14 Jul 2015 20:37 IST

India's online retail markets are near perfect

The e-commerce scene is flourishing in a way no one could have predicted

The Financial Times defines a perfect market as one in which buyers and sellers have complete information about a particular product and it is easy to compare prices of products because they are the same as each other.

With the boom in India’s internet use over the last decade, the country is beginning to approach the text-book definition of what a perfect market is. The best examples of this phenomenon are at the marketplaces of Flipkart, Amazon and Snapdeal — the so-called Big 3. Recognising that Indians are not prone to accessing their websites via desktops, these companies have invested heavily in making the user experience friendly on mobile devices.

With millions of Indians now constantly online, the sites meet Nobel Prize-winning economist Alvin Roth’s description of what “a thick market” should be — when exceedingly large numbers of people participate. Comparing prices in India’s retail markets is easy. Not only can a buyer check prices of the same good at a site from different sellers, he just Googles to get the lowest price across all three sites and even other, Big-3-want-to-be sites.

Market-efficient

India’s brand of e-Commerce is more market-efficient because of a quirk in the FDI laws. E-commerce sites, by law, are restricted to being online marketplaces, prohibited from operating warehouses and selling their own wares. In a sense, the Big-3 are the online equivalents of shopping mall operators providing the necessary infrastructure, parking and security for individual shop-owners. The latter rent mall space to sell their goods to customers who visit the malls.

The unintended consequence of this quirk in the law has been nothing short of remarkable. It has uncorked thousands of sellers, who were otherwise content with selling to neighbourhood customers, but now sell nationwide.

A merchant in a remote city, running a ramshackle shop on a side street where operating costs are low, can now offer a product for sale on one of the Big-3 sites at a small marginal cost. All he has to do is to agree to share a part of his revenues with the site.

Competitive forces forbid him to act unilaterally in making pricing decisions, however. When he sees that another merchant across the country is selling the same product for a little less, he is forced to lower his own price by extracting even more efficiency from his operations. Collusion in pricing and other anti-competitive behaviour is nearly impossible when the marketplace is this thick.

Once the merchant gets that marginal order from the site, he not only has to fulfil it at the lowest possible cost but meet much higher customer service standards. His jugaad DNA allows him to re-use packaging material (even old newspapers are good for this task) rather than the expensive packing materials that big e-Commerce sites are forced to use in the West. Inexpensive couriers who ride inexpensive two-wheelers deliver items to customers at a fraction of the cost of the elaborate delivery mechanisms of a UPS or a Fedex abroad.

Govt out of the way

The five-stage buying process in modern India — Need Recognition, Information Search, Evaluation, Purchase Decision and Post-purchase Behaviour — is therefore quick, efficient and largely online, with the government almost completely out of the way.

Peer ratings of products and sellers act as an excellent self-regulating mechanism. A market seller with a consistently poor ranking/reputation cannot survive for too long as orders will be harder to come by. Greedy merchants and poor customer service have no place in this highly information driven ecosystem.

The C2C space in India too is equally vibrant and efficient. Previously, a person wishing to sell a used motorcycle, say, would approach an agent who would extract a commission to market it to the limited clientele who frequented his shop. Pricing was based on the expertise of the agent but, because the agent was local to a small neighbourhood, the pricing was local too.

Today the seller simply advertises on Olx or Quikr to a metro-wide audience. Pricing is based on what the market bears. A search on these sites shows what other people are selling a similar vehicle for; so, open, freely available information — the essential pillar of free markets — keeps pricing transparent. And the ability to bargain seamlessly — often within the app which maintains a history of all communication — enhances the experience for both parties.

Tectonic shift

When these big e-commerce companies began operations a few years ago, most analysts could never have predicted how they would usher in a tectonic shift in the way Indians buy from merchants or how they buy from each other. That this shift has happened not because of government policies and investment, but in spite of them, shows that laissez-faire economic models — those based on classic free market principles of high market efficiency and limited government regulation — work well.

Let us not forget that New Delhi has largely been an innocent bystander during this revolution, overwhelmed by the rapid speed of development, innovation and simplicity that are unique to India. While the private economy generates valuable tax revenues and keeps large numbers of people gainfully employed, the government does what it does best: redistribute money to social programmes and infrastructure spending.

European nations such as Greece, Portugal and Spain should spend less time negotiating with large institutions and learn from India’s experience in nurturing an economy that has doubled in size, from $1 trillion to $2 trillion, in just seven years. Truly, a success story with few parallels.

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