Intermediating supply and demand
Traditional market models, focusing on supply control of scarce commodities, are outdated for the internet age. Modern tech companies grow by enhancing user experience and creating demand-driven platforms. This self-perpetuating cycle benefits consumers, challenging the need for market fragmentation. Indian competition authorities should independently assess the best approach to truly benefit consumers, even if it diverges from global norms.
This article was first published in The Mint. You can read the original at this link.
Our traditional understanding of the way markets function, has been based on the assumption that economic power lies with those who control the supply of scarce commodities. Competition law has, for this reason, been designed to protect consumers by preventing companies from taking undue advantage of their ability to control such products. But this economic model, based on market share and concentration that competition authorities have traditionally used to regulate industry, is becoming increasingly irrelevant today—particularly when they try to apply it to the modern technology world.
The internet operates under an entirely different dynamic from traditional markets. Tech businesses have little interest in controlling the supply. Instead, they focus on the demand side of the equation, looking to acquire more customers by creating a better user experience.
They do this by offering new forms of social and commercial interaction and by leveraging the fact that distribution, on the internet, costs next to nothing. They rely on viral marketing—on the fact that as word begins to spread about what they have to offer, more and more new subscribers will sign on. As a result, demand on the internet has begun to funnel through a number of large platforms that intermediate between supply and demand.
This is how modern internet businesses have grown to their current stature. Social media companies create platforms through which advertisers can serve advertisements perfectly targeted to consumers with a granularity born from a deep understanding of what they want. E-commerce companies understand the shopping habits and personalized needs of their customers so well that they accurately recommend purchases so useful to their consumers that businesses large and small have almost no other option but to sign up as sellers or else lose out on the huge potential market on offer.
None of these businesses control a scarce commodity. Instead, they offer platforms that are so useful that both demand and supply voluntarily gravitate to them.
Central to the attractiveness of their proposition is the user experience that they offer. Since they are entirely data driven, they have the ability to analyse and act, in real time, on the various user insights that are generated out of the data that their services produce. They use these insights to constantly tweak their offerings. As the service gets better, more and more users are willing to sign on and as more customers get added to the platform, the data these new customers generate contributes further to quality of the insights—which further improves the user experience. This is a self-perpetuating virtuous cycle that, almost by definition, continuously operates to the benefit of the consumer.
This is the key distinction between corporations in the internet age and those of times past. When corporations grew their profits solely by controlling the supply of a scarce commodity, they did so because the product they controlled was non-substitutable and customers had nowhere else to go to buy it. Internet businesses, on the other hand, grow because their subscribers self-select to use those platforms and will only keep growing if they continue to offer customers what they need. The short history of the internet is strewn with carcasses of many once-great businesses that no one uses today.
The European Competition Commission, however, takes a more paternalistic approach. It operates on the presumption that a plurality of service providers is necessary for healthy competition and that consumers must have choice at all costs. It has, based on this principle, handed down judgments designed to make space for more platforms to spring up and grow.
This approach, in my mind, is unsuited to the modern internet age. If the purpose of the law is to ensure that the consumer always benefits, it must readjust itself to account for the new ways in which these benefits accrue. The internet allows a greater level of personalization of services than was ever possible. This customization has the potential of adding considerable value to the customer experience but is highly dependent on the wisdom of crowds—the larger the crowd, the greater is the wisdom that the platform can generate.
If that is the case, it stands to reason that a larger platform is capable of generating more benefits to its users than a market that has been fragmented to allow multiple players to provide the same service. As the Indian competition authority begins to grapple with these issues, it would do well to independently come to a conclusion on these matters. After all, if the true purpose of competition law is to benefit the consumer, we need to find out for ourselves what approach will best achieve that result.
Even if doing so flies in the face of what the rest of the world is doing.
