Competition law and innovation3 min read . Updated: 09 Jan 2017, 12:57 AM IST
Protecting competitive marketsnot just the interests of incumbentsis essential for India to enjoy the fruits of innovation-driven markets
In markets driven by innovation, every so often, the old order is challenged. A new entrant overcomes some shortcoming of existing offerings or invents something that consumers wanted but did not have. The previously successful products or services become inferior, and old sources of profit of incumbents dry up. They then face a stark choice—innovate, or fade away.
Innovation improves consumer choice, and therefore consumer welfare, and contributes to economic growth as well. As India transitions away from state-based companies and regulated monopolies, it should protect the ability of new firms to enter the market and benefit from their innovations. In particular, innovators must be allowed to enjoy the benefits of their innovation, and not be forced to share it with incumbents or on terms dictated by the government. Such forced sharing reduces the incentive to innovate in the first place, because it reduces the profits available should the new entrant find success. Incumbents then have little incentive to innovate on their own! This is especially true in industries characterized by rapid innovation—whereas research and development costs tend to be substantial, the mantle of market leadership is transient. Thus, protecting competitive markets—not just the interests of incumbents—is essential for India to enjoy the fruits of innovation-driven markets.
India’s Competition Act of 2002 enshrines this principle. The law prohibits anticompetitive agreements and the abuse of a dominant market position to restrict the production of goods or deny market access to competitors. The law prohibits dominant incumbent firms from using their position to deny new entrants their chance to succeed. India’s regulator in charge of protecting competition is the Competition Commission of India (CCI). To date, CCI has had some success in attacking some types of competition law violations, particularly around “hardcore" price-fixing.
But now, the CCI faces a new challenge—how to analyse disruptive innovators who challenge established markets and offer new ways of thinking. Some of the incumbent firms have pleaded with the CCI to attack the entrants for failing to share their innovations on terms that the incumbents prefer. Facing loss of market share, these firms pose as victims of unfair competition from the entrants. In some cases, instead of innovating themselves, they look to the CCI to force the innovators to allow free riding. For example, the competitors of Uber and Ola wish to decelerate those companies’ growth and protect incumbent transportation providers. Traditional offline retailers are keen that Flipkart and Snapdeal do not reach out to their consumers through innovative business strategies. Competitors of Google wish to share in the benefits of the innovations that Google spent billions of dollars developing.
While the complaints of the incumbents that they are victims may seem superficially compelling, restraining entrants such as Flipkart, Uber, Ola, and Google only protects incumbents that are not innovating. This can lead the Flipkarts, Ubers, Olas, or Googles to underinvest in the Indian market. If this happens, there could be a loss for both innovators and consumers who would be denied the benefits of new technologies available to consumers elsewhere in the world.
It can be difficult for a competition authority to tell the difference between a victim of unfair and anticompetitive conduct and a weak competitor that loses out in the process of competition itself. To avoid this confusion, the CCI can use a metric of potential changes in consumer welfare due to the entry of innovative firms. If, indeed, there is abuse of dominance and anticompetitive behaviour, which leads to consumer harm, the telltale signs would be increased prices, lower quality, or reduced choice for the consumers. Innovative firms that bring new products and new services to markets, by contrast, are typically lowering prices, increasing quality, or offering consumers more choice. In such cases, these factors imply that the innovator has the competitive edge, which leads the consumer to shift loyalty away from incumbents.
Therefore, the CCI must carefully distinguish between disruptive innovation and violation of competitive law. It needs to ensure that entrants enjoy the benefits of their innovation so that there is incentive to develop and transform, and consumers have the chance to benefit from innovation and market economy.
Viswanath Pingali is a faculty member in the economics area, and his research interests include experimental economics, modelling competition and government regulations.