The emergence of two-sided platforms challenges competition law to adapt its ‘software’—the practical way in which cases are addressed. Competition authorities carefully and conservatively manage competition policy’s operating system, but the radical nature of multi-sidedness imposes major challenges. The purpose of this article, available here, is to discuss how these challenges might be addressed in practice.

Platform Market

This is done by reference to a two-sided platform merger inquiry that was undertaken by the UK Competition and Markets Authority (CMA) in 2017. The case concerned two merging food-ordering platforms that linked restaurants and customers, and accounted for 80% of the market (with the merger leading to a 10% increment).  A monetary transfer linked the two sides of the market – these platforms were usually rewarded by a percentage of the customers’ bill. The wider marketplace also included firms which operated ordering platforms and provided food delivery (‘food-ordering and logistics companies’), as well as restaurants and restaurant chains which themselves took orders and delivered food. This paper uses this case, and builds on the OECD’s (awarded*) 2018 report on Rethinking Antitrust Tools for Multisided Platforms, to evaluate how competition law should deal with multisided platforms. It does so as follows:

*I can say this because I had nothing to do with this – my colleague Chris Pike deservedly got the prize.

The paper begins by focusing on the principles governing market definition.

The UK Merger Guidelines note that market definition is generally bound to overlap and be inseparable from the assessment of competitive effects. This approach is not universally accepted, however. The OECD’s somewhat agnostic summary observations on market definition in two-sided markets can be summarised as follows: (i) in some cases a formal market definition can be dispensed with; (ii) in the absence of indirect network effects, separate market definition exercises on each side will suffice; (ii) where there are indirect network effects they can usually be taken into account in the framework of either a separate or combined market definition.

The paper then moves to an analysis of how to identify competitive effects in multisided markets.

This section begins with a discussion of multi- and single-homing. Much of the analysis of platform competition revolves around whether restaurants and customers confine themselves to one platform (single-home) or choose between multiple platforms (multi-home) before they make a purchase. The usual interpretation of multi-homing in economic or competitive discussions implies more than simple registration on several platforms. It requires the agent universally (or at least frequently) to scour more than one platform prior to making a choice. If every party is truly a multi-homer, then competition between platforms is feasible (subject to a variety of other problems such as strong direct networks effects). If both sides single home, however, then platforms compete on both sides, and every buyer or seller captured can be exploited. The more interesting case arises when one side single-homes and the other does not—which amounts to a competitive bottleneck. Faced with this, a platform will try to recruit as many single homers as possible, who can then be sold on to the highest bidder on the other side. This complicates the process of drawing inferences concerning the constraint which one platform can place on another in each side of the market. In the context of the reviewed merger, the CMA identified multi- and single-homing partners, which led the CMA to conclude that competition would be focussed on the consumer side of the market.

Another element that may be brought to bear in the analysis is adapted versions of the GUPPI and UPP approaches widely used in single-sided markets. However, such adaptation is complex. For example, it has been shown that knowledge of six diversion ratios is required as regards certain platforms. In the merger under discussion here, the CMA performed a price–concentration analysis which took account of the two-sidedness of the market by examining the effect that changes in the number of restaurants on platforms in different geographical areas had on the value of consumer orders made on the platforms owned by the two merger parties. This led to the conclusion that the merger had limited effects on the number of restaurants available on the platform, and that expansion of the number of restaurants in the merger entities’ competitors’ platforms was affecting the merging parties adversely.

The CMA also considered the strength of indirect network effects. These effects arise when the value of a platform to parties on one side depends upon the number of customers or providers on the other side. In this instance, the relevant questions are: (i) Does the value which a restaurant derives from being on a platform increase with the number of customers on the other side of the platform? and (ii) Does the value to customers of being on a platform grow with the number of restaurants on the platform? In each case, there is a notional function connecting the number of customers or restaurants, and the benefit accruing to the other side of the market. In the merger inquiry under examination here, the strength of the indirect network effects was investigated in four ways: (i) internal evidence from the merging parties’ documents; (ii) evidence received from other online food-ordering platforms; (iii) econometric evidence, and (iv) a survey of consumers. The results were complex, and somewhat mixed.

One of the reasons for wanting to know the strength of network externalities is that this variable may influence the likelihood of the market tipping. Merging firms may then argue that if the market will tip anyway, a merger will not entail a substantial lessening of competition; to quote Karl Marx, it merely ‘lessens or shortens the birth pangs.’ The CMA’s report examines this aspect at some length. It discusses a number of factors which might support or refute the tipping hypothesis. Overall, the CMA reached the conclusion that that there is no compelling evidence that the survival of only a single food-ordering platform was pre-ordained.

Comment:

This very interesting piece focuses on the practical challenges of dealing with multisided businesses. As consensus is emerging among economists as to how to analyse general platform issues in theory, the author argues – and I tend to agree – that the challenge right now is how to address these issues in practice. Questions such as what data (in the widest sense of the term) to collect, how to process it, and how to interpret and ascribe weights to the results, are likely to preoccupy competition enforcers.

This paper provides a good example of how agencies are likely to go about this, while offering some sophisticated reflections on the challenges this entails. The one quibble I have with the paper is that I do not think that the OECD and the CMA’s guidelines actually differ concerning the fact that market definition and the assessment of anticompetitive effects are closely related. In effect, one of the messages of the OECD report is that multisided markets pose specific challenges to market definition which should not, however, prevent one from identifying the relevant competitive effects. In any event, I agree that ‘the OECD’s document’s approach is apposite when it states that the choice between combined and separate definitions for the two sides of the market should not make much difference, provided the linkages between the two sides are adequately taken into account’.

Author Socials A weekly email with competition/antitrust updates. All opinions are mine

What do you think?

Note: Your email address will not be published