Digital Market and Zero-Pricing: Is SSNIP Test Applicable?

[Anubhav Sharma and Chirag Jindal are 4th Year B.A. LL.B. (Hons.) student at National University of Advanced Legal Studies, Kochi]

Introduction

Identification of the ‘relevant market’ is one of the most crucial aspects of the antitrust (competition) assessment by the authorities. It is based on two notions: firstly, ‘perfect monopoly’ and ‘perfect competition’ do not exist; and, secondly, firm(s) can possess power over a particular market.[1] With respect to emerging trends in the digital economy (such as platform-based digital business models), obvious problems arise in defining the relevant market. This is because of the special characteristics such as extreme returns to scale, network externalities and the role of data possessed by these models.

One of the tools used by competition authorities in defining the relevant market is the SSNIP (Small but Significant Non-transitory Increase in Price) Test or HM (Hypothetical Monopolist) Test. ‘Price’ is the most significant consideration for application of SSNIP Test. However, the players in the digital markets, such as Google, can employ zero-pricing strategies (providing services at zero price) for certain consumers. In such cases, the SSNIP Test cannot be applied on a prima facie note. This post analyses the problems associated with application of SSNIP Test in situations of zero-pricing and provides certain suggestions regarding the same.

Two-sided (or Multi-sided) Platforms and Zero-Pricing

The transition of the traditional economy into the digital economy by means of disruptive innovations has steered the way for successful zero- pricing business models. These days, one of the primary consumer considerations is the availability of services at zero pricing, and this has substantially contributed to the formation of various firms with zero pricing business models. In zero pricing strategies, one of the customer groups participating on the online platform, composed very often of end consumers, will do so without any charge by online platform since their application is subsidized by the other customer groups of the platform. Therefore, the zero pricing strategies do not raise an implication of zero profits; rather profits are made on other relevant aspects signifying the involvement of other players in the business model. The nature of zero pricing models entails that a digital platform acts as an intermediary who caters to the needs of two or more separate customer groups by facilitating interaction between them. Thus, fundamentally the two-sided and multiple sided business models incidentally raised the zero  pricing strategies in the ever expanding digital economy.

Zero-Pricing – How is SSNIP Test Applicable?

Digital platforms such as Google, Amazon, Zomato and Uber are either two-sided or multi-sided in nature. Zero-Pricing or negative pricing strategies are generally employed by aggregators or platforms that are two-sided (or multisided) in nature. The platform is an intermediary between the sellers who provide the products or services as well as buyers who avail of the products or services of seller. In a way, both sellers and buyers are the consumers of the services provided by the platform. Where EU competition law considers harm to consumers, it consistently refers to both final consumers and consumers at the intermediate level, e.g. manufacturers who use a product as an input or distributors of a good or service. Therefore, even the sellers must be considered as consumers of the services by digital platform. In essence, there are two groups of consumers in platform economy i.e. buyers (‘Consumers A’ of the platform’) and sellers (‘Consumers B’ of the platform).

The zero-pricing strategies are generally applied for Consumers A and not for Consumers B.  Whenever products or services can be provided to consumers at zero-price, there is no doubt that SSNIP test cannot be applied due to absence of ‘price’ factor. In the Google Shopping Case, the European Commission (EC) has noted that SSNIP test is not appropriate because Google provides its search services for free to users. However, this is not true for the set of Consumers B in platform economy where zero-pricing is not employed. Hence, for set of Consumers A, the SSNIP test is not applicable, but it can be applied for the set of Consumers B. 

‘Relevant Market’ Analysis – Suggestions

A detailed economic analysis of the platform market from a competition perspective is out of the purview of this post. Nevertheless, a possible approach towards defining relevant market is presented here.

In Topps Europe v. Commission, EC noted: “Although that type of economic test is indeed a recognized method for defining the market at issue, it is not the only method available to the Commission. It may also take into account other tools for the purposes of defining the relevant market, such as market studies or an assessment of consumers’ and other competitors’ points of view.” A relevant product market comprises all those products and services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use. This definition highlights three factors which can be used in the identification of a relevant market: products characteristics, prices and intended use. In the Google Shopping case, intended used was considered as the most important factor in defining the market for platforms.

Since SSNIP is not applicable in zero-pricing, there are suggestions to apply the SSNDQ (Small but Significant Non-transitory Decrease in Quality) Test. This test faces the problem of quantification as it not easy to quantify the quality of a particular product. Another suggestion is to apply the SSNIC (Small but Significant Non-transitory Increase in Costs) Test taking into account the information costs and attention costs. This is mainly because the digital marketplace is based on data and the attention to the platform provided by the consumer. This test has not yet been applied in any cases till date. Yet it can be considered as a possible approach as the economy is shifting from price towards data.

Conclusion

In case of digital platforms (either two-sided or multi-sided) we suggest that SSNIP test does not fail altogether. It can be applied to one set of consumers (Consumers B i.e. sellers). For the other set of consumers, other factors such as intended used, product characteristics as well as the new SSNDQ and SSNIC tests can play a vital role if considered in a proper manner by the authorities. A proper framework for market definition for digital platforms can be prepared by classifying the consumers into various groups as well as taking into account all the factors mentioned above. We also advocate for a proper economic analysis of platform markets before applying any of these factors into real-world problems.

Anubhav Sharma & Chirag Jindal

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