Digital platforms: Market definition and market power

Digital platforms play a central role as facilitators of online interactions and transactions between users. In particular, ‘two-sided platforms’ – which operate, for instance, e-commerce marketplaces – bring together two different but interdependent user groups. Competition authorities and courts are increasingly concerned with merger and abuse cases that involve digital platforms. A proper understanding of the ensuing market environments requires an understanding of which products or services should be included in the analysis. Our report ‘Market Definition and Market Power in the Platform Economy’ for the Centre on Regulation in Europe (CERRE)  provides guidance on how to define markets and how to assess market power when dealing with two-sided platforms. Key findings of the report relate inter alia to the advantages of the multi-markets approach, the recognition of zero-price markets, the relevance of homing decisions of users and the utmost importance of the assessment of entry barriers.

When defining markets in the context of two-sided platforms, competition authorities and courts are well advised to uniformly use a multi-markets approach that defines different markets for each side of a platform. This means, for instance, that an online hotel-booking platform operates in two markets: in the market for intermediation services offered to hotels and in the market for intermediation services offered to the hotels’ customers. The multi-markets approach is a more flexible and less error-prone instrument than the competing single-market approach, which defines a single market for both sides of a platform. Using the multi-markets approach does not spare the competition authorities and courts from investigating interdependencies since market definition on one side of the platform depends on characteristics on the other side.

On many two-sided platforms a price is paid on only one side. It is not sufficient to consider the activities on the ‘unpaid side’ of the platform only indirectly by including them in the competition law analysis of the ‘paid side’ of the platform. Such an approach would exclude certain activities and the ensuing positive or negative effects on consumer welfare altogether from the radar of competition law. For example, if merger control in case of ad-financed tv stations solely focused on the affected advertising markets but denied the existence of a “viewer market,” the effects of the merger on the economic interests of the consumers as “viewers” would be ignored. Therefore, competition practice should instead recognise that an activity is part of a broad or long-term strategy to generate revenue. This definition of a ‘market’ is meant to exclude essentially (only) activities that involve the exercise of power by public authorities and philanthropic activities.

Three additional observations deserve particular attention. (1) Some users may use multiple platforms in which case they multi-home. The degree of multi-homing on one side is relevant not only for the substitutability between platform services in this market but also for the substitutability in the market for platform services on the other side. (2) There may be multiple markets on each side of the platform; for example, a platform may offer different categories of services or may be active in different regional markets. However, multiple markets on one side may be linked with each other, in which case their interdependence has to be accounted for. (3) The SSNIP test, which seeks to identify the smallest relevant market a monopolist could impose a significant price increase, is a useful instrument for competition practice if applied as a thought experiment: it provides conceptual clarity regarding demand-side substitutability.

The application of competition law often requires an assessment of market power. In the context of two-sided platforms, high market shares are less apt to indicate market power. High overall profitability is an indication that a platform has market power in some of the markets in which it is active. However, initially low overall profits or losses are not proof of a lack of market power.

Barriers to entry are at the core of persistent market power and, thus, the entrenchment of incumbent platforms. They may arise for a number of reasons, including users’ failure to coordinate on a superior entrant platform; they are more likely to be present if an industry does not attract new users and if it does not undergo major technological change. In that case, the absence of entry attempts may be seen as an indication of market power.

In some cases, there may be direct evidence of market power, such as a significant reduction in product quality. In light of the difficulties of calculating and interpreting other measures of market power, such evidence is of particular importance.

Jens-Uwe Franck is a Professor of Law at the University of Mannheim

Martin Peitz is a Professor of Economics at the University of Mannheim