Tag Archives: Antitrust Law

14 June 2020
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Fundamentals of Competition Law

Adam Smith, the Competitive Process, and the Flawed Consumer Welfare Standard

On consumer welfare v. aggregate welfare, Warren Grimes writes:

‘Scottish economist Adam Smith wrote in 1776 that the collective buying and selling of individuals would result in the preferred allocation of society’s resources. That insight has endured and is the basis for the competition law goal of fostering and protecting the competitive process. That goal, with venerable roots on both sides of the Atlantic, has been sidetracked by emergence of the consumer welfare standard, which is now preeminent in competition law analysis. The narrow focus of the consumer welfare standard has led to confusion and misdirected decisions that do not adequately protect the competitive process. I point to confusion about who is the buyer and who is the seller in many transactions, and describe why that classification should, in any event, be irrelevant in applying competition law. When competition is distorted, the central goal of protecting the process and ensuring a preferred allocation of resources is undermined, regardless of the impact on the consumer.

The proper welfare standard is unconcerned with where the harm occurs. The standard focuses on anticompetitive conduct at any level of the distribution chain and regardless of whether the anticompetitive effects are directed upstream at sellers or downstream at buyers. The symmetric standard is rooted in competition law decisions on both sides of the Atlantic; it is sound in theory and, compared to the consumer welfare standard, is easier to explain and apply. It more comfortably honors the broader goals of competition, including promoting entry, innovation, and choices for both entrepreneurs and consumers. I assess how this symmetric welfare standard would apply to mergers and classic predatory or exclusionary conduct. The standard offers hope of simplifying analysis and better serving ancillary goals of competition. Fostering and preserving efficiency, enhancing output, and maintaining low consumer prices are among the highly valued benefits of the competitive process, but they are not determinative. The focus must remain on the central goal of preserving the competitive process.’

Source: Adam Smith, the Competitive Process, and the Flawed Consumer Welfare Standard

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19 August 2016
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Antitrust and Technology Markets

Market Definition and the Sharing Economy

By Carmen Ortiz*

Introduction

Technology enabled the flourishing of the sharing economy both in developed and in developing countries.[i] It is characterized as an innovative system of collaboration between peers through an online platform accessed through smartphones.[ii] Services, goods, spaces, and others that are in surplus are offered for lease or sale at reduced transaction costs. Thus, the sharing economy boosts competition while generating different effects for the groups affected. For one part, consumers benefit with the access to new products and services, lower prices and non price benefits. For the other part, traditional firms face new threats by suppliers that compete aggressively to reduce the revenues and the market shares of incumbents. This novel model of commerce motivates for an analysis that determines the extent to which competition authorities in developed and developing countries should include the sharing economy activities in the relevant markets (RM) for traditional products and services.

The inclusion or exclusion of sharing economy activities could widen or narrow traditional RM and this can produce several consequences that influence the efforts of competition authorities in their aim to protect competition. First, the analysis of market power may be influenced by identifying more or less competitive constraints in the commercial behaviour of an undertaking. Second, regarding merger control, if sharing economy firms participate in the same RM of traditional firms, mergers between them would be analysed as horizontal (for example, where traditional firms could acquire sharing economy start ups to eliminate competitors). Third, referring to abuses of dominance, traditional firms could independently or collectively exclude sharing economy suppliers by raising barriers to entry. Moreover, a cartel between traditional firms might be obstructed if sharing economy competitors are successful disruptors of collusion. For all these reasons it is important to set a framework for definition of RM that can adapt to cases where this model of commerce is present.

New and expanding competitive constraints by sharing economy suppliers can change the current structure of traditional markets. Real world cases of this model of commerce are Uber and Airbnb, which exert competitive pressures on traditional rivals. For example, Uber fares in Stockholm can be up to 60% lower than traditional taxi fares.[iii] Non price benefits for consumers include less congestion, less delays and less time lost in traffic, all of which increase the demand for the service. Regarding Airbnb, in Texas, its growth of by 10% results in decreases of 0.37% in monthly hotel revenues.[iv] In the period of 2010 to 2015 the occupancy rates of traditional hotels have decreased from 8-10% in the areas where Airbnb has more demand.[v] These firms will serve as examples for the development of this proposal.

Framework for defining RM when the sharing economy is present

For the purpose of suggesting a framework for the definition of RM, the EU antitrust jurisdiction will be taken as a base as it is a leading regime that can be taken as a guide or as a point of comparison for other jurisdictions. The first step in this framework is to embrace the objective and the concept of RM. In the EU, the objective of defining the markets is to establish which undertakings constrain others from behaving freely in absence of competition.[vi] The basic concept of RM encompasses a product and a geographic dimension, and these will remain as the building blocks of this proposal.[vii]

Second, the undertakings that could supply the products or services that form part of the RM must be defined.[viii] In this stage, the focus is directed to the economic activity of the entities.[ix] In the special case of the sharing economy, two economic activities must be distinguished: a) online platform’s intermediation of supply and demand and, b) the supply of products and services. The specific characteristics of the relationship between the owner of the platform for intermediation and the suppliers of the services are decisive to determine whether they together form a single undertaking or independent undertakings. Lougher and Kalmanowicz sustain that if the firm providing intermediation also influences the conditions of the offer it could be determined that there is a single undertaking performing both activities. This posture is also accepted outside the EU, for example, in Australia.[x] For example, Uber sets requirements for the driver, the car and for the mode of operation. According to Lougher and Kalmanowicz, the exam must consider the contractual conditions, whether or not the suppliers are independent from the platform, if they bear risks, if they are employees or agents, among others.

Third, once the firms have been identified, the competitive constraints that they encounter should be established. Firms can face constraints as demand substitutability, supply substitutability and potential competition.[xi] Special considerations for each of these constraints are required in the markets where the sharing economy is present. On one hand, demand substitutability significantly determines market definition. The whole purpose of market definition is to determine which are the substitute products or suppliers to which customers can switch. Demand substitutability may refer to the prices, characteristics and the intended use of the products. For the EU Commission, the decisive criteria is the consumer’s reaction to prices as it considers that product characteristics and intended use are insufficient to reveal demand substitutability.[xii] Nonetheless, consumers of the sharing economy have revealed that they prefer it for its convenience.[xiii] Therefore, this framework suggests that the analysis should be flexible enough to take into account the consumer’s reaction to prices and also the product’s characteristics and intended use as they are motifs of convenience. The evidence of marginal consumers switching for reasons as price or convenience to the sharing economy products and services and making the price increase in traditional products unprofitable allows the inclusion of those products and services into the traditional RM.

For example, to test consumers’ reactions to prices the EU Commission’s Notice refers to a hypothetical monopolist and whether its “customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range 5 % to 10 %) but permanent relative price increase in the products and areas being considered”.[xiv] In the case of Uber, the test will reveal if the referred increase in prices of traditional taxi services would be unprofitable because Uber exerts sufficient competitive constraints that enable customers to switch to it. If yes, Uber should be included in the product market. For defining the geographic market, the question is to which other areas of Uber service would costumers switch “in the short term and at negligible cost” in reaction to the referred fare increase.[xv] Those areas that are alternatives for consumers should be included in the relevant geographic market. In synthesis, this is the extent to which Uber services could be included in the RM of traditional taxi services. It is interesting to note that it has been argued that because the sharing platforms are not direct substitutes of traditional products and services and because they cannot fulfill the demand, they should not be considered competitors (see Oxera Compelling Economics article). This proposal disagrees with such point of view. The reason is that the inclusion of a product in a relevant market relies on whether that product exerts sufficient competitive constraints in the other products to the point that their price increases are not profitable, not whether that product is able to fulfill the total demand or whether it is exactly the same in terms of characteristics.

Evidence in support of the inclusion of the sharing economy in the traditional market definitions could include the substitution on the recent past,[xvi] empirical data of quantities demanded and its impact on the traditional offer, good brand reputation that attracts the preference and loyalty of consumers,[xvii] convenience (accessibility, trust), the legal treatment by authorities of the product forming part of the traditional supply,[xviii] among others.

Regarding Airbnb, a similar methodology applies. Unprofitability after the mentioned price increase in hotel rooms in a given area will reveal if Airbnb exerts sufficient competitive pressures that allow its inclusion in the traditional RM of accommodation services. Past substitution, comparisons of the room capacity of hotels versus the growing supply of Airbnb,[xix] the impact of Airbnb on hotel’s revenues, uniqueness of Airbnb service, consumer’s preferences, could all constitute evidence that supports demand substitutability.[xx]

Once it has been established that the sharing economy activities exert sufficient competitive pressures to make unprofitable the price increases of traditional services, it must be ascertained which specific activities will be included in the definition of RM. The activities could be the intermediation platform and the supply, which could be considered independently or jointly in the exam of substitutability. It will all depend on the closeness and interdependence between those activities. If they are independent from each other, only be the products or services that exert competitive pressures on traditional products or services will be tested. If they are close enough to constitute one single activity, the intermediation and its underlying supply should be tested as a whole.[xxi] Even when it has been acknowledge that the “sharing economy platforms are generally active on the relevant product market for the intermediation of the relevant underlying supply”,[xxii] this is a situation that must be determined case by case.

On the other hand, regarding supply substitution and potential competition, the sharing economy involves a significant and constant competitive threat. In the scenario of the sharing economy, consumers with surplus of space, products and time, can easily become suppliers of more than one product or service depending on the surplus they possess over them and this way they can compete with traditional firms.[xxiii] This could happen in response to small and permanent changes in relative prices of traditional products and services which represent potential sources of income for new suppliers.[xxiv] The presence of sharing economy suppliers that compete for the customers of the traditional firms is an element that supports the inclusion of that specific sharing economy in the traditional RM.

Finally, regarding barriers to entry, these could take the form of legal, cultural, social and economic barriers that could weaken or obstruct the pressure exerted by the sharing economy on traditional businesses.[xxv] Legal barriers were raised with the French Constitutional Court banning Uber services (See article by Reuters). Moreover, Uber has closed operations in Frankfurt, Hamburg and Düsseldorf in response to a Court ban (See article by Lomas, N). Cultural barriers might arise when local custom, traditions and values are not relaxed enough as to allow its members to interact with strangers that offer services through the sharing economy. Social barriers might be the political instability, insecurity and violence in the society that could demotivate consumers from being exposed to the risks associated with the offer of the sharing economy (for example, unpredictability of trusting a stranger). Economic barriers could referr to the lack of resources to fund publicity and marketing for a sharing economy product or service. All of the mentioned barriers must be considered for the definition of relevant markets as they prevent consumers from switching their demand towards sharing economy substitutes.

Conclusion

Technology, consumer preference, strong brand reputation and the possibility of an ever growing supply provide the sharing economy with a high potential of growth within many sectors of the economy. The assessment of its inclusion on traditional RMs is essential for the protection of competition and innovation in developed and in developing countries. The assessment must be case and context specific as every industry has different structure and conditions. Moreover, barriers to entry specific to each national context might prevent the sharing economy from being a competitive constraint. For these reasons, there cannot be a one size fits all answer to whether the sharing economy activities should be included or not into the traditional relevant markets. In some cases, some analysis will result positive for its inclusion while in others, negative.

*LLM in International Competition Law and Policy, University of Glasgow, School of Law, Scotland, United Kingdom. Candidate for the LLM in Law and Economics, University of Utrecht, Netherlands. Head of the Mergers Control Unit in Superintendencia de Competencia, El Salvador, from January 2012 to August 2015.

Bibliography

Reports and Market Studies

Australian Competition and Consumer Commission, “The sharing economy and the Competition and Consumer Act”, 2015, available at: “https://www.accc.gov.au/system/files/Sharing%20Economy%20-%20Deloitte%20Report%20-%202015.pdf

Stefansdotter, A., Utfall Danielsson, C., Kastberg Nielsen, C., Rytter Sunesen, E. (2015) “Economic benefits of peer- to-peer transport services”, Copenhagen Economics, Stockholm. Available at: https://www.google.nl/search?client=safari&rls=en&q=Copenhagen+Economics+(2015),+%E2%80%98Economic+benefits+of+peer-to-peer+transport+services%E2%80%99,+25+August.&ie=UTF-8&oe=UTF-8&gfe_rd=cr&ei=1oePVuPECYim8wfcoLbwDA

Notices

Commission Notice on the definition of relevant market for the purposes of Community competition law (97/C 372/03)

Notice 07/14 of the Transport for London – Taxi and Private Hire, available: http://content.tfl.gov.uk/07-14-taxi-and-private-hire-smartphone-apps-in-london-letter-to-drivers.pdf

Decisions

Hofner and Elser v Macrotron GmbH (Case C-41/90) [1991] ECR I-1979

Google/DoubleClick (Case COMP/M.4731) Commission Decision [2008] OJ C 184

Microsoft/Yahoo! Search Business (Case COMP/M.5727)

Articles and News

Lomas, N. (2015), “Uber Pulls Out Of Three German Cities After Court Ban Shrinks Driver Pool”, TechCrucnh, available at: http://techcrunch.com/2015/11/02/uber-retrenches-in-germany/#.prbkyj5:RjYZ

Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law, available at: http://jeclap.oxfordjournals.org.proxy.library.uu.nl/content/early/2015/12/10/jeclap.lpv086.full.pdf+html

Oxera Compelling Economics, (2015) “A fair share? The economics of the sharing economy”. Available at: http://www.oxera.com/Latest-Thinking/Agenda/2015/A-fair-share-The-economics-of-the-sharing-economy.aspx

Reuters, “French court upholds ban on Uber’s service using non-professional drivers”, available at: http://www.reuters.com/article/us-france-uber-tech-idUSKCN0RM26C20150922

San Francisco Chronicle, “S.F. taxi owners, cabbies join forces against Uber, Lyft, others”. Sept 2014, available at: http://www.sfgate.com/bayarea/article/S-F-taxi-owners-cabbies-join-forces-against-5773407.php#photo-6898035

Wallsten, Scott, (2015), “The Competitive Effects of the Sharing Economy: How is Uber Changing Taxis?”, Technology Policy Institute, Studying the Global Information Economy, June 2015. Available at: https://www.ftc.gov/system/files/documents/public_comments/2015/06/01912-96334.pdf

Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”. Available at: http://people.bu.edu/zg/publications/airbnb.pdf

[i] See, information about the scope and impact of the sharing economy, at Crowd Companies. Author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/2014/09/29/a-day-in-the-life-of/ . See, also, information about the expected growth of the sharing economy, at Crowd Companies. Author: Jeremiah Owyang, available at: http://www.slideshare.net/jeremiah_owyang/sharingnewbuying , slide No. 12.

[ii] Australian Competition and Consumer Commission, “The sharing economy and the Competition and Consumer Act”, 2015, pg. 1.

[iii] Uber was founded in San Francisco, California, in 2009. It functions through an online platform that permits consumers to hire drivers that use their own cars. “Uber is evolving the way the world moves. By seamlessly connecting riders to drivers through our apps, we make cities more accessible, opening up more possibilities for riders and more business for drivers. From our founding in 2009 to our launches in hundreds of cities today, Uber’s rapidly expanding global presence continues to bring people and their cities closer”. See, Uber Website: https://www.uber.com/about . See, also, Stefansdotter, A., Utfall Danielsson, C., Kastberg Nielsen, C., Rytter Sunesen, E. (2015) “Economic benefits of peer- to-peer transport services”, Copenhagen Economics, Stockholm. pg. 3-4. , which are factors that could increase the demand for the servicetter Sunesen, E. (2015) irms might have a different result if

[iv] Airbnb was founded in San Francisco, California. It is “a provider of travel accommodation and a pioneer of the sharing economy, has served over 30 million guests since it was founded in 2008. Although Airbnb remains privately held, its valuation of over $10 billion now exceeds that of well-established global hotel chains like Hyatt”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”, pg. 2.

[v] “Our main result is that in areas where Airbnb is most popular the revenue of the most vulnerable hotels in our data has decreased by about 8-10% over the past five years”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”. pg. 3.

[vi] See, Commission Notice on the definition of relevant market for the purposes of Community Competition Law (97/C 372/03), in further, Commission Notice, para. 13.

[vii] “A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use”. “The relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those area”. Comision Notice on the definition of relevant markets. Commission Notice on the definition of relevant market for the purposes of Community Competition Law (97/C 372/03), para. 7-8.

[viii] Case C-41/90 Hofner and Elser v Macrotron GmbH [1991] ECR I-1979

[ix] Lougher, G. and Kalmanowicz, S. (2015), “EU Competition Law in the Sharing Economy”, Journal of European Competition Law, pg. 3.

[x] See Note 2, pg. 35.

[xi] See Commission Notice, para. 2.

[xii] See, Commission Notice, para. 36.

[xiii] See, Crowd Companies. Author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/category/collaborative-economy/

[xiv] See, Commission Notice, para. 15-17.

[xv] See, Commission Notice, para. 29.

[xvi] Commission Notice, para. 38. For example, “Taxis, badly losing the battle on San Francisco’s streets, are finally fighting back. After seeing 65 percent of their business migrate to ride services like Uber, Lyft and Sidecar, taxi drivers and company owners, at odds for decades, have joined forces — not only with one another but with their overseer, the Municipal Transportation Agency”. See, article: “S.F. taxi owners, cabbies join forces against Uber, Lyft, others”. San Francisco Chronicle

[xvii] See, information on the public perception of brand reputation of traditional business and sharing economy businesses, at Crowd Companies, author: Jeremiah Owyang, available at: http://www.web-strategist.com/blog/category/collaborative-economy/

[xviii] For example, in the UK, the OFT includes Uber in the private hire operator sector. See Notice 07/14 of the Transport for London – Taxi and Private Hire. See, also, Lougher and Kalmanowicz, pg. 8.

[xix] See, information about the growing supply of Airbnb in 2015, at Airbnb summer travel report: 2015, available at: http://blog.airbnb.com/wp-content/uploads/2015/09/Airbnb-Summer-Travel-Report-1.pdf

[xx] See, information about consumer’s preferences regarding accommodation options, at Jeremiah Owyang, available at: http://www.web-strategist.com/blog/2013/07/29/collaborative-economy-airbnb-loved-over-traditional-hotel-brands/ . Besides, for example, in the state of Texas in US, Zervas, Prosperio and Byers state that “(…) this estimate indicates that Airbnb listings result in some Airbnb stays that are substitutes for hotel stays in cities with an established Airbnb presence”. See, Zervas, G., Prosperio, D., Byers, J. (2015), “The Rise of the Sharing Economy: Estimating the Impact of Airbnb on the Hotel Industry”, pg. 16.

[xxi] See Lougher and Kalmanowicz, pg. 5. See, also, Google/DoubleClick (Case COMP/M.4731) Commission Decision [2008] OJ C 184, para. 68 and Microsoft/Yahoo! Search Business (Case COMP/M.5727), para. 83.

[xxii] See Lougher and Kalmanowicz, pg. 7.

[xxiii] See, information about consumer’s potential of becoming suppliers in the sharing economy, at “Sharing is the New Buying: How to Win in the Collaborative Economy”, by Jeremiah Owyang available at: http://www.slideshare.net/jeremiah_owyang/sharingnewbuying

[xxiv] See, Commission Notice, para. 20.

[xxv] See, Commission Notice, para. 42.

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9 March 2015
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Non classé

The Net Neutrality Debate: Which Path Will the Rest of the World Follow?

By Francisco Beneke*

Regulations that ban paid prioritization have been discussed in different countries around the world. Prioritizing Internet content is either allowing certain data to travel faster, to not count it towards an end user’s maximum consumption cap, or any other form of preference that an Internet Service Provider (ISP) can contract with a content provider. The first country that adopted a ban on paid prioritization was Chile in 2010. Regulation of this type was also adopted in Mexico as part of a reform package in 2012 in the telecommunications sector, which included constitutional reforms that make access to the Internet a constitutional right. Other countries that prohibit prioritization include the Netherlands and Ecuador. The last country to issue such a prohibition has been the United States amidst a heated debate. The nascent trend of regulation and the adoption of such a rule by influential countries in their regions and worldwide can be a catalyst for many other countries to discuss and eventually adopt similar regulations. Therefore, it is important to sketch and analyze the main arguments that surround the debate.

In the US, the Open Internet rules adopted by the Federal Communications Commission (FCC) ban paid prioritization by means of classifying broadband Internet suppliers as common carriers under Title II of the Communications Act. The reclassification means that the services provided as a common carrier are excluded from Federal Trade Commission (FTC) jurisdiction. This is a particularity specific to the United States legal system and, therefore, it is not something that must necessarily be an issue in other countries. Having clarified this, we can move on to the substantive arguments of the debate.

Before the FCC adopted on a divided vote (3-2) the Open Internet rules, a group of scholars wrote a letter to the FTC Commissioners requesting them to advocate against the rules. They argued that the ban on paid prioritization amounts to a per se prohibition and that there is not sufficient evidence that supports the main justifications for instituting such a broad-sweeping rule: the high likelihood of significant harm and the low likelihood of both overlooking possible pro-competitive justifications and deterring pro-competitive behavior.

Another group of scholars reacted to the aforementioned letter and wrote to the Commissioners supporting the ban. On their part, they argued that there is enough evidence on the net benefits to competition that a bright-line prohibition on paid prioritization can have. They point to the fact that the United States Court of Appeals for the D.C. Circuit found the FCC’s position as reasonable and grounded in substantial evidence in Verizon v. Federal Communications Commission, 740 F.3d 623 (D.C. Cir. 2014). In that occasion, the court stroke down the FCC’s ban but on the ground that it had relied on an inadequate statutory basis. The classification of broadband services under Title II solves that problem.

The opponents of the Open Internet rules favor a rule-of-reason kind of approach to paid prioritization. They point to an FTC report in 2007, which states that the broadband industry is a dynamic one and that it is moving towards more competition. The report also points out that it is not clear if ISPs have a clear incentive to discriminate against data from non-affiliated content providers. Furthermore, even if such discrimination takes place, the FTC argues that it is not possible to know a priori if the net effect on consumer welfare will be negative. For the academics that oppose the regulations, price discrimination will lower the costs of content providers that do not need to use a fast lane (such as email services) and only firms that rely on greater speeds need to bear a higher price (e.g. Skype).

Supporters of the regulations, on the other hand, believe that the price discrimination schemes will take an anticompetitive turn because of the gatekeeper position of ISPs.

The argument behind the claim that the effects of paid prioritization need not be anticompetitive relies on competition between ISPs as a force that will discipline the market. There are at least two reasons why on this instance the trust in market forces can be misplaced. One of them has to do with information asymmetries. The bargaining power of the ISP can be higher compared to the content provider even if it does not have a dominant market share. The ISP can bargain hard by lowering the download speeds from, for example, Netflix without fearing that its customers are going to divert to other ISPs. The reason is that it will be hard for end users to distinguish who is to blame for the lower quality of the service and, therefore, they will have a weaker incentive to switch to other ISPs. The second point has to do with switching costs. Even if one assumes that customers have perfect information, it is still costly to switch from one ISP to another because of contract commitments and brand loyalty, among other factors. This is why the supporters of the ban talk about a terminating monopoly or gatekeeping position from the part of ISPs.

In addition, the supporters of the ban argue that a rule-of-reason approach cannot be relied on because, at least in the US, the hurdle to prove exclusionary conduct is high, which will discourage many administrative and judicial complaints. Such an approach would also mean higher administrative costs in adjudicating disputes, which would be avoided by a bright-line ban on paid prioritization.

Both sides of the debate are also divided on the effects that the regulations will have on innovation. For the supporters of the Open Internet rules, the ban will promote innovation from content providers. For the opponents, forbidding paid prioritization will chill innovation on the part of ISPs.

The innovation argument of the supporters’ side is built on the idea of a virtuous cycle that flows in the following direction: when new content or apps are developed by edge providers, more people use the internet, which in turn pushes ISPs to innovate and increase their broadband capacity. In the supporters’ letter to the FTC words: “if the next Facebook has to pay for an Internet fast lane, the next Mark Zuckerberg might go into investment banking instead of creating the next big new thing on the Internet”.

The opponents of the ban do not explain in detail why innovation would be hindered by the regulations but implicit in their stance is that the price discrimination mechanism and the increased profits it can bring might act as an incentive to develop faster broadband technology (an argument akin to what patent rights do to innovators).

The issue of the effects on innovation is complex and it is hard to make a good prediction on how the innovation in these markets really works. Regarding the virtuous cycle described by the supporters of the ban, the causality can feasibly run in a different way. It might be that investments in broadband capacity and innovations that increase traffic speeds incentivize innovation on the content providers’ side. This may be true at least for developers of apps and content who  rely ever increasingly on the speed of networks. On this respect, the course of the innovation cycle is ambiguous from a prospective point of view.

Regarding the opponents’ argument on innovation effects, extracting revenue from content providers as an incentive to improve the network will come as a trade-off with innovation from the content side. In other words, paid prioritization could, in theory, promote innovation from ISPs but at the cost of less innovation from edge providers. On this instance, this is an effect that one can predict with higher certainty because paid prioritization will decrease the appropriability of benefits on the side of developers of apps, web pages, and so on.

The argument of the opponents’ side also makes sense only if the content providers’ demand for higher speeds is more inelastic than the end consumers’ demand. That is, if for every dollar less charged to consumers the ISP can charge more than a dollar to edge providers. In this case, the price discrimination scheme will allow ISPs to increase both their revenues and their incentive to innovate. However, the lower elasticity from the side of content providers can be an argument against the desirability of the trade-off between innovation from ISPs and edge providers from a dynamic perspective.

One reason to think that ISPs face a less elastic demand on the content providers side is because of the terminating monopoly that was explained above. Whereas a certain market share would not grant an ISP market power in the end user market, it could do so in the market for paid prioritization. The reason is that if an ISP is of a certain size, the content provider cannot reasonably succeed if it cannot have access to the network’s users, which in turn weakens its bargaining position against the ISP. Therefore, it is not necessary that the latter enjoy what is conventionally believed to be a dominant market share in order to extract supra-competitive rents from edge providers.

One issue that will not be analyzed in depth in this post is the discussion around the narrowness of antitrust law’s objectives and their inadequacy to protect what is at stake in net neutrality. In this respect, the position of dissenters of the ban has been misunderstood. They do not advocate for antitrust laws to solve the issue from a consumer welfare point of view, but rather for an antitrust law-like approach. They propose a rule-of-reason framework in which all relevant policy objectives must be weighed. Therefore, the criticism that consumer welfare is too narrow to justify the benefits and harms of paid prioritization is not applicable.

Finally, another point of dissention is the freedom of ISPs to manage the traffic on their network. Paying for transiting in a high-speed lane can be viewed as a way of increasing efficiency in the market. Why? Because every content provider that develops an attractive app imposes an externality on previous firms by congesting the highway. Therefore, it would only be fair if a new content provider internalizes part of the cost it causes. Nevertheless, the argument has a weak point. Even without being able to charge content providers for a toll, the ISP can still manage traffic on its network in an efficient way without the incentives of charging monopoly fees to edge providers.

To conclude, although both sides have valid arguments, a rule-of-reason approach to solve the problem causes more costs than benefits. The reliance on a case-by-case ex post solution to the problem can be misplaced because it does not account for the difficulty of developing a system that adequately deters harmful conduct. An ex post law enforcement approach would make more sense if there is reason to believe that the market will generally perform well, which is the argument the opponents of the ban make. However, for the reasons stated above, there is stronger evidence that supports the theory of a terminating monopoly held by ISPs. One can also look into other platform markets where there appeared to be competition but in the end the platforms did enjoy market power against one side of the platforms. Specifically, I am referring to the credit card payment market. Visa and MasterCard where successfully prosecuted for anticompetitive conduct against merchants that accept credit cards, followed by another ruling against American Express on similar grounds. The resemblance of the arguments in the credit card cases and on the debate around the Open Internet rules is hard to miss, and the former sets an example that tilts the balance in favor of banning paid prioritization.

*Co-editor, Developing World Antitrust

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6 March 2015
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Latin America

Uber: Competition between platforms, innovation and economic policy in Colombia

By Victor Ayalde Lemos*

The relationship between law and the digital economy has been widely discussed. Low barriers to entry and costs, an important characteristic of the digital economy, enable market participants to offer free or very cheap products. The latter means that competitive differentiation is no longer patent through price differences, but through innovation and other added values that can be offered.

The aforementioned is just a manifestation of the undeniable premise that the digital economy evolves faster than the interpretation and application of the law. This situation generates an incentive for legislators and regulatory authorities to issue new regulations or amend the existing ones in order to include the new business models. Such is the case of one of the most obvious platforms: the Internet.[1]

I consider that the intervention in the economy by legislative and regulatory bodies should be minimal. Indeed, there is evidence that regulation on digital affairs tends to be ineffective (SOPA, PIPA, Ley Lleras, Hadopi, Sinde, among others) given the fact that problems are due to mainly the lack of adaptability of incumbent market suppliers. The answer to these problems has been a mix of enforcement (to a limited extend), but mostly from the acknowledgment of firms that they must adapt to the current trends and compete through innovative competition (Itunes, Netflix, HBOgo and other on demand content services).

In regulated markets, some incumbents use, the old argument, that new businesses infringe upon the current legal framework and thus they should be banned from any economic activity. Some countries have been, willingly or unwillingly, accomplices of this undesirable behavior, which of course can represent the breach of international treaties and principles such as national treatment and most favored nation.

From an economic policy view, it could have harmful effects: discouraging investment and undermine the exercise of consumers’ fundamental right of free choices of quality products. In this context, the Uber case becomes relevant, as it will send a message regarding the path that Colombia has chosen as a business forum in a globalized and digital economy.

Professors Fox and First, from NYU law school, have considered Uber as a technology platform-app, which can have an important impact on this market globally[2]. And is under this premise that I believe that the anticompetitive effects of Uber should be assed. Otherwise, it would mean that Tappsi and Easytaxi are ground transportation companies, and that apps such as Domicilios Bogotá[3] are restaurants, and Metrocuadrado[4] is a real estate company. Consequently, it is clear that, on one side, we have the market of technology platforms and, on the other side, there are transportation services associated with these platforms. The latter is just one end of the platform that uses it as means to provide its services to the clientele that also is deciding on which platform to use to acquire the services.

Bearing the latter in mind, we now shall analyze the antitrust and unfair competition accusation against Uber, summarized as follows: (i) an alleged price fixing arrangement; (ii) excessive pricing; and (iii) unfair competition for violating the general prohibition in which all participants in the market must always respect the principle of good faith in commerce and other regulations. In order to make the right approximation to the matter, I would invite readers to approach inter and intraplatform competition in the same manner as inter and intrabrand competition.

First, lets address the price fixing allegations. In my view, this is an intra-platform problem. Uber price is calculated based on the number of users demanding the service and the suppliers at a given time. The platform price is devised so as to increase and decrease under the free play of supply and demand. Therefore, price surges offer an incentive for drivers to join the platform. All this, of course, adjusted to the traveled distance and time as it occurs in the case of taxis where there is also a fixed factor that is multiplied by the number of traveled meters. In this sense, price is set according to an algorithm vertically determined by Uber which responds to supply and demand criteria, and has the necessary elements that serve to promote competition between platforms.

Besides all of the above, it is important to understand that antitrust law embraces the idea that any vertical restriction is relevant only if it represents an abuse of dominant position. In this case, there is no such position because Uber drivers are free to associate to any platform and offer their services directly by using the commercialization channels described before. Users can freely choose between Uber, Tappsi, Easytaxi or any other transportation mode they deem convenient. Thus, both suppliers and consumers are price-takers and in this way, neither can determine price.

This takes us to the second restriction: excessive pricing. This problem is being generated by the wrong interpretation of the current legislation, blocking Uber´s access to the national market. Determining that Uber is a transportation undertaking and thus unable to render its services without a license, generates a shortage in the market, which affects all the vehicles that want to associate to multiple platforms and the users that have to choose between them.

Additionally, it is important to consider that regulated taxi fares are not protecting users. Instead, they are generating a shortage in the provision of the service and a prejudice to consumers welfare because they can´t simply get around them – this cost is much higher as users who cannot transport themselves have to sacrifice satisfaction of other necessities as well. If we allow various platforms to operate, and taxis develop their own platforms and associate to them, competition between those markets can increase in an exponential way, contently leading to a competitive market price.

Finally, in relation to unfair competition allegations, it is important to understand that these supposed restrictions are the result of the wrong interpretation of the transportation law that rules in Colombia. First they are applying transportation regulation to an app, which is a platform that acts as a meeting point between supply and demand. And also, in regard to Colombian Regulations there is no such violation as Uber associated vehicles are licensed under special transportation services pursuant to Decree 147 of 2001.

It is then clear that the Uber case is a transcendental one. The way this case is handled will set the path that will label Colombia into one of two categories. The first one, as a country ready to be included in the global economy, where the fundamental principles of an economic model are respected without discrimination or undue restrictions on market agents – such us unlawful application of regulations -, which seeks to attract new and innovative business models in support of its economic development policy. Or, a country that is hostile to the above, in which old monopolist business models are allowed to maintain their rights under the abuse of law, generating interpretations that will aim to maintain a status-quo that in my opinion, is absolutely detrimental for both suppliers and consumers.

This is an invitation for legislators and regulatory authorities. We can´t keep regulating industries without necessity, and if we do it, we must follow the proportionality and rationality principles, without forgetting the legal and economic nature of those industries. Likewise it is an invitation to the incumbent economic agents who are confronting competition, to face it with new market strategies – innovation and added value – and not by legal actions, and for consumers, to maintain and raise their voice in order to require their constitutional rights to the freedom of choice and freedom of circulation.

[1] The Federal Communications Commission has long debated weather to include the Internet as a telecommunication service or information service. One or another would enable regulatory agencies to intervene to a greater or lesser extend on this platform.

[2]http://www.slate.com/blogs/moneybox/2015/01/13/uber_competition_can_a_global_taxi_alliance_put_other_ride_apps_on_the_map.html

[3] Online Delivery Directory.

[4] Listing Service similar to Craigslist.

*Associate, Esguerra Barrera Arriaga
LLM in Global Business Law (NYU-NUS)

Note from the editors: a spanish version of this post was originally published in Lalibrecompetencia.com. This blog entry comes as part of our collaboration agreement with Lalibrecompetencia. You can also check out the presentation of this post on the February Monthly Meeting of the Center for Competition Law Studies

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