Impact of digital platforms on traditional businesses

The rise of digital platforms is resulting in competition between platforms and traditional businesses, with some platforms establishing a dominant position in the market, such as Amazon in the online retail sector or Uber in the taxi sector. These developments are presenting traditional enterprises, particularly SMEs, with opportunities and challenges. This section examines the implications of the rise of digital platforms for traditional businesses, with a focus on the retail sector.

There has been increasing consolidation in the digital economy, with about 5 per cent of platform companies (21 companies) making 20 per cent of the total net income among companies on Standard & Poor’s 500 Index in 2019. Consolidation is also occurring at the country and regional levels. For instance, in India, two platforms (Amazon and Flipkart) controlled about 63 per cent of the market share in online retail in 2018 (S&P Global Market Intelligence 2019). Similarly, in the European Union (EU), where there were over 10,000 platform start-ups in 2018, these accounted for only 2 per cent of the total value of all platforms, while the seven largest platforms accounted for 69 per cent of the estimated value of the digital economy (European Commission 2019; KPMG 2018).

The consolidation is due to some of the major platforms acquiring both smaller platforms and traditional businesses. For example, Amazon and Alibaba, the two biggest e-commerce platforms, have acquired businesses in a range of sectors, from entertainment and finance to news and fresh food. In 2018, the US-based retail chain Walmart acquired Flipkart, one of the largest online retail platforms based in India, for an unprecedented US$16 billion, in a move to take on Amazon in the online retail market (Economic Times 2018).

Economies of scale, network effects and data collection enable platforms to achieve a dominant market position. The degree of market power concentration can be discouraging not only for traditional businesses, but also for new platform entrants. At the same time, certain dynamics within e-commerce markets have raised concerns regarding “anticompetitive collusive and unilateral conduct by economic operators” (OECD 2019b, 5). Amazon, for instance, has been criticized for its competition practices and their implications, particularly for SMEs, and is facing antitrust claims in a court in the United States (Bloomberg Law 2020).

Large technology companies, such as Amazon, Apple, Facebook and Google, are increasingly being investigated by competition authorities around the world. The Confederation of All India Traders, an organization representing small businesses in India, has been alleging, including through street protests, that unfair competition practiced by Amazon is a threat to small businesses in the country. While some large traditional businesses may be able to acquire platforms to improve their competitiveness, most SMEs are unlikely to have adequate resources for such undertakings. Many SMEs therefore use digital platforms, such as Alibaba, Amazon or Flipkart, to gain access to a wider customer base and to build and sustain their business.

However, traditional businesses, particularly SMEs, encounter a number of challenges in conducting their activities through digital platforms. Some of these challenges are described below. The contractual terms between platforms and business users, many of which are SMEs, are unilaterally determined by the platforms and are generally complex and unclear. For instance, the criteria for blocking a user’s account are not clearly defined, which can have severe implications for the continuation of their business operations.

Contracts are unilaterally determined, the commission fees charged by platforms to business users can vary considerably, and platforms can increase rates arbitrarily without any negotiation (this was particularly observed for location-based platforms). During the first months of the COVID?19 pandemic, when many restaurants were largely dependent on delivery platforms to continue their business operations, the commission fees charged ranged between 15 and 35 per cent in the United States, while discounts were being offered to consumers.

Another factor shaping competition between platforms and traditional businesses is the classification of platform services. Digital labour platforms often avoid sector-specific regulations, such as those governing the taxi sector, by insisting that they are merely technology companies providing intermediation services. In the EU, a number of businesses have emphasized “that there is a problem stemming from the fact that entire sectors that are subject to sector-specific rules now in fact compete with online platforms in these same sectors, yet those online platforms are not subjected to the same regulations”.

These rules cover areas such as consumer protection, social security, labour market regulation, and taxation of and technical standards relating to goods and services markets. Nevertheless, judicial decisions such as that by the Court of Justice of the EU, which held that Uber’s services must be classified as services in the field of transport, can help create a level playing field with the traditional taxi sector.

There has been increasing consolidation in the digital economy, with about 5?per cent of platform companies (21?companies) making 20?per cent of the total net income.

Competition between platforms and traditional businesses is also increasingly shaped by data. This is especially so when platforms rely on data they collect from their business users to promote their own goods and services in the marketplace. Google, for example, was fined in 2017 by the European Commission for abusing its dominant position as a search engine by prominently placing its comparison shopping service “Google Shopping” in its search results.

More recently, the European Commission has launched an investigation into Amazon based on preliminary findings that the platform is using the data of sellers trading on the platform to directly compete with them. Furthermore, competition issues can occur not only when platforms promote their own goods and services over those of competitors, but also when they favour certain business users on the platform. In India, a number of antitrust cases have been filed by associations of businesses against retail platforms like Amazon and Flipkart, alleging preferential seller treatment through anti-competitive practices such as deep discounting.

This alleged preferential treatment becomes even more problematic considering that the decision to promote one business user over another is often based on algorithmic ranking which is non-transparent. It is estimated that in the EU, the aggregated financial impact of the uncertainty derived from opaque practices on online platforms is between €2 billion and €19.5 billion per year. As a result, there have been a number of alternative platform initiatives, such as open source community platforms or platform cooperatives, that have tried to bring about more transparency by building fairer distribution systems.

Opaque practices on e-commerce platforms are also observed in algorithmic pricing. More specifically, data collected on these platforms allows them to analyze the demand for goods and services, and to adapt prices accordingly via algorithms. Furthermore, data collection allows platforms to target the preferences of consumers and businesses, including through rebates, incentives and loyalty programmes. Many SMEs, however, lack such data or the financial means to be able to compete with platforms and their pricing systems.

As a result, access to data, combined with their pricing strategies, offers platforms a competitive advantage over traditional businesses. This potentially threatens the sustainability of traditional businesses, and in turn the income stability of the workers engaged in these enterprises. Such pricing strategies are not specific to the retail sector but are also quite widespread in the taxi sector, which raises important questions from a competition law perspective.

The competition and business operations on some platforms are also shaped by exclusivity agreements (Competition Commission of India 2020) that can also lead to anticompetitive practices. In 2019, Google was fined by the European Commission for abusing its dominant position in the market for online search advertising intermediation by including exclusivity clauses in its agreements with third-party websites that prevented other online advertising brokers from placing their search adverts on these websites.

Another challenge for many business users relates to copyright or intellectual property right infringements enabled through digital platforms, which have implications for their profits and reputation. However, regulatory frameworks are unclear about the responsibility of digital platforms in instances where the intellectual property rights of business users are infringed. In a recent case before the Competition Commission of India, a business alleged, among other issues, that counterfeit products with its branding were appearing on Amazon at “unfair and discriminatory prices”, to which the Commission replied that the issue, though of concern, was not one of antitrust.

The rise of digital labour platforms also poses challenges that have not yet been adequately addressed for both domestic and international taxation regimes. Challenges in relation to taxation have also arisen with regard to data, especially given the fundamental role of data in the creation of value (OECD 2014). Traditional, formal enterprises have more clearly defined obligations regarding taxation and may end up paying higher taxes than many platforms, which therefore have a competitive advantage. On this issue, the European Commission announced in 2020 that it will move forward with a digital tax should the negotiations at OECD level not produce immediate and satisfactory results.

Finally, a key challenge that many businesses face relates to dispute resolution. The need to ensure fair dispute resolution with platforms has been invoked by business users in the EU, especially with regard to sudden delisting of accounts. For business users such as SMEs, fast and easy redress mechanisms are not only crucial to ensuring fairness and safeguarding their fundamental right to do business in equitable circumstances, but also to ensuring business continuity when they are confronted with unjustified delisting or freezing of assets.

Despite such challenges, digital platforms have become pervasive in today’s society and economy, especially since the outbreak of the COVID?19 pandemic. Given the increasing reliance of businesses on digital labour platforms and the fact that these platforms are gradually shaping the world of work, it becomes all the more relevant and urgent to better understand the implications of these developments for the worker experience in the digital economy.