A Marxist interpretation of capitalism (Source: here)
SUMMARY: Online retail is dominated by quasi-monopolistic platforms, which restrict choice, stifle competition, underpay suppliers, and overcharge consumers. The problem of monopolistic market practices in e-commerce is best be addressed by improving the market infrastructure to facilitate greater competition. The Beckn Protocol creates a genuinely competitive environment by making all stages of commercial transactions accessible to all participants. The Beckn protocol is accessed via a simple plug-in and once a platform is fitted with Beckn transactions can be done on the internet via any conventional interphase, such as a website, mobile phone, or app. Introducing open networks offers far more promising way to deal with the monopolistic e-commerce giants than expensive law suits.
Monopoly power is big problem for society. Monopolists are fundamentally exploitative, worsen the income distribution, and their operations result in an inefficient allocation of society's scarce resources. They also stifle competition, limit choice, and impede innovation. Firms with monopsony power force suppliers to sell them inputs at lower than competitive prices, while firms with monopoly power charge consumers more than market prices, often accompanied by inferior service.
Monopolistic business practices are particularly pervasive in young economies and in new industries, where first movers quickly gain a dominant position. Monopolies naturally tend to wither away over time as economies develop and competition increases, but some monopolies are able to sustain their market power for many years, even decades.
To counter the problem of monopolies, most countries have legislation in place to curb abusive business practices. For example, the United States Congress passed the Sherman Antitrust Act in 1890 and the Clayton Act in 1914 to stop widespread abuse by monopolies as well as the operation of cartels ('trusts' in American lingo). Anti-trust legislation gives the government powers to regulate or even break up monopolies. Over the years, the US government has anti-trust powers against US railways, Standard Oil, AT&T, Microsoft, and many others. Today, merges and acquisitions have to be approved by regulators to ensure that the merged entities do not pose a threat to competition.
Today, the problem of monopolistic market practices is back, not in the real economy, but in online commerce space. Movie lovers would love to rent or buy any movie they want, but they can only get the narrow selection on offer on Netflix or Amazon Prime. Similarly, those looking to book hotels only see the limited number of hotels on Booking.com, Trivago.com, Hotels.com, or Airbnb.com, but only if they subscribe to all four and they never see what is on other platforms nor those properties that are not listed on any platforms at all.
Government regulators have so far been ineffective in curbing the monopolistic business practices of the e-commerce giants, despite the existence of anti-trust legislation. To some extent, this is understandable. Since there is no infrastructure available for conducting e-commerce outside of the big e-commerce platforms, it is not easy to dismantle the e-commerce monopolies without disrupting the consumer experience. Remember that many consumers love the ease of doing business online, even if they fail to fully appreciate that their choices are restricted and they pay more than they should when shopping online. Governments are also subjected to constant lobbying against regulation by the e-commerce giants.
Fr now, the big online monopolists are therefore allowed to conduct their business entirely as they see fit, manipulating access to their platforms and managing the prices they pay to suppliers and charge consumers. They also control client information, which gives them a vital edge over their own suppliers, because they can launch proprietary brands that gradually squeeze out their own suppliers, thereby further increasing their market power.
At root, the problem of imperfect competition in the e-commerce space is one of market infrastructure. Specifically, there is currently no openly available facility within the internet that enables e-commerce outside of the major quasi-monopolistic platforms. New entry and hence competition is therefore almost impossible.
To illustrate the problem, imagine a country that has just two cities and a privately owned highway that connects the two cities. Since there is only one road, the company that owns the road has monopoly power with respect to drivers, that is, it can charge drivers significantly more than its marginal cost as drivers have no choice but to use the road. At the same time, the owner of the road can also act as a monopsonist with respect to suppliers, forcing them to lower their margins for, say, tarmac, since the road company is the only buyer of tarmac in the country.
Now contrast this with another country, where the government has put in place a comprehensive road network as well options to use railways and airports. The existence of a complete infrastructure for transportation massively expands choice and competition. The erstwhile monopolist road owner is now forced to lower the prices he charges drivers for using his road. He can no longer gets away with underpaying suppliers either, because they can direct their supplies elsewhere. The monopoly rents previously enjoyed by the monopoly road owner are now distributed widely throughout the economy to the benefit of both suppliers and consumers. The volume of economic activity is far greater, there is more choice, and prices are lower.
The road analogy closely resembles the situation in the e-commerce industry today. Since there is no free access to the infrastructure required to do commerce online, consumers have to go to the big e-giants, who provide this infrastructure. Since they are the only game in town, they only grant access to tto a fraction of suppliers (for a hefty fee), so consumers never get to see the whole market. Consumers who want choice beyond the limited stuff on offer on e-commerce platforms have nowhere to go. New or small suppliers which are not on the platforms cannot discover clients, while, due to the scale economies enjoyed by the e-commerce giants, they find it uneconomical to set up their own online market infrastructure. As the drawing below illustrates, whole sections of the market - the white circles and squares in the drawing - are simply not served by the current monopolistic market infrastructure.
E-commerce today - large swathes of the market (white circles) are not served, while the e-commerce giant has excessive market power (Source: own drawing)
Some government agencies, such as the European Union's Competition Commission have attempted to force e-commerce giants to be less predatory through draconian regulatory clampdowns and the threat of fines and other punishment, but this is proving costly, unpopular, and largely ineffective. So what to do?
A promising way forward is to break the e-commerce giants' monopoly on market infrastructure through greater competition. The best way to achieve greater competition is to provide the open e-commerce infrastructure required for anyone to enter the market. All consumers and all producers must be free to transact, including on the existing platforms if they so with.
Fortunately, it is now possible to for everyone to freely transact on the internet. India has shown the way in this regard, launching the the Open Network for Digital Commerce a few years ago - for more on ONDC see here.
As the name suggests, ONDC is an open network. It's 'secret sauce' is a protocol called Beckn (see here), which is a kind of operating system that specifically facilitates e-commerce on the internet in exactly the same way as the SMTP, POP3, IMAP/API protocols enable email messages to be read on competing platforms such as Google, Outlook, or Apple Mail. In an easy and accessible way, Beckn makes available to everyone the infrastruture required to transact online, which was previously only available on the platforms of the giant e-commerce firms. Specifically, Beckn provides infrastructure for all stages of commercial transactions, including catalogue management, product search, cart building, payment gateways, order fulfilment, delivery, returns and cancellations, dispute resolution, and reviews.
The Beckn protocol is a free public good. It is accessed via a simple plug-in and once a platform is fitted with Beckn transactions can be done on the internet via any conventional interphase, such as a website, mobile phone, or app.
ONDC - which uses Beckn - has enabled private sector activity to flourish in India as any seller on any platform is able to view any buyer and vice-versa. Monopoly power in the e-commerce sector has therefore been undermined. The drawing below illustrates what an ONDC-style market place looks like. All suppliers and consumers are able to participate in the market (no white boxes), while the number of platforms through which transactions occur has multiplied, ensuring far more competition and a fully served market.
E-commerce with ONDC-style market infrastructure - all market participants are served and there is competition between e-commerce platforms (Source: own drawing)
ONDC was established with initial sponsorship from the Government of India in collaboration with private sector players. Now that it is up and running, the daily management of ONDC is now left to FIDE, a non-profit organisation.
Nandan Nilekani - the man behind India's population scale digital transformation (Source: Forbes)
Open commerce networks are revolutionary. Returning to our examples of movie lovers, they are now able to rent or buy any movie they want. Those looking to book hotels will see all the hotels in the market and they will be able to view them from within any platform. Beckn has provided the complete transactions infrastructure required to make this possible.
One of the important ways that open markets benefit sellers is by not requiring them to accept the platforms' predatory terms for access to clients. Since the transaction infrastructure on open Beckn-supported markets is no longer owned and controlled by a monopolistic e-commerce giant, sellers have immediately and full access to all consumers. Sellers are free to change platform at will and when they do they can take their heir corporate identities and their valuable proprietary sales information with them, regardless on which platform they choose to operate.
Importantly, open markets do not do away with the e-commerce giants. Instead, the e-commerce giants are free to participate in open markets, but they are prevented from limiting the competition, since Beckn makes the market infrastructure available for all to use, big or small, old or new. It is thus precisely by doing away with barriers to entry that open e-commerce increases choice, lowers prices, and enhances competition and, most likely, innovation.
Innovation improves under in open markets, because of the easy of entry for new platforms, market participants, and technology providers. Greater competition creates stronger incentives to adopt ever more efficient technologies over time, which in turn increases the number and sophistication of platforms available to both sellers and buyers, thereby lowering costs for suppliers and prices for consumers.
One of the key features of Beckn is that fosters interoperability between previously incompatible platforms. Beckn can therefore also facilitate non-commercial transactions, say, enabling communication between different parts of the public sector that were previously unable to communicate. Beckn therefore makes it unnecessary to build enormous and costly software solutions for, say, health and education sectors. Instead, governments can simply install Beckn and their various systems can - with modest adjustments - begin to communicate with each other.
India has been a leader in showing how open transaction systems can be used beyond conventional retail. For one, India's UPI e-payments system allows payments across different banks, even if individual banking platforms are completely different. Everything can be done from a phone. UPI is simple to use, cheap to operate, interoperable, and functions at population scale.
India is also using open networks to enhance public services. UPI and ONDC work in conjunction with Aadhaar, a unique identity number available to all residents in India. Since each resident is identified by biometric and demographic information, the Indian government can reach nearly every person in the country via a simple mobile phone. The Aadhaar system has reduced the size of the informal sector dramatically, which in turn has helped to grow the tax base. It has also improved access to government services. For example, with the Aadhaar system the Indian government can now make cash transfers directly to individuals in, say, famine-affected areas, or to pay for education, or health care.
Technology has improved the efficiency of the Indian tax system (Source: here)
The potential of Beckn protocols and open markets is great in poorer countries for two reasons, namely that resources available to buy expensive information management systems for the public sector are extremely scarce and monopoly power is a particularly large problem due to rudimentary stages of development.
India's system also has clear applications in developed economies. For example, fighting market abuse by the big e-commerce giants through the provision of key market infrastructure is preferable to fighting the e-commerce giants in court. EU's Competition Commissioner, Margrethe Vestager, a keen warrior in the fight against market abusers, should study closely what India is doing in this regard.
The End
Additional resources/information:
Cambridge Hub for Innovation Prosperity: Link here.
ONDC:
Open Network for Digital Commerce (ONDC) frees up e-commerce markets (Source: YouTube)
Beckn Protocol:
Beckn protocols make e-commerce available to all market participants on ONDC (Source: YouTube)
Nandan Nilekani on ONDC and India's digital future:
Nandan Nilekani is co-founder of Infosys and a key proponent of India's digital revolution (Source: YouTube)