The Financial Express

e-Commerce market: Protecting small start-ups

| Updated: October 22, 2017 00:59:32

e-Commerce market: Protecting small start-ups

In Bangladesh, e-Commerce is a relatively new phenomenon. At its nascent stage, there appears to be more than 5,000 merchants selling products online; out of them, 200 are mainstream players. 
The sector appears to be attractive to foreign investment; but such investment is virtually absent in physical retailing. Almost 10 foreign funds have already invested US$20 million over the last three years. Local investors have pumped in about Tk 2.5 billion (250 crore). The obvious question: can the sector create possibilities for profitable competition among numerous small merchants? 
In e-Commerce, how could Amazon and Alibaba grow into such big companies so quickly? Are there underling natural factors which give advantage to big firms to get bigger and offer better shopping service to more customers at less cost? 
In simple terms, e-Commerce is an online marketplace. Customers compare and select products through suppliers' web-based catalogues, by looking into different features of the product such as pictures, price, terms and conditions, reviews, and most importantly, the brand value. Once the order is placed through the web pages, suppliers ship physical products from nearby warehouses. 
Like physical retail shops, can there be numerous e-Commerce retailers? Scale of a physical store depends on a number of factors. The distance customers are required to travel to get to the store is the most size-determining factor. Once the option of selecting products through online catalogue is available, the scale is no longer limited by familiar factors of physical stores. Moreover, customers prefer larger on-line shops over smaller ones, as the scope of selection is greater on larger sites.   As a result, although physical marketplace gives the opportunity to numerous stores to operate profitably, in e-Commerce, the situation is quite different.
If minimum efficient scale (MES) is far lower than the total demand, numerous firms can profitably compete in that market. On the other hand, if MES is greater than the total demand, a producer has the incentive to keep getting larger to minimise the cost of production, reaching to the total size of the market. In such a market, getting larger means getting cheaper. Moreover, there is a strong externality benefit. As a result, smaller operators cannot keep competing with the larger ones. Eventually, the market ends up with diminishing number of providers-sometimes leading to one. 
Such a market is an imperfect market, as it has a natural tendency to encourage monopoly. In such an imperfect market, to avoid monopoly in order to benefit from competition, the industry value chain must be segmented, both vertically and horizontally, and business tactics have to be regulated. In order to formulate policies and regulations to govern competition in such an imperfect market, the focus should be on strategic competition.
It appears that due to the advantage of economies of scale, scope and innovation, e-Commerce industry has the characteristic to benefit from both supply and demand sides' scale benefit-underpinning natural tendency of monopoly. Should we rely on invisible hands to govern nascent e-Commerce industry of Bangladesh? Are invisible hands good enough to offer space for profitable competition to numerous e-Commerce companies in the country? Unless the e-Commerce market is governed by suitable policies and regulations, there is a danger that it would be monopolised by a few by making hundreds of entrepreneurial initiatives bankrupt. 
The second issue is: should there be entry barriers? Particularly, should there be any concern about the entry of telecom companies or Internet service providers to be e-Commerce providers? Telcos, particularly mobile operators (MNOs), came to the market to offer primarily voice service. In course of time, they started offering SMS (short messaging service) and data services. With the emergence of smartphones and the expansion of broadband wireless capacity, these handsets are becoming very useful devices to deliver diverse functionally specialised services such as commerce, health, education and news. Being the platform owners, should we welcome them to be such functionally specialised services providers? One may, however, ask: if a company likes to invest in expanding business, why should it be a concern? Why should it be a concern if MNOs with investment and management capability enter in e-Commerce space to offer scale and scope benefits to customers and create new jobs? But if a company has been given the license to develop a technology infrastructure to support the delivery of functionally specialised services over that network, should they be allowed to be provider of that very service as well? Here are a few concerns to look into: 
n NET NEUTRALITY: First, if a platform provider also becomes the provider of functionally specialised services, will other providers delivering services over the same network get fair access to the vital underling infrastructure? In the context of telecom, this concern is basically termed as net neutrality. To ensure net neutrality, all electronic communications passing through mobile networks should be treated equally - in the context of an environment where traffic management, in varying forms and degrees, is ubiquitous. There is a fine line between correctly applying traffic management to ensure a high quality of service and wrongly interfering with data traffic to limit applications that affect the operators' own lines of business. By allowing MNOs in e-Commerce, the door of anti-competitive strategy such as throttling rivals' e-Commerce services will be opened up-- exercised through measures such as non-uniform access time and security features. There could be arguments against using regulations to address such issues, but due to information asymmetry, it is likely that policy of minimising conflict of interest will be far more effective than monitoring unauthorised behaviour and taking punitive actions. 
n CROSS SUBSIDY: Cross subsidy is a commonly used tool to exercise predatory pricing to make smaller competitors weaker, eventually forcing them to leave the market. Home-grown more than 5000 e-Commerce firms, numbering more than 5000, are small. e-Commerce is the only revenue source for most of these start-ups. All the target customers of e-Commerce are already customers of mobile operators (MNOs). To lure these customers to their e-Commerce services, MNOs are in a position to give discount or bonuses on voice and data services.  But, other non-MNO e-Commerce providers are not in a position to exercise similar cross-subsidy practice. 
THE FATE OF SMALL E-COMMERCE PROVIDERS: There could be argument that by taking the advantage from scale, scope and investment capability, MNOs can follow supply-driven strategy to offer higher quality service at lower price to customers, than what the small standalone e-Commerce providers can deliver. Entrepreneurial spirit no longer drives all these MNOs. Basically well-paid managers are managing these firms to produce dividends for their shareholders, who can wait long until they get the desired return. With the capacity of providing subsidy at the take-off stage, they are very much in a position to crowd out all other small entrepreneurial initiatives-by making them bankrupt -- from the market, where they have interest and entry. In the absence of competition from entrepreneurial initiatives, society will be deprived from innovation and initiatives. 
FUNCTIONAL SPECIALISATION: Although mobile handsets and networks are opening the opportunity of delivering conventional services through such MNO-operated platforms, MNOs do not have specialisation in functional areas like commerce, finance, health or news. Society has already made over the decades big investments to establish functionally specialised firms in those areas. Will not society benefit more by ensuring fair competition among these as well as emerging functionally specialised firms to expand their services over the mobile networks, instead of crowding out them from digital service space by allowing MNOs to become providers of such services?
Due to the natural tendency of monopoly and dependence of e-Commerce service delivery over mobile networks, policy-makers should encourage mobile network operators to remain platform providers and the value chain should be segmented to regulate entry and competition behaviour-to create the possibility of maximising benefit from competition.
M. Rokonuzzaman, Ph.D is Professor, Department of Electrical and Computer Engineering, North South University.
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