Discounting Practices
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Chapter 17 ABUSES IN DIGITAL PLATFORM MARKETS 17.1 INTRODUCTION The context. The digitisation of society is one of the most significant economic and social changes over the last decade or so. It increasingly pervades most aspects of human activity, such as eating, shopping, banking, travel, transport, finance, media, etc., and has been transformative (and will increasingly be so) across many of these sectors. Indeed, this pervasiveness is not merely economic, but is impacting on some of the deepest and most intimate aspects of human existence, e.g., social interaction, healthcare. An important basic economic insight into many of these digital markets is that they are “multi-sided” or “platforms.”1 In essence, this means that a group of buyers and sellers are brought together by an intermediary, such as a platform, to interact. Examples include credit card systems (a card system operated by banks bringing together retailers and consumers), search engines (search engine operator, advertisers, and consumers searching for products), and online property portals (property sellers, retailer estate agents, and property buyers). There may also be multiple players operating in between such as developers of mobile or software applications (apps). Many such digital platform markets are described as “eco-systems” due to the large number of complex interactions and inter-dependencies between multiple players within them. Whilst economic progress has always posed challenges for competition law to adapt, the step changes which are occurring in digital markets are, perhaps, more significant than previous major phases of industrial progress.2 First, for physical goods, costs in the form of transport costs and customs duties place real limits on the geographic scope of markets. By contrast, most digital goods can be distributed worldwide in milliseconds with no transport costs. Second, the incremental costs of scaling up digital product/service volumes are close to zero for established operators, thus leading to potentially extreme returns to scale. Whilst building a new physical factory can also increase returns to scale, these returns are, in general, not as extreme as those for most digital goods. Third, the scope to catalogue digital information is virtually limitless. For example, previously record stores would need to hold inventory in a physical medium whereas now streaming services like Spotify have virtually every song commercialised available instantly. Fourth, by competing for attention, platforms can easily and quickly add large volumes to the “matching” groups on the two sides of the market. The same is not true of “physical” matching exercises.3 Indeed, this issue is so acute that there is 1 For an excellent non-technical overview, see J Tirole, Economics For The Common Good, Chapter 14, Princeton University Press (2017). 2 See generally OECD Report, Rethinking Antitrust Tools for Multi-Sided Platforms (2018). 3 In Ireland for centuries there were professional matchmakers (who still exist) and the two sides of this market, intermediated by the matchmaker, would convene at summer festivals in often remote parts 1047 Abuses In Digital Platform Markets a problem of too much information in digital markets and the ability to discern quality in digital goods becomes difficult. Finally, in part because of network effects, the speed by which enormous market power can be acquired and extended (and lost) in multi- sided/platform markets is remarkable. Witness the growth of Facebook from a public launch in 2006 to over 1 billion users by 2012, and now over 2.5 billion and the ascent and demise of Google and Altavista, respectively. The role for Article 102 TFEU. As with any major economic or socio-economic change of this kind, EU competition law in general, and Article 102 TFEU in particular, is starting to contend with myriad issues that arise in the context of multi-sided digital platform markets. But it is fair to say that the challenges arising in this regard under Article 102 TFEU are probably the most profound, difficult, and interesting, for several reasons. First, as discussed in Section 17.3 below, the economic characteristics of many digital platform markets will tend to produce very high levels of concentration among a very small number of firms, or even a single firm, due inter alia to network effects, extreme returns to scale, the importance of data, and competition for the market. Dominance is therefore frequently present, thus naturally activating Article 102 TFEU issues. Second, many of the key practices of interest under EU competition law as respects multi- sided/platform markets tend to involve unilateral conduct, thus precluding the application of Article 101 TFEU. Third, as discussed in more detail in Section 17.2 below, the growth of multi-sided/platform markets by acquisition activity is less likely to be constrained by ex ante intervention under EU merger control, thus making ex post control under Article 102 of greater importance. As matters stand, the Commission and most national merger control authorities operate turnover and/or market share thresholds that are not always apt to capture acquisitions of start-up firms with little or no turnover or market share. Fourth, multi-sided platforms can give rise to unique counterintuitive problems under Article 102 TFEU. For example, selling below a reasonable measure of cost may be an abuse of dominance.4 But many platforms offer products for free to one side of the market in an effort to increase the size, and therefore interest, of the platform for the other group, to whom “high” prices are then charged. The instinctive reaction is to regard this as predatory pricing, but, as discussed in Section 17.4 below, this mechanical application of Article 102 TFEU is generally incorrect.5 Finally, as discussed in more detail in Section 17.6 below, the approach to multi-sided or platform markets under Article 102 TFEU can in some respects fairly be characterised as “regulatory,” and there is a long, and in many respects unsatisfactory, history of using Article 102 TFEU to pursue regulatory ends.6 Definitional issues. The terms “multi-sided” market and “digital platform” lack precision, and there is a danger that, without further precision, the principles under of the country, e.g. Lisdoonvarna, to see if marriage could be brought about. Now, millions of people can be matched online instantaneously across a large range of features or variables. 4 See further Ch. 6 (Predatory Pricing). 5 Similarly, whilst an owner of a valuable pharmaceutical patent may wish to limit competition among licensees, a digital platform whose success depends on its ability to attract a first user group that is of interest to a second will in principle welcome competition among sellers or licensees. For example, many platforms have open-source licensing for this reason, e.g., Android. 6 See further Ch. 1 (Introduction, Scope of Application, and Basic Framework), Section 1.4.5. 1048 The Law and Economics of Article 102 TFEU Article 102 TFEU end up being applied by label rather than substance.7 A number of points bear mention in this regard. First, there is, currently, no legal definition of multi- sided digital platforms under Article 102 TFEU.8 Second, public authorities in the EU have offered definitions based on the factual circumstances of what digital platforms typically do. An EU Communication on online platforms notes the following specific characteristics:9 “Online platforms share some important and specific characteristics. In particular: - they have the ability to create and shape new markets, to challenge traditional ones, and to organise new forms of participation or conducting business based on collecting, processing, and editing large amounts of data; - they operate in multisided markets but with varying degrees of control over direct interactions between groups of users; - they benefit from ‘network effects’, where, broadly speaking, the value of the service increases with the number of users; - they often rely on information and communications technologies to reach their users, instantly and effortlessly; - they play a key role in digital value creation, notably by capturing significant value (including through data accumulation), facilitating new business ventures, and creating new strategic dependencies.” Third, the key characteristic of a multi-sided platform is that it intermediates to match the interests of two or more distinct, non-competing groups of users. For example, a search engine competes to acquire “eyeballs” (or attention) from users searching for information, e.g., on products, on one market side and to then match those users to vendors or advertisers on the other side who have services or products to sell. As discussed in more detail in Section 17.3 below, this gives rise to a “chicken and egg” problem of balancing the respective interests of the two user groups. For example, if a search engine has too many ads, and not enough relevant information, users would switch off, which in turn would make it less interesting as an outlet for advertisers. Fourth, an obvious but important point is that not all digital goods involve multi-sided or platform markets. For example, PayPal is simply a digital form of convenient and secure payment. It does not match two groups together. By the same token, not all platforms are digital. Tirole gives the example of a fruit and vegetable market where sellers interact directly with customers through the marketplace.10 A nightclub is another oft-cited example. 7 See generally M Katz and J Sallet, “Multisided Platforms and Antitrust Enforcement,” 127 Yale Law Journal, 2142 (2018). 8 In the United States, Justice Breyer stated “…there are four relevant features of such businesses…they (1) offer different products or services, (2) to different groups of customers, (3) whom the ‘platform’ connects, (4) in simultaneous transactions.” See Ohio v. Am. Express Co., 138 S. Ct. 2274, 2298 (2018).