CADE releases report on studies discussing competition law aspects of digital markets

The Administrative Council for Economic Defense (CADE) has recently released a report on various relevant topics of antitrust policy around digital markets. The Report summarizes the main issues discussed and challenges faced by antitrust authorities around the world in the context of cases involving digital markets.

The Report initially describes the general aspects of those markets, highlighting their benefits, such as greater connectivity and reduction of transaction costs, but its main focus lies on the analysis of the antitrust concerns usually perceived in the digital space, which can affect the consumer welfare, in particular in terms of quality, innovation, data protection, and interoperability.

The Report states that competition levels are low in several digital markets and that antitrust authorities have to be more proactive in prompting rivalry in such markets. According to the Report, possible solutions to the concerns raised would include, for example, greater use of interim measures, review of the criteria for mandatory merger control clearance, adjustments to the standards of proof applied to investigations involving such markets, and greater attention to potential competition and discriminatory practices, among others.

The Report is an additional effort from CADE to participate even more active in the ongoing discussions around digital markets, which has already been applying some effective measures in connection with the topics discussed in the Report.

Introduction

On August 13, 2020, CADE’s Department of Economic Studies (DEE) released a working document addressing relevant topics of antitrust policy around digital markets.

The Report features a summary of relevant topics on competition aspects and the challenges faced by antitrust authorities when analyzing corporate transactions and conducts in digital markets. Such challenges were discussed in 21 reports released within the past couple of years by antitrust authorities and research centers around the world, which were selected by DEE as the most relevant ones published to date.

Three reports were of particular relevance to the Report: (i) the “Sub-committee on Market Structure and Antitrust Report”, prepared by the Committee for the Study of Digital Platforms at the Stigler Center from the University of Chicago, United States; (ii) “Unlocking Digital Competition”, a report prepared by a panel of experts for the British Government; and (iii) “Competition Policy for the Digital Era”, a report prepared by a panel of three experts for the Directorate-General of Competition of the European Commission.

Although the Report does not bring CADE’s express views on the topics discussed, it provides a comprehensive overview of the main issues that are currently in the spotlight at CADE and worldwide, which may end up influencing the enforcement priorities and regulatory framework that the Brazilian antitrust authority is defining for cases concerning digital markets.

The Report is divided into six chapters. The first one addresses general comments made by foreign authorities on the functioning and the features of digital markets. The second one synthesizes the views of these authorities on the main benefits created by these markets. The third one introduces concerns related to digital markets and strategies to tackle them. The fourth one summarizes studies regarding specific digital markets, such as price comparison platforms, online advertising (e.g., general search and social media), and app-stores/marketplaces. The fifth chapter addresses possible solutions for the concerns raised, and the sixth one indicates the areas that demand further analysis.

General Considerations and Benefits

Initially, the Report stresses out that digital markets have general distinctive characteristics that justify a special review: digital platforms feature strong economies of scale and scope, network effects, are characterized by minimal marginal costs and have low switching costs on the user’s side, allowing for the so-called multi-homing.

However, the Report also notes the many challenges posed by relevant market definition and by assessment of market power in the digital context, given that most markets are multi-sided and that many platforms do not charge end users for the services, which raises doubts as to what would be the accurate metric to assess the competitive dynamics in such industry.

In addition, the Report highlights competitive issues resulting from the role of data as an essential input for digital platforms, addressing behavioral biases that are relevant for the comprehension of the competitive dynamics in digital markets, such as those in the relationship between platforms and consumers to solidify a dominant position through changes in human behavior.

In addressing the benefits generated by digital markets, the Report notes that the analyzed reports generically address such benefits, including, for instance, greater connectivity, reduction of transaction costs and geographical barriers, incentives for competition between suppliers, improved matching between suppliers and consumers, broader access to sources of information, and an explicit acknowledgment that digital advertising poses efficiency gains due to personalization, which benefits the end user.

Potential Problems

Despite pointing out such benefits, the Report focused on the competitive concerns posed by digital markets, which were classified into two problem vectors: price effects and non-price effects. The latter, in turn, was further segmented into quality and innovation, privacy, personalization, and addiction, discriminatory pricing, and restriction of access, essential facilities, and interoperability.

Regarding the price effect, the Report underscores that the fact that platforms charge a zero nominal price from end consumers does not rule out the risks of end users being harmed by potential conducts. This is because a cost increase on the other side of the platform can be passed on to consumers through an increase in the product’s final price. On the other hand, even though it is not possible to exclude effects related to price, the zero nominal price drives the focus of competition in digital markets to other factors, such as innovation and quality.

The Report also points out an increase in indications that large platforms, in order to safeguard their leadership, would be employing killer acquisitions strategies to prevent the appearance of new effective rivals, as well as using their dominant position to enter adjacent markets. The Report highlights problems caused by aggressive data collection, which could, among other consequences, reduce users’ privacy – a factor directly linked to the level of product quality – and increase the level of manipulation.

According to the Report, the personalization of content made possible by data collection aims to keep consumers engaged, developing increasingly addictive products and allowing the “exploitation of their vulnerabilities”, which are factors directly linked to the reduction of consumers’ welfare. The last non-price effect analyzed is the restriction to interoperability by dominant companies, which could also have harmful effects on the market, resulting in the exclusion of a competitor or the unreasonable leverage of market power to adjacent areas.

The Report reviewed, within specific digital markets, the negative effects of clauses/agreements that restrict competition, such as Most Favored Nation (MFNs) and Non-brand bidding agreements (NBBAs), as well as the strategies of some platforms in their respective App-stores (especially Apple and Google) and online advertisements (Google and Facebook, respectively, in the general search and social media markets). According to the DEE, these strategies could help such platforms to maintain their market positions.

Possible solutions

The Report describes that the analyzed materials indicate low competition levels in several digital markets and that antitrust authorities should be more proactive in prompting rivalry in such markets. Accordingly, in order to boost competition, DEE submits that the analyzed reports would advocate for antitrust authorities to focus in two main fronts: to prevent dominant companies from implementing strategies that undermine the growth of potential competitors (competition for the market); and to prevent platforms from constantly strengthening its control over the ecosystem, in particular in secondary markets/aftermarkets (competition within the platform).

According to the Report, this approach would be informed by consumer welfare and would include, among other factors:

• a greater use of interim measures to promote competition and prevent that certain conducts lead to a definitive market consolidation, a tool recently applied by CADE in the Administrative Proceeding No. 08700.002871/2020-34 involving Cielo S.A. and Facebook;
• changes in the standards of proof, provided that, in several occasions, it is not possible to measure the damages to consumers in a clear fashion, as well as reassess criteria adopted for specific conducts, which would involve, for instance, the shifting of the burden the proof, the creation of rebuttable presumptions of anticompetitive effects, and stricter criteria to evidence the sharing of efficiencies with the market;
• review of the mandatory merger control notification criteria, as well as of the analysis of mergers and acquisitions involving digital markets;
• greater attention to potential competition and discriminatory practices;
• data portability and interoperability; and
• specific remedies for markets based on online advertising, for the purpose of mitigating sources of market power, such as in the case of Google and Facebook, according to such reports.

Nevertheless, there is not a consensus regarding the best way to implement these solutions, i.e., whether through competition authorities or a new regulatory body, exclusively dedicated to digital markets, as some reports suggest. Concerning this specific point, DEE noted in the Report that the potential negative impacts resulting from the creation of a new regulatory regime still demand an in-depth assessment, as well as the acting scope of such regulatory body and the best way to structure it.

Finally, DEE found that there is a movement among foreign authorities to analyze the effects of past decisions involving technology markets, to understand their concrete impacts, and to reflect upon the best way to handle these markets going forward.

Conclusion

As already mentioned, the Report does not necessarily reflect CADE’s final views on the topics discussed in it. Despite this, the very preparation of the Report makes it clear the interest of the Brazilian authority on the subject, something that has already been externalized by CADE for some time through other initiatives, such as the international conference “Designing Antitrust for the Digital Era” it promoted in mid-2019, as well as the report “BRICS in the Digital Economy: Competition Policy in Practice” launched in the VI BRICS Competition Conference.

It is also possible to identify the foreign reports and views that appear to be influencing the Brazilian authority, which has already been adopting some effective measures concerning the topics of the Report. As recent examples, it should be mentioned the interim measure imposed by CADE ex officio to temporarily suspend the partnership between Facebook and Cielo, as well as the market monitoring procedure initiated by CADE to analyze corporate transactions carried out in digital markets over the past 10 years. The Report, therefore, is just an additional initiative adopted by CADE in such a front, and we should all expect other initiatives, in particular on the part of DEE, and more enforcement to come against players active in various aspects of digital markets.