Market Power Parasites: Abusing the Power of Digital Intermediaries to Harm Competition

Some digital information intermediaries, such as Google and Facebook, enjoy significant and durable market power. Concerns regarding the anti-competitive effects of such power have largely focused on conduct engaged in by the infomediaries themselves, and have led to several recent, well-publicized regulatory actions in the EU and elsewhere. In our article, forthcoming in the Harvard Journal of Law and Technology, we add a new dimension to these concerns: the abuse of such power by other market players, which lack market power themselves, in a way which significantly harms the competitive process and undermines the integrity of the relevant information market. We call market players who act in this manner ‘market power parasites’.

A small firm wishing to enter or to expand in its market must normally compete on the merits. Any unilateral anti-competitive conduct it might engage in, it is presumed, will not affect competition, because such a firm is too small and powerless to influence market conditions. Accordingly, competition laws, including in the US and the EU, typically focus on the behavior of firms with significant market power. Unilateral anti-competitive conduct engaged in by smaller firms is not prohibited. 

But what if a small firm can free-ride on the market power of another to significantly affect competition in its market? Such conduct challenges the basic assumption of a link between the market power of the entity engaged in anti-competitive conduct and its competitive effects. As we show, a small market player might indeed cause substantial harm to competition and to the integrity of the information market by abusing the market power of another. 

To illustrate this behavior, our article demonstrates how parasitic behavior may take place in online information markets. We analyze the following three case studies, which exemplify different parasitic methods of exclusion via (mis)information: 

• Black hat search engine optimization – manipulative methods for artificially improving a website’s ranking in search results, such as cloaking, keyword stuffing, link scheming, and scraping or auto-generating content; 
• Fake ratings and reviews – the distortion of information by misrepresentation; and 
• Click fraud – using fake clicks to artificially increase a rival’s advertising costs and distort his data on consumers’ preferences.

Clearly, an exclusionary effect does not occur every time such conduct takes place. However, as we elaborate in our article, a relatively easy and costless attack through a digital infomediary which enjoys substantial market power can potentially create a significant exclusionary effect. For example, by artificially inflating the number of times a word which is relevant to Google’s ranking appears in the code of one’s website, and making it invisible to users by ensuring that the color of the word is identical to the website’s background, a firm may increase its ranking in Google’s algorithm (which is partly based on website codes) and resultingly in Google’s results page, demoting its competitors. This, in turn, might lead to a significant reduction of its competitors’ market shares, despite the fact that their products might better fit consumers’ needs. We also show that in many cases market forces, as well as infomediaries, cannot be relied upon to correct such information distortions.

We then analyze the existing legal tools that might be used, under US law, to address the harms caused by parasitic manipulation of infomediaries, including competition law, tort, and consumer protection laws. Competition laws, which are specifically designed to deal with harms to competition resulting from distortions to the competitive process, would have been an obvious choice. Yet application of these laws is hampered by the de-linkage of market power and parasitic conduct, as noted above. Tort laws provide a partial remedy for some parasitic conduct. However, the use of these laws is hampered by the need to prove reliance on a specific fraudulent misrepresentation, which often creates a high hurdle of proof and also disregards the wider, market-wide distortions created by parasitic conduct. Consumer protection laws suffer from the same limiting requirement to prove reliance, as well as from administrative failures and limited remedies.

To remedy this situation, our article proposes to implement into business torts and consumer protection laws a fraud-on-the-online-information-market rule, akin to the rule adopted in American securities law. Since evidence of reliance on fraudulent information by each and every investor in financial markets is difficult to obtain, the US Supreme court created the fraud-on-the-market rule, a presumption that investors did in fact rely on fraudulent information that was publicly available in the market in their decisions regarding trade in securities. This presumption formed a broader, market-based cause of action, which aims to protect and vindicate the integrity of markets, rather than to compensate victims for their losses. By implementing a similar concept in fraud suits against parasitic attacks on infomediaries, competitors who suffer from exclusion will not be required to prove reliance on the misrepresentation by each and every consumer. This may transform American fraud torts as well as some American consumer protection laws into more suitable tools for fighting the wider market influences of parasitic exclusionary practices, regardless of whether the wrongdoer has or is likely to gain significant market power. By strengthening such a private cause of action, courts can relieve competitors from the burden imposed in antitrust law of proving that the wrongdoer had market power.

Noga Blickstein Shchory is a Doctorate Candidate at the University of Haifa and an Attorney at the District Attorney’s Office in Tel Aviv. 

Michal S. Gal is Professor and Director of the Center of Law and Technology, University of Haifa Faculty of Law, and the President of the International Association of Competition Law Scholars (ASCOLA).