1. Market power’ is generally defined in terms of the ability to profitably sustain an increase in prices above the competitive level. Explain why this may not be a useful approach when assessing the conduct of platform operators. Use one or more examples to illustrate your answer.
Competition assessment is important in any economy because it allows the government through its selected bodies to promote and regulate competition across industries. Increased competition is important to the economy because it improves the performance of the economy, reduces the costs of products and services and opens up busines opportunities for citizens. Traditionally, market power has been one of the most commonly utilized competitive assessment tool for most industry. market power is an assessment that determines the ability and terms that a firm can profitably sustain an increase in process above the competitive level. This tool has been essential in regulating competition because of its ability to highlight areas of focus in uncompetitive markets. The information provided has then assisted government to formulate necessary policies to promote competition.
However, in the case of platform operators, this competition assessment tool seems to be ineffective in determining the competition level because of many reasons. Before divulging into some of these reasons it is important to first understand the concept of platform operators. Platform operators are defined as entities that contracts sellers to make available either part or all of platform to identified sellers. Generally, platform operators are not concern about elements of the products such as quality but are instead concern with providing sellers with a platform where they can market and consequently sell their products.
One of the reasons that market power may not be the appropriate approach in assessing the conduct of platform operators is because of the evolving use of technology by these operators. Notably, platform operation is not a new business model but rather an evolving field with improved technology. Online platform operators for instance do not use a traditional for of business operations. Take the case of Amazon which is a platform operator. Amazon despite selling goods is a service-based company as it simply contracts sellers to use their platform to reach out to a larger pool of customers. in this case, Amazon supplies several products some which have the same purpose. Consequently, the bargaining power for buyers is increased because of variety of products. as a result, the ability of Amazon to maintain sustain its profitability is not dependent on a single product because it has contracted several sellers.
On the other hand, market power is a traditional competitive assessment tool that seeks to understand the influence that a company has on determining the market price of a specific product within its industry. in this case, we see that market price is only effective when assessing a specific product within an industry which is contrary to the functioning of platforms operators. The presence of multiple products from different industries is what makes market price an ineffective tool to assessing the conduct of platform operators.
Even if one were to consider using market power to assess different platform operators, it would be difficult to use this tool because of the variety of services that these forms of businesses operate. For instance, take the case of Airbnb and Uber all who are platform operators but offer different services to the sellers utilizing their platforms. The different aspect of these operators makes it difficult to assess their conduct because of the different aspect of the industries that they operate in which influences their conduct. Even in cases where platform operators serve in the same industry, it is still difficult to assess their conduct because they have different models of operations that’s sets them apart when compared to traditional business models.
Another key reason why market power is not a useful tool in assessing the conduct of platform operators is because of the dynamic aspect of platform operators. Platform operators especially those operating on a digital platform are still a fairly new concept in some countries. Therefore, there are places were there is little or no laws or regulations to govern their operation. With limited policies, it is possible that some of these platform operators may be engaging in uncompetitive business practices which gives then an unfair advantage in the market. For instance, operators such as Uber do not have to worry about factors such as scarcity of raw material which are determinants of pricing power, a major assessment element in market power analysis. As a service-based platform, these operators do not encounter challenges that normal business face. Generally, market power is tool that is suitable for firms that operate in a traditional sense in terms of offering a specific product within an industry. this is different what platform operators do hence meaning the tool is not a useful when it comes to assessing the conduct of platform operators.
2. What is the role of a counterfactual when analysing an alleged abuse of market power or the equivalent? Are there complications applying the counterfactual test when analysing the conduct of platform businesses?
The counterfactual test plays an important role in the analysis of alleged abuse of market power as it allows the creation of alternative actions and consequences therefore allowing for definite determination whether an action constituted an abuse of market power or not. In counterfactual analysis, the outcomes of the intervention are often compared with the outcomes of achievement that would be made if the intervention has not been implemented. As a result, this method helps in identifying areas of improvements or alternative interventions that would have resulted to preferred outcomes. The creation of possible alternative is a particularly important intervention when using counterfactual test as it helps to see the options available hence further validating the presence of abuse of market power. Generally, the counterfactual test plays a key role in pinging especially obvious behavior that would indicate abuse of power market.
However, when it comes to using the counterfactual test in analysing the conduct of platform business, there are several complications that may arise. One of the possible complications in this case is that the process may fail to identify outlying behavior especially when the platform business is utilizing technology for most of its services. That is, conceptual test involves the study of human tendencies. In platform businesses, most of the activities are automated and some of the decisions are made by artificial intelligence. And while AI may be using human guidance, there are cases where it is possible that a glitch can result to series of events that ae unexpected and which also lead to abuse of market power. In this case, it would be difficult to penalize these businesses especially when the necessary precautions are undertaken to prevent further abuse of market power.
Another possible complication in using counterfactual power for platform business is the inability to define market power in these platforms. Considering that platforms operate in a different spectrum as traditional business, the level of competition is different for each of these platforms. Therefore, applying the control group tests in the conceptual analysis process may fail to apply or relate to how each of these platforms operate. The uniqueness of each platform means that formulating scenarios that are applicable to each is difficult especially when conducting a comparative analysis. As a result, the results form this process may be misleading and effective in determining is there is abuse of power market.
More so, a complication of applying this test to platform business lies on the fact that counterfactual process is arbitrary. That is, counterfactual test has a critical flaw where the test asks whether a firm without market power, but in the same situation as the firm with market power would have engaged in the same intervention. This logic of reasoning is flawed in the sense that it is difficult to predict human behavior. In this case, it would be difficult to ascertain if the firm without market power would have acted in the same manner further implying that the process is hypothetical with no hard evidence to back its effectiveness in determining if there is abuse of market power. More so, it is difficult to determine when there is an abuse of market power when there are instances where firms with market power have the right to influence the market. A further complication arising from this is that it becomes hard to draw the limit to which firms with market power can influence the market and identifying what actions constitute of abuse.
On another front, it is important to note that counterfactual test draws information from previously occurred events as basis for reference. Most platform business utilizing the online world are a relatively new addition to the market. Therefore, there is limited information about the best cause of action or what constitutes abuse of not. As a result, with no precedent or prior information as reference, the complication of having to define the parameters that constituted abuse of market power further complicated the use of counterfactual process.
The counterfactual test is a key tool that helps in analysis of actions of a company with market power and determine if they constitute to abuse. This test is important in pinging obvious behavior that can easily be identified as abuse. However, with implementation of technology, the complexity of actions of platform businesses increases as most decisions are automated. These among other reasons further complicates the use of counterfactual test whose basis is analysis of human behavior.
3. The EU’s Digital Markets Act introduces rules for platforms that act as “gatekeepers” in the digital sector. It aims to prevent gatekeepers from imposing unfair conditions on businesses and consumers and at ensuring the openness of important digital services.
A. Briefly explain why in this Act the EU has specifically targeted unfair practices by gatekeepers separately from the conduct caught under Art 102 of the TFEU.
The Digital Markets Act targets unfair practices in business differently when compared Art 102 of the TFEU as it directly targets the digital sector. In the Digital Markets Act for instance aims at preventing platforms from imposing regulations that would prevent sellers form assessing their data when using these platforms. In this case, this law touches on the element of data control by recognizing its important when engaging in online businesses. In this case, it is apparent that the Digital Markets Act is more concern about the service delivery part of business operation. This is contrary to the Art 102 of the TFEU which is concern with specific activities especially in production or service delivery that may restrict competition. One good example is how in the case of Art 102 of the TFEU may limit production as a precaution to restrict competition. On the other, the Digital Markets Act instead looks at controlling processes that would constitute unfair business practices.
Another important difference in how the Digital Markets Act is different from the Art 102 of the TFEU is that it focuses on the relationship between platform operators or gatekeepers and the sellers. On the other hand, Art 102 of the TFEU main focus on how different firms compete within an industry hence amin focus is on preventing monopolies. The Digital Markets Act main aim to ensure that the practices by gatekeepers provides a fair condition to operate effectively in these platforms. Therefore, unfair practice when applying the Digital Markets Act revolve on the company policies and how they affect the operation or access of these platforms by sellers. Generally, while these two regulations are different, they are both important in facilitating or promoting fair competing condition. The major difference as highlighted is based on the focus where one focuses on the digital aspect of business while the other regulation covers physical actions such as production. Despite these differences, each of this regulation is important in the existing dynamic business world.
B. Could this Act indicate that FRAND has not been successful in ensuring access to Standard Essential Patents?