Understanding Online Markets and Antitrust Analysis

D. Daniel Sokol (University of Florida)*

Antitrust analysis of online markets is a hot topic around the world.  In a number of jurisdictions, online markets already have been subject to antitrust review in merger or conduct cases.  In other jurisdictions, these issues are in a nascent stage of policy.  A number of lessons can be learned from the cases to date involving online markets with regard to optimal antitrust policy.  What these cases tend to share are some basic features as to how online markets work.  I identify four areas in which online markets may be different from traditional markets for antitrust purposes. 

1.      Market definition is more complicated and competition online is not always like for like

Online markets challenge traditional antitrust analysis because online services are often available to users for free. That is, consumers do not pay a monetary price for a free service.  Instead, consumers provide attention and information that is often used to direct relevant advertising to consumers. The economics literature refers to markets with more than one “side”.  A firm (or “platform”) that brings distinct types of economic actors together to interact (e.g., online auctions, dating, search engines, payment systems) operates in a multi-sided market.

In a multi-sided market, very different kinds of services may compete for business.  For instance, social media companies like Facebook and Twitter offer users a very different service as compared to gaming app Candy Crush or search engines like Google and Bing. Yet, they all compete directly for ad budget. Indeed, Facebook also competes for offline advertising budgets such as TV and print ads fact. In this way, competition is not always like for like online. Often the free service being offered to the user may differ, while the advertising being sold is close substitutes.

Market definition is the first step of traditional antitrust analysis.  In one-sided markets, an increase in price or decrease in output provides guidance on how to undertake antitrust analysis using a traditional SSNIP test.  However, market definition is more complicated in a multi-sided market because the traditional tools are more limited due to how the different sides of the markets interact with each other. For example, one side of the market may see no price increase while another will.  Thus, in multi-sided markets, the use of market shares for market definition purposes is something that should be carried out very cautiously.  Understanding the multi-sided nature of internet markets is very important to market definition analysis. 

2.      Success may be ephemeral because entry barriers are low

Online markets are constantly transforming.  Indeed, online markets typically have innovative challengers against incumbents.  Challengers may overtake incumbent firms through new ideas and technologies.  User data can be a powerful driver of these innovations, however as an input it is plentiful and easily accessible by new entrants: consumers can share information with as many services as they like. 

To succeed, these new entrants must develop valuable products and services in order to attract consumers. In some cases, more data does not translate into a better product as data is most relevant when it is about how a company and its consumers use its own product. It is the quality of the insights and not the quantity of data that will inform success. The success of taxi apps like Uber and Kakaotaxi are a clear mark of this: they had the insight that consumers want to order taxis on demand and thus were able to challenge traditional taxi companies, in spite of the fact these incumbents possessed large amounts of data about their users.

3.      Users multi-home and have low switching costs

Traditionally, antitrust analysis is concerned about switching costs from one platform to another.  However, in online markets, competition is often only a click away resulting in low switching costs and  multi-homing.

For instance, take the example of someone who needs to book a flight from Hong Kong to Madras.  A consumer can easily switch from a general search engine (e.g., Naver) to another search engine (e.g., Google or Baidu), a social network (Facebook or Tencent), a specialized travel search engine (Ctrip, Expedia, or Kayak), via website and/or app.  Thus, any incentive that a firm may have to bias its search results would be significantly limited. As Alex Chisholm, Head of the UK Competition and Markets Authority recently put it “The barriers to switching for consumers is very low in online markets. If I am unhappy with my search engine, I can stop using it at a click of a button."

4.      There is a need to analyze all sides of a market when examining a multi-sided market

Indirect network effects take place in situations where additional users improve the use of a product or service better, though not due to direct interaction across users. Rather, additional users allow a platform to determine what its users want via trial and error in search results.  This in turn improves the quality of search results. 

In a multi-sided market, all sides of the market need to be analyzed because the benefits of indirect network effects can only be achieved when multiple agents are coordinated, and participation of each agent is ensured.  For example, in a one-sided market, consumers and producers are often considered as a whole, whereas in multi-sided platforms consumers with different preferences could be separated and treated as independent groups. The increasing use of the platform of one consumer group would create an externality to other groups; therefore, particular attention has to be paid to the indirect network externality at the demand side. Without a multi-sided platform, the “value-creating” interaction among multiple agencies could be extremely costly.

5.      Conclusion

The case for antitrust intervention in online markets requires great caution because of a number of factors: proper market definition, accounting for possible low entry barriers, multi-homing and low switching costs, and the need for a proper analysis of all sides of a market.  Often, multi-sided markets produce significant benefits to consumer welfare in what are dynamic and fast moving markets. Mistaken antitrust intervention in such markets threatens innovation.  Given these significant concerns, antitrust authorities and courts should closely examine the facts of a particular case to ensure that facts and economic analysis align well with legal theories in multi-sided markets before bringing such cases.  Further, the nature of multi-sided markets suggest that before deciding on potential remedies, an antitrust authority should reexamine the market to see if its particular dynamics have already changed. 

* Daniel Sokol is a Professor of Law at the University Of Florida Levin College Of Law. Sokol is also a Senior Of Counsel in the Washington, D.C., office of Wilson Sonsini Goodrich & Rosati, where his practice focuses on antitrust counseling.