Dynamic Competition in Online Platforms Evidence from five case study markets MARCH 2017 Dynamic Competition in Online Platforms Contents Acknowledgements ...................................................................................................................... 5 Executive Summary ...................................................................................................................... 6 Introduction ................................................................................................................................... 9 Policy context .............................................................................................................................. 9 Research questions .................................................................................................................. 10 Our approach ............................................................................................................................ 12 Qualitative analysis of the case study sectors ....................................................................... 12 Quantitative analysis of the case study sectors ..................................................................... 12 Interviews with market participants ........................................................................................ 13 Small-scale survey of the UK population ............................................................................... 13 Background on the Case Studies .............................................................................................. 15 Search engines ......................................................................................................................... 15 What is the product? ............................................................................................................. 15 What is the process for a transaction? .................................................................................. 16 Online platform share in the wider sector .............................................................................. 16 Revenue................................................................................................................................ 16 Short-term accommodation ....................................................................................................... 17 What is the product? ............................................................................................................. 17 What is the process for a transaction? .................................................................................. 17 Online platform share in the wider sector .............................................................................. 18 Revenue................................................................................................................................ 18 Music ........................................................................................................................................ 19 What is the product? ............................................................................................................. 19 2 Dynamic Competition in Online Platforms What is the process for a transaction? .................................................................................. 19 Online platform share in the wider sector .............................................................................. 21 Revenue................................................................................................................................ 21 Car insurance price comparison websites ................................................................................. 22 What is the product? ............................................................................................................. 22 What is the process for a transaction? .................................................................................. 22 Online platform share in the wider sector .............................................................................. 23 Revenue................................................................................................................................ 23 Social networks ......................................................................................................................... 24 What is the product? ............................................................................................................. 24 What is the process for a transaction? .................................................................................. 24 Online platform share in the wider sector .............................................................................. 25 Revenue................................................................................................................................ 25 To What Extent is Dynamic Competition Encouraged by Network Effects, Which Might Otherwise Constitute a Barrier to Entry? .................................................................................. 26 Other sectors ............................................................................................................................ 30 Search Engines ......................................................................................................................... 32 Short-Term Accommodation ..................................................................................................... 34 Music ........................................................................................................................................ 38 Price Comparison Websites ...................................................................................................... 43 Social Networks ........................................................................................................................ 46 Overall Findings ........................................................................................................................ 53 Entry is common and tends to materially affect the market .................................................... 53 Effective entry does not appear to be less likely in more concentrated digital markets .......... 54 Concentration tends to increase over time in each sector, but competition from other sectors often intensifies ..................................................................................................................... 54 3 Dynamic Competition in Online Platforms To What Extent Does Dynamic Competition Produce Positive Competitive Outcomes, even Despite a Lack of Obvious Competition? .................................................................................. 56 Search engines ......................................................................................................................... 57 Short-term accommodation ....................................................................................................... 58 Music ........................................................................................................................................ 60 Price Comparison Websites ...................................................................................................... 61 Social networks ......................................................................................................................... 62 Overall conclusions ................................................................................................................... 64 Online platform market shares tend to be fragile, limiting the extraction of material rents ...... 64 Innovation seems to persist among online platforms, even in concentrated sectors .............. 64 Traditional competition concerns regarding conduct can still be relevant .............................. 64 To What Extent do the Effects of Market Practices Vary Based on Market Characteristics? 65 Bundling and ties to other products and services ...................................................................... 65 Contractual commitments about the service offered through other channels ............................. 66 Distorting algorithmic results ..................................................................................................... 67 Reactions to switching .............................................................................................................. 68 Changing product offerings in response to actual or threatened entry ................................... 68 Seeking to identify users that may switch and encourage them to remain ............................. 68 Horizontal takeovers ................................................................................................................. 68 Vertical integration .................................................................................................................... 69 To What Extent Might Regulatory Interventions Affect Innovation? ....................................... 71 Existing requirements ................................................................................................................ 71 Requirements for platforms ................................................................................................... 71 Requirements for providers ................................................................................................... 73 Barriers to multi-homing .......................................................................................................