- Barriers to entry — Market power — Rights — Internet — Technology
10.01 Outside of per se illegal antitrust offences, like price-fixing, antitrust analysis generally considers the ease of entry.1 The belief is that companies cannot exercise market power for long when entry into these markets would be timely (generally under two years), likely (profitable for the entrants), and sufficient (the entrants would attain sufficient business to prevent the exercise of market power by the incumbent firms).2 As the European Commission stated, ‘[w]hen entering a market is sufficiently easy, a merger is unlikely to pose any significant anti-competitive risk.’3 If a firm degraded quality below competitive levels, entrants would seize the opportunity to profit and competition would be fully restored. Whether this is empirically true is another matter.4 But there is little dispute that market power can be sustained in markets with significant entry barriers, and ‘entry analysis constitutes an important element of the overall competitive assessment’.5
10.03 Some argue that data does not lend itself to entry barriers. This at times is true. The Organisation for Economic Co-operation and Development (OECD), for example, noted three trends underlying data-driven innovation:
(i) the exponential growth in data generated and collected, (ii) the widespread use of data analytics including by start-ups and small and medium enterprises (SMEs), and (iii) the emergence of a paradigm shift in knowledge creation and decision-making.6
10.04 Others, however, go further in claiming that ‘[o]nline markets are notable for their low entry barriers and typically do not require big data for entry’.7 Google’s chairman, for example, stated that ‘the barriers to entry are negligible, because competition is just one click away’.8 The chairman of one of the world’s largest collectors of personal data told a room full of executives, economists, and scientists that, ‘Our experience is that you don’t need data to compete online.’9
10.06 But the merging parties or dominant firm may use the traditional factors that the agencies consider to argue that entry barriers are generally low in that online industry. So under these traditional factors, the entry barriers may seem low, obviating the need for intervention.
10.07 For example, many online industries are dynamic and fast-growing. The General Court, in upholding the European Commission’s decision to not intervene in Microsoft’s acquisition of Skype, observed how the consumer communications (p. 159) sector was ‘a recent and fast-growing sector which is characterised by short innovation cycles in which large market shares may turn out to be ephemeral’.10 In such a dynamic context, the Court noted, ‘high market shares are not necessarily indicative of market power and, therefore, of lasting damage to competition which Regulation No 139/2004 seeks to prevent’.11
In so far as users expect to receive consumer communications services free of charge, the potential for the new entity to set its pricing policy freely is significantly restricted. The Commission rightly observes that any attempt to make users pay would run the risk of reducing the attractiveness of those services and of encouraging users to switch to other providers continuing to offer their services free of charge.12
This statement has several important implications. What we want to mention here is that firms can have market power even though their product or service is free of charge. Companies, like Facebook and Google, have tremendous market power for free products (such as social network and search), and free might be supra-competitive when a competitive market offers a negative price (ie, the company pays you to toil on its social network providing information to attract others users).
10.09 Other historical entry factors are any ‘technical or economic constraints which might prevent users from switching providers’.13 Customers generally are not locked-in if they can easily switch to other free products or services. The General Court did not find any ‘technical or economic constraints’ when users could download several communications applications on their operating device, and the software was free, easy to download, and took up little space on their hard drives.14
10.11 Focusing on these traditional factors, the agency or court may conclude that entry barriers are low. Take for example search engines, like Google, Bing, Yahoo!, and DuckDuckGo. They are free and easy to use. Users can easily switch from one search engine to another. Seemingly users are not locked-in by any data portability (p. 160) issues. Moreover, search engines do not display the classic direct network effects that the courts and agencies have identified.
10.12 If this were true, then the low entry barriers and switching costs should prevent any search engine from intentionally degrading quality (in terms of the relevance of the response to a search inquiry). As the European Commission’s statement of objections involving Google reflects, that is not the case.15
10.14 The next three chapters outline four potential network effects: classic network effects in Chapter 11; network effects arising from the scale of data in Chapter 12; and in Chapter 13, network effects from the scope of data and how network effects on one side of a multi-sided platform can spill over to the other side.
10.15 The observation by the General Court in Cisco Systems that free constrains an entrant’s ability to price (either positively or negatively) has important implications. When consumers become accustomed to ‘free’, it is very hard for a new entrant to charge even a small amount for the same or a similar service, even if the quality is higher. Similarly, just because something is ‘free’ does not mean that the competitive price should be zero rather than negative. But transaction costs may prevent an entrant from ‘paying’ customers for their information. So the result seems to be that once the market price is set at zero, entrants likely have to live with this constraint. But that may be hard, as we shall see, if they cannot quickly ramp up to scale to attract users and advertisers.
10.16 We want to emphasize at the outset that markets susceptible to network effects do not always lead to dominance.16 For example, Waze, as the UK competition authority recognized, failed to achieve sufficient scale to represent a significant competitive threat in Great Britain. Google, while dominant in certain markets, has not always leveraged its dominance to other markets. As the European Commission aptly stated, ‘[t]he existence of network effects as such does not a priori indicate a competition problem in the market affected by a merger’.17 Instead, the extent to which network effects have increased entry barriers must ‘be assessed on a case-by-case basis’.18 (p. 161) Our point here is that competition authorities in assessing mergers and monopolistic abuses will have an incomplete picture of the market realities if they consider only the traditional entry barriers and traditional network effects. They must be aware of several additional data-driven network effects, which can lead to market concentration and dominance.
1 United States v Microsoft Corp, 253 F3d 34, 51 (US Ct of Apps (DC Cir), 2001) (absent direct evidence, monopoly power ‘may be inferred from a firm’s possession of a dominant share of a relevant market that is protected by entry barriers’). Entry barriers ‘are factors (such as certain regulatory requirements) that prevent new rivals from timely responding to an increase in price above the competitive level’. Ibid.
2 US Department of Justice (DOJ) and Federal Trade Commission (FTC), Horizontal Merger Guidelines, 19 August 2010, s 9, https://www.ftc.gov/sites/default/files/attachments/merger-review/ 100819hmg.pdf.
3 European Commission, Guidelines on the Assessment of Horizontal Mergers Under the Council Regulation on Control of Concentrations Between Undertakings  OJ C 31/03, para 68 (‘EC Horizontal Merger Guidelines’), http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex: 52004XC0205%2802%29 (‘For entry to be considered a sufficient competitive constraint on the merging parties, it must be shown to be likely, timely and sufficient to deter or defeat any potential anti-competitive effects of the merger.’).
5 EC Horizontal Merger Guidelines, above note 3, para 68; see also US Auto Parts Network, Inc v Parts Geek, LLC, 494 F App’x 743, 745 (US Ct of Apps (9th Cir), 2012) (affirming summary judgment on antitrust counterclaims when Parts Geek failed inter alia to offer evidence such that a jury could reasonably find significant entry barriers in that market).
6 OECD, Data-Driven Innovation for Growth and Well-Being: Interim Synthesis Report, October 2014, p 35, http://www.oecd.org/sti/inno/data-driven-innovation-interim-synthesis.pdf.
8 Eric Schmidt, Executive Chairman of Google, ‘Why Google Works’, Huffington Post, 20 January 2015, http://www.huffingtonpost.com/eric-schmidt/why-google-works_b_6502132.html.
9 Eric Schmidt, Executive Chairman of Google, ‘The New Gründergeist’, Google Europe Blog, Posted: 13 October 2014, http://googlepolicyeurope.blogspot.com/2014/10/the-new-grundergeist.html.
15 European Commission, ‘Fact Sheet: Commission Sends Statement of Objections to Google on Comparison Shopping Service’, 15 April 2015, http://europa.eu/rapid/press-release_MEMO-15-4781_en.htm; Maurice E Stucke and Ariel Ezrachi, ‘When Competition Fails to Optimize Quality: A Look at Search Engines’, 18 Yale J L & Tech (2016): p 70.
16 Cisco Systems Inc, above note 10, para 76 (observing that ‘the existence of network effects does not necessarily procure a competitive advantage for the new entity’).