Patricia V Galvan and Rebecca E Weinstein, US Federal Trade Commission
This is an extract from the second edition of the E-Commerce Competition Enforcement Guide - published by Global Competition Review. The whole publication is available here.
The US Federal Trade Commission’s experience with e-commerce competition issues
The United States Federal Trade Commission (FTC) is an independent law enforcement agency. The FTC protects consumers from anticompetitive mergers and conduct, including those arising in rapidly evolving digital markets. Today, many consumers begin their shopping experiences online, and businesses have responded by providing new technologies and opportunities to buy products online, leading to tremendous growth in e-commerce. These advances in technology routinely inform the dynamics of competition in both online and offline environments, and antitrust agencies must navigate these quickly moving areas by monitoring developments and evaluating conduct as it occurs.
Although the US antitrust laws have been in existence for more than a century, they have proven to be flexible tools for addressing new methods of competition and potential harms through successive cycles of ‘disruption’, including the recent digital revolution. As applied today, US antitrust enforcement relies on rigorous economic analysis of the specific facts of each case to determine whether the transaction or conduct at issue is likely to reduce consumer welfare by reducing output, raising prices, restricting quality or stifling innovation. This chapter describes recent FTC competition enforcement and advocacy efforts that respond to the challenges of the modern digital marketplace.
Merger review and enforcement
Vigorously enforcing US merger law is among the FTC’s chief responsibilities. The Commission is committed to preventing mergers that may substantially lessen competition in any market, included in digitised domains. In fiscal year 2018 alone, the FTC challenged over 20 mergers that likely would have resulted in higher prices, reduced quality or lower rates of innovation. Five of these cases resulted in litigation.
In challenged and non-challenged mergers alike, the FTC’s competitive analysis in digital markets, including e-commerce markets, is driven by the facts of each case, which are often changing in real time. In some cases, the facts provide a basis to challenge mergers that are likely to raise prices, reduce quality or choice or stall innovation. Other times, the facts indicate that post-merger markets are unlikely to experience diminished competition. Below is a description of how the FTC has applied standard antitrust considerations to mergers involving digital markets, including assessing quality competition, understanding the impact of multisided markets, considering the value of data aggregation and evaluating acquisitions of nascent competitors.
Non-price and potential competition
Many products and services, including those in e-commerce markets, compete on the basis of attributes in addition to price. Consumers may be willing to pay more for their preferred mix of price and non-price attributes, and competition on these non-price attributes can be a significant aspect of market competition. Enhanced market power can manifest in non-price terms and conditions in ways that adversely affect competition, including reduced product quality, reduced product variety, reduced service or diminished innovation. These non-price effects may coexist with price effects or can arise in their absence.
For many years, US antitrust enforcers have examined a wide variety of non-price effects when reviewing mergers. For instance, non-price effects were front and centre when the FTC sued to block the merger of the two largest online daily fantasy sports platforms that allow users to win money from each other based on their ability to construct virtual sports teams composed of real athletes. At the time of the merger, DraftKings, Inc and FanDuel Ltd were close competitors and combined would have controlled more than 90 per cent of the market for online daily sports contests. Evidence showed that intense head-to-head competition between the digital gaming giants provided both price and non-price benefits to consumers using the platforms. The Commission alleged that the proposed merger was likely to lead not only to an increase in fees charged to contest participants, but also to a decrease in the quality of the user experience on these platforms, which could manifest in a reduced size of guaranteed prize pools, slower innovation in new product features, and reduced contest formats and sport variety. The parties abandoned the transaction shortly after the FTC filed suit, and the companies continue to offer online daily contests.
Engaging in new product development is another way firms compete, and this type of innovative activity can lead to product improvements, cost savings or entirely new offerings. The FTC has taken action to prevent a reduction in this type of innovative activity, even when those efforts have not yet led to a new product. For example, a merger between an existing competitor and a firm with a product in development may violate US merger control law by eliminating a potential competitor that could infuse the market with more competition.
Similarly, a merger between two firms that are both working to develop new products may substantially lessen future competition where those firms are two of only a few likely entrants into a developing market. For instance, in 2013, Nielsen, the leading provider of television audience measurement services, proposed to buy Arbitron, the leading supplier of radio audience data. Consumer viewing habits were changing in response to new distributors of video programming, such as online and subscription streaming services, and media companies and advertisers were looking for measurement services across all platforms, including information on consumers that used more than one platform to view content. Both firms had developed plans, invested money and reached out to customers to begin marketing cross-platform measurement services in beta form. Customers believed that eventually Nielsen and Arbitron would develop competing products that would be important to online businesses – and that, at the time of the merger, the two companies were the best positioned to develop a new cross-platform measurement product relative to others. On this evidence, the Commission concluded that each company could be considered a likely future entrant, and that the elimination of one would likely result in a lessening of future competition in the market of cross-platform measurement.
Multisided platforms, including zero-price products and services
Multisided platforms provide products and services to distinct user groups, which are linked across the platform through indirect network effects: that is, the value to participants on one side of the platform increases when there is more activity on the other side. To be successful, a platform must cultivate users on both sides of its platform. Sometimes, the platform will offer free products or services to users on one side of the market to induce them to participate for the benefit of users on the other side of the platform. As a result, products and services provided to users at zero price are particularly common in online multisided platforms. Assessing quality competition is of particular importance in markets with zero-price products and services where quality differentiation can be key to attracting users.
With the emergence of multisided platforms in a variety of digital markets, courts and academics are working through the implications of platform economics for antitrust analysis. While the law and scholarship is developing, the FTC remains watchful for signs of competitive harm in markets where platform competition is present.
The FTC’s investigation into the 2015 merger of Zillow, Inc and Trulia, Inc is a recent example of the Commission’s experience with such multisided platforms. At the time of the merger, Zillow and Trulia were the first and second-largest consumer-facing websites providing potential homebuyers with free information on houses for sale. Both portals also sold advertising space to real estate agents seeking to offer real estate broker services. Staff investigated whether the consumer-facing zero-price side of the market would experience a reduction in innovative product offerings because of the merger – that is, whether the merger would substantially lessen competition for consumers interested in researching home buying and selling online. On the advertiser platform side, staff also assessed whether the merged entity would likely increase the price of advertising for real estate agents. Ultimately, the Commission determined that it was unlikely that users on either side of platform would be harmed. Consumers would continue to have options in the form of other portals like Realtor.com, online brokerage services such as Redfin and other consumer-facing online real estate products. On the other side, real estate agents would have options after the merger that would prevent the merged firm from raising advertising rates. In short, the FTC considered qualitative and quantitative competitive dynamics on both sides of the market to reach the conclusion that the merger was unlikely to violate Section 7 of the Clayton Act or Section 5 of the Federal Trade Commission Act (the FTC Act).
The importance of data
Over the years, the FTC has applied competition analysis to examine the many ways in which firms compete using data. For example, data can be a product that is bought and sold, such as with a database. Data can be an input for firms that provide analysis, verification or other analytics to customers. In some cases, the need for access to data may constitute a barrier to entry. Data also can be a medium of exchange, with consumers or businesses providing data in return for zero-price products and services. Data may be relevant to multiple dimensions of competitive analysis in any particular case, including market definition, product differentiation via quality competition and innovation. Thus, while the applications for and types of data continue to evolve, traditional antitrust principles provide a flexible set of tools to analyse how data affects competition in e-commerce and other digital markets.
During merger review, the FTC will examine the competitive significance of data given the realities of competition in the markets under review. For example, in a merger involving real estate data and analytics companies, CoreLogic and DataQuick, the Commission examined both market definition issues for the data products sold by the merging parties as well as data-related entry barriers. The merging parties competed directly in the provision of real property information, analytics and services through custom products for customers in the lending, investment and real estate industries. Firms in the market integrated current and historical data collected from local public records into a national data set for use in value-added products, such as risk and fraud management tools, valuation models and consumer-facing real estate websites. The FTC determined that the geographic scope of the market for national assessor and recorder bulk data was worldwide because market participants could provide the product from anywhere in the world.
The FTC also concluded that although bulk data was publicly available, the cost of collecting, aggregating and updating the data created significant barriers to entry in the market. After the merger, only two firms – CoreLogic and another – would own a historical database, and neither firm would have the incentive to give a licence for that data to a potential entrant who would compete with them in the market. As a remedy, the FTC required CoreLogic to grant a licence to a new company, RealtyTrac, so that it could step into the shoes of DataQuick to maintain the competitive status quo post-merger.
When data is a critical input for downstream competitors – for example, because the data allows downstream products or services to be highly customised or otherwise adapted to demand – the FTC may closely scrutinise mergers involving two firms competing with data-derived products. For example, the Commission moved to block Verisk Analytics, Inc’s proposed acquisition of EagleView, alleging that the proposed transaction would result in a virtual monopoly in the US market for rooftop aerial measurement products used by insurers to estimate repair costs for property damage claims. Prior to the merger, EagleView was the leading provider of rooftop aerial measurement products that relied on its proprietary software to analyse aerial images. Verisk provided the leading software platform used by insurers to process roof damage claims, and had recently entered into direct competition with EagleView by developing its own library of high-resolution aerial images. With other firms being much more distant competitors, the Commission alleged that the elimination of the firms’ close competition would likely lead to higher prices and reduced incentives to innovate. After the Commission voted to challenge the acquisition, the companies abandoned their deal.
The application of competition and consumer protection law
The FTC is one agency with two missions: promoting competition and protecting consumers. The FTC has consumer protection authority under Section 5 of the FTC Act to prevent unfair and deceptive acts or practices, including a failure to keep privacy promises made to consumers to protect their data. Consumer protection concerns provide a separate basis for examining the way that firms collect data from consumers, and the FTC’s Bureau of Consumer Protection has aggressively pursued privacy and data security cases in broad areas of children’s privacy, financial privacy, health privacy and the internet of things. In some circumstances, a particular set of facts may raise both competition and consumer protection issues, especially in e-commerce markets where firms collect data from consumers.
To date, there is little case law dealing with the implications for antitrust analysis of some consumer data concerns, including privacy in particular. However, privacy policies, privacy options for consumers and corresponding mechanisms for data protection have the potential to form a quality basis on which businesses compete. Although the FTC has not yet challenged a merger based on privacy competition, the FTC has experience in analysing non-price elements and the tools to address a non-price competition concern when it arises.
Spotlight on acquisitions of nascent competitors
Concerns raised over mergers in the digital space often focus on the prevalence and impact of large firms’ acquisitions of emerging competitors. While there is not yet robust empirical evidence that competitively troubling acquisitions of nascent competitors are, as a general matter, widespread across high-technology markets, the law is nevertheless clear: under current interpretations of both Section 7 of the Clayton Act and Section 2 of the Sherman Act, it is unlawful to harm competition by acquiring nascent or potential competitors. Accordingly, the FTC routinely assesses the competitive implications of acquisitions involving small but growing market participants.
For instance, in March 2018, the FTC challenged the merger of market leader CDK Global and far smaller competitor Auto/Mate. According to the complaint, the transaction would have reduced competition in the already concentrated US market for specialised software known as dealer management systems. These systems are used by franchise car dealerships to manage every aspect of their business, including accounting, payroll, parts and vehicle inventory, service repair scheduling and vehicle financing. Auto/Mate competed with CDK and other larger franchise dealer management system providers and won business by offering lower prices, flexible contract terms, free software upgrades and training, and high-quality customer service. The Commission’s complaint alleged harm to current competition from the merger, but also stressed the potential for harm to future competition given Auto/Mate’s substantial efforts to grow its single-digit market share through important price and non-price competition, including continuous software innovations and a willingness to work with third-party app developers. Additionally, Auto/Mate’s outsized impact on existing platforms indicated that the merger would dampen competition from a key emerging rival. Shortly after the FTC issued its complaint, the parties abandoned their proposed transaction.
The Commission has taken action to undo the acquisition of a nascent competitor to resolve charges that the acquisition helped the incumbent firm maintain its monopoly in violation of Section 2 of the Sherman Act. Similarly, a series of small acquisitions can lead to a claim that prior acquisitions substantially reduced competition in violation of Section 7, with relief in the form of fencing-in behaviour of the firm on a forward-going basis. Although these actions did not involve e-commerce products or services, the Commission has a number of tools to promote competition by preventing the acquisition of smaller or emerging competitors.
In addition to its role in reviewing mergers and acquisitions, the FTC also vigorously investigates and prosecutes anticompetitive conduct, including in high-technology and digital markets. Under the US antitrust laws, it is unlawful for a company to monopolise or attempt to monopolise trade, meaning that a firm with market power cannot act to maintain or acquire a dominant position by excluding competitors or preventing new entry through anticompetitive conduct. It is not illegal for a company to have a monopoly, to charge high prices or to try to achieve a monopoly position by aggressive methods. A company violates the law only if it tries to maintain or acquire a monopoly through anticompetitive conduct.
The Commission’s most recent conduct litigation, FTC v. Surescripts LLC, extends the FTC’s long-standing healthcare expertise into digital markets and raises key issues that also arise in e-commerce cases, including multisided market definition and zero-price market analysis. The Commission’s complaint, filed in federal court, alleges that Surescripts employed both vertical and horizontal restraints to maintain at least a 95 per cent market share in two electronic prescription markets: routing and eligibility. E-prescribing provides a safer, more accurate and lower-cost means to communicate and process patient prescriptions compared with traditional paper prescribing. According to the complaint, Surescripts set out to keep e-prescription routing and eligibility customers on both sides of each market from using additional platforms (a practice known as multi-homing) using anticompetitive exclusivity agreements, threats and other exclusionary tactics. Specifically, the FTC alleges that Surescripts used loyalty and exclusivity contracts to increase the costs of routing and eligibility multi-homing. The litigation is still in its early phase, but the case is nonetheless indicative of the FTC’s willingness to bring anticompetitive conduct cases with digital dimensions under the right circumstances.
The FTC also applies standard antitrust analysis to agreements among e-commerce firms that unreasonably restrict competition. For example, in 2016, the FTC charged 1-800 Contacts, the nation’s largest e-commerce retailer of contact lenses, with entering into a web of unlawful agreements with 14 rival contact lens sellers to suppress online search advertising auction competition. The FTC’s administrative law judge conducted a three-week administrative trial and found that the auction agreements restrict truthful and non-misleading internet advertising to consumers in violation of the antitrust laws. In November 2018, the Commission upheld the administrative law judge’s initial decision, finding that the agreements prevented online contact lens retailers from bidding for search engine result ads that would inform consumers that identical products were available at lower prices. The Commission found that the restraints artificially reduced the prices that 1-800 Contacts pays for search ads, as well as the quality of search engine results delivered to consumers. Although the opinion directly addresses restraints to search engine advertising for contact lenses, it carries broader implications for preserving competition through online advertising. The matter is currently on appeal before the United States Court of Appeals for the Second Circuit.
Research and advocacy
In support of the FTC’s enforcement efforts, the Commission actively collects, organises, and disseminates facts and data about digital economies. The FTC’s public research touches on technology and e-commerce related areas, including big data, the sharing economy and the internet of things. Of particular note, the Commission recently organised a series of hearings to discuss issues of 21st century competition and consumer protection law. In hearings that concluded in June 2019, panellists discussed a variety of e-commerce topics, such as: the identification and analysis of collusive, exclusionary and predatory conduct by digital and technology-based platform businesses; the antitrust framework for evaluating acquisitions of potential or nascent competitors in digital marketplaces; privacy, big data and competition; and algorithms, artificial intelligence and predictive analytics. The public comments and panel materials, which are available on the FTC’s website, will help inform and stimulate the evolving considerations for key digital enforcement and policy issues.
The FTC’s Technology Task Force
Building on the FTC’s existing experience in digital markets, the FTC launched a new Technology Task Force in April 2019 as a specialised unit to address anticompetitive conduct of all kinds in high-technology markets. The team of attorneys drawn from the Bureau of Competition is supported by several dedicated Bureau of Economics staff economists. The Technology Task Force is already hard at work investigating potential competitive concerns in a range of markets across the digital economy.
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