The Legal Definition of Self-Preferencing: Too Narrow, Too Broad, or Both?

(by Peter Ormosi[1])  Self-preferencing is usually defined as when a large digital platform treats its own (vertically integrated) products more favourably than those of its competitors.  Such behaviour may be harmful to consumers.[2]  Versions of this definition have now been embodied in EU and UK legislation which also makes such behaviour illegal for gatekeepers or businesses of strategic market status. However, is this definition of self-preferencing too narrow in that vertical integration may not be a prerequisite for essentially similar strategies to be profitable and similarly harmful? Or is it too broad because it does not specify consumer harm as a condition of illegality, even though self-preferencing often does not harm consumers?

A bit more detail on the legal definitions

The EU Digital Markets Act designates digital platforms as ‘gatekeepers’ if they provide an important gateway between businesses and consumers in relation to core platform services. Article 6(5) states that “The gatekeeper shall not treat more favourably, in ranking and related indexing and crawling, services and products offered by the gatekeeper itself than similar services or products of a third party. The gatekeeper shall apply transparent, fair and non-discriminatory conditions to such ranking.” Similarly, para.20(3)(b) of the draft UK Digital Markets, Competition and Consumers Bill, empowers the CMA to prohibit a firm with strategic market status (i.e. with market power or strategic significance) from: “using its position in relation to the relevant digital activity, including its access to data relating to that activity, to treat its own products more favourably than those of other undertakings.”

What makes these definitions too narrow?

There are numerous cases where the platform is not integrated into supply but the effect of its behaviour is the same as self-preferencing because a platform can profit from restricted supplier competition in many different ways. In Fletcher et al (2023)[3] we group such business practices into three categories:

• Favouring suppliers that confer a higher margin: Suppose there are two products x and y, offered by suppliers A and B respectively, and x would be more relevant for the consumer, but y represents higher revenue for the platform. This could happen, for example, where the platform receives a higher commission from the supplier of y. Examples include recommendations on streaming platforms and online travel agencies.[4] If the platform steers end-users towards suppliers that award the platform a greater margin (for example by manipulating the ranking of recommendations), it could lead to suppliers competing to give the platform a bigger margin. This increased cost would then feed into higher prices for end-users.[5] For example in the Trivago case, the ACCC found that when providing users with holiday recommendations, Trivago’s algorithm gave more weight to those suppliers that paid a higher payment fee (cost per click). Trivago’s own data showed that higher-priced room rates were ranked at the top (the most prominent offer or Top Position Offer) over alternative lower-priced offers in two-thirds of their listings.[6]
• Supplier bargaining power: Another conduct that’s similar in its effect to self-preferencing, is where some larger suppliers have bargaining power with respect to the platform and are able to impose contracts that influence product ranking or product recommendations on a platform. A relatively little-discussed implication of network effects is that certain suppliers can effectively become ‘must-have’. Without their presence on a given platform, end-users on the other side of that platform would switch to an alternative platform. This could in turn lead to other suppliers leaving, and so on. Such critical suppliers have substantial bargaining power and can potentially utilise this to require preferential treatment by a platform. This requirement can be direct, but it can also be indirect. For example, some music streaming services have minimum payment guarantees with the three major record labels, each of which has substantial bargaining power. At the margin, such minimum payment guarantees may be expected to incentivise the streaming services to favour major label music over independent music.[7]
• Wider strategic reasons: Finally, a platform may have wider strategic reasons for distorting supplier competition. For example, a firm which offers an ecosystem with many different services within it may wish to keep end-users within its ‘walled garden’. As such, even if it does not itself provide a particular product, it may be more inclined to recommend a third-party product that lies within the walled garden than one which would take end-users outside it. For example, Google’s mobile search service (at one stage) gave preference in its rankings to content which was cached on Google’s own AMP servers (AMP originally stood for ‘Accelerated Mobile Pages’). This may be – as Google claimed – because Google could then be sure of the download speed and quality of such content. However, it might also have reflected Google’s preference to keep end-users within the Google ecosystem. Similar considerations may apply in relation to Amazon giving preference in its rankings to third party suppliers that use its ‘fulfilled by Amazon’ service.

A platform engaging in any of the above conducts effectively self-prefers, even though the favoured product is not its own vertically integrated product. It is possible that policymakers had in mind an effects-based approach intended to include these business practices.[8] However, even if this is the case, it will likely take lengthy and costly legal battles for the seemingly narrow legal definitions to be tested (and broadened) in court.

What makes the legal definitions too broad?

On the other hand, one could argue that the legal definitions are too broad in that they fail to qualify an important condition of welfare-reducing self-preferencing, the harm to consumers. It is true that  a platform’s incentives are not necessarily aligned with consumers. For example, in a field experiment on a video-on-demand system, Zhang et al. (2021) estimate the effect of using a profit-maximising platform relative to an end-user welfare maximising platform. They show that when facing consumers who exhibit a lower price elasticity of demand towards products placed in salient slots a profit maximising platform can increase its profit by hurting both consumer surplus and total welfare.[9] Similarly, Fletcher et al. (2023) show that the preferences of the platform over choice of its recommender system model can be the precise reverse of the preferences of end-users.[10]

But it is also true that there are many ways a platform can limit supplier competition and this can often align with consumers’ preferences. For example, if the way products are displayed by a platform disfavours third-party products that are inferior, it could technically violate self-preferencing provisions, but may still benefit consumers. Objective measures of product quality might reasonably be included in an unbiased ranking algorithm.

It is possible that leaving out reference to consumer harm as a condition of unlawfulness is a sign of turning away from a consumer welfare standard, and both the EU and the UK want to allow these instruments to be able to pick up behaviour that only harms other suppliers (and not the consumer).  It would be an unfortunate precedent if these provisions were used to save certain competitors even if disfavouring them would not harm (or even benefit) consumers.

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[1]             The views expressed in this post are the sole responsibility of the author and cannot be attributed to Compass Lexecon or anyone else.

[2]             See, for example, Padilla, J., Perkins, J., & Piccolo, S. (2022). Self‐Preferencing in Markets with Vertically Integrated Gatekeeper Platforms. The Journal of Industrial Economics, 70(2), 371-395.

[3]             Fletcher, A., Ormosi, P. L., & Savani, R. (2023). Recommender systems and supplier competition on platforms. Journal of Competition Law & Economics, 19(3), 397-426.

[4]             See Bourreau, M., & Gaudin, G. (2022). Streaming platform and strategic recommendation bias. Journal of Economics & Management Strategy, 31(1), 25-47; and Hunold, M., Kesler, R., & Laitenberger, U. (2020). Rankings of online travel agents, channel pricing, and consumer protection. Marketing Science, 39(1), 92-116.

[5]             More generally, see Armstrong, M., & Zhou, J. (2011). Paying for prominence. The Economic Journal, 121(556), F368-F395; and Inderst, R., & Ottaviani, M. (2012). Competition through commissions and kickbacks. American Economic Review, 102(2), 780-809.

[6]             https://www.accc.gov.au/media-release/trivago-to-pay-447-million-in-penalties-for-misleading-consumers-over-hotel-room-rates

[7]             Antal, D., Fletcher, A., & Ormosi, P. (2021). Music streaming: Is it a level playing field?. Competition Policy International Antitrust Chronicle, 2(2).

[8] An effects-based rather than form-based approach to exclusionary conduct has been confirmed by European courts in several cases such as Intel, Qualcomm, or Google Android, and has been explicitly laid down in the new Amending Communication to interpret the 2008 guidance on Article 102 TFEU (https://competition-policy.ec.europa.eu/antitrust/legislation/application-article-102-tfeu_en).

[9]             Zhang, X., Ferreira, P., Godinho de Matos, M., & Belo, R. (2021). Welfare Properties of Profit Maximizing Recommender Systems: Theory and Results from a Randomized Experiment. MIS Quarterly, 45(1).

[10]            Fletcher, A., Ormosi, P. L., Savani, R., & Castellini, J. (2023). Biased Recommender Systems and Supplier Competition. Available at SSRN 4319311.

Brexit Sunset Clause Risks Uncertainty for UK Competition Law

This blog post draws on the presentation given by Professor Catherine Barnard (University of Cambridge) at the ESRC ‘UK in a Changing Europe’, ‘UK Regulation after Brexit Revisited’ event held at the British Academy in London on 27^th October 2022.

(by Andreas Stephan) The UK’s new Prime Minister, Rishi Sunak, promised to put EU laws through the ‘shredder’, as part of the leadership contest campaign video he released in August when running against his predecessor, Liz Truss. The Retained EU Law (Revocation and reform) Bill (REUL) promises to impose a sunset clause on 2,400 or so pieces of retained EU law, which will cause them to cease applying in the UK unless ministers actively act to keep them. This includes all secondary law (regulations and directives) and related case law of the European Commission and Court of Justice of the European Union (CJEU), which plays an important role informing UK Competition Law (at least to the extent that it relates to EU case law delivered until 31 December 2020). This blog explains why the law could create significant uncertainty for the enforcement of UK competition law and what might be done about it.

Are vertical restrictions on the use of trademarks in online search advertising always anticompetitive? The European Commission’s Guess decision

(by Elias Deutscher)[1] Can the owner of a well-known brand lawfully prevent its independent retailers from using its trademarks and brands to advertise their products on Google? This question has major implications, in particular, for small- and medium-size retailers who largely benefit from the reduced costs of online search advertising and the new sales channels offered by online distribution. For quite some time, issues surrounding the use of trademarks as keywords in paid online search advertising have stirred considerable controversy amongst trademark and IP lawyers. Recently, this question also came into the focus of competition law enforcers. In the Case AT. 40428 Guess,[2] the European Commission assessed for the first time the legality under European Union (‘EU’) competition law of a vertical agreement whereby a trademark proprietor restricted the ability of its licensed distributors to use or bid for its brand names and trademarks as keywords in Google AdWords.

Flight Centre: Australian High Court finds agent competed with principal and breached cartel laws

(by Julie Clarke[1]) On 14 December 2016, Australia’s highest court (the High Court) determined, by majority, that Flight Centre, a travel agent, competed with airlines for the supply of airline tickets and that, as a result, its attempts to induce the airlines to lower their direct-to-public ticket sales constituted unlawful price fixing. Flight Centre markets itself as offering a ‘Lowest Airfare Guarantee’. In attempting to induce the airlines not to discount tickets sold direct to the public, it was found to be in competition with the airlines and therefore subject to a per se prohibition rather than a full effects analysis. The treatment of travel agents and other similar arrangements falls into somewhat of a grey area in Competition Law.  Are the agents competing horizontally with their suppliers in selling to consumers, or are they better seen as vertically related retailers, or even as de facto employees?  This is important because horizontal cartels are almost universally per se illegal, often with criminal sanctions, vertical price fixing (e.g. RPM) has a much more mixed and nuanced legal position, and employees are completely exempt (a firm is free to set prices that all its salesforce must implement). In Europe, genuine ‘agency agreements’ fall outside the scope of Article 101 TFEU, even though they may contain clauses that can produce anticompetitive effects, such as minimum pricing.[2] This blog analyses the significance of recent developments under Australian Competition Law.

Drug prices post-Brexit – an expensive pill to swallow?

(by Farasat Bokhari) Much has already been written about the potential effects of Brexit on both the British economy as well as the rest of the word, vis-à-vis effects on immigration, employment, wages, inflation, investment, growth and so forth, and by now we know that either the sky is going to fall or it will be like manna falling from the sky.  Definitely one of those two.  Reality however is a bit more nuanced, and what follows may be sector specific and depend on the regulations and terms that are negotiated upon exit.  Post exit, will the UK be on its own in terms of trade agreements with the rest of the world, or will it, like Norway, be able to enjoy benefits of a single market by entering into European Economic Area (EEA)? Not to be gauche, how does it affect the price of my medicines here in the UK?   While the Farage v. Cameron debate rages on, in this blog I give example from just one sector – pharmaceuticals – to discuss how prices of branded drugs, which include new and important therapies, may increase due to various trade agreements post Brexit.