Market dominance entails the risk of a systemic failure

The recent incidence of unprecedented service disruptions at a major domestic airline exposed a significant blind spot.

- DEEP MUKHERJEE

Over-dependence on one (monopoly) or two (duopoly) players for an economically critical service exposes the economy to concentration risk. In the event of a monopolist failing to provide a key service, economic activity can get severely disrupted. It may be argued that a failure by a monopolist or duopolist to provide a critical economic service is a problem at least as serious as an outright abuse of market dominance by means of anti-competitive practices. The Competition Commission of India (CCI) has taken cognizance of the air-service disruption and reportedly plans to examine if the carrier abused its aviation dominance.

However, the issue of concentration risk attributable to market dominance remains unaddressed. Certain industries are critical to the functioning of the economy. Commercial activity depends on what may be called ‘systemically important infrastructure service providers’ (SIISPs). These industries need better risk oversight from regulators. Yet, with the exception of banking, most SIISP regulators do not explicitly take concentration risk into account. Operational risk management in many of these industries is also quite rudimentary compared to banking.

In the banking sector, it is well understood that the failure of an entity or disruption of its services may create a domino effect in the economy through operational networks. Its regulator, the Reserve Bank of India (RBI), apart from regulating much else, is aware that some banks are ‘too-big-to-fail’ and preemptively intervenes to prevent bank failures or service disruption at scale.