By Neil Dryden, Jorge Padilla, and Helder Vasconcelos
The growing digitalization of the economy has led to the emergence of new business models, based on multi-sided platforms, which have inspired a relatively recent but rapidly expanding strand of the economics literature on the economics of two-sided markets. (2)
This literature has given rise to many important challenges as far as competition policy enforcement is concerned. As several commentators have repeatedly highlighted,(3) the one-sided logic may be misleading in making inferences in two-sided markets. To correctly frame the competitive environment in multi-sided markets, it is, therefore, crucial to factor in the intrinsic characteristics of these markets as well as the associated economic context.
For example, due to the existence of network effects between different groups of market participants intermediated by online platforms, on the one hand, and of increasing returns to scale, on the other, these platforms typically work in markets that are prone to concentration, tipping to one or a few providers.(4) Nonetheless, as highlighted by Tirole (2019) (5):
“That today’s information-technology markets are highly concentrated is beyond dispute. In most cases, a single company dominates a given market. There is nothing abnormal about this, as users are prone to flocking to just one or two platforms, depending on the service.“
The analysis developed in the scope of the application of competition law must then carefully take into consideration both the specificities of multi-sided markets and,(6) we add, the specific business model adopted by online platforms when competing in those markets. Otherwise, competition agencies and enforcers may run the risk of misusing traditional principles and, most importantly, of failing to capture the essence of competition in multi-sided markets as well as the correct identification of their potential anticompetitive problems.
A typical concern within competition assessments in two-sided markets relates to the fact that platforms can become “bottlenecks” or “gatekeepers” that provide exclusive access to single-homing users,(7) which may grant those platforms market power vis-à-vis agents on the other side(s) of the market wishing to interact with the single-homing users.
While not disputing that this is a legitimate concern, as the exclusive access to single-homing users by a dominant firm may strengthen its competitive advantage over its competitors, eventually giving rise to anticompetitive effects if used in an abusive manner, our claim is that dealing with single-homing consumers needs not be anticompetitive and, more precisely, that the final induced competitive effects are bound to depend on the business model of the (allegedly) dominant firm. More specifically, in this paper, we investigate in detail what are the likely competitive effects of single homing in the context of hybrid platform marketplaces, i.e. marketplaces run by vertically integrated platforms which operate also as resellers.
The paper is organized as follows. In Section II we present the logic of the so-called “competitive bottleneck,” an economic concept which states that, in multi-sided markets, a platform may be granted (and exercise) significant market power whenever its end-users concentrate and single home. In Section III we present and discuss arguments in the extant economics literature regarding who benefits from single homing in platform competition. In Section IV we claim that even if consumers decide to single home when joining a hybrid-marketplace, this need not give rise to anticompetitive behavior by the online platform running the marketplace, as the nature of the induced competitive effects will critically depend, among other factors, on the specificities of the business model adopted by the platform. Finally, Section V presents some policy implications from our analysis.
This paper was originally published in the February 2021 issue of Competition Policy International’s Antitrust Chronicle.
The opinions presented here are those of the authors, Neil Dryden, Jorge Padilla and Helder Vasconcelos, who are employees of Compass Lexecon, and do not necessarily reflect the views of Compass Lexecon LLC or its management, its subsidiaries, its affiliates, its other professionals or clients.
(2) See, for instance, Evans, D.S., (2003), “The Antitrust Economics of Multi-Sided Platform Markets,” Yale Journal on Regulation, Vol. 20, pp. 325-381, Caillaud, B. & Jullien, B., (2003), “Chicken & Egg: Competition Among Intermediation Service Providers,” RAND Journal of Economics, Vol. 34, No. 2, pp. 309-328, Rochet, J.-C. & Tirole, J., (2003), “Platform Competition in Two-Sided Markets,” Journal of the European Economic Association, Vol. 1, pp. 990-1029, Rochet, J.-C. & Tirole, J., (2006), “Two-Sided Markets: A Progress Report,” RAND Journal of Economics, Vol. 37, No. 3, pp. 645-667, Armstrong, M., (2006), “Competition in Two-sided Markets,” RAND Journal of Economics, Vol. 37, No. 3, pp. 668—691, and Armstrong, M., (2007), “Two-Sided Markets: Economic Theory and Policy Implications.” In: Choi, J. P. (Ed.), Recent Developments in Antitrust, MIT Press: Cambridge, for seminal pathbreaking references regarding the economics of multi-sided platforms. See also Jullien, B., (2012), “Two-Sided B2B Platforms,” In: Peitz, M. & Waldfogel, J. (Ed.), The Oxford Handbook of the Digital Economy, Oxford University Press, providing a roadmap to this literature with a specific focus on B2B marketplaces.
(3) See e.g. Wright, J. (2004), “One-Sided Logic in Two-Sided Markets,” Review of Network Economics, vol. 3(1), pp. 44-64.
(4) The online economy has been demonstrating a tendency towards winner-takes-all outcomes. As observed by Tirole, J., (2019), “Regulating the Disrupters,” Think Outside, ING. ING Bank N.V. (available at https://think.ing.com/opinions/jean-tirole-regulating-the-disrupters), “by dint of network effects and economies of scale, the digital economy almost inexorably creates ‘natural monopolies’.” (p. 3). See also Section II in Jullien, B. & Sand-Zantman, W. (2019), “The Economics of Platforms: A Theory Guide for Competition Policy,” Toulouse School of Economics, Digital Center Policy Papers series No.1, September 2019.
(5) See Tirole (2019), op. cit.
(6) Along related lines, Tirole (2019), op. cit., underlines that: “New guidelines for adapting competition policy to two-sided markets would require that both sides of the market be considered together, rather than analyzed independently, as competition authorities still sometimes do. This will require care and a new analytical approach.” (p. 3).
(7) An economic agent single homes if she uses only one platform in a particular industry and multi-homes if she uses several.