The government recently released the draft e-commerce policy, which attempts to regulate and control deep discounting by e-commerce players.
The government recently released the draft e-commerce policy, which attempts to regulate and control deep discounting by e-commerce players. While the structure of the draft has been criticised in some quarters, there is no denying that there is an urgent need for an e-commerce policy. Regulation is required as price distortions would have wide ramifications for the industry and the economy as a whole. We are seeing other industries, such as telecom, bleeding due to predatory pricing and the outcome may not eventually be beneficial for the consumers, too. In the airline industry, for example, we hear voices that question whether very low prices can be sustained, and whether it is healthy for that sector.
E-commerce is a $38-billion industry in India, and is projected to grow to $200 billion by 2026 (according to the India Brand Equity Foundation). India is one the fastest growing e-commerce markets globally. In India, e-commerce retail sales make up only about 2.9% of total retail sales, but the share is expected to grow sharply as the internet usage increases. In fact, e-commerce has gained prominence globally. The sector is being discussed in multilateral forums like WTO, G20 and OECD, and is also being taken up in trade agreements such as the TPP and the RCEP. India has so far expressed concerns in participating in e-commerce discussion at the WTO. A carefully crafted e-commerce policy will enable the government to take a stand in global negotiations.
Coming back to the issue of deep discounting/predatory pricing by large e-commerce players, predatory pricing is defined as a deliberate strategy, usually by a dominant firm, of driving competitors out of the market by setting very low prices or selling below the firm’s average variable cost. It makes consumers more vulnerable as they deal with a monopoly/near-monopoly situation. E-commerce players are able to price attractively compared to brick-and-mortar companies as they save on rentals and inventory cost (in case of a marketplace model, an e-commerce company does not maintain inventory but only provides a platform for buyers and sellers). But, apart from their business model which gives them cost advantage, many e-commerce players are able to sell cheap simply because they have received a large amount of investments from private equity or venture capital funds. This funding enables them to sustain a model of deep discounting, which other players in the market may find difficult to sustain.
Even e-commerce companies may not be able to sustain deep discounting as the funding dries up.
While deep discounting is beneficial for the consumer in the short term, it could be detrimental in the long run as it wipes out other players from the market. The dominant player indulging in predatory pricing could then increase prices to recoup the past losses, and consumers will not have much choice.
Predatory pricing by e-commerce players is a global phenomenon. In China, we saw the war between Uber and Didi Chuxing play out, which ended with Uber finally selling its Chinese arm to Didi, which then sharply raised taxi fares to the detriment of final customers. The European Commission last year concluded an e-commerce sector inquiry, highlighting the potential competition concerns. In the US, Amazon is often blamed for predatory pricing. But the company escapes antitrust scrutiny by the US regulator as it can argue that it’s not in a dominant position in any of the businesses. Establishing breach of antitrust law is a complex exercise globally and there are no easy solutions.
Deep discounting by e-commerce players is a global phenomenon. The difference is that in developed markets the retail industry is already developed and hence is in a better position to take on price competition from e-commerce players, but in India both the organised retail industry and e-commerce are at a nascent stage.
The guidelines for FDI in e-commerce sector (2016) state that e-commerce entities providing marketplace will not directly or indirectly influence the sale price of goods or services and shall maintain a level-playing field. In addition, it states that an e-commerce entity will not permit more than 25% sales on its marketplace from one vendor. This was supposed to protect brick-and-mortar stores from price disruptions by e-commerce players. However, these rules are being circumvented as many e-commerce players are influencing the price through their preferred sellers.
The government needs to take a balanced approach in its e-commerce policy formulation. It is critical to provide all the support to e-commerce, which is helping flourish start-ups and providing a platform to SMEs. But, at the same time, there could be a concentration risk with increasing dependence of SMEs on a few big e-commerce players. The government needs to be wary of monopsony powers (meaning pricing power of the single buyer). There is risk that a few big e-commerce players can bring down prices at which they procure from small businesses.
The e-commerce industry needs to be built on a sustainable business model. Short-term price cutting can harm long-term interests of players and consumers. The government needs to have regulations in place to discourage price distortion. This is important not just for the sustenance of the e-commerce industry but also of other industries that are directly or indirectly exposed to this sector. E-commerce is going to grow into a significant industry with implications for overall consumption, production, employment in the economy, which makes it all the more important to have the right business model and the required regulation in place.