Digital Platform Regulations-Focusing on Competition Law

Digital Platform Regulations-Focusing on Competition Law

 

Abstract

Due to their unique features of having two-sided or multi-sided market and network effect, digital platforms can be both advantageous and disadvantageous to customers and suppliers. Although digital platforms facilitate the connection between sellers and buyers, they also tend to monopolize in the given market and treat suppliers unfairly, which are their users and competitors at the same time. In order to protect the free and fair competition, KFTC is currently enforcing Monopoly Regulation and Fair Trade Act to regulate digital platforms’ abuse of dominance, business combination, and unfair trade practices. However, the Act may not be perfectly effective, as it is legislated to target business entities of traditional markets with only one side. In order to be prepared for the newly emerged form of business, other approaches to regulation are being suggested; revising the Act on Fair Transactions in Large Retail Business so that the definition of “large retail business entity” includes digital platforms and adopting Platform-to-Business Regulation of the EU. Although they all may be possible means to ensure free and fair competition in a marketplace, regulations should be carefully planned, considering both anti-competitive effects and efficiency effects of digital platforms.

 

I. Introduction

These days, shopping through digital platforms, such as open markets, O2O(Offline to offline) service applications, and search engines became prevalent. Due to this technological progress, customers can buy items more conveniently, without having to visit offline stores, while small and medium-sized enterprises can acquire an easier access to markets. Korea is one of the countries where both customers and enterprises depend heavily on digital platforms as the online shopping market grows at a rapid pace. Open markets such as Interpark, G-market, and Coupang, delivery applications such as Baemin, Yogiyo, and search engine like Naver are being widely used.

However, despite the benefits of digital platforms, the dominance of key platforms in certain markets often leads to competition issues, such as abuse of market power and unfair trade practices, thereby affecting customer welfare and small enterprises. Therefore, a need to regulate the digital platforms is being suggested. This article will be covering features of digital platforms, specific competition issues caused by digital platforms, and legislations currently being enforced in Korea or under discussion to regulate such enterprises.

 

II. Features of Digital Platforms

A digital platform is defined by the European Commission as “an undertaking operating in two or multi-sided markets, which uses the Internet to enable interactions between two or more distinct but interdependent groups of users so as to generate value for at least one of the groups.” [1] In online marketplaces, digital platforms often facilitate commercial interactions between supplier group and consumer group.

A network effect is one of the important features of digital platforms. The network effect refers to a phenomenon where a user of a good or service affects other existing or potential users. For example, in an open market, as more various types of products and suppliers gather, more customers will visit the market. If so, more suppliers will be willing to sell their products through the platform. Eventually, both enterprises and customers benefit from the network effect.

Therefore, it is essential for platforms to dominate the market in advance and acquire as many users as possible. In order to do that, platforms are likely to use unfair strategies, such as excluding their competitors or exploiting their business partners. Once the platforms become dominant, it becomes easier for them to lessen competition in the marketplace.

 

III. Competition Issues

Due to digital platforms, two types of problems, regarding free and fair competition, are being suggested: abuse of market-dominant position and unfair trade practices. After discussing these two issues in detail, legislative efforts to regulate them in Korea will be explained.

  1. Abuse of Market-Dominant Position

When dominant platforms monopolize markets, consumer welfare is likely to be harmed. As a result of lack of competition, prices may increase, while choice decreases. Monopolization also harms suppliers, who depend heavily on the platforms. Online platforms function as a broker between buyers and individual sellers, and their main source of profit is brokerage commission and advertisement fee paid by the sellers. If a dominant platform increases the commission and fee, suppliers have no choice but to follow the changed terms.

These days, digital platforms tend to strengthen their market power through vertical or horizontal integration. Amazon started as an online bookstore, but gradually expanded its business vertically into upstream and downstream markets. Now it is engaged in diverse businesses, such as fashion design, music, movie, consumer goods, and even manufacturing and retailing its own brands. Since Amazon competes with other traders on its platform, it became possible to perform abusive and exclusionary conducts like predatory pricing and discrimination in terms of fees to its competitors at the retail level.[2] Horizontal mergers also reduce competition as they eliminate competitors in relevant markets.

  1. Unfair Trade Practices

Some platforms attempt to exclude their competitors from the market by unfairly restricting business activities of their suppliers. Specifically, in order to secure more customers, they often force their suppliers to stop selling goods on their competing platforms or offer them at a higher price.

Digital platforms’ abuse of superior position over suppliers are also often found. As platforms have become an important access for sellers to survive in a marketplace, there is an inequality of bargaining power between platforms and sellers. Therefore, platforms exploit the sellers by forcing them to accept disadvantageous contract terms, accomplish sales target, or pay optional services fee. For example, Yogiyo, a food delivery platform, imposed a ‘minimum price guarantee policy’ to restaurants registered with it. This policy banned the restaurants from selling food at lower prices by other sales routes, such as other delivery applications or ordering directly by phone. So far, Yogiyo terminated its contract with 43 restaurants that did not comply with the rule. This year, Korea Fair Trade Commission fined Yogiyo 468 million won for abusing its superior position.[3]

 

IV. Related Legislations

  1. Monopoly Regulation and Fair Trade Act (the “Fair Trade Act”)

               (1) Background

Monopoly Regulation and Fair Trade Act is recognized as Korean competition law, and it focuses on regulating abuse of dominance, cartel, business combination, concentration of economic power, and unfair trade practices. It is mainly applied by Korea Fair Trade Commision (KFTC).

               (2) Purpose

The purposes of this Act are:

to promote fair and free competition, to encourage thereby creative business activities, to protect consumers, and to strive for balanced development of the national economy, by preventing business entities from abusing their market-dominant positions and any excessive concentration of economic power and by regulating illegal cartel conduct and unfair trade practices (Article 1).

               (3) Main Contents

               1) Abuse of Dominance

This Act uses the term “market-dominant business entity” to refer to dominant enterprises in the relevant market. Specifically, this term refers to ‘a business entity, which is a supplier or customer in a particular business area, in a position to determine, maintain, or change the price, quantity, quality, or other terms and conditions of transactions of specific goods or services either alone or together with other business entities’ (Subparagraph 7 of Article 2). The criteria for determination of market-dominant positions is as follows: if a business entity’s market share is at least 50% or the aggregate of market shares of two or not more than three business entities is at least 75%, such business entities shall be deemed market-dominant entities (Article 4). However, a market-dominant business entity should be determined not only by its market share, but also by considering aspects like whether and to what extent any barriers to enter a market exist, and the relative scale of competitors comprehensively (Subparagraph 7 of Article 2).

The abusive practices of market-dominant entities are classified into five types by this Act: abusive pricing, control of production output, interference with business activities, limiting market entry of a new competitor, and exclusion of competitors or hindrance to consumers’ interests (Article 3-2).

               2) Business Combination

Combination of enterprises has both advantages and disadvantages. Through business combination, enterprises are able to reduce investment risks, reduce costs based on the scale of economy, and strategically respond to technology innovation and market changes. On the other hand, it can limit competition in the market when used as a strategy to artificially dominate the market. In order to prevent any anticompetitive harms and benefit from the efficiency, this act requires enterprises to report their combination so that KFTC can thoroughly review it through legal and economic analysis.[4]

The Fair Trade Act categorizes the combination of enterprises into five types: acquisition or ownership of stocks, concurrent holding of an executive position, merger, acquisition of business, and participation in the establishment of a new company (Article 7 Clause 1).

               3) Unfair Trade Practices

Unfair trade practices refer to unfair or unjust trading conducts of enterprises, which may disturb competition orders in a market. Unlike restricting abuse of dominance, this chapter of the Act regulates not only market-dominant entities, but any business entities, and focuses on rectifying the conduct itself, rather than changing the market structure to be more competitive.

General unfair trade practices are categorized into nine types by KFTC:

unfairly refusing a transaction, discriminating against a transacting party, unfairly excluding competitors, unfairly soliciting customers, unfairly coercing customers, trading with a transacting party by unfairly taking advantage of one’s bargaining position, trading under terms and conditions which unfairly restrict business activities of a transacting party, disrupting business activities of another enterprise, and unfair provision of funds, assets, manpower, etc (Article 23 Clause 1).

According to a research done by Korea Federation of Small and Medium Business (KBIZ), in case of Korean digital platforms like open markets and delivery applications, practices like abusing their bargaining position to impair free decision making of individual sellers or restricting parties with which the sellers may transact are especially common.[5]

 

  1. Legislation under Discussion

Recently, researchers are emphasizing the necessity to find new methods of regulating digital platforms. They say that although the Fair Trade Act is a possible means, it is not completely suitable for restricting anticompetitive conducts of platforms. Considering the fact that the Act aims to promote free and fair competition in general, and not specifically target digital platforms, it would be difficult for KFTC to monitor them intensively and enforce the law.[6] In addition, when it comes to digital platforms, it is difficult to define the relevant market or judge their dominance in the market. Even when platforms do not meet the criteria for determining dominance according to competition laws, they actually may be dominant enough to force unfair practices to platform users.[7]

               (1) Revision of Act on Fair Transactions in Large Retail Business

Some people suggest to revise the Act on Fair Transactions in Large Retail Business to solve this problem. This Act is applied to large retail business entities that is judged to have superior power over suppliers, or sales floor tenants and protects those who have less bargaining power by prohibiting the large retail business entities from reducing in payment of goods, refusing or delaying receipt of goods, unjustly shifting burden of sales promotional expenses, and forcing exclusive dealing (Article 7, 9, 11, 13). This act is recognized as a strong regulation because it shifts the burden of proof from KFTC to large retail business entities and a high fine. Currently, the Act cannot be applied to digital platforms because it defines the “large retail business entity” as a person “who source goods used by consumers from multiple business entities and sell them” (Subparagraph 1 of Article 2). Since platforms mostly connect transactions between buyers and sellers, instead of selling the goods directly to the buyers, the Act should be revised to be applied to them.

               (2) Adoption of Platform-to-Business Regulation of EU

Others suggest adopting the so called ‘Platform-to-Business Regulation of the EU’ (EU P2B Regulation). On June 20th, 2019, the EU enacted「Regulation (EU) 2019/1150 of the European Parliament and of the Council of 20 June 2019 on promoting fairness and transparency for business users of online intermediation services」. This rule includes banning on certain unfair practices, such as providing terms and conditions in unintelligible language and sudden, unexplained account suspensions; increasing transparency in online platforms by disclosing the main parameters they use to rank goods and services on their site; and seeking for new avenues for dispute resolution like setting up an internal complaint-handling system.[8]

 

V. Conclusion

Digital platforms like open markets, search engines, and delivery applications are the results of technological development that benefit diverse economic players, including customers, suppliers, and the platforms themselves. Although it is important to detect and punish enterprises that evidently disturb markets, it is also important not to discourage the relatively new, innovative field of business by over-regulation. In that light, neither revising the Act on Fair Transactions in Large Retail Business nor adopting EU P2B Regulation may not be appropriate. As a strong regulation, the former may restrict innovative platforms from attempting different business methods, while the latter is yet more of a declaration rather than an enforceable law. In order to establish a principled market economy and grow potential enterprises comparable to global giants like Amazon and Google, regulations should be carefully planned, considering both anti-competitive effects and efficiency effects of digital platforms.

 

 

 

 

References

“Public consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy.” European Commission, 2015-2016. ec.europa.eu/digital-single-market/en/news/public-consultation-regulatory-environment-platforms-online-intermediaries-data-and-cloud. Accessed 26 July 2020.

Gokce, Ebru. “Competition issues in the digital economy UNCTAD Background Note 2019.” 2019.

Shin, Ji-hye. “Antitrust watchdog fines Yogiyo W478m for market power abuse.” The Korea Herald 2 June 2020. koreaherald.kr/search/list_name.php?byline=Shin+Ji-hye&np=0. Accessed 26 July 2020.

Fair Trade Commision. www.ftc.go.kr. Accessed 26 July 2020.

Korea Federation of Small and Medium Business. “A survey on difficulties of transacting parties of open markets, social commerce, and delivery application.” Kosbi DB, August 2018. db.kosbi.re.kr/kosbiDB/front/functionDisplay;jsessionid=526420A9350220C95D6BD62FD86A71DC?menuFrontNo=3010&menuFrontURL=front/categoryResearchDetail&dataSequence=181022K4. Accessed 25 July 2020.

Cha, Ji-Yeon. “Platform regulation, traditional approach is not valid…a need for improvement in law.” Yonhap News 19 June 2020. www.yna.co.kr/view/AKR20200619080700002. Accessed 22 July 2020.

Choe, Chang-Su. “Comparative Analysis on Global Regulatory Systems for Digital Platforms – Focused on Antitrust Laws-.“The Justice, vol. 177, 2020, 325-354.

“Digital Single Market: EU negotiators agree to set up new European rules to improve fairness of online platforms’s trading practices.” European Commission, 2019.   ec.europa.eu/commission/presscorner/detail/en/IP_19_1168. Accessed 21 July 2020.

 

 

[1] “Public consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy.” European Commission, 2015-2016. ec.europa.eu/digital-single-market/en/news/public-consultation-regulatory-environment-platforms-online-intermediaries-data-and-cloud. Accessed 26 July 2020.

[2] Gokce, Ebru. “Competition issues in the digital economy UNCTAD Background Note 2019.” 2019.

[3] Shin, Ji-hye. “Antitrust watchdog fines Yogiyo W478m for market power abuse.” The Korea Herald 2 June 2020. koreaherald.kr/search/list_name.php?byline=Shin+Ji-hye&np=0. Accessed 26 July 2020.

[4] Fair Trade Commision. www.ftc.go.kr. Accessed 26 July 2020.

[5] Korea Federation of Small and Medium Business. “A survey on difficulties of transacting parties of open markets, social commerce, and delivery application.” Kosbi DB, August 2018. db.kosbi.re.kr/kosbiDB/front/functionDisplay;jsessionid=526420A9350220C95D6BD62FD86A71DC?menuFrontNo=3010&menuFrontURL=front/categoryResearchDetail&dataSequence=181022K4. Accessed 25 July 2020.

[6] Cha, Ji-Yeon. “Platform regulation, traditional approach is not valid…a need for improvement in law.” Yonhap News 19 June 2020. www.yna.co.kr/view/AKR20200619080700002. Accessed 22 July 2020.

[7] Choe, Chang-Su. “Comparative Analysis on Global Regulatory Systems for Digital Platforms – Focused on Antitrust Laws-.“The Justice, vol. 177, 2020, 325-354.

[8] “Digital Single Market: EU negotiators agree to set up new European rules to improve fairness of online platforms’s trading practices.” European Commission, 2019. ec.europa.eu/commission/presscorner/detail/en/IP_19_1168. Accessed 21 July 2020.

 

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Posted in 2020, Autumn 2020.