This paper, which can be found here, argues argues that market definition in online platforms requires us to revisit how the hypothetical monopolist test is applied. Given that one side of the market is often free, the application of the small but significant non-transitory increase in price (SSNIP) test will have to be overhauled. In the case of zero-pricing strategies commonly used by online platforms, the only feasible option for assessing demand elasticity for the purpose of performing the hypothetical monopolist test requires us to adopt a quality-oriented analysis, and to deploy a test based on the effect of a small but significant non-transitory decrease in quality (SSNDQ).
The paper is structured as follows:
Section 2 looks at the use of zero-pricing strategies by online platforms, and at the implications of these strategies in the context of market definition.
Online platforms are intermediaries that cater to two or more separate customer groups by facilitating an interaction between them. The success of online platforms as intermediaries depends on their ability to get (and keep) all the parties of their matchmaking interactions ‘on board’ and internalise the indirect network effects between them. Accordingly, online platforms often implement a skewed pricing scheme reflecting the intensity of indirect network effects between their various customer groups, and their respective market power with regard to the platform and one another.
Zero-pricing strategies do not mean that undertakings make zero profits or no longer compete; it merely means that undertakings compete on aspects other than price, while profits are made by means of a different but related product or service. In itself, zero-pricing is neither a novel business practice nor one that is exclusive to online platforms. However, before today competition law had been able mostly to ignore the challenges such practices created. With the growing importance of online markets, the challenges raised by zero-pricing strategies can no longer be ignored. For example, in cases where an alleged abuse of dominance takes place with respect to a subsidised group of platform customers, a market definition will inevitably have to be performed with regard to the free product or service provided by the online platform. Furthermore, when the alleged abuse of dominance occurs with regard to a paying customer group that is interlinked with a non-paying customer group, agencies and courts may still be required to define the relevant market for the non-paying customer group if there are bi- or multilateral indirect network effects.
Section III discusses the role of the SSNIP test in market definition, and the challenges raised by its application to businesses pursuing zero-pricing strategies.
Although there is no legal obligation to make use of the SSNIP test in the context of market definition, the practical importance of this test raises important challenges for the definition of zero-priced markets. Market definition involves, first and foremost, a demand side substitution assessment regarding what are the closest competing products or services to those offered by the concerned undertaking. The need for an accurate economic tool to this end led to increasing reliance on the hypothetical monopolist test. According to this test, a market is defined by reference to the product or set of products for which a hypothetical monopolist could increase its prices in a profitable manner on a long lasting basis – a small but significant non-transitory increase in price (SSNIP).
The application of the hypothetical monopolist test to two-sided markets is a matter of ongoing debate. There is little agreement on whether the test should be applied to the entire price-structure of the platform or independently to each side, or on whether the test should take into account the possibility of price structure modifications by the concerned undertaking. In the case of online platforms, this difficulty is accentuated by challenges in determining whether the interaction between various separate customer groups facilitated by the online platform constitutes a single product or multiple products. A last area of concern relates to the application of a price-based test such as the SSNIP to zero-priced products.
Section III also reviews alternative approaches for the application of the SSNIP test.
These approaches rely on a nominal change in quality or cost, instead of price. Although both approaches are theoretically sound from an economic standpoint, the feasibility of their application in practice may differ significantly due to practical complications.
As regards cost, the purpose of the test is to assess whether the concerned undertaking is capable of imposing a small but significant non-transitory increase in cost for customers in a profitable manner (SSNIC). In the context of such a test, the costs for customers in the case of zero-priced markets are traditionally split into information and attention costs. Asking customers, particularly consumers, to evaluate their behaviour in light of theoretical increases in price is a wholly different matter than asking them to do the same with regard to an increase in information or attention costs. The obscure nature of information and attention costs also poses challenges, since both information and attention costs can come in a variety of shapes and forms. Information costs can translate into sensitive and less sensitive types of personal data and combination thereof, which analysis is further complicated by the application of data protection rules. Attention costs can be translated into the number of ads displayed, the length of display, size of each ad, frequency of their appearance, as well a combination thereof. In short, although the economic logic behind the SSNIC test is sound in theory, it seems to be unsuited to be applied to cases concerning online platforms in practice.
By contrast, a quality-centred test – asking what is the effect of a small but significant non-transitory decrease in quality (SSNDQ) – may constitute a feasible option. The relation between quality and substitution has long been recognised in economic theory and competition law practice. Furthermore, unlike in the case of information costs, the current legal framework applicable to online platforms does not stand directly in the way of theorising changes in the quality of a product or service. Nonetheless, testing demand substitutability on the basis of quality entails some similar practical challenges to those of a cost-based test. Quality is a general term that can encompass a wide variety of criteria; in the case of online platforms, the criteria covered may include privacy, user friendliness, security and others. Given that different kinds of online platforms will compete based on different quality parameters, the relevant quality that needs to be the subject of the SSNDQ test will likely differ from case to case. Nonetheless, and despite these hurdles, the SSNDQ may be able to contribute to adapting competition law practice to online markets.
Section IV addresses the future implications of zero-pricing in the absence of a modified SSNIP test.
In short, while the definition of the relevant market for zero-priced products or services is difficult, particularly given the inability to pursue SSNIP tests based on quantitative data, this will not prevent markets from being defined. After all, there is no legal obligation to rely on quantitative tools such as the SSNIP test, nor do these quantitative tools possess a higher evidentiary value compared to qualitative evidence. Nonetheless, applying and refining a SSNDQ would be beneficial for competition law.
This thoughtful piece identifies a number of challenges with market definitions when no prices are available, and outlines potential alternatives.
I very much enjoyed how the piece engaged with practical matters, but I was left unconvinced regarding the viability of the alternatives. The article seems to rely on the fact that the relationship between ‘quality and competition has already been recognised and studied intensively.’ Quite so, but the assessment of trade-offs between price and non-price elements remains complex, difficult and uncommon outside the theoretical domain. In effect, I am yet to see a convincing argument to the effect that there are non-price related methodologies that are as coherent and easy to apply as the SSNIP test – which, I must say, is a test regarding which I already have some serious reservations.