Synopsis: India needs to speed up its regulatory architecture in line with the pace of adoption of digital marketplaces.
One consequence of lockdowns imposed across the world during COVID was the quickening pace of economic transactions shifting from physical to digital marketplaces.
Eighteen months since the pandemic hit, societies have moved towards more engagements online. However, regulatory architecture hasn’t kept pace. It has large gaps when it comes to dealing with digital markets.
Now, we have reached a stage where this slow pace may have an adverse impact on the nature of digital markets.
Why a new regulatory architecture is essential?
Digital markets have a set of unique features that make the need for a new regulatory architecture essential.
Economies of scale: They offer otherwise unavailable economies of scale where, following a high initial cost, incremental customers can be added at practically no cost. This makes for the so-called network effect: an Increase in the number of participants concurrently enhances the value of a service.
Huge amount of data: Also, the ability to accumulate huge amounts of data on users offers economies of scope inconceivable for a dominant firm in a traditional industry like steel or cement. To illustrate, Amazon started as an online bookstore less than three decades ago and is now among the world’s top five firms by sales.
First mover advantage: Unique features of digital markets also confer a set of advantages to first movers that can potentially kill competition. In this context, the danger comes from large digital platforms that start off as mere intermediaries, but later also compete against businesses using their platform. There’s an inherent conflict of interest in simultaneously being player and referee.
What is the way forward?
The inaction in regulatory space means that early-mover advantages available to some firms may weaken the competitive nature of the market. Temporary regulations covering platforms in standalone areas such as e-commerce may create new distortions. A sector-specific approach is a bad idea.
What India needs is a comprehensive umbrella legislation to cover digital platforms. A delay could lead to irreversible distortions.
Source: This post is based on the article “Regulatory limbo: Digital markets are fast expanding. We need an umbrella law for platforms” published in Times of India on 13th Sep 2021.