How a Luddite approach might hurt ecommerce in India

Attempts are being made to democratise India's digital marketplace. But before the policymakers move to restrict online platforms, they need to consider how various factors contribute to the success of one

By IIM Ahmedabad

Published: Dec 22, 2021 12:52:14 PM IST

Updated: Dec 22, 2021 01:07:23 PM IST

Restricting multi-business groups to enter the platform business merely for other sellers, ignoring their own established brands, limits the potential benefits to customers and sellers both, of having more choices, not only of goods but also of marketplaces.

Image: Niharika Kulkarni / Reuters

The Luddites were a group of English textile workers in the 19th century who destroyed textile machinery out of fear that machines would replace them. There was some initial structural unemployment, but long-term unemployment was unaffected. In the ecommerce space today, the equivalent to that is the policy view that a marketplace entity should not have its related parties or associated enterprises on the platform. The Luddites here believe that online majors promote select sellers on their platforms. It does not result in a level playing field and they would not favour Starbucks or Titan or Croma selling products on a Tata-owned marketplace website. Cloudtail, the joint venture between Amazon and NR Narayana Murthy, that helped many small manufacturers to achieve national reach, will not be able to sell on the Amazon platform. Flipkart that intends to acquire Walmart’s wholesale-retail portfolio unit will not be able to deploy Best Price on its platform.

Platform markets are characterised by the presence of externalities in such a way that the value to a user from one side of the market increases in the presence of the actors on the other side. What consumers care about is to have more suppliers on the app because that will increase the variety of products and it will drive down the prices. At the same time, more competition in a submarket that caters to a particular variety of products (for example, the submarket for headphones) reduces seller profits and their entry on the platform. It results in fewer sellers in that market segment. Platforms realise this tradeoff and manage the participation on both sides. When the number of sellers is small, they may do—as Amazon did—much of the legwork for retailers. For example, helping them upload product descriptions, fill out tax forms, handle phone orders on their behalf, and pick up, pack, and deliver using durable packaging. As the number of sellers increases and prices decline, if commensurate consumers do not use the platform, it will use the price and non-price strategies to limit seller participation.

For instance, as the sellers in a market segment saturate, the platform has an incentive to grow other segments and increase the variety of products that consumers can purchase. Or the platform can lower the costs of trading for consumers (free or low-price delivery) and sellers (assistance in promoting their product on the site) so that there is more participation by both sides.

The relation between platforms and their sellers has an echo in the business literature on vertical relationships such as that between a wholesaler and a retailer where each of the two firms in the supply chain adds a markup to its cost resulting in a final price that includes a double margin. A vertical merger between the wholesaler and the retailer would knock off one markup margin and lower the final price, thereby benefiting consumers as well as the seller due to the larger volume of sales that results. In a similar vein, a platform may connect consumers with sellers and be a seller itself. This could improve efficiency. But it is mistaken to view it as promoting select sellers on the marketplace.

In the market segment in which the platform does so, it reduces a margin and increases the attractiveness to the consumer who demands more. At the same time, by managing the variety of market segments that are catered to on the platform, it adds customers and slows down the exit of sellers who are unable to recover the sunk costs of setting up a business as their profits decline with new sellers joining the platform.

If the platform owning company already has other businesses that manufacture products and have established brands, like the potential case of Tata, the vertical integration implicitly exists. Such organisations sharing the platform with other sellers increases the competition among platforms, a healthy outcome for both sellers and buyers, and on the other hand, allows consumers to gain from the benefit of variety and economies of scope. The proposed rules imply that multi-business groups should enter the platform business merely for other sellers and ignore their own established brands. It has scant commercial logic. Restricting such participation limits the potential benefits to customers and sellers both, of having more choices, not only of goods but also of marketplaces. Tata Croma and Reliance Digital are multi-brand in-store and online marketplaces, aggregating various sellers, where access to a platform is an efficiency increasing outcome.

As the Commerce Ministry attempts to democratise digital commerce, which is its announced objective in the draft ecommerce rules seeking to restrict online marketplaces, it may want to think about how different business models aggregate supply and the factors that promote or result in an assault on the future of digital platforms.

Errol D'Souza is a Professor and Director at IIM Ahmedabad and Astha Agarwalla is Assoc. Professor at the Adani Institute of Infrastructure Management.