The growing e-commerce platform have impacted the way competition works and the type of competition concerns that may arise.
Most brands are making their presence online.
Thus, today’s trading platforms and market place involves 3 important situations:
1) products that are available only on the Internet -e.g. some software, games or magazines can be bought only on-line, (pure on-line sales);
2) products that are available in the same format from physical and on-line distributors (mixed sales/same format); and
3) products that are available in different formats in the two distribution systems – e.g. home video and streaming, (mixed sales/different formats).
So, brick and mortar shops & traditional distribution networks now exist parallel with direct e-tailing networks, as defined in Kirsch and Weesner (2005).
What are the conflicts that may arise between these two competing distribution networks?
We will answer this question by explaining how the online market has shaped the interpretation of competition law and the main features of e-commerce that can affect retail competition.
To begin with, e-commerce involves four issues:
- search costs,
- how e-commerce affects the geographic scope of transactions,
- the distribution cost and
- how e-commerce affects the existence of information asymmetries between consumers and suppliers.
As a result, Internet is making price competition more intense, geographic markets are becoming wider and it is also allowing consumers to buy products that would not be available in the physical world. Network effects become significant after a certain subscription percentage has been achieved, called critical mass.
A key business concern must then be how to attract users prior to reaching critical mass. One way is to rely on extrinsic motivation, such as a payment, a fee waiver, or a request for friends to sign up. A more natural strategy is to build a system that has enough value without network effects. Then, as the number of users increases, the system becomes even more valuable and is able to attract a wider user base.
Metcalfe’s Law says that the utility of being connected to the network not only grows, but does so exponentially.
While these developments should lead to an increase in consumer welfare, the emphasis on price competition may in some cases reduce the ability and willingness of retailers to undertake investments that can improve consumers’ welfare. Moreover, due to network externalities it may be harder for new firms to enter electronic markets and thus e-markets tend to be more concentrated.
There is a new pricing policy for the e-market place called “across platforms parity” agreements or “retail most favoured nation” clause (retail MFN). It is an agreement between a seller and an electronic trade platform where the seller undertakes not to charge on that platform a price that is higher than the price that he charges on other platforms.
The competition problems that this practice may cause are similar to the problems raised by a “best price guarantee” or “ reserve price maintenance “ ( RPM) that a retailer will either match the lower price of a rival or refund the difference to the consumer. A particularly relevant situation is where several on-line retailers have a MFN clause with the same supplier.
Both practices have also a significant potential for facilitating collusion with the most potential harm being the foreclosure or deterrence effect to potential discounters.
This is because the on-line retailer is controlling the minimum price that is being set in the market and it can manipulate that price by increasing its commission. This is an additional element of harm that may arise with retail MFN.
A vertical agreement between a manufacturer and a distributor can affect competition in two distinct markets:
The upstream market – where the manufacturer competes with similar firms (inter-brand competition – within differentiated products that compete on the basis of brands or labels like Coca Cola vs. Pepsi-Cola, Kellogg’s Corn Flakes vs. Nabisco’s Bran Flakes )
The downstream market – where retailers compete against other retailers (intra-brand competition on price or non-price terms. For Eg. a pair of Levi jeans may be sold at a lower price in a discount or specialty store as compared to a department store but without the amenities in services that a department store provides)
First, inter- brand competition guarantees that manufacturers will strive to innovate their products and to choose the features that meet consumers’ preferences. Second, manufactures will also compete by offering consumers the lowest possible price; since consumers pay the retail price, they seem to have no reasons to limit price competition among their own retailers, unless this is the only way to induce retailers to provide ancillary services or to invest in promotional activities that benefit consumers more than a limited price reduction.
The increased transparency and cost efficiency brought about by the e-commerce is often seen as a positive evolution of trade towards increased competition. The Internet is generally considered as a catalyst for consumers purchasing ability. Consumers can easily access a huge amount of information, can compare prices, have a wider choice of products, virtually reach any seller around the world, and their purchasing choice is aided by intermediaries often providing pre- and post- sales information and services.
Reduction in search costs of consumer , operating costs for firms are added benefits.
By and large, e-commerce is believed to have pro-competitive effects, and it enjoys a special protection in the European Union (EU) as it is consistent with the political goal of the Internal Market.
Many producers capitalize on this cost-saving and an enlarged consumer base.
Thus, E-commerce has transformed marketing and distribution systems.
- Strong network effects may tip markets toward creating dominant players like e-tailers acquiring / merging;
- Consumers may be deceived more readily by misleading and non-verifiable information.
Potential anti-competitive impact of vertical restraints –
Rise in price – how
By exclusively dealing with few brands or not giving choice of varied brands to the customer by restricting the number of retailers that can sell a certain product, one limits intra-brand competition resulting in price rise. This also allows restricting the price from falling below the minimum resale price.
However, negative effects of a price increase on consumer welfare would need to be compared to any efficiency benefits vertical restraints bring. One would have to control for product quality, service quality, matching consumers with the items they want, etc.
A manufacturer earns a profit off the wholesale margin. A vertical restraint is going to be profitable for a manufacturer only if it allows him to sell more units or reduces his cost – through scale economies or through lower distribution costs – or somehow raising the wholesale price.
The Justice Department filed a lawsuit last year to unwind the merger, alleging Bazaarvoice used the PowerReviews merger to remove its most significant rival.
The companies have supplied online-ratings platforms and other social media services for retailers including Best Buy Co. and Home Depot Inc. and a wide range of product manufacturers. After the merger, nearly 300 of the top 500 Internet retailers were Bazaarvoice customers, the department said in court papers.
Bazaarvoice argued that the Justice Department’s case ignored fast-changing market realities, including the competition provided by other firms. The company also said the government lawsuit failed to acknowledge the looming threat from companies like Amazon.com Inc. that sell e-commerce platforms to retailers.
- Authorities may welcome new business models that promise consumers low prices and good levels of service. However, the mechanisms of rivalry between online platforms and other retailers will continue to be scrutinized as authorities try to identify whether consumers are benefitting from these models or whether competition is being harmed.
- Physical and non-physical goods – authorities increasingly need to grapple with the challenges of applying traditional rules on acceptable restrictions in distribution agreements to online selling, in both physical and non-physical goods. The challenge for suppliers and online retailers is therefore to be able to navigate an uncertain regulatory landscape.
Mergers – increased merger activity will allow authorities to examine the competitive dynamics between online and traditional retailers in more sectors. The approaches taken in these cases is still developing.
In the UK, for example, the Competition Commission is considering whether online gambling exercises a competitive constraint on bricks and mortar casinos (eg Rank/Gala), having previously found that internet sales are increasingly acting as a constraint on high street travel agents (eg Thomas Cook/Co-operative Group/Midlands Co-operative).