By Liu Cheng, Audrey Li, Yang Jingru and Nick Torres, Corporate & Commerical Group, King & Wood Mallesons
A few days ago, the State Administration for Market Regulation (“SAMR”) and Shanghai Administration for Market Regulation (“Shanghai AMR”) successively issued two administrative decisions punishing two Internet platform companies for engaging in “either-or choice” practices (a type of exclusive dealing arrangement) on their in-platform merchants. On April 13, 2021, SAMR, Cyberspace Administration, and State Taxation Administration also held an administrative guidance meeting with 34 platform undertakings, urging them to conduct comprehensive self-inspection and rectify any potential anticompetitive practices or behavior within one month. Some platform undertakings have issued their commitments, promising not to engage in anticompetitive practices.
These two decisions did not only provide guidance on “either-or choice” practices in the Internet field, more importantly, they illustrate the enforcement trend towards Internet companies in abuse of dominance cases, which appears to have changed tremendously since the so-call “3Q war” era in year 2014, in China. In this article, we examine two administrative decisions to ascertain how the recent enforcement trend in China is evolving, and we pay particular attention to how, during an investigation, the competition authorities in China are defining the relevant market and how they would establish whether an Internet company has a dominance position.
I. Definition of the Relevant Market
In these two “either-or choice” cases, both of SAMR and Shanghai AMR clearly defined the relevant markets as a preliminary issue. This practice is consistent with the principle that generally the relevant markets should be first defined in a case involving the abuse of market dominance as stipulated in the Antitrust Guidelines for the Platform Economic Industry (“Platform Guidelines”). When defining the relevant market, the following two aspects of the market definition are particularly noteworthy: (1) considering the characteristics of two-sided markets; and (2) considering whether further segmentation of the market is possible.
- Considering the characteristics of two-sided markets: In the two cases, both of the platforms deal with the merchants (i.e., the in-platform merchants) on one side, and deal with the users (i.e., the consumers) on the other side. The merchants and users conclude transactions directly on the platforms. When defining the market, the enforcement authorities (i.e. SAMR and Shanghai AMR for these two cases) carried out a demand-side substitution analysis from the perspective of both merchants and users.
It is also noteworthy that SAMR and Shanghai AMR did not define multiple relevant markets, (e.g. separate markets in terms of merchants and users). Instead, SAMR and Shanghai AMR considered the network effects of the platforms and defined the relevant markets as of the online retail platform service market in China (in SAMR’s case), and online catering delivery platform service market that provides English services in Shanghai (in Shanghai AMR’s case). This determination methodology is consistent with the precedents in other jurisdictions, i.e. for “transaction platform”, the relevant market could be defined as a single market and there is no need to define separate markets for both sides of the platform.
- Further segmentation of the market is possible: In the case investigated by SAMR, SAMR considered further segmenting the relevant market based on B2C online retail and C2C online retail, as well as based on different commodity categories sold on the platform in defining the relevant market. However, ultimately SAMR believed that there is no need to segment the online retail platform service market in this case. We understand that the most likely reason behind this determination is that given the platform involved in this case provided platform services for all kinds of commodities—not limited to a specific sub-category—it seems that further segmentation of the relevant market was not necessary for the purpose of analyzing the competition effects. However, in the case investigated by Shanghai AMR, the enforcement authority defined the market as the online catering delivery platform service market that provides English services in Shanghai, which is a segmentation of the online catering delivery platform service market based on the needs of specific user groups. This case also reflects that, under certain circumstances, the relevant market may be segmented from different approaches. Correspondingly, a company that does not have a dominant market position in a relatively wider-defined market may be considered to have a dominant market position in a segmented market due to the irreplaceability of the service it provided.
II. Determination of Market Dominance
In the two “either-or choice” cases, in determining whether the online platforms being investigated have market dominance, both of the two enforcement authorities took into account the following six factors: (1) market share of the undertakings; (2) the competition status in the relevant markets; (3) the market control power of the undertakings; (4) the financial resources and technical conditions of the undertakings; (5) the degree of dependence of other undertaking on the concerned undertaking; and (6) the degree of difficulty for market entry. This approach is consistent with the stipulations in the Platform Guidelines.
Compared with the 3Q case in 2014, where the court determined that the relevant market was rising and the market competition was fully competitive, thus the highly dynamic features of the Internet industry should be stressed, the enforcement authorities in the two cases began to consider, inter alia, the degree of the platform economy’s overall development, the maturity of platform businesses as well as the relatively stable market structure. Considering these factors demonstrate certain changes in the enforcement authorities’ considerations when examining the Internet market competition. Specifically, the enforcement authorities examine the following five factors:
- Calculating market share based on a different criteria and considering the duration of the market share and the market concentration. In the two “either-or choice” cases, the enforcement authorities calculated the online platforms’ market shares based on different criteria and paid close attention to the duration for such market share and the market concentration. In the case investigated by SAMR, SAMR calculated the online platform’s market shares in the past consecutive five years from two perspectives, i.e. the revenue of the platform and the product transaction value in the platform. In the case investigated by Shanghai AMR, the enforcement authority calculated the market share respectively based on the criteria like average daily orders, average online merchants, sales values and number of users in the past consecutive three years. Based on the above, Shanghai AMR determined that the concerned platform undertaking’s market share remained stable in a long period and thus enjoyed relatively strong competition advantages in the long term.
- Strong financial and technical resources may consolidate market power. In the previous cases, the court held that given the instant communication service requires relatively lower-end technologies and less cost, and there were many companies active in the market owning relatively strong technologies and financial conditions, the court thus opined that financial resources and technical conditions do not constitute dispositive factors in determining whether an undertaking in the platform area has market dominance. In the case investigated by SAMR, SAMR particularly took into account the platform’s strong financial resources and advanced technical conditions. SAMR also held that by virtue of this online platform’s early entry into the online retail platform market, it has accumulated a large number of in-platform undertakings and customers, and possessed a large amount of data related to transactions, logistics, payment and others, surpassing that of its competitors. This online platform’s financial resources and technical conditions have consolidated and strengthened its market power.
- User retention, lock-in effect and other features of the platform economy. In the case investigated by Shanghai AMR, the enforcement authority held that Internet economy features a high degree of user retention. Once users are accustomed to using a certain platform, they would not easily switch to other platforms if user experience is good. In the case investigated by SAMR, SAMR also indicated that the concerned online platform has possessed a large amount of customers with high user retention and up to 98% of cross-year retention rate. In the meantime, merchants would incur high costs if switching to other platforms. Merchants acquired many loyal users in the concerned platform and accumulated a vast amount of data related to transactions, payment, user evaluation, etc. Merchants rely on such data to carry out business activities. It is difficult to transmit such important resources and intangible assets to other competing platforms.
- Difficulty of market entry for new market players by considering high customer acquisition cost. In the case investigated by SAMR, SAMR pointed out that entering the online retail market requires not only a large monetary investment to build the platform and establish the logistics, payment, data systems and other facilities, but also continuous investment in brand credit, marketing and promotion. Hence, the entry barrier is high. More importantly, in the two cases, both of the two enforcement authorities attached great importance on the early entry advantages in the relevant markets, determining that online retail platform must acquire enough users to realize effective market entry. At present, the customer acquisition cost of such platforms in China is increasing, and it has become difficult to enter into the relevant market.
- Clear competitive advantages in the related market. In the case investigated by SAMR, SAMR also paid attention to the concerned online platform’s business segment layout in logistics, payment, cloud-computing and other areas. These areas have provided the concerned online platform with strong logistics service support, payment guarantee and data processing capabilities. SAMR regarded that these business segments have consolidated and strengthened the concerned online platform’s market power.
III. The Practices of Abusing Market Dominance
In the two cases, both of the enforcement authorities took the rationale of “practices + effects + no justifiable causes” in determining that the “either-or choice” practices conducted by the two platforms constituted the abuse of market dominant position, which eliminated and restricted the competition in the relevant markets, and damaged the interests of both merchants and consumers. The following elaborates on these three indicators of which the enforcement authorities consider when evaluating whether an undertaking has engaged in abusing its market dominance:
- Practices: SAMR considers specific practices conducted by Internet platforms. In the case investigated by SAMR, SAMR found that the platform prohibited its “core merchants” from opening stores and participating in promotional activities in competitive platforms via written agreements or oral requests. Furthermore, SAMR especially considered that the platform took incentive measures via flow support, and punitive measures via lowering search ranking, reducing platform resources, etc., to ensure the implementation of its “either-or choice” requirements.
- Effects: SAMR considers effects restricting innovation and development of the platform economy. In the two cases, both of the enforcement authorities closely analyzed the effects of “either-or choice” on other platform competitors, in-platform undertakings, and consumers. Moreover, in the case investigated by SAMR, which is distinguished from the cases of abusing market position in traditional industries, SAMR for the first time discussed in detail the impacts of anti-competitive practices on the innovation and development of the industry (platform economy in this case). Specifically, SAMR believed that the platform’s “either-or choice” practice prevents the in-platform undertakings from freely choosing between different online retail platforms, and inhibits them from being able to conduct differentiated operations through flagship stores, franchised stores, etc. In addition, the platform in this case used improper means to maintain and consolidate its own competitive advantages, which weakened the motivation of other platform undertakings to carry out technological and business model innovation, and affected the willingness of other platforms and potential competitors to innovate.
- Justifiable causes: SAMR considers anti-competitive restrictions indispensable for the purpose of efficiency defense. In the case investigated by SAMR, the platform undertaking under investigation proposed that the “either-or choice” restrictions are indispensable to ensure the implementation of the agreement and protect the specific resources invested in the platform. However, SAMR determined that the resource input of the platform can be protected by other means, and exclusive dealing was not an indispensable means to protect the resource input. What can be particularly drawn from the above is that, in the analysis of justifiable causes, the enforcement authorities will still maintain its position that an anti-competitive restriction implemented shall be indispensable for the purpose of efficiency defense.
IV. SAMR issued Administrative Guidance to the Concerned Platform Undertaking
SAMR issued Administrative Guidance to the platform undertaking, requiring it to follow the guidance, make relevant rectifications and submit self-inspection report on compliance annually for the succeeding three years. This is the first time that SAMR has made such requirements under an anti-monopoly investigation. With regards to the Administrative Guidance, the following points are worth highlighting:
- Focusing on the openness of platform and data: Under Administrative Guidance, the platform undertaking is required to “further increase access to its resources such as data, payment, and applications in its platforms; fully respect users’ choices; refrain from refusing to deal without justifiable causes; and promote trans-platform interconnection and interoperation”. This signals that the enforcement authorities’ are increasingly paying attention to more complicated anti-competitive practices, including abusing data rights, blocking trans-platform interconnection, etc.
- Requiring comprehensive rectifications and specific actions: The scope of rectification required under the Administrative Guidance is much broader than the “either-or choice” practices, covering the merger filing obligation, platform rules, personal data and privacy protection, anti-monopoly compliance policies, consumer interest protection, etc. At the same time, SAMR also required the platform undertaking to take specific actions, including “cooperate with in-platform undertakings on the basis of fair, reasonable, and non-discriminatory terms, and refrain from charging in-platform undertakings unfairly high price service fees, imposing unreasonable restrictions or transaction conditions on in-platform undertakings, or discriminating against in-platform undertakings”, “timely and publicly announce the platform’s punitive measures against in-platform undertakings, including lowering searching rankings, taking the products off the shelf, suspending the services, etc.”
V. Implications for Anti-Monopoly Compliance
Investigations and administrative punishments rendered in the above two cases shed light on enforcement authorities’ methodology and thought-process when addressing platforms’ competition issues and promoting sustainable development of platform economy. The enforcement authorities methodology indicates the willingness to adopt drastic measures to “strengthen the role of Anti-monopoly Law and prevent capital’s disordered expansion,” after the promulgation of the Platform Guidelines.
More importantly, the two cases reflect the significant change of the competition landscape in Internet industry and also a change of attitude on regulating and investigating anti-monopoly practices (especially practices of abusing market dominance) in Internet industry in recent years. A review of these two cases provides several new insights for the platform undertakings’ anti-monopoly compliance:
- The enforcement authorities tend to define the relevant market based on concerned products’ platform function, business model, application scenarios, users’ group and other factors. In some cases, it may be necessary to further segment the relevant market. As mentioned earlier, although the relevant market is defined as the online retail platform service market, it cannot be excluded that the relevant market may be further segmented if the practices in question only target at products of specific categories or part of the products/services in the platform.
- In the case of “platform ecosystem” undertakings, the enforcement authorities may consider the trans-platform network effects based on the “ecosystem” and evaluate the impact of its status in other related markets on the consolidation of its market power of the platform involved in question.
- Distinct from the focus on dynamic competition during the “3Q war” era, the market structure of platform economy in certain areas has been relatively stable and gradually solidified. The top competitors in these markets have already acquired a large number of users and their data by taking advantage of their competitive advantages. New market players, in order to obtain necessary resources to enter into the relevant market, often need to bear large customer acquisition costs. Moreover, new market players have to make huge investments in financial and technical aspects, which demands strong financial resources. Therefore, when determining the market dominant position, the enforcement authorities may be more inclined to focus on the changes of market structure over a period of time, while reducing the weight of consideration of dynamic competitive factors, which have great uncertainty.
- The enforcement authorities will also begin to focus on the circumstances where platforms use their advantages to exert undue influence on new and developing platforms, hindering technological development and commercial innovation. In terms of analyzing the effects of the anti-competitive practices involved in Internet industry, the enforcement authorities are likely to consider not only the practice’s impact on other competitors, in-platform undertakings, and consumers, but also its impact on platform innovation development more generally.
Against the backdrop of strengthening anti-monopoly law enforcement in the Internet industry, there is no doubt that it is necessary for Internet enterprises to improve their internal compliance systems. As of today, 34 enterprises have announced their compliance commitments, which also indicates that anti-monopoly compliance will become the key point in the compliance of Internet enterprises moving forward. Great attention shall be paid to the conclusion of monopoly agreements by virtue of algorithms and data, most-favored-nation treatment clauses, restrictions on transactions such as “either-or choice”, “Big Data Mastery” and other potentially discriminatory treatment practices, the refusal of transactions by setting restrictions and obstacles through platform rules, algorithms, technology, flow distribution and other means, compulsorily collection of unnecessary user information, and whether the concentration of undertakings involving Internet enterprises shall be notified shall also be carefully evaluated.
 See decision Guo Shi Jian Chu  No. 28, which could be visited at http://www.samr.gov.cn/fldj/tzgg/xzcf/202104/t20210409_327698.html; and decision Hu Shi Jian Fan Long Chu  No. 06201901001, which could be visited at http://www.samr.gov.cn/fldj/tzgg/xzcf/202104/t20210412_327737.html
 See SAMR, Cyberspace Administration, and State Taxation Administration Jointly Held an Administrative Guidance Meeting to Regulate Online Economy Order, Central Government Official Website, http://www.gov.cn:8080/xinwen/2020-11/06/content_5558481.htm. From April 14 to April 16, 2021, SAMR disclosed the Commitments of Operation in Compliance with Laws of the 34 Internet platform companies attending the administrative guidance meeting. See https://mp.weixin.qq.com/s/SlDlWWOcsEt89isAEJKi3Q.
 See Ohio v American Express Co., 138 S.Ct. 2274 (2018). In Ohio, the majority of Justices in Supreme Court of U.S. held the view that the relevant market can be defined as the credit-card market, considering American Express facilitated a single, simultaneous transaction between the participants from the two sides of the platform.
 See, Beijing Qihoo Technology Co., Ltd. v. Tencent Technology (Shenzhen) Co., Ltd. for Abuse of Market Dominance, (2013) Min San Zhong Zi No.4.
 See, Beijing Qihoo Technology Co., Ltd. v. Tencent Technology (Shenzhen) Co., Ltd. for Abuse of Market Dominance, (2013) Min San Zhong Zi No.4.; See also, Guangzhou Huaduo Network Technology Co., Ltd. v. Guangzhou Netease Computer Systems Co., Ltd. for Abuse of Market Dominance and Unfair Competition, (2018) Yue Min Zhong No.552.