Replacing the Anachronistic Methods of Determining Dominance in EU Competition Law

[Aryan Garg and Bishesh Joshi are undergraduate law students at NALSAR University of Law, Hyderabad]

With the evolving technology, there has been a rise of new dynamic digital platforms. They deviate from the traditional business models in various ways. The modern-day digital platforms are multi-sided, due to which there are network effects, and they can operate on the basis of zero-price models. These novel dynamisms, due to their complex nature, create challenges in assessing anti-competitive practices and determining dominance. Therefore, in this post, the authors shall particularly analyze the relevance of anachronistic methods of determining dominance in the case of Digital Multi-Sided Platforms (MSPs) in detail and evaluate the modern legal inventions that endeavors to solve the problems of determining dominance in these cases.

The MSPs are defined “as an undertaking operating in two (or multi) sided markets, which uses internet to enable interactions between two or more distinct but interdependent groups of users to generate value for at least one groups.” In the case of digital mobile platforms, an appstore is an intermediary or a platform. It usually has two sets of interdependent groups: the app developers and the app users (consumers). An appstore is preferred by app developers if there are a larger number of consumers to whom they can sell the app. On the other hand, an appstore is preferred by the consumers if there are higher number of prominent apps offered in that app store by the app developers. Hence, this exhibits a positive feedback loop and leads to indirect network effects

In the present day, the nature of the appstore is such that it is generally offered for free to the consumer. A commission is levied on the developer to obtain revenue, and nothing is charged to the consumer. This business model is known as the zero-priced model. However, this model, due to its very nature, generates myriad challenges in determining dominance.

The Traditional Way

The traditional way of determining dominance is the indirect method. It has the imprimatur of the Court of Justice of the European Union (CJEU). According to the Enforcement Guidelines of Article 102 (“Guidance”), this method involves two phases: determination of relevant market (product and geographic) and evaluation of market power through market shares, countervailing buyer power, and barriers to entry and expansion. Thus, an undertaking capable of profitably increasing prices above the competitive level for a significant period of time without facing effective competitive constraints is regarded as dominant. According to the Commission notice on the definition of relevant market, geographic markets are basically geographical areas wherein the undertakings are involved in supply and demand, and the conditions for competition are homogenous, and distinguishable from other areas. However, in case of digital platforms, if a company has high market shares, then the question regarding the geographic market can be avoided. The product market, however, is necessary to be determined.  The relevant product market consists of interchangeable products (to a sufficient degree) due to products’ characteristics, prices, and intended use, and is defined via competitive constraints. There are three ways to evaluate the competitive constraints over any product, i.e. the demand substitutability, supply substitutability, or potential competition. But, demand side substitutability is preferred as it is the most effective and immediate disciplinary force on suppliers of given products and is majorly assessed via the SSNIP test (small-but-significant-and-non-transitory-increase-in price test).

The SSNIP test is adopted by the Commission for defining relevant market, wherein “market is defined as the smallest set of substitutable products such that a small-but-significant (typically 5%) and non-transitory (often 1 year) price increase by a hypothetical monopolist would be profitable.” This test is repeatedly performed in a loop until no more products can be included or price cannot be profitably increased.

However, it is important to understand here that a mobile platform is characterized by dynamic competition. In a dynamic competitive market, innovation acts as a key-competitive constraint. According to the 2019 Commission Report, over-emphasis cannot be laid on the market share of the platforms as these platforms are more performance-based than price-based, and the use of SSNIP test would lead to a downward bias in the definition of the size of the relevant product market, and upward bias in assessing market power. Moreover, market shares do not account for potential new entrants leading to skewed evaluations. Additionally, since mobile platforms follow a zero-price model (as discussed above), the SSNIP test is rendered inapplicable because it is mathematically impossible to evaluate the 5 percent increase through the hypothetical monopolist test (HMT), as any percent increase from zero is equal to zero. Therefore, the application of the SSNIP test to only the non-zero priced markets in MSPs would lead to omitted variable bias and would result in over-narrow definitions of the market. Furthermore, the Commission emphasized in Google Shopping and Topps Europe that it is not obliged to follow the SSNIP test stating that it is not apt for the zero-price markets.

In order to solve the problem of the zero-price market and a multi-sided application of the test, a modified way of applying the SSNIP test has been devised, i.e., the SSNDQ test (small-but-significant-non-transitory-decline-in-quality-test). This test primarily involves assessing the changes in demand on one side of the platform to a SSNDQ, then predicting the change in demand on the other side in response and, lastly, determining what the market-balancing price on these other side would be in response to the change in demand. The exercise would be repeated on each side of the market and with a simultaneous increase in the price (on the price chargeable market) and decrease in quality, in the zero-price market. If the dominant firm is the only hypothetical monopolist in the SSNDQ test, then it is dominant. The replacement of ‘price’ by the ‘quality’ variable solves the problem for the zero-price market. The Microsoft/Skypecase held that “quality” is a significant parameter of competition (since many consumer services are provided for free and consumers pay attention to other features for purchasing a product). The SSNDQ test has been applied in one of the reputed cases of Qihoo v. Tencent by the Chinese competition authority. Hence, this test is highly promising in terms of determining the relevant market.

However, the SSNDQ test is inadequate to determine relevant market because it does not provide a precise measurement of quality. Even if it was possible, it would be difficult to quantify the effects of the quality degradation on the firm’s revenues in order to determine whether such degradation would be profitable.

Taking the Road Less Travelled: Using Direct Method to Ascertain Dominance

In order to counter the inefficiency of the indirect method in the case of multi-sided platforms, the lesser-known “direct method” can be used. The courts in the US have used the direct method on a number of occasions to ascertain dominance in the case of multi-sided platforms. In the Re Max International and the El du Pont, it was held that direct evidence can be relied upon in place of indirect evidence (such as high market share) when the defendant has “power to control prices” and is “involved in exclusionary conduct.” In the EU, the aspect of direct evidence is given scant attention. The Guidance does mention that power over price and power to exclude can generally be regarded as dominant. However, a proper interpretation of the text is yet to be determined.

If we look at the first aspect of direct method, the power to control price refers to the ability of an undertaking to raise price above the competitive level. In an MSP, it is observed that the platform owners compete aggressively to sign up buyers, and in order to compete, they charge the customers a significantly less amount (sometimes zero), and then their revenue is earned solely from the sellers (the applications). Therefore, if there are large number of buyers in a mobile platform who will not leave the platform, since they are getting the services for free, the sellers will have to stick to the platform, which enables the platform to charge supra-competitive prices. This essentially implies that the platform owners do have power to control monetary price. However, it is pertinent to mention here that paragraph 11 of the Guidancehas equated substantial market power (SMP) with the power to control price. The paragraph further clarifies that the term ‘increasing prices’ does not only include price as a factor, but also other factors, such as output, innovation, and quality. On the basis of the said observation, if the undertaking has the ability to influence these factors, it has the power over price. However, if the platform operator is able to charge supra-competitive prices, it can still show that it is not dominant by using the wider definition on ‘increasing prices.’

The second element is the platform owner’s engagement in exclusionary conduct. Exclusionary conduct involves the “practice of preventing an undertaking from falling to a lower competitive level by raising the cost of the rivals and thereby causing them to restrict their output.” In mobile platforms, an undertaking can be involved in inter-platform and intra-platform exclusionary conduct. Inter-platform exclusionary conduct can be a result of high switching cost imposed on the consumers by the undertaking, which is a result of network externalities, costs of entry and economies of scale. Intra-platform exclusionary conduct, wherein one undertaking tends to exclude a rival undertaking within the platform, can also be noted. The conduct may involve, among other things, preinstallation of the operator’s application, high cost of transaction for using rival platform, and better integration of operator’s app with the app store. However, it is necessary to understand that paragraph 20 of the Guidance says that “a dominant undertaking’s conduct can be interpreted by direct evidence of an exclusionary strategy.”  This essentially implies that the intent of a firm to exclude a rival is important to prove direct evidence. Therefore, the court should offer a chance to the undertaking to offer pro-competitive justification (which can include efficiency, performance and value to consumers) for its conduct. If an undertaking can offer justification, the conduct is not exclusionary and, hence, dominance cannot be inferred (direct evidence) from exclusionary conduct.

Conclusion

The direct method is a necessary renegade in antitrust analysis for digital mobile platforms. The competition authorities and courts face major challenges in terms of defining a relevant market due to the burgeoning complexity of the digital platforms. However, the direct method eradicates the very need to define the relevant market, and directly seeks to detect dominance through a firm’s power over price and capacity to exclude competitors. The direct method is not a panacea to the anachronistic policies of defining the relevant market, as it has its own limitations. However, it is definitely more accurate and efficient in contrast to the indirect method in the said case.

Aryan Garg & Bishesh Joshi

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