The tricky business of regulating disruptors

In a famous verdict by a US court in 2000, Microsoft was found guilty of using anticompetitive means to monopolize the web browser market. While this case subsequently went into an appeal and finally a court settlement, a plethora of such cases have now been decided by courts and regulators across the world. But the question which has still not been answered satisfactorily is: Where do we draw the line between anticompetitive and good business practices?

Adjudicating on a monopolization charge against DuPont—the owner of US operations of French cellophane producer La Cellophane—the district court judge Paul Leahy, in a 1953 verdict, observed that DuPont’s monopoly was “the result of research, business skill and competitive activity”, not anticompetitive practices. With the advent of a wave of disruptors in markets ranging from retail to city transport, the need to distinguish between legitimate and anticompetitive business practices has assumed great significance in India.

Leveraging digital technology and cheap venture capital, the disruptors are offering a mix of (sometimes astonishingly) low prices, high discounts and attractive cashback schemes for prolonged periods of time. Unsurprisingly, concerns have been raised if these practices amount to predatory pricing and a means to drive away the competitors. Uber and Ola, the two major app-based taxi aggregators in India, have been accused of both predatory pricing and monopoly pricing at different times—the latter charge stems from their use of surge pricing in periods of high demand.

The extent to which the pricing power of new entrants should be regulated will depend on how the markets which they are operating in are defined. If a disruptor is assumed to be creating a new market, then predatory pricing is a lesser concern than monopoly pricing. And if the disruptor is assumed to be an addition to an existing market, predatory pricing concern will trump that of monopoly pricing. This factor was important in the DuPont case as the company commanded three-fourths of the market share in the new cellophane market, but only 20% in the older market for flexible packaging materials.

Unlike judge Leahy, the Competition Commission of India (CCI) observed, in a February 2016 order, that the relevant market for Uber (disruptor) does not include traditional private taxis (the older market). The protests that have been mounted by private taxi unions against the disruptors may give a different impression. Nonetheless, being a market place with network effects, Uber and Ola possess characteristics of public goods and natural monopolies and hence all concerns cannot be summarily dismissed.

So far, the CCI has rejected the charges of predatory pricing by these aggregators. Proving surge pricing to be monopolistic/oligopolistic in nature will also be difficult with vigorous competition in the market noted by CCI itself in the February order. But it is not just the app-based taxi aggregators, BookMyShow, for instance, enjoys a virtual monopoly in movies and events online ticketing platforms. The Internet convenience fee it charges, some complain, is on the higher side. Is the case for regulation clearly made out?

Perhaps not. One, regulation in a country like India, with its history of not allowing firms to set their own prices, has to be approached cautiously. Clumsy regulation can itself be a disincentive to disruption. Entrepreneurs must be provided with room to experiment with different business models and pricing scenarios. This experiment is in consumers’ interest.

Second, is a monopoly necessarily bad? Joseph Schumpeter, one of the most influential economists ever, did not think so. Widely known for coining the phrase “creative destruction”, Schumpeter did not believe in the utility of perfect competition based on prices. To Schumpeter, what mattered was competition from the next disruptor with a new method of production or organization.

A harsh regulatory approach can impede the “Schumpeterian waves” of technological innovation. The biggest threat to disruptors that threaten to monopolize, based on Schumpeter’s theory, would come from the next set of disruptors. No wonder, Microsoft feels threatened enough to keep innovating and updating its operating systems. This also explains why Kodak lost, as Mark Sagoff reminds us, not to Fujifilm but to mobile phones with cameras.

Can a monopoly endowed with the network effect resist Schumpeter’s creative disruption? Well, the demise of Orkut answers that.

There can, however, be no straitjacket prescription for regulating disruptors except perhaps one: the honourable judges should avoid setting taxi fares.

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