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The first principles of commerce should guide e-com policy too
Over-stringent e-com regulations would lower consumer welfare, work against small businesses, and also stifle innovation
A buyer purchases an electronic item from a brick-and-mortar shop. It turns out to be defective and breaks down after a while. Should the buyer claim damages on the warranty from the product maker or should s/he go back and threaten the shopkeeper into returning his money?
This retail outlet sells a lot of products from all sorts of producers. The shopkeeper also buys stuff in a wholesale market and packages it neatly into smaller quantities, making it easier for buyers to shop. It sells its own-label goods a bit cheaper than the branded substitutes on offer. It also showcases its own brand’s products prominently to attract customer attention.
Should we make it illegal for the shopkeeper to showcase her own products over the other brands and compel her to ensure a level-playing field for all brands in her shop? If she has invested heavily in her retail business, taking substantial risks in the process, doesn’t she have a right to strategically display products that make more profit for her? And even worse, if she wants to sell her own-label products, then should we ask her to open another shop exclusively for that purpose?
What seem like untenable rules for a traditional commerce format are what our proposed regulations expect e-commerce companies to abide by. If enacted into law, India’s e-commerce regulations would shift the burden of liability for the products sold on these platforms onto e-commerce companies, instead of sellers, and would come down heavily on promoting their own brands, among several other restrictions. This would in effect amount to, say, the Tata group not being able to sell or promote Tata salt, Tata tea or Croma products on its e-commerce platform when it enters the sector, even as it sells all other brands of salt, tea and electronic items through its website.
What if e-commerce majors tomorrow declare that instead of following such stringent regulations, they would rather sell only their own brands? Who would win—buyers, other sellers, or the e-commerce giants?
Yes, the scale and reach of a traditional high street shop or retail chain is much smaller than a large e-commerce company. No doubt, there need to be checks and balances on their power, so that their search engines are not manipulated and a customer has a fair way to complain.
But we must remember that the same firms also offer discounted prices to small sellers for their raw material and lower their cost of production. These platforms have increased the reach of small businesses nationwide and even helped them address export markets. For customers, they have made product returns hassle-free and improved product quality and variety. They have revolutionized the country’s logistics industry and supply chains. Their contribution to employment generation is now significant. And, all in all, the lower prices that e-commerce companies offer is an indirect real income increase, especially for our relatively low-income households.
India’s e-commerce sector is set to expand into an oligopoly with the entry of Reliance, Tata and a revamped Snapdeal from a near-duopoly of Amazon and Walmart-owned Flipkart at present. An oligopolistic market can indeed see its players join hands to form a cartel and act against consumer interests. There are oligopolies that exist in other industries; for example, cement, where producers have been punished by the Competition Commission for operating illegal cartels. But, at present, there is no evidence of such anti-competitive practices in the e-commerce sector.
What is the best way to ensure that e-commerce platforms work to the benefit of smaller sellers across India? Encourage market entry and ensure that there is no excessive regulation. More e-commerce companies entering the market should result in more choice for small sellers in terms of the platforms they want to list on, depending on the listing fees, commission and so on. The e-commerce industry, however, would remain driven by economies of scale and the sector can never be expected to turn into a perfectly competitive market. It will remain a differentiated oligopoly.
A large number of businesses—small, medium or large—go bankrupt daily, and at the same time, new businesses emerge. At one time, the retail business used to be conducted only in a traditional format, and there was no way of knowing how many businesses were going bankrupt. It had little visibility. Now, with e-commerce, it is the same process; not every business that lists itself online is successful, but failures are more visible and vocal now. The truth is that many of India’s small-business owners should be gainfully employed elsewhere; large numbers are into subsistence entrepreneurship because of a lack of jobs.
Coming back to our shopkeeper, she often has customers who ask for discounts on marked retail prices and bargain hard, while she also gets customers who reach straight for their choice, pick it up, pay the price, and leave without uttering a single word. Effectively, different consumers pay her different prices for the same products based on their willingness and ability to pay. Nearly every traditional retail transaction involves bargaining and price negotiations, but e-commerce platforms cannot engage in such price discrimination. Instead, they offer discounts for limited periods on specific goods for customers whose willingness and ability to buy is less, which works to the benefit of many budget-bound shoppers.
In sum, we should not place excessively stringent regulations on e-commerce companies, which would lower consumer welfare as well as the ability of small sellers to expand their market reach, and also stifle innovation by lowering the ability of newer e-commerce companies to take risks.
Vidya Mahambare is professor of economics at Great Lakes Institute of Management, Chennai
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First Published:25 Jul 2021, 09:06 PM IST
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