Abstract
The growth of the digital market has challenged competition policy in terms of how innovation should be considered. This article deals with the current market development in Indonesia as a showcase for how innovation responds to market demand faster than state regulations. The study focuses on Go-Jek, a technology company that offers a wide range of online services, including transportation, delivery, and mobile payment, by bringing together consumers and service providers; hence, Go-Jek plays a role as an intermediary and at the same time also as an infomediary that collects information from users and shares it with its users. While policy makers and regulators struggle to find the most workable policies and regulations, markets take initiatives to regulate themselves to protect the interests of the contracting parties. Questions remain about the extent to which party interests are balanced out and how self-regulation could meet established public policy. The analysis in this article considers Indonesian competition authority (KPPU) Regulation No. 4. In the European Union (EU), the desire to advocate self-regulation has been emphasized in the EU Agenda on Better Regulation in 2015 by considering “well-designed non-regulatory means” in the policy for better regulation. Taking a lesson from the EU, this article discusses three key issues. First, how and to what extent does self-regulation of online platforms govern transactions being made on the platform. Second, what challenges do self-regulation of online platforms pose to competition. Third, which policies could the government make to deal with the self-regulation of online platforms.
Introduction
Innovation in the digital market brings two new challenges to competition policy: first, how to fit innovation into the policy, and second, how to define suitable approaches to deal with changes driven by innovation in the market. While policy makers and regulators attempt to find the right tune to respond to innovation in the form of the most workable policy and regulation, markets take initiatives to regulate themselves to protect the interests of the contracting parties. Such market-initiated regulation is shielded by the principle of the freedom of contract. However, self-regulation raises questions about the extent to which the party interests are balanced out and how self-regulation could meet established public policy.
Disruptive innovation complicates the matter even more in cases where no regulation, apart from fundamental good faith principles, provides a solid legal basis on which the contracting parties build their contracts. Disruptive innovation is distinguished by the potential to create a new market and terminate an existing market. Hence, dealing with disruptive innovation is difficult for existing market players and another challenge emerges: achieving the delicate balance between supporting innovation and ensuring that asymmetrical regulation that is caused by the birth of new products, or new markets, does not put the existing market players at unjustified disadvantages. Thus, changes of regulation might be required.
Go-Jek is a technology company that focuses on the development and use of a mobile platform and an application that offers a wide range of services, including transportation, logistics, delivery, and mobile payment. The services are provided by bringing together consumers and service providers, which means that Go-Jek plays a role as an intermediary of services. As reported by Russell (2015), Go-Jek and its competitors, Uber and Grab, have entered the Indonesian market in the last few years, offering online platforms to meet supply and demand for transportation services. Essentially, Go-Jek connects demands and supplies on a mobile platform, where consumers can search for services they need and service providers can offer their services. The company started its business from the services to bring together passengers and motorbike riders or car drivers for transportation services. These services are referred to in this article as the online transportation network. According to Cosseboom (2015), the introduction of the new door-to-door public transportation services in the market is not without controversy concerning issues related to the legality of business licenses, measures to ensure passenger safety and security, taxation, and competition concerns raised by conventional taxi providers. Due to its public transportation problems, Indonesia has a large market for taxi and motorbike services (in Indonesia, the motorbike service is called ojek). With the entry of IT-based services, the market saw the birth and growth of online transportation networks that challenge the existing conventional taxi and motorbike services.
Among the several complex issues brought about by the emergence of the online transportation network are safety, personal data, and consumer protection. KataData (2018) described that there is also major resistance from conventional transportation service providers who have suffered a substantial loss of market share in a reasonably short period of time since the entrance of the online transportation networks. The short-term outcome for consumers can be seen in the availability of more transportation choices and the benefit from taxis reducing their fares in order to make their pricing more competitive. However, several problems occur. Personal data might suffer from the poor yet nonnegotiable privacy policy. Also, there is the as yet unsettled issue whereby asymmetrical regulations applied to conventional door-to-door transportation providers and online transportation networks are accused of being the primary cause of the imbalance of the capacity to compete in the market, and hence, the balancing mechanism is in demand.
Online transportation networks are not the only new online business developments in the digital market. The Indonesian market has also witnessed other developments, such as online shopping (Tokopedia, Bukalapak, OLX, etc.), nonbanking loans (loans provided by private institutions outside the banking system, such as UangTeman and Uangku), e-wallet (such as GoPay and travelokaPay), and online travel agents for hotel, flight, and train reservations (e.g. Taveloka, Tiket, and Pegipegi). Amindomi (2018) explained that, along with three other startups (Tokopedia, Traveloka, and Bukalapak), Go-Jek has been recognized as a unicorn—a term referring to startups valued at over US$1 billion—with Go-Jek as the largest Indonesian unicorn.
In the online transportation network market in Indonesia, Go-Jek is competing with Grab and Uber. However, the latter two companies recently merged their business operations in Indonesia (and in Asia). Focusing not only on online transportation networks, Go-Jek has expanded its business to differentiate itself. It now offers services ranging from motorbike and car rides, e-wallet, courier services for documents and packages, and delivery for food and medicine, top-up services for mobile phones, and massage services.
The discussions in this article focus on three key issues. First, how and to what extent does self-regulation of online platforms play a role in decentralizing the law-making process to regulate the transactions being done on the platform? Second, what challenges are posed to competition and how should competition law deal with them? Third, which policies could the government make to deal with the self-regulation of online platforms? The article uses the case of Go-Jek to represent the new emerging market players in the online business in Indonesia.
The article is structured into six parts. Having provided the background and stating the research questions in the first part, the second part examines the self-regulation of online platforms and the decentralization of law-making process. The third part discusses Go-Jek as a case study. The fourth part analyzes the challenges to competition policy and law and Indonesia. The fifth part discusses governmental policies that need to be taken to deal with self-regulation. The sixth part concludes.
Self-regulation of online platform and decentralization of law-making process
According to Castro (2011, p. 3), self-regulation can be understood as “a regulatory process whereby an industry-level organization (such as a trade association or a professional society), as opposed to a governmental- or firm-level, organization sets and enforces rules and standards relating to the conduct of firms in the industry.” Self-regulation has been used by industries for two reasons. It responds to the absence of state regulation on the one hand and, on the other hand, it is chosen to avoid excessive state regulation. Joskow and Rose (1989) argued that excessive state regulation would potentially hinder market growth and innovation.
The Internet has become a medium that significantly changes the way commercial interactions are made. It is an important enabler for various economic activities and brings commercial advantages, but, as Feeley (1999) argued, it also exposes the society to various forms of Internet abuse. The need to regulate the Internet to eliminate such abuse and potential harms is clear; however, the traditional approach to govern the society by means of state regulation will not be enough to govern the Internet.
Two decades ago, during the shift of the European Union (EU) approach from advocating state regulation to supporting self-regulation to govern the Internet, Feeley (1999) noted that state regulation will most likely be ineffective for three reasons. First, the Internet allows transborder activities, both in terms of geographical and governmental, which makes the activities hard to control. Second, full coordination in intragovernmental regulations is unlikely because of the various backgrounds of the state involved that lead to difficulties to compromise their interests. Third, even when state regulations exist, the enforcement will be difficult due to anonymity and potential remote use.
Self-regulation of online platforms
The European Commission (2015) defined the term online platform as “a wide range of activities including online marketplaces, social media and creative content outlets, application distribution platforms, price comparison websites, platforms for the collaborative economy as well as online general search engines.” Saldaña and Rosón (2015) identified two main aspects of self-regulation. First, it derives from a voluntary commitment of the parties in a certain industry. Second, the existence of a legislative act on the affected industry is not always implied, although the matter governed under self-regulation is not exempted from the existing act.
The role of online platforms in the digital market is increasingly important, not only as an intermediary that connect business players and consumers or between business players, but also as an infomediary that collects information from users and shares it with users. Go-Jek exemplifies how online platforms play such roles. Although Go-Jek operates as an online mobility platform, the underlying business concept is like those of Web-based online platforms in general.
As an intermediary, both Go-Jek and online platforms in general play distinctive roles, not only in connecting users (such as business players and consumers), but also because the two types of users cannot engage with each other without the platform. Thus, to allow the transaction between a seller and buyer to take place, both must first engage with the platform. Here, the platform becomes a market place and, at the same time, a matchmaker. In the case of Go-Jek, the matchmaking is done through several parameters, including geolocation, types of services, and prices. The parameters could vary for every platform. For this to happen, the platform sets out rules that both parties must follow.
Go-Jek, like online platforms in general, also acts as information hubs for their users as infomediaries. Although the legality of information as a commodity is highly debatable, the importance of information is undeniable. It helps to define the best suitable services that users might get from using the platform. Hence, the collection and use of information also becomes part of the rules set out by the platforms.
Decentralization via self-regulation of online platforms
Cohen and Sundararajan (2017) defined self-regulation as “the reallocation of regulatory responsibility to parties other than the government.” The decentralization of regulation in online world is practically helpful, especially with the development of the digital market, where innovation takes place in fields or sectors where state regulation is lacking.
Terms and conditions represent how the decentralization of regulation is done by private actors (i.e. business players), which have become the backbone of online transactions nowadays. They are basically a contract that establishes the foundation on which the relations between parties on the platform are built and governed. As a contract, their existence is based on the agreement between parties on the provisions stipulated in the terms and conditions. In real life, the provisions are drawn up by the online platform as a standard contract, which means that, as a rule, users can use the platform only by agreeing to the terms and conditions. The form of the agreement can be as simple as this clause: “By using the site, you agree to our terms of use.” Go-Jek’s (2018) Terms and Conditions or Terms of Use (both terms are used interchangeably) state: “By downloading, installing, and/or using the Go-Jek application (the ‘Application’), you agree that you have read, understood and accepted and agreed to these Terms of Use (‘Terms of Use’).” Usually, there is no way around it; users cannot modify or negotiate it. They can disagree, but it means they cannot use the platform. There is no obligation, in general, for the online platform to consult the terms and conditions to users, public, or the government. Herein lies the problem.
Self-regulation and the protection of public interest
Self-regulation has benefits over state regulations to rule the relations between parties in the market. However, it also has disadvantages and there are concerns about whether self-regulation would be sufficient to protect public interests. Jordan and Hughes (2007) explained that the notion of public interest might vary depending on the political or cultural backgrounds. Hence, public interest is difficult to define. Further, they noted that the degree to which public interest would govern a decision to allocate a regulatory power depends on the type of market institution involved. Not all market institutions give rise to the same degree of public interest.
In their report, Senden, Kica, Hiemstra, and Klinger (2015) presented a mapping of the different approaches to self- and co-regulation within the EU context, in several Member States and international organizations, and noted that self-regulatory practices, including self-regulation, have been used in various sectors. The report refers to self-regulation as private regulation and distinguished it into three forms: (1) pure self-regulation, (2) civil regulation by NGOs or other actors, and (3) other forms of multi-stakeholder regulation (NGOs and industry). In the pure form of self-regulation, the initiatives to regulate come from a certain group or stakeholders; however, in the civil regulation by NGOs or other actors, it is the civil society actors as the active participants who create, monitor, and enforce the rules. In the third form, there are various stakeholders, including nonprofit groups. These parties play a role in negotiating, developing, and ensuring the implementation of standards.
Senden et al. (2015) further noted that a key document for self-regulation in 2001 was the Council of Europe, Committee of Ministers, Recommendation No. R (2001) 8 of the Committee of Ministers to Member States on Self-Regulation Concerning Cyber Content. According to the Recommendation, the Council of Europe encourages the use of self-regulation and user protection against illegal and harmful content by means of establishing organization representatives of Internet actors to create regulatory mechanisms, such as codes of conduct, and monitor their compliance. The Recommendation is in line with the European Commission White Paper on European Governance (Commission Communication, Paper on European Governance—A White Paper; COM (2001) 428 final), which encourages the European legislative institutions to “renew the Community method by following a less top-down approach and complementing its policy tools more effectively with non-legislative instruments.” The desire to advocate self-regulation in the EU was further emphasized in the EU Agenda on Better Regulation in 2015 (Commission Communication, “Better Regulation for Better Results on for Communication,” 19 May 2015; COM (2015) 215 final) by taking account of “well-designed non-regulatory means” for better regulation in the EU.
However, Verbruggen (2017) revealed that although the forms of private regulation were increasingly considered as alternatives for EU legislative intervention, the increase in its actual use as an alternative to EU law was not evident. Further, he concluded that it is still unclear how private regulation is considered by the Commission and the EU legislature at large, as well as its relationship to EU law and policy-making.
In the field of contract law, Cafaggi (2016) proposed two main scenarios for the use of self-regulation to harmonize European contract law. The first scenario is to use self-regulation as a complement or, otherwise, a substitute to a hard law. Second, it can be used as a general or a sector-specific regulation. However, Cafaggi also recognized that there are certain limitations of self-regulation in this regard, mainly competition law and mandatory contract law in the EU as well as the common principles of contract law in the Member States of the EU.
One of the advantages of self-regulation, according to Ian Bartle and Vass (2005), is that it leads to more commitment within the industry than state regulation and better functioning of the market. Following the logic of game theory, Christiansen and Basilgan (2013) argued that to optimize the functioning of contracts as the basis of the transactions between parties which must understand that, by abiding by the rules they have made, they will be in better off than otherwise. Hence, their commitment is more inner-driven in nature than relying on external powers, as in the case of state regulation that involves the role of law enforcers or, in some cases, even courts.
However, one of the problems with self-regulation is that it is built on contracts that are often drafted by the online platform provider with little to no room left for users to negotiate. Thus, the commitment of the parties that do not involve in the designing of the contract is induced by the lack of options; that is, due to high market concentration or the homogeneity of contracts used by the rivals of the online platform provider.
As an example, in the Terms and Conditions applied by Go-Jek (2018), users can only accept the terms or leave the site. The Terms and Conditions read: “Please cancel your account (if you have signed up for the Application) and permanently delete the Application from your device if you do not agree or wish to or enter into the Terms of Use.” This reflects inequality between the online platform provider and its users; that is, consumers and service providers (drivers). As Savage and McConell (2015) pointed out, one of the problems with self-regulation is that it suffers a perceived lack of accountability and the unequal engagement of stakeholders who are not technology providers.
Roßnagel and Hornung (2007) argued that self-regulation benefits the state due to lower expenses, in economic and political terms, for making regulations, leaving the state to focus on more essential matters. While the process for making regulations could be costly, the problem is how to define which matters are essential and require more state intervention than others. For instance, it will be hard to define whether matters concerning payment methods are more important than those concerning product delivery, or whether privacy is more essential than passenger safety.
On self-regulation and innovation, Brousseau (2002) argued that the absence of state control in self-regulation contributes to the innovative way in which the Internet could be regulated despite not being a perfect model. He further explained that the work of the Internet is governed by technical logic that allows access control and a mechanism to banish infringers from the platform. As an example, Article 10 of Go-Jek’s Terms and Conditions reads: “You will treat the Service Providers with respect and will not engage in any unlawful, threatening or harassing behavior or activities whilst using their services.” While the provision itself is useful and necessary, the Terms and Conditions do not provide the same provision to protect consumers from “any unlawful, threatening or harassing behavior or activities.” However, Go-Jek designed a mechanism for consumers to rate and give comments about the service providers, based on which Go-Jek can act; for instance, banning a service provider who has harmed consumer for a certain or unlimited period of time, depending on the case. Hence, the protection might not be put into words, but it is applied technically by design and is even more effective than the written provision.
However, Brousseau (2002) also noted the downside of self-regulation: It relies on the technical capacity, which means this power could be exercised without taking account of constitutional or ethical principles. The inclusion of those principles by design for the work of the platform could be done, but it would require state intervention to provide a broader guidance and monitoring mechanisms to ensure the compliance.
Tang, Hu, and Smith (2008) pointed out an interesting consideration that self-regulation could work based on user trust. This is why the online feedback mechanisms are increasingly used for businesses to build reputation. Users, or consumers, rely more on reputation as part of dispute prevention mechanisms than procedural laws or alternative dispute resolution mechanisms when making split-second decisions about whether they will buy the product.
Baird (2002) found that while self-regulation is helpful for the contracting parties, with several downsides as described earlier, it has limitations in terms of fully addressing public interests without state intervention. Such public interests include privacy protection, security, and access to diverse content.
As with any other type of regulation, self-regulation is subject to certain boundaries that limit its scope of application. Self-regulation is applicable within a specific market, namely, a relevant market, which means, for instance, that the rules governing online transportation networks are not applicable to conventional taxis. Because a contract is only binding for the parties, it cannot be expected to take account of the interests of any third parties. However, there could be public interests affected by the contract. In this case, state intervention by means of regulation and supervision is a necessity. Tax compliance, security measures on the Internet and online transactions, and consumer protection issues still require state intervention, as pointed out by Kesan and Galo (2006). In addition, state intervention in the form of law enforcement is needed when self-regulation fails to enforce voluntarily.
Go-Jek: A case study
The article deals with the current developments in Indonesia as a showcase of how innovation responds to market demand faster than state regulations. Go-Jek exemplifies this development in the way it meets the need for public transportation and expands the services to delivery of foods, documents, and goods and offers other services such as shopping and money transfer. Thus, from tackling transportation problems to answering various needs of the community, it has started to create new markets.
Go-Jek’s services appear to involve more parties and more complex transactions than conventional services. While it offers different types of services, Go-Jek describes itself as a technology company. The recent development of the use of e-wallets such as Go-Pay has led to discussions about the decentralized role of banks. However, this will not be part of the discussions in this article.
The work of rating, tracking system, and service quality
Rating and tracking systems have been increasingly used by different types of online platforms in Indonesia. Especially for an online transportation network like Go-Jek, the use of a rating and tracking system is critical to assure consumers of service quality. In the online transportation network business, there are several points that matter most for consumers apart from price: namely, safety, security, and convenience. Those three elements are what the government regulation for taxi companies has been attempting to address, as can be seen in the regulations on the safety measures for passengers, the regulation of taxi tariffs, mandatory operating licenses, and the minimum standard requirements for the vehicles used in operation.
The online transportation network is an IT-based service, and the program is designed to keep the service quality in the three elements mentioned earlier by employing a rating system and geolocation to allow a tracking system. With the rating system, consumers can evaluate and report the level of each service being delivered, based on which the level of commissions earned by the service provider will be decided. The rating is done independently by consumers from their own smartphone in such a way that consumers are free to evaluate and report the level of the service without interference from the service provider. Thus, consumers can exercise their rights spontaneously and easily.
Geolocation systems are used to allow tracking the location of the vehicle prior to the pickup and during the taxi ride. The benefits are threefold: (1) it helps Go-Jek to find the nearest service provider to the location of the consumer, (2) it makes it possible to estimate the time needed for the pickup and taxi, and (3) for security reasons, it restricts the misuse of services. However, this is not without potential downsides, which will be discussed separately in the following.
As explained earlier, Go-Jek has expanded its services beyond merely enabling service providers to transport passengers. The use of rating and tracking system for assuring the quality of services is also applied for the rest of Go-Jek’s services.
From consumers to prosumers
The development brought by innovation to the market also affects consumers’ behavior. From merely receiving goods and services and paying for them, consumers have become prosumers that actively take part in ensuring the fulfillment of their rights. The term prosumers (Izvercian, 2013, p. 388) is defined as “creative individuals who have a predilection for engaging in activities concerning firms or institutions with which they have a relationship.”
Dusi (2016) explained that the shift is not only enabled by the user-friendly technology that makes it simple for consumers to exercise their rights, but also by the development of digital economy, where heterogeneous users are involved in diversified usages of the Internet. Consumers as online platform users are skillful users who are capable of and willing to make use of their digital skills.
Privacy issues and nonnegotiable policy
The positive impact of the development of the digital economy is not without shortcomings. As discussed earlier, disruptive innovation leads to the birth of new products and, hence, new markets, which in most cases are not yet covered by the existing regulation. One of those shortcomings that requires a closer look is the privacy issue. Due to the absence of specific regulation on the matter, market players take initiatives to set the rules of play to cover the activities and transactions they make in the online market. While this is not a negative development per se, the rules being set raise questions about the assurance of the protection of public interests and parties with weaker bargaining position. Here, privacy infringement seems to be an additional cost for consumers to pay, where the privacy policy is, in most cases, not negotiable. For example, users’ personal data can be transferred to third parties for the purpose of executing a particular transaction, but there is no sufficient explanation about how far into the execution of the transaction the data transfer would be required. Also, the data controller exonerates itself from any liability in the cases of personal data breach or misuse.
Challenges to competition policy and law in Indonesia
The use of a sharing economy model as the underlying idea for an online service network by market players, like Go-Jek, raises questions about the best approach to address such development while maintaining fair competition.
This analysis considers one of the two the Indonesian competition authorities (the Commission for the Supervision of Business Competition, hereafter KPPU). Regulations that refer to innovation as a key element in guiding how competition law should be implemented by the competition authority. There are two Regulations in this regard. First, innovation has a place in competition policy consideration in the context of the interplay between competition law and intellectual property rights. Second, innovation is used as a reference when evaluating whether a certain policy or regulation results in the decrease of consumer welfare when it reduces the incentive to compete. However, this article will address only the second Regulation, because the first focuses mainly on competition law analysis in cases that involve intellectual property rights and less on innovation.
Innovation is mentioned as a new element in competition policy consideration. However, Law No. 5 of 1999 does not mention innovation in its provisions. The role of innovation in Indonesian competition policy will be discussed in the following.
Competition policy framework under KPPU Regulation No. 4 of 2016
KPPU Regulation No. 4 of 2016 concerning Guidelines for the Use of the Checklist of Competition Policy (hereafter, Competition Policy Guidelines) places innovation as part of the testing element in the first list concerning regulations on economic sectors that are not exempted from Law No. 5 of 1999 when considering whether a regulation or policy is in conflict with interests to protect fair competition. The term regulation includes those imposed by the Government and also regulations imposed by private entities. The latter is further distinguished in the Attachment of the Regulation between self-regulation and co-regulation. However, discussions in this article are limited to regulations imposed by private entities in the form of self-regulation.
To complete the test, the evaluation process is grouped into four categories of regulations or policies: (1) limiting the volume and scope of companies, (2) limiting the capacity of companies, (3) reducing incentives to compete, and (4) limiting consumer choices of goods and services. The Guidelines use innovation as a reference to evaluate the third test concerning regulations or policies that reduce incentives to compete in the market.
The Guidelines emphasize that a regulation or policy that reduces incentives to compete hinders innovation and would reduce consumer welfare. In order to evaluate whether a regulation or policy has such impact, the Guidelines ask whether the regulation or policy contains a provision that (1) grants full authorization to regulate a sector of an industry to a group of companies (such as associations), (2) requires an agreement between a group of companies and the Government in order to enact a sector regulation, (3) requires all companies to inform the public or an association of all data about their products, prices, distributions, and/or costs, or (4) exempts certain companies from Law No. 5 of 1999.
The Guidelines also provide three cases to demonstrate how a regulation or policy could harm innovation.
Market allocation policy versus innovation
Innovation might be hindered by a regulation or policy that limits distribution areas or imposes market allocation for goods, raw materials, services, capital, or labor. The Guidelines further clarify that this category does not include local government regulations that are limited in terms of the scope of geographical jurisdiction, but it does include regulations or policies that facilitate companies allocating a market between them. This clarification makes the Guidelines unclear regarding whether they would address only regulations or policies that facilitate distribution cartels or those that contain provisions that limit the distribution area or impose market allocation. The Guidelines use both but limit the scope to the first while excluding local government regulations.
This category applies, for example, when a regulation or policy at the national or regional level attempts to protect new or infant industries. Such regulation is not uncommon in developing countries. However, by limiting the distribution area or allocating the market, it creates isolated market fractions that could result in the limiting of innovation and product differentiation. To evaluate whether negative impacts of such regulation or policy occur, the competition authority should investigate whether (1) the innovation obstacle is related to the purpose of the regulation or policy; (2) the regulation or policy that results in the innovation obstacle exceeds what is necessary to attain the purpose; (3) rational arguments would support the use of the obstacles to reach the purpose of the regulation or policy; and (4) the restrictions are imposed for a certain period of time.
Although the Guidelines take further steps, they lack critical justification of the purpose for the regulation or policy under scrutiny. Hence, a contradiction between the purpose of competition policy and the regulation or policy in question remains unresolved.
Pricing policy versus innovation
A regulation or policy that limits the freedom of companies to set prices might also harm innovation. The pricing policy referred to in the Guidelines includes policies for both the floor and ceiling prices. Both types of pricing are common in Indonesia. The floor is typical for agricultural products, like rice and chili. The ceiling is common for goods that are in high demand, such as cement. While the floor is imposed to protect small and medium-sized enterprises (SMEs) from unfair competition of strong players, the ceiling is used to protect consumers from overly high prices.
Pricing policies might harm innovation in two scenarios. First, when the floor price is imposed, companies are not allowed to sell below the floor prices, even though efficiency or innovation could result in the ability to offer low prices. Thus, companies would not have sufficient incentive to innovate. However, innovation does not always result in low prices. For example, high prices could result from the cost of research and development. Enforcement of a ceiling price policy might dissuade companies from innovating. Allowing a price higher than the ceiling may bring innovation and lead to better product quality.
The Guidelines do not provide further elaboration regarding how to eliminate the negative impacts to innovation by the pricing policy or which grounds justify retention of the policy at the expense of innovation, or whether the Guidelines would not justify such policy at all.
Self- and co-regulation versus innovation
Self- and co-regulation are also referred to by the Guidelines as types of regulation that could impair innovation. Self-regulation refers to a regulation made by a group of companies (i.e. an association) based on an authorization granted by the Government for matters relevant to competition, such as price fixing, new business permit, or selling quota. Co-regulation is a regulation that requires a policy related to the industry that needs to be agreed upon by the group of companies (i.e. an association) and the Government.
Innovation might be at stake when a regulation or policy contains a reduction of incentives to compete. According to the Guidelines, this type of regulation or policy could facilitate a cartel. Self- and co-regulation could belong to this type and can be used to secure the interests of companies to survive in the market. Since such regulations do not potentially leave sufficient room for other parties to negotiate, they could be used to reinforce the market power of companies. By allowing self- or co-regulation, there is a danger that companies would not have sufficient incentives to innovate. However, the Guidelines seem to reflect concern about self- and co-regulation models and have a traditional view that favors state regulation over the other regulation models, rather than including a per se prohibition of self- and co-regulation.
The Guidelines also do not elaborate on how to evaluate such types of regulation, the extent to which they could be justified, or whether all regulations of those types would be considered in conflict with competition policy and should be revoked.
Policy and regulation framework for digital market
The policy road map for the Indonesian digital market is included in the ninth Package of Economic Policy, which aimed for Indonesia to become a major digital market player in South East Asia by 2020. According to the policy road map, optimizing the development of the digital market in the country would be based on the empowerment of local SMEs. This leads to the policy of significantly reducing legal costs and administrative burdens for setting up businesses. This approach is taken based on the major contribution of SMEs to the gross domestic product (GDP). According to 2015 data from the Ministry of SMEs, the total amount of SMEs in the country contributed to 61.41% of the GDP. To implement this Policy Package, the Government is preparing a Government Regulation that is expected to be released and enter into force in 2017.
Based on a Report by the Indonesian Telecommunication Providers Association (ATSI, 2016), in 2015, 91% of the Indonesian population had access to a cellular signal and almost all the inhabited land area had signal coverage in 2016. In 2016, the number of Internet users in Indonesia (93.4 million) represented 51.85% of the population, of which 71 million were smartphone users.
According to the Ministry of Communication and Information Regulation No. 17/PER/M.KOMINFO/10/2010 concerning Organization and Working Procedure of the Ministry of Communication and Information the Ministry of Communication and Information has the responsibility for regulating Internet activities in Indonesia. The Ministry is also responsible for regulating the telecommunications industry that existed prior to use of the Internet. Entrusting regulatory authority for the Internet to the Ministry derives from Internet access being made available by the Internet network that is part of the telecommunication services.
The tasks of the regulator in the telecommunication market are carried out by the Indonesian Telecommunication Regulation Body (Badan Regulasi Telekomunikasi Indonesia) established in 2008 under the Ministry of Communication and Information Regulation No. 36/PER/M.KOMINFO/10/2008 concerning the Establishment of Indonesian Telecommunication Regulation Body as amended by Ministry of Communication and Information Regulation No. 31/PER/M.KOMINFO/8/2009. The strong Government intervention in the industry is justified by Law No. 36 of 1999 on Telecommunication (hereinafter, Indonesian Telecommunication Law). The Law in Article 4 paras (1) and (2) states that telecommunications are controlled and fostered by the state in order to improve telecommunications operations through policy, regulation, supervision, and monitoring.
Although competition policy in the telecommunication industry uses the ex ante regulation approach, an ex post approach is also used in the applicability of competition law. Under Law No. 36 of 1999 Article 4 para. (1) and (2), companies are prohibited from carrying out activities that could result in monopoly practices and unfair business competition while providing services in the telecommunication industry (i.e. Law No. 5 of 1999 concerning Prohibition of Monopoly Practices and Unfair Business Competition hereinafter, Indonesian Competition Law). The provision is further implemented in the Decision of the Ministry of Communication No. 34 of 2004 concerning the Supervision of Fair Competition in the Fixed Network and the Provision of Basic Telephony Services, which prohibits dominance abuse with rules for the use of access codes and interconnection, and an obligation to meet demand in limited services.
A different regulation—namely Law No. 19 of 2016 (hereafter, EIT Law)—applies regarding Internet use. EIT Law amends Law No. 11 of 2008 on Electronic Information and Transaction. The provisions are further implemented in Government Regulation No. 82 of 2012 concerning the Provision of Electronic Transaction Systems (hereafter, PETS Regulation). Although placing regulatory responsibility for Internet use with the Ministry of Telecommunication and Informatics seems logical, there are fears that the Ministry would heavily regulate the digital market industry as it does to the telecommunications industry. However, this concern is still to be closely monitored.
The ex post and ex ante approaches of regulations
Competition law commonly takes an ex post approach in which anticompetitive elements are assessed on a case-by-case basis. This approach is used to ensure the freedom of companies to engage in business activities and innovate without restricting them with overly rigid rules. The same approach is used by Law No. 5 of 1999.
However, an ex ante approach could be useful in certain cases, particularly when it involves public interests, such as the interest in protecting consumers and safeguarding public welfare by imposing tax regulation. Hence, ex ante regulations are applied to ensure that those interests are sufficiently protected in the market. This is the case in the transportation industry in Indonesia, as can be seen in Law No. 22/2009 on Traffic and Transportation.
Despite the benefit of taking the ex ante approach, it could be problematic when it comes to new markets that might not be covered by existing regulations. It is difficult to predict innovation, especially disruptive innovation, which makes it tough, if not impossible, to design regulations that could cover such developments. Online transportation networks are not included Law No. 22/2009. This leaves a legal question regarding whether they are also subject to the obligation imposed by the Law and, if so, whether it would be subject to the same obligation imposed on conventional taxi providers. However, there are difficulties with applying the Law to online transportation networks because, by definition, they do not have the same characteristics as conventional taxi providers. This leads to asymmetrical regulations applicable to different market players (i.e. the incumbents and the new players who brought innovation that have not yet been recognized in the existing regulation). To deal with this development, the Transportation Ministry enacted a new regulation that includes provisions applicable to online transportation networks, the Transportation Ministry Regulation No. 32 of 2016 on the Provision of Transportation of Persons Using Motor Vehicles Not Based on Route (hereafter, Regulation No. 32/2016). Hence, the state addresses the asymmetric regulation problem by creating a new regulation. Although could be helpful, it takes time because it requires a thorough study to adequately tackle the problems and put the solutions into a regulation, while the regulation making itself is already time-consuming.
However, Go-Jek not only operates in online transportation network for passengers, the market claimed to be the same relevant market with conventional taxis. It also operates in the following markets: (1) delivery market for goods, such as Go-Food (for foods), Go-Send (for documents), and other merchandise (such as with Go-Box); (2) for services such as Go-Shop and Go-Mart in which Go-Jek drivers also deliver other services, like groceries; and (3) Go-Massage and Go-Clean in which Go-Jek drivers take another service provider (for massage or cleaning services, respectively) to consumers. These are new services in the market that have mostly not been covered by specific regulations, and yet do not trigger much debate.
Ex ante regulation and asymmetrical regulation issue in online transportation network market
Rauch and Schleicher (2015) pointed out that the asymmetric regulation with door-to-door transportation services could lead to circumstances that benefit new entrants by allowing market entrance with lower legal costs than those applicable to conventional taxi providers. This advantage contributes to lower prices than those of incumbents, which enables the new entrants to gain a foothold in the market. The other important point that attracts consumers is the innovation that allows consumers to easily get a transportation service. These include the technology that enables consumers to find and order services from smartphones, the ability to track a vehicle being ordered and during transport, and the review mechanisms that play a significant role in gaining consumer trust.
The new Transportation Ministry Regulation attempts to balance the regulation asymmetry to ensure that no market player is above the law. Companies are not hindered from innovating for the benefit of consumers, but they remain subject to minimum requirements to comply with safety and security standards.
However, as Edelman and Geradin (2016) noted, certain characteristics of online transportation networks actually make them amenable to regulations. Thierer, Koopman, Hobson, and Kuiper (2015) explained that transparency of payments, traceability of location, and reliable user review mechanisms provide a reputation mechanism to address asymmetric information for users prior to the ride, exemplifying how the technical mechanism could be more effective than security measures imposed by a government regulation.
Self-regulation in competition law analysis
Dontoglou (2002) argued that self-regulation is useful for dealing with technological innovation. With its abilities to adapt to particularities, it allows market players to self-assess competition risks and evaluate the appropriateness and efficiency of the existing sanctions for their compliance to competition law. However, as Bartle and Vass (2005) pointed out, self-regulation can also be problematic from the perspective of competition law when it is dominated by the large market players, stifles competition, and creates barriers to enter the market.
Potential problems
Self-regulation might raise competition law concerns when it is used to facilitate anticompetitive conduct, like enabling companies to exclude competitors or to exploit their market power. Therefore, self-regulation should be subject to competition authority supervision. As Dontoglou noted, regulating self-regulation might become relevant.
Exclusionary conduct might occur, for instance, when self-regulation contains a privacy policy that restricts users from providing the same personal data or the same quality of data to competitors. Exclusionary conduct also occurs when the choice of users to use services provided by the online platform’s competitors is limited. A policy could be exclusionary when it hinders user portability to move or use similar services from competitors.
On the other hand, exploitive conduct might be involved when the freedom of users to negotiate a policy is restricted. Due to the dominance of an online platform in the market, the user would be left with only the option of accepting the policy or leaving it and using a less preferable service provided by competitors.
The Policy Guidelines (KPPU Regulation No. 4 of 2016) published by KPPU state that the competition authority shall consider self-regulation with caution. Because the incentive to compete is an important element of encouraging innovation, the Guidelines carefully evaluate regulations that have the potential to facilitate cartels. Here, innovation should play an important role as the main concern of the competition authority when evaluating self-regulation.
Current issues
Regarding online transportation networks, anticompetitive pricing concerns arose due to the low prices offered compared to those of conventional taxi providers. The concerns have been under KPPU scrutiny. One KPPU investigation (2016) focused on whether such pricing is early-stage predatory pricing aimed at driving competitors out from the market.
Predatory pricing is prohibited under Article 20 Law No. 5 of 1999, which reads: [e]ntrepreneurs are prohibited from supplying goods and/or services by selling without making any profits or by setting a very low price with the intention to eliminate or end their competitors’ business in the relevant market, thus causing monopolistic practices and/or unfair business competition.
KPPU is currently looking into the merger between Go-Jek’s competitors—Grab and Uber—concerning the impact of the merger to competition in the market in Indonesia. Although neither of those two companies are dominant in the market, there are concerns about whether the merger would significantly increase the already high concentration in the online transportation network market in Indonesia.
Under Indonesia’s Competition Law, the merger control is based on the post-merger evaluation. Article 28 para. (1) and (2) of Law No. 5 of 1999 read: (1) [e]ntrepreneurs are prohibited from conducting merger or dissolving companies that might cause monopolistic practices and/or unfair business competition. (2) Entrepreneurs are prohibited from acquiring shares of other entrepreneurs if the said action can cause monopolistic practices and/or unfair business competition. [m]erger of the companies or acquisition of shares as referred to under Article 28, causing its assets value and/or sales value to exceed a certain amount, must be reported to the Commission at the latest within a period of 30 (thirty) days after the merger or acquisition takes place. (2) Provisions regarding determination of the assets value and/or sales value and procedure of reporting as referred to under Paragraph (a) of this article are stipulated in the government regulation.
KPPU cleared the merger, stating that there is no violation against Indonesian Competition Law in Grab’s asset acquisition of Uber. However, a different view was taken by the Singaporean Competition Authority, which has been taking a longer time to scrutinize the merger between the two companies; that result remains to be seen.
Governmental policies to deal with self-regulation of online platforms
As discussed in the previous sections, self-regulation is necessary to cope with the speed of innovation that results in the creation of new markets or the modification of existing markets that necessitates the legal relationship between parties and between parties and the object of transactions.
However, the downsides of self-regulation should not be underestimated. Thus, the government needs to establish policies that serve two main purposes. In the first step, it needs a policy on how to minimize the shortcomings of self-regulation. The Competition Policy Guidelines framework, discussed in the previous section, is a good start, but it requires refinement in terms of what should be the basic principles of self-regulation.
To help policy makers to define the most appropriate self-regulation as a policy intervention in terms of forms and methods, Cafaggi and Renda (2012) suggested an assessment of self-regulation. The assessment needs to be carried out on the effectiveness of self-regulation, whether as a substitute or as a complement to public regulation. Hence, the second step is to establish a policy concerning effective procedures for the assessment of self-regulation and the actions required in response to the result of the assessment.
Again, the policy framework under KPPU attempts to address the need for this policy. Unfortunately, the Guidelines do not elaborate on the extent to which self-regulation could be justified or, instead, considered as anticompetitive, and should be revoked, as well as the mechanism of how the revocation could be done; for example, whether KPPU could declare it invalid and, if so, what would be the mechanism to ensure compliance.
However, the two policies proposed earlier should be taken by a higher level of state intervention than merely a KPPU Regulation. The reasons are the following: (1) KPPU Regulation has a limited scope of application, namely only within the administration scope of competence of KPPU. Thus, it has no binding force against self-regulation that is established within a specific industry and is subject to a specific ministry. Compliance to the KPPU recommendation resulted from the fact that the assessment having been carried out would have been at risk. (2) As Baird (2002) pointed out, self-regulation has limitations in terms of its ability to sufficiently address public interests such as privacy protection, security, and access to diverse content. Kesan and Galo (2006) added that self-regulation might be insufficient to govern other issues, such as tax compliance and consumer protection. Further, as Brousseau (2002) argued, self-regulation relies on technical capacity, so this power could be exercised without taking account of constitutional or ethical principles. Thus, there are concerns other than competition that should be taken into consideration, while the scope of KPPU Regulation is limited to competition.
Hence, it needs to be considered whether KPPU will be the right agency to make the policy or whether it should be done by another government agency, such as the Ministry of Trade. The benefit of choosing KPPU as the authoritative agency for this matter is that the policies can be directly coupled with competition policy to ensure that the element of fair competition is well guarded. However, one of the potential downsides is that KPPU might be overloaded with tasks that could lead to slower processing of competition law cases. Here, a policy to allow better competence of KPPU staff for regulation assessment and a larger budget for the enlargement of KPPU body is necessary.
A comparison to how self-regulation is treated in the EU might shed some light on how to deal with self-regulation in Indonesia. According to the European Economic and Social Committee (EESC) Opinion on “Self-Regulation and Co-Regulation in the Community Legislative Framework” (2015), the major benefits of self-regulation are “removing obstacles to the single market, simplifying laws, flexible and speedy application, freeing up legislative circuits, and shared responsibility of participants.” Further, the EESC views self-regulation and co-regulation as “important instruments” with the function of complementing or supplementing hard law. Nevertheless, the EESC does not consider them to be an alternative to hard law, except where otherwise there are “fundamental rules” as a legal basis. As part of the strategy in the framework of the digital single market of the EU, DG Connect published “Principles for Better Self and Co-Regulation” (2014) to provide guidance for effective self-regulation and co-regulation that specify the principles for the conception of both self-regulation and co-regulation. However, the discussion in the present article is limited to self-regulation.
The following principles are required for the conception of self-regulation, according to the EU Principles for Better Self and Co-Regulation: “As many as possible potential useful actors should be represented.” Although legitimate, the problems with implementing this principle are that the scope of “potential useful actors” is debatable, and it can potentially take time to ensure the representation of useful actors. Thus, if this principle is used, KPPU needs to specify the extent to which actors (such as potential suppliers and potential customers) should be regarded as potentially useful, and how to represent such actors, such as whether an association can be regarded as a representative of a group of potential suppliers and consumers should be represented by a consumer protection agency. According to Law No. 8 of 1999 on Consumer Protection, a consumer protection agency is a nongovernmental organization that shall be registered and acknowledged by the Government and is given a mandate to monitor the implementation of the protection of consumers, along with the Government and the society (Article 1 No. 9, Article 30 para. (1)). “Envisaged actions should be prepared openly and involve all interested parties.” The principle would be helpful to ensure that actions taken have been agreed and anticipated in advance here; all interested parties also need to be defined in the policy. Referring to practice in the EU, all interested parties shall involve public authorities, enterprises, legislators, regulators, and civil society. The potential problem in implementing this principle is the difficulties of reaching a compromise between all interested parties, especially when the interests are largely diverse and when a party considers itself to be in a higher position to make a decision, for which a mediation could be needed. As a result, implementing this principle might lead to a long process of creating self-regulation. “Different capabilities of participants should be taken into account, activities outside the action’s scope should be coherent with the aim of the action and participants are expected to commit real effort to success.” The potential difficulties of implementing this principle in Indonesia are, firstly, involving participants to give their real best effort and, secondly, determining what should be done if this principle of good faith fails. The company might continue creating self-regulation and take the risk of being assessed later on by KPPU as long as the legal impact is considered insignificant; for example, there is no sanction apart from the revocation of self-regulation or the penalty is too low. Hence, the policy needs to cover legal compliance and specify the legal impact of noncompliance. “It must be set out clearly and unambiguously and include targets as well as indicators for evaluation purposes.” This principle is important because clarity of regulation will potentially lead to disputes between parties. “Actions must be designed in compliance with applicable law and fundamental rights as enshrined in…national law.” For a possible implementation in Indonesia, a study of regulatory assessment is required in order to ensure compliance with the applicable law and fundamental rights. One of the problems with regulations in Indonesia, as reported by Putra, is that many regulations are overlapping and, in some cases, contradictory to each other.
Further, the EU Principles for Better Self- and Co-Regulation also list principles for the implementation of self-regulation, which include iterative improvement, monitoring, evaluation, resolving disputes, and evaluation.
To conclude, the hesitation of KPPU to regard self-regulation as a valid type of regulation could be set aside and replaced with specific measures to examine the validity of self-regulation based on the fulfillment of the basic principles for its creation and implementation. The EU Principles for Better Self- and Co-Regulation could be used as a model with necessary modification, as explained earlier, according to the local needs.
Conclusion
The role of innovation in the emergence of the digital market has become more prominent, but it has also raised legal questions. While innovation has not been given a clear role in shaping suitable approaches, markets take their own path to respond to the new developments, as shown in the use of online transportation networks. This article has argued that self-regulation of online platforms could be a better alternative than attempting to restore the balance of the existing regulation asymmetry through introduction of a government regulation that purports to fit all scenarios. However, state intervention in the form of state regulation, supervision, and regulatory reviews remains necessary to protect public interests that are not covered, or are difficult to cover, by self-regulation. The role of KPPU can be extended to assess self-regulation in the framework of the assurance of fair competition. Two types of policies are needed. First, it is necessary to lay down the basic principles of self-regulation, for which the principles used in the EU can be taken as a model. Second, another policy is needed concerning the procedure of assessment by KPPU. Future research is needed in this area to assess the effectiveness of self-regulation as a substitute or complement to state regulation.
Footnotes
Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.
