The recent air traffic chaos holds a lesson: Regulators should watch the risk of systemic failures amid market dominance

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 pre-emptively intervenes to prevent bank failures or service disruption at scale.

In a modern fast-evolving economy like ours, there are SIISPs beyond banking. These industries have such intricate networks that a disruption at one point could spread to other areas and engulf a significant portion of operations across India.

Such SIISPs include transport providers such as airlines, power generators and power grid owners, providers of data and mobile connectivity, email service providers and cloud data storage providers, to name a few.

The failure of one provider could cause a spike in demand for the same service from other providers, which may face operational risks of their own, given a sudden surge. What can we do to mitigate risks?

We must broaden our view of market dominance: We must reject the generalization that dominant players in any industry always abuse their dominance. This is not true. The US has among the world’s most stringent antitrust frameworks.

However, US judge Learned Hand, while deciding on the watershed case of United States vs. Alcoa, rejected the idea that market share alone implies monopoly power and emphasized that a business’s conduct is more important: “The successful competitor, living substantially within the law, will doubtless see his competitors die one by one, but he will not be commanded to bury the dead.”

Giving credit to market leaders, he stated, “A single producer may be a survivor out of a group of active competitors merely by virtue of superior skill, foresight and industry.

In such cases, a strong argument can be made that [while] the result may expose the public to the grip of such a monopoly, it is the play of forces which our whole economic system is intended to foster.”

Debates on the dominance of a player in an industry tend to focus almost exclusively on the potential for market abuse or anti-competitive practices. Worryingly, though, these debates often neglect the economic impact of the failure of a major infrastructure provider.

However, what needs to be discussed is the risk of such a player’s failure to meet customer needs at scale. This is determined by how sophisticated its operational risk management and resilience practices are.

This is independent of whether it is abusing its market dominance.

We need to expand regulatory mandates: Most regulators of SIISPs should track all major players in a critical industry for operational resilience, perhaps along the lines of what RBI does.

This would include assessing such companies for how they manage operational risks, apart from the specifics and feasibility of their resilience plans.

Based on data from minor disruptions, regulators could estimate the likelihood of a ‘black swan’ mega disruption and map it against the company’s capability to overcome such a shock.

For some SIISPs, data feeds could help regulators track variables in real-time for early signs of an extreme event. This would give regulators a line of sight on interventions and timely recovery.

The Directorate General of Civil Aviation, Central Electricity Regulatory Commission, Telecom Regulatory Authority of India and others could take a leaf out of RBI’s book. These regulators could conduct stress tests, assess resilience and set guidelines.

The systemic impact of a monopolistic player’s failure is agnostic of its market conduct. However, the genesis of both is often the mergers and acquisition (M&A) route.

Given that no central entity looks at the aspect of concentration risk from an operational failure perspective, the CCI’s mandate may need to be enlarged too.

While approving M&As among SIISPs, the CCI could be mandated to assess the impact of the merged SIISP entity’s failure on the Indian economy. With its enhanced role, perhaps the Competition Commission of India should be renamed the Competition and Concentration Risk Commission of India.

The author is a risk management and AI consultant, and a member of the visiting faculty, IIM Ahmedabad and IIM Calcutta.