Social Commerce: The Impact of Pricing Strategies on Business Competition and Regulation

The surge in social commerce has significantly altered the market landscape in Indonesia, with a leading platform emerging as a key player. This platform’s strategy of offering products at notably lower prices compared to traditional and online retailers has raised concerns about potential predatory pricing practices aimed at undermining competition. This article explores how these pricing strategies impact market dynamics, primarily under Law Number 5 of 1999 concerning the Prohibition of Monopolistic Practices and Unfair Business Competition (“Law 5/19999”). It also considers Minister of Trade Regulation Number 31 of 2023 (“MOTR 31/2023“), which provides further guidelines on regulating electronic commerce, including social commerce platforms and ensuring fair competition. As scrutiny intensifies, the question remains whether these pricing strategies are competitive or indicative of unfair business practices.

Social commerce, the integration of social media with e-commerce, has seen significant growth, with TikTok Shop emerging as a notable example. The key social commerce company has gained traction in Indonesia recently, offering an innovative blend of entertainment and shopping through its platform. As consumers increasingly shift from conventional retail and e-commerce to social commerce platforms, driven by competitive pricing and appealing features, questions arise about the nature of these pricing strategies. Does this shift suggest that social commerce platforms engage in predatory pricing? This article will explore this issue by examining the rise of social commerce in Indonesia, its impact on the domestic industry, while evaluating it through the lens of MOTR 31/2023.

The Popularity of a Leading Social Commerce Platform in Indonesia

A leading social commerce platform has swiftly become dominant in Indonesia by seamlessly merging entertainment with shopping. Its remarkable success is highlighted by an impressive user base nearing 100 million and significant monthly transaction growth.¹ The rise of the platform can be attributed to several key factors. Advanced algorithms deliver highly personalized content, while effective marketing strategies and integration with engaging social media features enhance its appeal.² Additionally, the user-friendly interface and overall accessibility are crucial for widespread adoption. A notable aspect of this platform’s success is its competitive pricing; it frequently offers products at lower prices than other e-commerce sites, accompanied by extensive promotions and discounts.³ This blend of affordability and convenience has solidified its position as a preferred choice among Indonesian consumers, driving its rapid growth and prominence in the market.

Social Commerce and Market Disruption

Why Indonesian Consumers Shop Online at TikTok Shop
(Source: databoks)

The emergence of social commerce in Indonesia has significantly influenced the dynamics of the e-commerce market. Platforms established for over a decade, such as Lazada and popular players like Shopee, are experiencing a shift in their market positions due to the rise of social commerce. A defining feature of this model is the presentation of products at notably lower prices.

This stark price disparity has raised concerns about whether these platforms are engaging in predatory pricing—a strategy where exceptionally low prices are used to undermine or eliminate market competitors.⁴ The Ministry of Trade and the Ministry of Cooperatives and SMEs have expressed concerns that the low prices on TikTok Shop are not merely the result of efficiency or discounts but are part of a strategy to dominate the market. For instance, recent observations from the Ministry of Trade highlight that online platforms often offer goods at prices significantly cheaper than those in physical stores. A local example noted that beauty products, such as a locally produced powder priced at IDR 22,000 per unit at physical stores, are available online for as low as IDR 15,000, including shipping costs.⁵ This raises fears that the market could be vulnerable to unhealthy business practices, threatening long-term market stability. SMEs and local businesses, particularly those relying on physical stores, have reported significant declines in revenue. In the long term, the dominance of a single large platform could potentially disrupt a fair and balanced business ecosystem.

MOTR 31/2023: Regulating Social Commerce and Ensuring Fair Competition

In response to the new challenges in regulating Electronic Commerce or Perdagangan Melalui Sistem Elektronik” (“PMSE“) due to the rise of social comm, Indonesia introduced MOTR 31/2023. This regulation replaces MOTR Number 50 of 2020 and aims to clarify and strengthen rules related to PMSE, including social commerce such as TikTok Shop, focusing on preventing unfair competition practices such as predatory pricing.

Cassation

Obligations and Prohibitions for Social Commerce

MOTR 31/2023 outlines several obligations and prohibitions for social commerce operators, including:

Licensing Obligations: Social commerce platforms must have a business licenses in accordance with applicable regulations. The license must be obtained through the OSS (Online Single Submission) system and meet government standards.⁶
Standardization and Supervision: Products sold through social commerce must comply with Indonesian standards for goods and/or services, including registration numbers, halal certification numbers, product safety registration numbers, and other relevant permits or certificates.⁷
Prohibition of Price Manipulation and Unfair Competition: In implementing PMSE, Electronic Commerce Operators or Penyelenggara Perdagangan Melalui Sistem Elektronik (“PPMSE“) are required to actively ensure that the prices of goods and/or services are free from price manipulation practices, either directly or indirectly.⁸
Prohibition on Facilitating Payment Transactions: MOTR 31/2023 explicitly prohibits social commerce platforms from facilitating payment transactions for goods and services within their electronic systems. This is intended to prevent social commerce platforms from functioning as dual-purpose marketplaces and disrupting conventional markets.⁹

Sanctions and Penalties for Unfair Business Practices

Sanctions Under MOTR 31/2023:¹⁰

Written warnings;
Inclusion on priority monitoring lists;
Blacklisting;
Temporary suspension of domestic and/or foreign PPMSE services by the relevant authorities; and/or;
Revocation of business licenses.

Before the enactment of MOTR 31/2023, the Business Competition Supervisory Commission or Komisi Pengawas Persaingan Usaha (“KPPU“) had already established sanctions for business actor practicing predatory pricing based on Law 5/1999. The sanctions imposed on business actors who violate Law 5/1999, including predatory pricing practices, shall be in the form of fines with the following provisions:[11]

a maximum fine of 50% (fifty percent) of the net profit obtained by the business actor in the Relevant Market during the violation period; or
a maximum fine of 10% (ten percent) of the total sales in the Relevant Market during the violation.

Could Social Commerce Pricing Disrupt Fair Competition?

Pursuant to the promulgation of MOTR 31/2023, oversight of social commerce platforms has become more stringent. Despite the new regulations aimed at preventing practices like predatory pricing, questions persist about whether some platforms are engaging in such strategies.

As defined by the Indonesian Business Competition Law, predatory pricing involves setting meager prices to eliminate competitors and create a market monopoly. The KPPU is investigating these practices within the social commerce sector, but no final conclusions have been reached yet. The critical question remains: Are the low pricing strategies observed indicative of predatory pricing, or are they simply a feature of competitive market dynamics?

Amid these developments, the KPPU recently engaged with representatives from a leading social commerce platform. This engagement focused on addressing concerns related to pricing practices, the platform’s role in supporting local products, and the growth of SMEs in Indonesia. The discussions aimed to dispel public misconceptions and provide greater transparency about the platform’s operations.[12]

As the investigation continues, the findings will likely influence future regulatory measures and legal considerations for social commerce in Indonesia.

For continued updates and expert consultation on this evolving issue, please contact us at ADCO Law.

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