Does ONDC address the competition concerns that plague Indian E-commerce?
In this blog, we closely evaluate the extent to which an unbundled and interoperable ecommerce network might undo existing competition concerns.
(Before we go ahead, you may want to read our blog on the introduction to the ONDC model here. If you already know about it, then go right ahead! )
Anil Wagh, 30, is a school teacher in Pune and lives with his wife, Smita Wagh, 27, who is a homemaker. Anil’s father, Mohanrao Wagh, 60, owned and operated a small business making sports t-shirts. In the past few years, the business had been slowing down, with the sales and contracts drying up. Given his age, Mohanrao decided to shut shop– metaphorically and literally.
Smita, after the father-in-law confided in her of his decision to close down the business, had a brilliant idea. She decided to take the shop online– transforming the business model into a B2C e-commerce platform business. Smita convinced her husband of the tremendous opportunity to tap into a large customer base with farther reach through the online marketplace. The couple explained to Mohanrao of their plan to sell their products online– on one of the renowned e-commerce marketplaces. Although half-convinced, he let them have their way.
Smita and Anil decided to go forward with the e-commerce platform named Appazon. They also noticed their friends and relatives use this app to buy things online. Just by providing the bank account, and GST information to the platform, and uploading the product photos and details, they were able to onboard as sellers within 15 minutes.
Within a few months, the sale of t-shirts saw brisk growth. The t-shirts were priced at just Rs. 499 and were available in five colors. The affordability of such a good quality t-shirt, and the variety of colors offered, were important factors in this rise in sales. The product gained considerable traction on the platform, with the outpouring of positive feedback– reviews and ratings. Business was good. The Wagh family was happy.
Twist in the Tale
To everyone’s surprise, business sales plateaued in the following few months. The growth initially slowed down, before hitting nil. Upon some informal investigation done by product searches on the platform through various accounts, Smita and Anil found out that their product was listed way below its competitors– though being rated and reviewed better. At the same time, these rival products also came with the tag of “Appazon Assurance.” Surprisingly, the retailers and the sellers are given primary preferences in the search results were subsidiaries of Appazon itself– Cappario Retail and Proudtail Retail.
This anti-competitive malpractice is called self-preferencing1. It involves actions by an undertaking that are designed to favor its own products or services over those of its competitors. The main issue with self-preferencing is that an organization in a dominant position might use it to strengthen its own position in the market and to obstruct or restrict the entry or growth of other competitors. In other words, there is concern that self-preferencing behavior by dominant undertakings may have an exclusionary impact.
Such malpractice in the current e-commerce scenario negatively affects the smaller players who get killed in the competition. This is one of the monopolizing tendencies in the current e-commerce landscape, where the platforms attempt to corner most of the sales and push the rivals out of the competition.
In this case of Appazon, the preferencing of the products’ list follows a pattern where similar products from subsidiary retailers, here Cappario and Proudtail, are higher up the list. The product-agnosticism of the platform is diluted. This eats away into the sales of small sellers and retailers such as the Wagh family. At the same time, the platform endorsement in the form of an assurance tag provided to the subsidiary brands, further corners consumer choice, and hence the sale. This leaves less scope for small businesses, sellers, and retailers to undertake business, operate profitably, and maintain their online presence.
Are the competitor’s products any better?
To dig deeper into the products, Smita and Anil ordered a few sports t-shirts from the retailers Cappario and Proudtail. To their utter disbelief, they found out that the manufacturing units of these specific t-shirts were located in Baroda– from where most of their own orders originated. At the same time, the subsidiaries manufactured and sold t-shirts in only three colors: black, blue, and red– which were the most popular colors of the sports t-shirts sold by the Wagh family. At the same time, the plagiarized product was priced at just Rs. 349– in comparison to the Rs. 499 t-shirt sold by Smita and Anil. This shook the guts out of them.
E-commerce marketplaces collect vast troves of data through transactions that happen on the platforms. The proprietary data of a certain brand or seller's number of orders, best sellers, product details, specifications or characteristics of the products in demand, and the geographic distribution of these purchases, is transferred to third-party subsidiary companies to conduct brand plagiarism– the imitation game2 of the e-commerce platforms. It cuts through the shipping costs and hence offers cheaper and better shipping options. Such improper use of data is one of the major problems in the current e-commerce landscape. Anti-competitive malpractices hinder the smooth functioning of a product-agnostic, facilitative marketplace.
This attempt by Appazon to steer away the sales and e-commerce traction of a particular product by setting prices unnaturally low is anti-competitive, anti-trust malpractice. This is known as predatory pricing3. Such malpractices in the current e-commerce landscape have pushed the smaller players out of business. At the same time, the dominant position of the platform-cum-retailer brings itself and its claim of being an agnostic, facilitative marketplace into question. Such deep discounting practices hurt not only the small retailers and sellers on the marketplace but also the small, offline sellers.
Although discounts per se are not anti-competitive in nature, deep discounts are considered to be anti-competitive when they are used to enter into exclusive agreements with certain, enlisted sellers; or used to restrict such retailers from entering into business with other platforms4. Ecommerce platforms mete out discriminatory treatment to the enlisted sellers by offering discounted fees to certain preferred sellers as well as third-party subsidiary sellers. This pricing strategy can drive out the small sellers out of the market. At the same time, the operator-cum-platform helps a select few sellers cut out special, exclusive deals with leading big tech manufacturers– especially electronics and mobile phones; crowding out the retail market.
The tendency to extract maximum value from the customers and sellers alike leads to the rent-seeking behavior of the platforms. Combined with the centralized way of planning and functioning of the e-commerce platforms, such anti-trust strategies arise. The Competition Commission of India (CCI) has recognized these strategies employed by the e-commerce platforms such as self-preferencing, improper use of data, predatory pricing, deep discounting, and exclusive agreements5 as anti-competitive malpractices, and raised concerns about it. Thus, the concentration of power, barriers to entry for sellers as well as other e-commerce businesses, and the misuse of data-driven insights sourced from the proprietary technologies are the fundamental problem with the platform-centric e-commerce system which leads to antitrust strategies and competition concerns.
Globally, e-commerce platforms provide comprehensive services to sellers in every aspect of the order lifecycle. Platforms employ a data-centric approach from the data generated by the proprietary technologies used on the platform. Thus, the platforms have end-to-end control over transactions. At the same time, the network effects that arise on these platforms result in a highly skewed number of winners and losers6. The CCI chairperson, Ashok Kumar Gupta, noted that these markets appear to have inherent characteristics that support the entrenchment of market power7. Thus, addressing the competition concerns arising from the fundamental characteristics of the e-commerce industry is an imperative task.
Will ONDC come to the rescue of small traders who want to sell online?
In the past few years, the global trend has been moving away from the centralized, platform-centric model toward a decentralized, protocol-oriented one. The market has responded to the concentration of power, wealth, and control of the e-commerce platforms by shifting towards openness, protocol-based standardization, decentralization, and interoperability – a fundamental redesign in value creation. Apart from the market response, various governments have attempted to deal differently with such influential companies in the e-commerce or tech space that influence pricing and restrict competition.
The Open Network for Digital Commerce (ONDC) is a first-of-its-kind approach that addresses these competition concerns in the e-commerce industry by employing a market-based, competitive solution. ONDC is not a platform aggregator, nor is it a super-app. It is a company registered under Section 8 of the Companies Act; it is a not-for-profit organization. It is a protocol that aims to transform the e-commerce industry. The network has the potential to serve as a globally replicable model for digital commerce.
The Open Network for Digital Commerce (ONDC) has attempted to address competition concerns in the Indian e-commerce industry by creating an alternative model for the e-commerce ecosystem. The network is a decentralized and interoperable ecosystem of e-commerce that envisions a facilitative role for itself.
Although the claim of ONDC is to transform and democratize e-commerce, its operationalization would effectively dilute the platform-centricity of the Indian e-commerce sector, the concentration of power & control, and the redundancy of proprietary technologies through various aspects of the network, such as:
Reduction in Entry Barriers: The ONDC provides an open-source protocol for standardized constituent microservices. Interoperability between various sellers, buyers, and logistics platforms creates wide discoverability for sellers. Due to this unbundling, the innovation in e-commerce is reenergized giving rise to newer models and services in the e-commerce industry. This decentralization of network participants and e-commerce businesses would effectively shift the power from a small number of large platforms and sellers to a large number of smaller players. Thus, effectively reducing the barriers to entry for e-commerce businesses and sellers alike.
Redundancy of Proprietary Technologies: E-commerce platforms have troves of proprietary data generated by their technology stacks with every interaction and transaction. The platforms employ data-driven insights to optimize their centralization of control and restrict competition. With the decentralization of platforms, the scope for misusing data-driven insights will no longer have any currency in the e-commerce ecosystem, as every network participant can employ standardized, open-source technologies. Although the data generated remain with the network participant, its relevance is restricted– diluting the ability to employ anti-competitive practices such as the misuse of data.
Dilute the Concentration of Control and Wealth: By reducing the entry barriers for network participants i.e. e-commerce businesses and sellers, and enabling open-source standardized technologies, the platform-centricity of the e-commerce system will fade. The ONDC is attempting to kick in ecosystem-wide transformation for the e-commerce industry, wherein the incumbent few large platforms that provide solutions designed as bundles are replaced by a vast array of network participants providing granular e-commerce solutions and competing with each other. Thus, the USP of platforms– proprietary technologies, monopoly of a few sellers/retailers, and a platform-centric approach for e-commerce, is diluted; effectively leading to the loss of rent-seeking and wealth-generating control.
Break down the Siloed Network Effects: The incumbent system of e-commerce has a few players that have triggered enormous network effects within their platforms. Although this has proved beneficial for some retailers and sellers, the majority of them have missed out on scoring big. These platforms function within their silos of bundled solutions powered by a proprietary technology stack. This restricts the cross-competition of sellers and retailers; paving the way for anti-competitive policies on the platforms. With the advent of ONDC, the silos of network effects will break down due to interoperability, decentralization, and open-source technologies. This will trigger an ecosystem-wide transformation of the e-commerce industry in India– unifying the siloed network effects.
With the advent of ONDC, the Wagh’s have access to a wider market. The network principles ensure that a wider market translates to fair competition with more sellers. The small sellers, who face the brutal brunt of anti-competitive strategies, are safeguarded in the ONDC-compliant e-commerce ecosystem. Thus, the restricted scope of growth for the small sellers is unshackled. In the long run, the Wagh’s have the opportunity to scale exponentially and generate more wealth. Thus, the ONDC prevents anti-competitive behavior and widens the scope of operations for small sellers.
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Rutvik is an intern with D91 Labs and is a student of Public Policy at NLSIU.
All artworks are designed by Poorvi Mittal.
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A predatory pricing strategy is one that offers products or services at extremely low prices with the goal of eliminating competition and raising barriers to entry. The goal is to maintain low prices for a protracted period of time, long enough to, ideally, drive out the competition.
According to a Reuters report, on a certain e-commerce platform that boasts of having onboarded more than 400,000 Indian sellers, only 33 sellers account for about a third of the value of all goods sold on it. Two sellers, with indirect equity stakes by the e-commerce platform itself, accounted for almost 35% of the total sales revenue in 2019. So, only 35 sellers out of the 400,000 sellers on the platform, cornered around two-thirds of the total sales. This is a classic example of network effects within the platform leading to a skewed proportion of winners and losers. (Amazon documents reveal the company’s strategy to dodge India’s regulators )