Competition policy enforcement in the digital age

On August 23, 2017, the Philippine Competition Commission (PCC) greenlighted the proposal of Alibaba founder and Chinese tycoon Jack Ma’s Alipay Singapore Holding Pte Ltd (Alipay) to acquire a 45% share in Globe Fintech Innovations, Incorporated (Mynt).

Mynt was formerly wholly-owned by Globe Capital Venture, Incorporated, itself a wholly-owned subsidiary of Globe Telecom, Incorporated.

The PCC decided that based on the facts and circumstances disclosed by the transacting parties, the proposed acquisition would not substantially lessen competition in the relevant market for electronic money payment and related services. Following an in-depth review of the case, the commission found no basis to suspect increased ability or incentive for the parties to engage in foreclosure or anti-competitive behavior in the face of competitive restraints from other incumbent and potential market participants, both domestic and foreign.

A week prior, PCC Chairman Arsenio Balisacan confirmed to the media that the PCC had requested to meet with the Land Transportation Franchising and Regulatory Board (LTFRB) about the month-long suspension of Uber’s Philippine operations. The commission was concerned that elevated demand and prices for other ride-sharing services in the absence of viable transportation alternatives affected consumer welfare.

The suspension ended prematurely on August 29 after Uber paid a P190-million fine, in addition to assuring P229.2 million in financial assistance to drivers displaced during the 15-day suspension. Nevertheless, the PCC’s initiation of a dialogue with the LTFRB showed the commission’s agility in responding to the emergence of competition issues. This is a crucial function of the PCC, which must vigilantly monitor and sort out potential threats to socially-beneficial competition, even when the source of such threats is another government agency.

The digital economy democratizes markets

To this day, business deals across all stages of production and distribution in the Philippines are realized or hindered based on familial ties and patronage. As such, market access, financing, and technical expertise remain elusive for many small and unconnected businesses. Digital platforms and services provide small-scale entrepreneurs access to financing, marketing, and distribution networks, allowing them to start up, grow, and connect their business to a vast network of consumers and other firms based within and outside main urban hubs.

For example, the fundamental innovation behind ride-sharing, as popularized by Uber and Grab, was the creation of an accessible and reliable platform for drivers to set up profitable independent operations, while providing riders a centralized and convenient transport option.

Meanwhile, the electronic payments market, which is expected to quickly grow and develop following the Alipay investment in Mynt, provides a means for fast and convenient business-to-business and business-to-customer financing and transactions. The PCC itself expressed a desire to facilitate expansion and innovation in the nascent industry, seeing its potential to serve the needs of unbanked individuals and small businesses.

The digital challenge

Even with full appreciation of the benefits of the digital economy, it is undeniable that the two recent PCC engagements portend the rise of competition issues concerning these new ways of doing business. The digital economy is characterized by a complex value web of interconnected markets with constantly evolving products, participants, and boundaries.

Players in the digital economy leverage modern telecommunications technology and interconnectivity to engage in platform development and use advanced data analytics to serve as intermediaries between different economic sectors. This leads to the prevalence of multi-sided markets, where instead of just buyers and sellers, a platform provider links two or more groups of clients, such as suppliers, advertisers, and consumers.

In addition to electronic financial services and ride-sharing platforms in the cases above, other examples of digital economy operators include online search giant Google, e-commerce aggregators like Lazada and Zalora, entertainment platforms like Netflix, and social media platforms like Facebook, Twitter, and Instagram, among others.

The multi-sided structure of digital markets allows extensive network effects. The network effects in these markets can be direct, that is, on the same side of the market. For example, if more of your friends are on one social networking platform, you would be encouraged to sign up for the same one. There can also be indirect or cross-side effects, like when sellers decide to sign on to an e-commerce aggregator based on customer traffic or when brands and businesses choose social networks to advertise with based on the number of the platform’s active users. Since transactions are processed online at minimal cost, digital economy players can take advantage of such network effects and benefit from increasing returns to scale, leading to massive scalability.

Taken together, multi-sided network effects and increasing returns to scale lead to the tendency of digital markets towards dominance by a single firm or by a few large players. But the markets are multi-sided, and it is relatively easy to move from one digital platform to another. This provides many ways to reach end users, so while specific markets are prone to domination, broadly speaking, the manner of service delivery remains contestable. This staves off complacency on the part of market leaders that still have an incentive to stay at the top of their game and to innovate to keep their position. Therefore, in the digital economy, market power and dominance may not necessarily imply harmful consumer and competitive effects traditionally associated with monopolies.

But competition authorities traditionally look into the accrual of market power and the potential abuses that firms or groups of firms may perpetrate to the disadvantage of competitors and consumers. They employ frameworks that assess markets and determine appropriate policy interventions depending on the relevant market identified, established dominance, and estimated likelihood or proof of perpetration of abusive or anti-competitive conduct. They observe patterns in pricing and market share, among others.

The distinctive features of the digital economy challenge traditional frameworks for competition policy enforcement, requiring a shift in approach from rigid conceptions of market boundaries to the development of new theories of harm, depending on evolving business models; from reliance on pricing signals to the proactive design of incentives for innovation; and from evaluations of static efficiency to a greater consideration of dynamic efficiency in the multiple interrelated markets.

International debate: The case of Google

In recent years, the European Commission had pursued charges against online search giant Google. In June 2017, it finally decided to fine Google 2.42 billion euros for abusing its large market share in online search to stifle competition in the comparison shopping market by giving illegal advantage to its Google Shopping service in online search results.

The decision’s key point was that firms must compete on the merits of a product, rather than by leveraging the company’s dominance either in the market for that product or in other markets. The decision called for equal treatment of the platform provider’s own services and rival services in the pertinent market.

On top of this, two other cases under investigation relate to anti-competitive behavior involving the Android operating system and AdSense. The European Commission advised of preliminary decisions leaning on further adverse decisions and fines against Google.

Meanwhile, the United States Federal Trade Commission and the Canadian Competition Bureau had earlier dropped cases against Google based on the direct consumer welfare effects of Google’s actions and the precedent message on innovation an adverse decision would make. They reportedly found insufficient evidence that the company engaged in anti-competitive behavior or abuses of its dominance in the online search market.

The European Commission decision is evidence of its staunch advocacy of ensuring a competitive environment among firms in the tech ecosystem, arguing that fair competition allows other firms to compete and provides consumers with genuine choice and the full benefits of innovation. These divergent actions taken by the world’s major antitrust bodies illustrate potential gray areas in assessing and regulating the anti-competitive behavior of digital market players.

Cultivating a culture of competition

Since the Philippines is in the relatively early stages of competition policy advocacy and enforcement, authorities have latitude in spreading awareness and obtaining buy-in among stakeholders when it comes to understanding the benefits of market competition and adjusting practices to foster a culture of competition. The PCC finds itself in the unique position of being guided but not bound by precedents from jurisdictions with long-established competition regimes, that are themselves reassessing their frameworks in light of the new challenges presented by the digital economy.

Nevertheless, the decisions to be made by the commission in coming months, as it fully implements the Philippine Competition Act, will set the tone for competition regulation in Philippine markets. Taking competence in economic and legal analysis, along with genuine concern for societal welfare, as given, foresight and prudence will serve the commission well in “ensuring businesses compete and consumers benefit” in all markets, traditional and digital. – Rappler.com

 

Emmanuel M. Garcia is an economist at the Asian Institute of Management Rizalino S. Navarro Policy Center for Competitiveness.The article expresses the author’s views and not necessarily those of the AIM.