Understanding online marketplace from antitrust point of view

Traditional antitrust tools, fine-tuned for tackling concerns of digital economy, may help prevent monopoly.


antitrust law | Online marketplace | monopolies

Online marketplace is an internet platform that allows third-party companies to sell their products alongside the products owned by the online market giant, who owns this marketplace. Many third-party sellers are willing to pay it a fee or percentage of their sales for access to a greater number of customers to this online marketplace. The best examples of large online marketplace, which operate analogous platforms, are few and diversified across the globe.

The are many benefits which online marketplace bestows to its consumers which include inter alia stimulating the demand by showcasing different products, reducing asymmetric information by revealing the prices of products online with its reviews, increasing the competition by lowering the transaction cost through avoidance of agents or intermediaries and minimizing inventory cost and marketing cost. At the same time, it might have possibilities of hurting consumers too. These online marketplace having data of wide ranges of customers in the market creates monopoly power through various means which include inter alia placing preferred products in front of customers thereby reducing indirectly their choice of selection and might have possibility of tendency to form a dominant price leader ultimately. The monopoly output is less than the competitive output, and the monopoly price is greater than the competitive price. Therefore, the market is not Pareto Optimal and thus there is deadweight loss to the economy.

Online marketplace creates a principal agent problem with the consumers in which they bargain with sellers on behalf of consumers. Since because of its monopoly, it has a much larger bargaining power than the individual consumer and because of information asymmetry between them and consumers, the full benefits of bargaining done by them may not be available to consumers, which was a clear possibility in free market scenario. Predatory pricing by this marketplace may affect the small-scale producers leading to their elimination and thus contribute to reduction of the consumer choices in future. They adopt different types of anticompetitive practices such as foreclosure which means refusing to sell a product unless a purchaser buys other products the firm is selling or involving bundling of products, imposing their standards and conditions on producers, which may stop their entry to marketplace. This may indirectly lead finally to incomplete information about products, as it may impose consumers to be visible only to selective products, without having detailed information of its quality assessment.

Determinants of market power include the market elasticity of demand, the market share of firms, and the elasticity of supply of other firms. However, these can be difficult to measure in practice, so governments often rely on rough proxies based on the concept of the product and geographic market. According to the European Commission, the relevant product market “comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use”. The relevant geographic market “comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous”.

New challenges to understanding and applying antitrust principles arise with the digital economy. Firms tend expand rapidly by providing certain services at low cost to create large networks of users. Not only do firms engage in vertical integration but they aspire to control aspects of the e-commerce architecture.

As an antitrust authority, it may have specific factors that would be relevant in determining whether this online marketplace has market power and is illegally restraining competition. Some of the tools in this regard include calculation of market share with help of Herfindahl–Hirschman index (HHI), examining relevant product market and check predatory pricing, examining tendency of foreclosure, examining the usage of third party data for strategizing their own products as also exploring the substitutability of the relevant product sold. A calculation of the high profit accumulation may also lead one to interesting conclusions in this context.

The role of whistle-blower and their assistance to the antitrust authorities could play vital role in checking unfair market practices by these online marketplaces. It can assist in revealing whether these marketplace uses the third-party sellers on its marketplace to improve sales of its own competing products and checking its anticompetitive behaviour. The information on formulating product strategy (ie; pricing, marketing, placement, bundling) with the help of the complete information of the product helps the antitrust authorities to identify the price fixer in the market based on detailed information. Thus the practices of demotivating, demoralizing the competitive products by using marketing and other strategies could be prevented.

As a customer if one have identified a practice that may be anticompetitive in these marketplaces, they could help the Government by providing information based on which Government with the support of broad legislative and/or regulatory measures, take action to restore competition in the market. The measures that could be primarily considered in this regard include strict implementation of data usage policy, if fining is not considered prominently. The other alternatives are reviewing the third party contracts signed by the online marketplace to ensure level playing field, regulation of product foreclosures and bundling, breaking the big tech/ monopolies in many competitive firms and reducing the period of Intellectual Property Rights/compulsory licensing of generics in the selected markets.

(Surjith Karthikeyan serves as Deputy Secretary, Ministry of Finance. The views expressed are personal)

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