This paper – a contribution to OECD work on how to deal with multisided market which can be found here –  seeks to provide pragmatic suggestions on how to measure market power in multi-sided markets. It is quite practical: it draws operational conclusions on how to adapt existing enforcement and merger assessment tools to address some of the challenges posed by multi-sided markets.

The paper is structured as follows:

The first section of the paper sets out some important features of multi-sided markets, including indirect network externalities, single-homing and multi-homing, price structures, and tipping. These have been discussed extensively in previous posts, so I’m not going to elaborate on them here. Suffice it to say that: ‘The standard results from one-sided markets do not apply directly to multi-sided markets and any assessment of market power needs to take this into account explicitly. Many of our standard tools for assessing market power are more complex to apply in multi-sided markets and may need to be adapted.’

The second section describes some practical steps that can be adopted when assessing market power in multi-sided markets. A number of suggestions are made:

  • Understand the nature of competition and identify the market(s) where the market power relevant to the theory of harm is expected to arise. When thinking about market power and the effect of the conduct, it is important to identify clearly the nature of competition, including understanding the extent to which multi-sidedness with multiple consumer groups and interlinked demand affects market power. Furthermore, measuring market power will be specific to the conduct under investigation. It is important that market power is not considered in isolation from the conduct and the theory of harm.
  • Take a sequential approach to measuring market power in multi-sided markets. A purist approach may suggest measuring market power by assessing all sides of the market simultaneously. However, this may not be practical, or even possible. When the multi-sided nature of the market appears to be important, a reasonable and pragmatic approach would be to: (i) start by using standard tools to assess market power for each side of the market separately; and (ii) then factor in the indirect network effects by using a range of evidence and expert judgement.

The third section sets out some measures of market power, and how they may need to be adapted for multi-sided markets. These measures are:

  • Market share and concentration – there are challenges to using market shares as an indicator of market power in multi-sided markets, particularly for platforms. The first challenge is how to measure market shares: it is not always clear how shares should be computed to take account of the various sides of the market, particularly if one side of the market is for free. A second challenge is that it may be difficult to distinguish between customers and competitors in multi-sided markets, because customers on one side of the market may also be competitors to the platform. For example, hotels that list on an online travel agent platform might also compete directly for bookings. As such, care should be taken when using market shares / concentration as a measure of market power.
  • Measures of margins and profitability can be used to assess market power. Alongside the usual pitfalls of using such measures, multi-sided markets present additional problems given the existence of feedback loops and the complexity of their pricing structures. Theoretical models have been developed that explicitly take account of the linked nature of demand in multi-sided markets and could provide a basis for measuring margins or profits. However, these models are complex and may not be practical to implement. It may be more pragmatic to first measure margins or profits to each group of consumers, and then take account of the strength of feedback loops and their implications for inferences regarding market power. It may also be informative to consider changes in margins or profits over time. For example, it may be possible to examine whether commission levels have increased with concentration in the market.
  • Single-homing and multi-homing – The extent to which customers on one side of the market single- or multi-home affects the single-or multi-homing choice of customers on the other side of the market. Examining the extent of single- or multi-homing on each side can provide an indication of likely market power on each side of the market.

In practice, assessing market power can be done by looking at the following questions:

  • Competition for the Paid Side of the Market: (a) What proportion of customers on the free side of the market single-home? (b) What proportion of customers on the paid-for-side of the market single-home? (c) How important is the platform for attracting customers to the paid side?;
  • Competition in the Free Side of the Market: (a) How important is the platform for a consumer when choosing the product it wishes to purchase and the supplier it uses? (b) How loyal are consumers to one platform? (c) How easy is it for consumers to search across competing platforms?
  • Conduct – Sometimes the ability to engage in the investigated conduct may be seen as an indicator of market power, particularly for conduct that would be unachievable or unprofitable in the absence of market power.
  • Barriers to entry and expansion, including switching costs as a source of market power – Any assessment of market power should include an analysis of barriers to entry and expansion. A firm is unlikely to have market power in the absence of material/substantial barriers to entry, and barriers to large-scale expansion by fringe competitors. The relevant types and extent of barriers to entry may depend on the context, but these are fairly well established in the literature.

A specific consideration in multi-sided markets is the need for platforms to establish and market themselves to all sides of the market. Another consideration are switching costs. Switching costs can create barriers to entry and expansion and, if there is a first-mover-advantage, can establish and strengthen a position of market power. Switching costs may arise between platforms, or between platforms and direct sales, due to customer habits and convenience. On the other hand, technological developments may weaken switching costs as they may lead to periods of intense innovation and businesses responding to technological changes, which can be destabilizing to firms with established market power.

A last section provides practical suggestions for assessing the strength and impact of indirect network externalities and feedback loops. The authors suggest adopting a sequential approach, looking first at the market power on each side of the market separately, and looking then at constraints from the other side via feedback loops. This second step requires an assessment of the strength of feedback loops to determine whether competition from one side of the market constrains the platform in its price setting to the other side of the market.

There are two key elements in an assessment of the strength and impact of indirect network externalities and feedback loops. The first is the elasticity of demand (on all sides), which provides an indication of the sensitivity of the relevant group of customers to a change in the relative price. The stronger the reaction to a change in price, the greater the impact that a feedback loop can have. The second element is the responsiveness of demand (on all sides) to participation rates on the other side(s), which provides an indication of how a response from one side of the market to a change in price will affect demand on the other side of the market.

In practice, it may be difficult to measure these elements directly. However, there are three potential sources of evidence on these elements: (i) customer data; (ii) econometric studies; and (iii) survey evidence.

Comment:

This is a very interesting article, and it is the first road map I am aware of on how a competition authority may deal with the specificities of multi-sided markets. I’m quite sympathetic to studies such as this, which acknowledge the limitations of economic models (in theory and when dealing with individual cases) and take a (second-best) empirical approach to enforcement based on available data and knowledge.

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