For the digital world, customer is truly king

Over the past five years, the internet has seen the growth of large technology platforms in various sectors, leading to concerns about competition. Social media and aggregator platforms create a lock-in effect, where users and suppliers feel compelled to join popular platforms, leading to potential monopolies. Traditional competition law views monopolies as harmful, but these platforms challenge this view by improving consumer choice and service quality. However, this shift in market dynamics may harm smaller suppliers, suggesting a need for regulatory protection for these market participants.

This article was first published in The Mint. You can read the original at this link.

The defining characteristic of the internet over the past half decade has been the growth of large technology platforms. In addition to giant retail and social media companies, we have seen the rise of a wide array of aggregation platforms on which we have come to depend for our day-to-day services—from urban mobility to food delivery and hotel accommodation. More recently, we have witnessed the consolidation of online activity around a few mammoth platforms, which has given rise to concerns about the structure of these business models with particular reference to their implications on competition.

Take social media for example. The nature of social media is such, that as more and more friends and family begin to consolidate their social interactions on a given platform, anyone who is not signed on feels compelled to join in order to have the opportunity to participate in the interactions taking place online. Equally, those unfortunate enough to be using a competing platform feel compelled to leave their current service for the more popular one. Once a critical mass of friends have signed on to a given platform, it becomes extremely hard for any of them to exit even if they don’t like the services offered, since doing so would come at the cost of forsaking the social interactions that now occur exclusively on that platform.

Aggregator platforms have similar lock-in features. By offering greater benefits as more and more users sign up to the platform, they present customers with real commercial incentives to stay on the service. Taxi aggregators that have enrolled a large number of drivers have the ability to offer their customers shorter wait times and lower fares than their competitors. As it becomes apparent that a given aggregator offers better prices and rides at shorter notice compared to others, more users will sign up to that service, often choosing to leave a competing service provider so as to avail more benefits. This in turn results in more drivers signing up to take advantage of the expanded user base.

This behaviour is true of all online aggregators. As more and more service providers enrol onto a given platform, greater volumes of users will flock towards it. This then encourages more service providers to sign up to gain access to the larger user base and so on and so forth in an upward spiral which, if taken to its logical conclusion, will eventually result in one platform becoming the sole provider of services in that market.

Any market that ends up with a single dominant service provider is considered to be problematic when viewed through the lens of traditional competition jurisprudence. The primary purpose of competition law is to maximize consumer welfare, and the starting presumption has always been that monopolies lead to high prices and unfair and restrictive behaviours which adversely impact the customer.

By regulating competition in the supply market, the law seeks to ensure that customers always benefit from lower prices and better services.

However, none of this seems to apply to internet platforms. On the contrary, aggregator markets demonstrate characteristics that fly right in the face of our traditional understanding of the effect that monopolies have on consumers.

Let’s say there are two competing food delivery platforms in the market and restaurants are free to list on both. Once a restaurant notices that the majority of its delivery requests come from a given platform, it will focus its efforts on improving its ratings on that platform, sometimes ignoring the other platform on which it is also listed. On the other hand, as restaurants contend for the top rankings on the leading platform, customers start benefitting from higher quality services and an improved selection until, they gradually stop using any other platform.

As more suppliers aggregate on the leading platform, they will be under increasing pressure to improve their internal efficiencies, as the brutal economics of online markets makes it easy for consumers to shift allegiance at the drop of a hat. By taking distribution out of the control of the suppliers of services, aggregator platforms have given some power back to the customer, allowing them to determine—with minimum friction—which supplier they prefer. This forces suppliers to stay on their toes, constantly responding to customer complaints and tweaking their product offerings and delivery times to make sure that the customer is always kept happy.

The shoe is now clearly on the other foot. Suppliers have hitherto had the upper hand by virtue of their ability to control the distribution of their services. Internet platforms have put customers in the driver’s seat, giving them the ability to force suppliers to improve their game in order to stay relevant in the market.

In certain segments, this flip in market dynamics has already begun to take its toll. As small restaurants and other service providers are beginning to see a dramatic dip in sales, they struggle to keep up with the demands of the new online-only market that they find themselves in.

In this aggressive new digitized world, it may not be the customers that need protection, but the suppliers.

If things continue in this direction, we may well have to look towards regulation for the protection of market participants on the other end of the spectrum.