and 30% y-o-y towards order volume and gross merchandise value (GMV), according to Unicommerce and Kearney
• Personal care, beauty, health, and wellness volumes jumped 95%
• CPG and healthcare volumes grew a whopping 46 % year-on-year
• Websites of leading brands, including D2C, reported 2x traffic compared to pre-pandemic levels
• Tier two and three cities contributed 90 percent year-on-year additional volume and value growth
• The World Economic Forum predicts that India will be the world’s #3 consumer market by 2030.
• E-commerce in India would cross $99 billion by 2024, recording a 27% CAGR (2019-24), driven by growth in grocery and fashion and apparel
• In 2021, consumer electronics and apparels, each comprise a 40 % share of India’s retail e-commerce
• By 2023, 1% valued at $10 billion of Indian grocery business would migrate online
• Social commerce would clock a 60% CAGR to cross $ 70 Bn by 2030
• Omnichannel business model would continue to prevail with the presence of offline and online retail
• Digital payments ecosystem would further strengthen the roots of online shopping
E-commerce has immense potential in India with only up to 10% of 80+ million small businesses have opted to sell online. It is encouraging to note that many are joining the digital bandwagon and many homegrown Indian D2C businesses are opting for a 100% digital route, having their own online store. Given the huge business opportunity, it is imperative to provide a level-playing field to all players in fair spirit towards price parity. This is what the draft rules seek to achieve.
Key aspects of the new draft e-commerce rules:
The above background would be useful for us to understand the rationale behind introducing the draft rules, mainly with the intention to protect the interests of small players and physical store-owners, mom and pop shops, spread across India whose business suffers due to the heavy price discounts offered by global big tech players in the e-commerce space especially the marketplace model. The following are some of the provisions:
• Mandatory mention of country of origin: e-commerce players have to ensure that all products listed on their websites mention the country of origin.
• Rationale: This would encourage consumers to buy indigenously produced or locally manufactured, quality Made in India products, as against imported, cheaper substitute products of inferior quality.
• Advertisements or promotions by sellers: E-tailers should dissuade sellers on the platform from issuing controversial or ‘misleading’ advertisements related to price or quality. Further, specific promotion of sellers that may be a subsidiary of the e-commerce player to attract buyers is disallowed.
• Rationale: This would ensure that buyers can unbiasedly decide between buying from a particular seller based on product quality without being unduly influenced by the e-commerce player’s recommendations.
• Mis-selling of goods and services by e-commerce players is prohibited: This clause mainly applies to marketplaces that allow sellers to host products on their websites.
• Rationale: Mis-selling is a violation of fair business practices and such manipulation of any kind, should be discouraged by one and all.
• E-tailers should desist from misleading users by manipulating web search results to their advantage: Web searches work on the basis of algorithms. Certain big tech e-commerce players have allegedly been guilty of promoting their products and sellers by tampering with search functions.
• Rationale: Small and mid-sized retail shops should not lose out to competition owing to a lack of influence or financial firepower.
The intent behind these draft rules is to empower the consumer to independently take purchase decisions without being influenced by external opinion and prevent the occurrence of ‘the winner takes it all’ scenario. In other words, the profits from e-commerce businesses should not accrue to a select few owing to their global presence or financial muscle. Rather a non-zero-sum game would work best, where multiple parties benefit. Healthy competition would allow local retail brands and home-grown D2C players to have an equal opportunity to grow their business in a fair manner.
In the next article, we shall look at the other salient aspects of the draft e-commerce rules.