Irfan Rashid
Introduction
The digital economy in India is a significant contributor to the overall GDP growth. With the high odds that the digital economy will contribute 20% to India’s GDP by 2026, India becoming the leader in digital revolution does not seem a distant dream now. In March 2024, the Committee on Digital Competition Law set up by the Ministry of Corporate Affairs released its report along with the Draft Digital Competition Bill 2024 (Draft Bill).
This Draft Bill aims to regulate large digital enterprises and promote fair competition in the digital space in India. It proposes an ex-ante approach, inspired mainly by the Digital Markets Act in Europe. The Draft Bill aims to govern digital enterprises, satisfying certain financial thresholds and user thresholds and factors considered relevant by the Competition Commission of India (CCI), designated as Systemically Significant Digital Enterprises (SSDEs). The SSDEs and their Associate Digital Enterprises (ADEs) would be required to comply with several obligations as specified in Chapter III of the Draft Bill, and prohibition on self-preferencing is one of the key obligations.
This article critically examines the blanket ban on self-preferencing proposed in the Draft Bill. It argues that the prohibition overlooks the potential benefits of self-preferencing in digital markets. The article illustrates how legitimate self-promotion differs from exclusionary practices. Moreover, the author advocates for an effects-based approach that evaluates self-preferencing on a case-by-case basis, balancing competition, consumer benefits, and innovation.
Understanding Self-Preferencing
Self-preferencing is the act of giving preference to their own products or services over competing products or services, often in its own ecosystem or platform. It is often seen to be manifested in search rankings, product recommendations, or display placements in favour of the company’s offerings. A famous example could be Apple promoting its own apps over other third-party apps in its App Store. Another one could be seen when Amazon gives higher visibility to its private-label products, such as AmazonBasics, in search results or recommendations. Similarly, Zomato’s and Swiggy’s promotion of its private labels in restaurant searches presents a case of platform self-preferencing that merits careful analysis rather than outright prohibition.
The Draft Bill explicitly prohibits self-preferencing by SSDEs. Section 11 mentions that an SSDE shall not favour its own, affiliated, or partnered products or services over those of third-party users on its ‘Core Digital Service’, as specified in Schedule I of the Draft Bill. However, this approach does not take into account the unique characteristics of digital markets in general and the Indian market in particular, where network effects and dynamics work differently than mature economies.
Arguments Against Prohibiting Self-preferencing by SSDEs
Blanket Prohibition on Self-Preferencing by SSDEs
On the face of it, the Draft Bill views self-preferencing as inherently harmful or anti-competitive. Unlike the Competition Act 2002 (2002 Act), which treats self-preferencing as a specific form of abuse of dominance under Section 4, the Draft Bill does not offer a nuanced examination of market specificity or its potential pro-competitive effects. Also, in most cases, self-preferencing must be proven as constituting an abuse, with a considerable effect demonstrated on competition in the market or choice available to consumers. Thus, it is not illegal if a particular self-preferencing action does not cause substantial harm to competitors or consumers. This approach is better because it does not categorize self-preferencing as an abuse ‘per se’ rather it is left to case-by-case assessment. The CCI has traditionally used an effects-based approach while assessing whether a particular action taken by a dominant enterprise would cause harm to competition. The Draft Bill departs from this approach by imposing a ‘by-object restriction’ (conduct presumed anti-competitive per se, thus requiring no detailed analysis of its effects on the market) on self-preferencing for SSDEs.
Implementation Challenges in India’s Regulatory Environment
India’s regulatory framework provides a unique set of challenges for the blanket ban on self-preferencing. The CCI often suffers from a lack of adequate capacity, with limited staffing and resources, that may impede its ability to monitor compliance effectively and enforce the provisions of the Draft Bill. This raises concerns about whether the regulator can meet the complexities of self-preferencing practices in diverse markets. Judicial delays in the Indian legal system, notorious for prolonged resolution of disputes, could undermine the effectiveness of the ex-ante framework and create uncertainty for market participants. The CCI has so far relied on an ex-post, case-by-case approach under the 2002 Act. An ex-ante framework that presumes certain conduct, such as self-preferencing, to be anti-competitive may face resistance from stakeholders who are accustomed to the existing system.
Risks of Overreach and Regulatory Uncertainty in SSDE Designations
Equally important, under Section 3(3) of Draft Bill, the CCI is given wide discretionary powers to designate an enterprise as SSDE based on multiple factors, even when it does not touch the financial thresholds and user thresholds. This provision, while ensuring flexibility in dealing with changing market dynamics, also raises concerns about potential overreach by the regulator and uncertainty. At the same time, this could create a scenario where not just known large players such as Amazon or Google can come under the ambit of “SSDE” but also smaller and emerging enterprises which are yet to gain prominence. This blanket prohibition on self-preferencing combined with such discretion may have the unintended consequence of disincentivizing firms to innovate, reducing consumer welfare, and making it ambiguous as to what compliance is expected. Although, under Section 4(6), enterprises can challenge their SSDE designation by responding to a show cause notice and being heard before a final decision is made, the overall framework may chill both emerging and established players, potentially stifling competition rather than promoting it.
The Need to Distinguish Legitimate Self-Promotion from Exclusionary Self-Preferencing
Another overlooked yet fascinating aspect is that self-preferencing has the potential to be both exclusionary and competitive, so a balanced anti-trust approach is in order. A distinction needs to be made, for example, between ‘self-promotion’ and ‘exclusionary self-preferencing’. Self-promotion involves companies promoting their products or services, which will usually benefit the consumer and drive competition. For example, when Amazon promotes its streaming service on its Prime platform, it challenges competitors like Netflix and enhances consumer options without any anti-competitive practice.
On the other hand, exclusionary self-preferencing can be harmful to competition because it wrongfully disadvantages rivals. For example, the landmark Google Shopping case in the EU holds a lot of crucial insights into how India needs to approach its own self-preferencing policies. In 2017, the European Commission fined Google €2.42 billion for abusing its market dominance by giving an illegal advantage to its own comparison shopping service. The Commission investigation determined that Google systematically placed and presented its comparison shopping service more highly in search results, while other competing services appeared only on average on page four. This case established that ‘favouring’ is not limited to the level of prominence in presentation but also encompasses the various criteria applied on the services of its rivals. The EU case shows that not all self-preferencing is equal and focuses on demonstrating actual harm to competition rather than presuming all self-preferencing to be anticompetitive. The Indian regulatory framework would do well to heed such a nuanced approach that keeps in mind the context and actual market impact.
Another landmark case is Bayou Bottling, Inc. v. Dr Pepper Co., where a local Pepsi bottler claimed that the acts of a local Coca-Cola bottler were actually preventing Pepsi products from being placed in those vending machines or coolers that the Coca-Cola bottler operated or supplied. The court observed that the activities of using vending machines and coolers strictly for its products and providing free maintenance to loyal customers were considered competitive strategies and not anti-trust violations. The court held that no such harm was done to the competition as shelf space shared the same market performance, and the defendants had not blocked Bayou’s ability to compete or access essential resources. It was concluded that the defendants were exercising only legitimate self-promotion and not exclusionary self-preferencing.
Impact on Innovation and Competitive Differentiation
Another detrimental effect of prohibiting self-preferencing could be on innovation. It is well known to us that that large digital platforms often invest heavily in building proprietary ecosystems, integrating diverse services, and enhancing user experience. The inability of platforms to self-promote or integrate their services may lead them to be less likely to invest in the Indian digital sector, thereby slowing innovation and competitiveness in the Indian market. The outright ban also fails to take into account the benefit of ‘competitive differentiation’ that can be derived from self-preferencing. For instance, Amazon uses Fulfillment by Amazon (FBA) logistics to fulfil its own and third-party orders; this results in faster delivery to customers and also gives the third-party sellers access to an extremely efficient logistics network they otherwise could not afford or gain access to. This approach allows sellers to focus on their core products while Amazon handles fulfilment. In fact, it has been seen that sellers see a 20–25% increase in sales after adopting FBA. Therefore, a strict ban on self-preferencing may thus limit value-added services such as such integrations to reduce the competitiveness of smaller sellers who may benefit from such integrations and lead to fewer options for consumers.
Assessing the Rebuttable Nature of Self-Preferencing Presumptions
The assumption that self-preferencing is abusive per se needs to be examined in greater detail. Unlike tying, which typically restricts consumer choice by conditioning the sale of one product on another, self-preferencing often yields tangible procompetitive benefits. For instance, platforms accused of self-preferencing, such as AmazonBasics, could demonstrate that prioritizing their products improved consumer welfare through lower prices or enhanced functionality. An effects-based approach would allow firms to be able to produce evidence that will serve to refute abuse allegations.
In contrast, tying, such as Microsoft’s bundling of Teams with Office 365, has been considered problematic because it is viewed as diminishing consumer choice. Yet, even tying can create the effect of seamless integration and greater consumer utility. Self-preferencing, when compared to tying, is more likely to result in pro-competitive effects, especially in digital markets that are driven by innovation.
Consumer Benefits and Market Efficiency through Platform Self-Preferencing
Platform self-preferencing could benefit customers and even competitors, through improving user experience, innovation, and market efficiency. Platforms, by prioritizing their integrated services, are now given more streamlined navigation and connected experiences such as the seamless integration of Google for Gmail, Maps, and search in a single window. This provides more convenience and cohesive functionality to consumers. Self-preferencing also pushes firms to invest in the quality of their product so as to innovate, thereby availing better services to the user. For example, Amazon’s private labels, for example AmazonBasics, typically offer products at a lower price as compared to other companies, and this pushes the competitors selling the same product to innovate and reduce prices. Similarly, Flipkart’s promotion of in-house brands such as MarQ has brought low-priced electronics to consumers, along with stronger relationships with small partners representing the two benefits of self-preferencing in promoting innovation and expanding market opportunities.
Additionally, self-preferencing can stimulate market dynamics by enabling platforms to optimize resource allocation and invest in product development, further driving innovation. Platforms can test new ideas and features, which later become adopted and enhanced by rivals. Such rivalry improves consumer choices and accessibility. Another pro-competitive effect is the ability to enter and expand in the market. Service-focused platforms can use the resultant efficiencies and revenues to support ancillary businesses or fund new initiatives, creating some spillover effect that indirectly benefits the ecosystem. For instance, self-preferencing may open up markets to smaller or niche competitors as barriers decrease because they are able to exploit the bettered infrastructure or consumer demand brought forth through the platform.
Thus, self-preferencing benefits consumers not only through better services and lower prices but also promotes innovation, enhances market competition, and maximizes overall market efficiency. However, these advantages are to be weighed against the risks of distorted markets. Network effects can also multiply the sum of positive and negative impacts of self-preferencing. While an increased user base raises the quality of service and improved availability of data increases product recommendations, there are dangers of market concentration and possible exclusion of competition. Accumulation of data advantages by leading platforms require careful regulatory considerations.All these aspects call for a balanced approach rather than an outright prohibition on self-preferencing practices.
Conclusion
By treating self-preferencing as inherently anti-competitive, the Draft Bill overlooks its potential pro-competitive benefits, such as innovation, enhanced consumer experience, and market efficiency. Although the intention might be to curtail anti-competitive practices, the blanket ban on self-preferencing by SSDEs coupled with the CCI’s wide discretionary power risks capturing enterprises that do not have significant market power or influence to distort competition and may result in overreach or misapplication of regulatory measures.
While the ex-ante approach aims to reduce the procedural inefficiencies in the enforcement process and prevent harm, a balanced approach that combines case-by-case analysis can provide for a more nuanced approach to evaluating practices that promote competition and innovation without being exclusionary.
Moreover, the policymakers should understand that the race to efficiency that benefits consumers and improves competition will, sometimes, come at the expense of inefficient, less-innovative players. Also, the focus should be on overt exclusionary behaviours by enterprises in a position where they can influence the market in their favour while still leaving room for legitimate self-promotion. This approach, paired with clear guidelines and enhanced regulatory capacity, will ultimately serve the goal of creating a competitive digital economy, supporting investment and innovation, and protecting against genuine market abuse.
The author is a second-year law student at School of Law, CHRIST (Deemed to be University), Bangalore.
NUALS Law Journal 